Lear Corporation (NYSE: LEA), a leading global supplier of automotive seating and electrical distribution systems, today reported record sales, earnings and margins for the third quarter. Highlights include:
Sales of $4.2 billion, up 8% from a year ago
Core operating earnings of $251 million, up 22%
Adjusted earnings per share of $1.93, up 33%
Ninth consecutive quarter of year-over-year earnings improvement
Company operating margin of 5.9%, up 60 basis points, with sales and margins up in both business segments
Returned $119 million to shareholders through share repurchases and dividends
Announced agreement to acquire Eagle Ottawa, the world’s leading supplier of automotive leather
“We had our best third quarter ever,” said Matt Simoncini, Lear’s president and chief executive officer. “Sales grew faster than industry production, and we improved our margins in both business segments on a year-over-year basis. The investments that we have been making to improve our cost structure, increase our component capabilities, and grow and strengthen both our business segments are paying off. We are continuing to win new business in both segments and in every region of the world. As we gain market share, we remain focused on operational excellence and continuous improvement to sustain our success.”
Business Conditions
In the third quarter, global vehicle production increased 3% from a year ago, reflecting primarily strong production growth in China and North America. Production was up 10% in China, 8% in North America and 1% in Europe & Africa. Production was down 20% in South America.
Third Quarter 2014 Financial Results
For the third quarter of 2014, Lear reported sales of $4.2 billion, core operating earnings of $251 million, net income of $140 million and adjusted earnings per share of $1.93. This compares with sales of $3.9 billion, core operating earnings of $207 million, net income of $113 million and adjusted earnings per share of $1.45 for the third quarter of 2013.
In the Seating segment, sales were up 10% to $3.2 billion, reflecting the addition of new business and higher production on key platforms. Adjusted segment earnings were $176 million or 5.5% of sales. Earnings increased 14% from last year, primarily reflecting the increase in sales and favorable operating performance.
The Electrical segment continues to report strong earnings growth, driven by an industry leading cost structure and strong operating performance. Adjusted segment earnings were $139 million or a record 13.3% of sales, marking our 20th consecutive quarter of year-over-year margin improvement. Earnings increased 24% from last year, reflecting favorable operating performance.
In the third quarter of 2014, free cash flow was $145 million, and net cash provided by operating activities was $237 million.
Reconciliations of core operating earnings to pretax income before equity income, adjusted net income to net income attributable to Lear, adjusted earnings per share to diluted net income per share attributable to Lear, adjusted segment earnings to reported segment earnings and free cash flow to net cash provided by operating activities, in each case as determined in accordance with accounting principles generally accepted in the United States (GAAP), are provided in the attached supplemental data pages.
Share Repurchase Program
During the third quarter of 2014, Lear repurchased 1.0 million shares of its common stock for a total of $103 million.
As of the end of the third quarter, we have a remaining share repurchase authorization of $491 million, which expires in April 2016 and reflects approximately 7% of Lear’s total market capitalization at current market prices.
Since initiating the share repurchase program in early 2011, Lear has repurchased 29.3 million shares of its common stock for a total of $1.8 billion. This represents a reduction of approximately 28% of our shares outstanding at the time we began the program.
Eagle Ottawa Acquisition
Consistent with our strategy to make value enhancing acquisitions, in August, Lear announced plans to acquire Eagle Ottawa, the world’s largest supplier of leather to the automotive industry. The addition of Eagle Ottawa will further strengthen Lear’s global seating business, enhance Lear’s position as the industry leader in luxury and performance automotive seating and complement Lear’s existing capabilities in the design and manufacturing of seat covers.
Simoncini added, “Eagle Ottawa adds design and development resources, as well as technical expertise to our existing leather capabilities. Eagle Ottawa will enhance the level of craftsmanship, improve our overall cost structure and increase opportunities for sales growth and diversification.”
The transaction is expected to be accretive to earnings per share by 5%, before synergies, for the first twelve months following closing. We expect the transaction to close in the first quarter of 2015, subject to customary conditions, including regulatory approvals.
Full Year 2014 Financial Outlook
Lear has increased its full year 2014 earnings outlook, reflecting strong year-to-date operating performance.
Our 2014 financial outlook is based on industry vehicle production assumptions of 20.4 million units in Europe & Africa, 17.0 million units in North America and 21.3 million units in China, all of which are in-line with the prior outlook. Lear’s financial guidance is based on an average full year exchange rate of $1.33/Euro, down 3% from the prior outlook.
Sales in 2014 are expected to be approximately $17.7 billion, consistent with our prior guidance despite a weakening Euro. Core operating earnings are now expected to be in the range of $1,010 to $1,040 million, up from the prior range of $975 to $1,025 million. Free cash flow is expected to be approximately $450 million.
Pretax income before restructuring costs and other special items is estimated to be in the range of $940 to $970 million. Tax expense, excluding the impact of restructuring costs and other special items, is expected to be in the range of $270 to $285 million. Adjusted net income attributable to Lear is expected to be in the range of $640 to $655 million.
Pretax operational restructuring costs are expected to be approximately $100 million, up $10 million from the prior outlook, reflecting plant consolidations and other census related actions. The outlook for capital spending and depreciation and amortization expense is unchanged at approximately $450 million and $310 million, respectively.
