Lear(US:LEA)2023-10-26 13:04Part I – Financial Information Item 1 – Condensed Consolidated Financial Statements For the nine months ended September 30, 2023, Lear Corporation reported a significant increase in financial performance, with net sales rising to $17.6 billion from $15.5 billion year-over-year, and consolidated net income more than doubled to $502.7 million Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $7,737.7 | $6,994.1 | | Total assets | $14,613.7 | $13,763.0 | | Total current liabilities | $5,701.4 | $5,188.3 | | Long-term debt | $2,742.1 | $2,591.2 | | Total liabilities | $9,630.4 | $8,932.7 | | Total equity | $4,983.3 | $4,830.3 | Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in millions, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $5,781.0 | $5,241.2 | $17,625.7 | $15,520.6 | | Consolidated net income | $152.1 | $119.2 | $502.7 | $271.4 | | Net income attributable to Lear | $132.9 | $92.3 | $445.2 | $210.2 | | Diluted EPS attributable to Lear | $2.25 | $1.54 | $7.50 | $3.50 | Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Cash Flow Category | 9 Months Ended Sep 30, 2023 | 9 Months Ended Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $679.6 | $484.2 | | Net cash used in investing activities | $(603.1) | $(616.7) | | Net cash used in financing activities | $(207.8) | $(313.2) | | Net Change in Cash | $(134.2) | $(477.0) | - On April 26, 2023, the company completed the acquisition of I.G. Bauerhin (IGB), a supplier of automotive seat thermal comfort systems, for a preliminary purchase price of $174.5 million, net of cash acquired. This acquisition is part of the Seating segment and aims to expand the company's thermal comfort systems portfolio333435 Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 14% year-over-year sales growth for the first nine months of 2023 to higher vehicle production volumes and new business wins, with both segments reporting increased sales and improved operating margins Executive Overview Lear operates through Seating and E-Systems segments, focusing on extending leadership, transforming for electrification, enhancing operational excellence, and prioritizing sustainability amidst a recovering but challenging automotive market - Lear operates through two main segments: Seating, which designs and manufactures complete seat systems and components, and E-Systems, which designs and manufactures electrical distribution systems and electronic products142143 - The automotive industry production is expected to increase by 7% in 2023, returning to pre-pandemic levels but still facing headwinds from component shortages, inflation, higher interest rates, and labor strikes148 - The company's strategy focuses on extending leadership in Seating, transforming E-Systems for electrification growth, enhancing operational excellence, and prioritizing sustainability154 - On April 26, 2023, Lear acquired IGB for approximately $175 million to enhance its thermal comfort systems portfolio within the Seating segment, partially financed with a $150 million draw from its term loan facility160164 Results of Operations Net sales increased by 10% in Q3 2023 and 13.6% for the nine months, driven by higher production volumes, new business, and the IGB acquisition, leading to significant growth in net income attributable to Lear Consolidated Results of Operations (in millions) | Metric | Q3 2023 | Q3 2022 | % Change | 9 Months 2023 | 9 Months 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $5,781.0 | $5,241.2 | +10.3% | $17,625.7 | $15,520.6 | +13.6% | | Gross Profit | $418.2 | $376.9 | +10.9% | $1,305.2 | $1,038.3 | +25.7% | | Net Income Attributable to Lear | $132.9 | $92.3 | +44.0% | $445.2 | $210.2 | +111.8% | - Q3 2023 net sales increased by $540 million (10%) year-over-year, driven by higher production volumes ($231 million), new business ($177 million), favorable foreign exchange ($100 million), and the IGB acquisition ($52 million)174 Segment Performance (in millions) | Segment | Period | Net Sales | Segment Earnings | Margin (%) | | :--- | :--- | :--- | :--- | :--- | | Seating | Q3 2023 | $4,284.9 | $244.7 | 5.7% | | | Q3 2022 | $3,887.8 | $222.6 | 5.7% | | | 9M 2023 | $13,206.0 | $823.4 | 6.2% | | | 9M 2022 | $11,674.4 | $636.6 | 5.5% | | E-Systems | Q3 2023 | $1,496.1 | $60.4 | 4.0% | | | Q3 2022 | $1,353.4 | $46.8 | 3.5% | | | 9M 2023 | $4,419.7 | $155.6 | 3.5% | | | 9M 2022 | $3,846.2 | $64.7 | 1.7% | Liquidity and Capital Resources The company maintains strong liquidity with $980 million in cash and $2.0 billion available credit, utilizing operating cash flow to fund investments, share repurchases, and dividends - As of September 30, 2023, the company had $980 million in cash and cash equivalents and $2.0 billion available under its credit agreement, which management deems sufficient for foreseeable liquidity needs218 Cash Flow Summary (in millions) | Activity | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $680 | $484 | | Net cash used in investing activities | $(603) | $(617) | | Net cash used in financing activities | $(208) | $(313) | - Key financing activities in the first nine months of 2023 included borrowing $150 million under the Term Loan, paying $138 million for share repurchases, and paying $137 million in dividends to Lear stockholders224 Item 3 – Quantitative and Qualitative Disclosures about Market Risk Lear is exposed to market risks from foreign exchange rates, interest rates, and commodity prices, actively managing a portion of these exposures using derivative instruments - The company's primary market risks are fluctuations in foreign exchange rates, interest rates, and commodity prices, utilizing derivative financial instruments to manage a portion of these risks without engaging in trading activities239 Foreign Exchange Transactional Exposure Sensitivity (in millions) | Currency | Hypothetical Strengthening | Potential Annual Earnings Impact | | :--- | :--- | :--- | | U.S. Dollar | 10% | $19 | | Euro | 10% | $31 | - With $150 million in variable rate debt outstanding under its Term Loan, a hypothetical 100 basis point increase in interest rates would raise annual interest expense by approximately $2 million245246 Item 4 – Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting, excluding the recently acquired IGB from the 2023 assessment - The President and CEO, along with the Senior Vice President and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period248 - No material changes in internal control over financial reporting occurred during the quarter250 - The acquired operations of IGB will be excluded from the assessment of internal control over financial reporting as of December 31, 2023, as permitted during the first year post-acquisition250 Part II – Other Information Item 1 – Legal Proceedings The company is involved in various legal proceedings and claims, having recorded reserves for disputes, warranty, and environmental matters, with management not expecting a material adverse impact - As of September 30, 2023, the company has recorded reserves of $15 million for pending legal disputes, $30 million for warranty and recall matters, and $6 million for environmental matters231 Item 1A – Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022254 Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, Lear repurchased 521,552 shares of common stock for approximately $75 million, with $1.1 billion remaining under its share repurchase authorization Common Stock Repurchases (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2 - July 29, 2023 | 4,426 | $144.55 | | July 30 - Aug 26, 2023 | 265,703 | $145.11 | | Aug 27 - Sep 30, 2023 | 251,423 | $141.92 | | Total | 521,552 | $143.57 | - As of September 30, 2023, the remaining authorization under the common stock share repurchase program was approximately $1.1 billion255256 Item 5 – Other Information President and CEO Raymond E. Scott established a Rule 10b5-1 trading plan on September 14, 2023, for potential sales of up to 23,528 shares of Lear's common stock through June 28, 2024 - President and CEO Raymond E. Scott entered into a Rule 10b5-1 trading plan on September 14, 2023, for potential sales of up to 23,528 shares of common stock through June 28, 2024258 Item 6 – Exhibits This section lists the exhibits filed with the Form 10-Q report. Key exhibits include certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and XBRL data files - The report includes certifications from the CEO and CFO pursuant to Rule 13a-14(a)/15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002261