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Lear Beats but Profits Slide

LEA JCI

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Lear Corp. (LEA - Snapshot Report) posted a 12.3% fall in adjusted earnings per share to $1.35 in the second quarter of 2012 compared to $1.54 in the corresponding quarter last year. However, profits surpassed the Zacks Consensus Estimate by 6 cents per share. In absolute terms, profits slashed 18% to $135.4 million compared with $165.2 million in the year-ago quarter.

Revenues decreased marginally by $11 million to $3,665.0 million in the reported quarter, surpassing the Zacks Consensus Estimate of $3,639 million. The decline in revenues was driven by challenging economic condition in Europe, partially offset by positive impact from higher productivity in North America and Japan due to recovery of Japanese manufacturers.

Revenues from the Seating segment went down 2% to $2.8 billion, driven by the negative impact of foreign exchange, which was partially offset by positive impact from new business additions.

Adjusted operating income declined to $185 million or 6.6% of sales in the second quarter of 2012. The year-over-year fall in earnings is driven by increased product and facility launch costs, increased program development costs and lower production volume.

Revenues from Electrical Power Management Systems segment rose 7% to $872 million. Addition of new businesses had a favorable impact on revenues, which offset the negative impact of foreign exchange.

Adjusted operating income went up to $59.1 million or 6.8% of sales in the quarter driven by increase in sales and productivity, partially offset by increased product and facility launch costs as well as program development costs.

Share Repurchase

In the second quarter of 2012, Lear repurchased 1.8 million shares for $70 million. Since the inception of the share repurchase program, the company has repurchased 9.1 million shares for $402 million. The company had approximately $298 million worth of shares remaining for repurchase at the end of the quarter.

Acquisition

In May, Lear completed the acquisition of Guilford, which is a global leader of automotive and specialty fabrics. Guilford will add global fabric design and technical expertise to Lear's existing seat fabric and seat cover capabilities.

Financial Details

Lear had cash and cash equivalents of $1.3 billion as of June 30, 2012, declining from $1.8 as of December 31, 2011. Long-term debt amounted to $695.6 million as of June 30, 2012 compared with $695.4 million as of December 31, 2011.

In the first half of 2012, cash flow from operating activities amounted to $159.8 million, compared with $360.9 million in the same period of 2011. Capital expenditure amounted to $175.9 million in the period compared with $156.2 million in the first half of 2011. The company had free cash flow of $16.1 million during the period compared with $204.7 million in the first half of 2011.

Outlook

Lear anticipates that revenues between $13.9 and $14.4 billion for 2012 with operating earnings in the range of $740 to $790 million. Adjusted net income is expected between $510 and $540 million for the year. Free cash flow is estimated to be $275 million with capital expenditures of $435 million, a $10 million rise owing to the Guilford acquisition.

Our Take

Lear Corporation designs, manufactures, assembles, and supplies automotive seat systems, electrical distribution systems, and related components primarily to automotive original equipment manufacturers. The company sells its products chiefly in North America, South America, Europe, and Asia.

Continuous investment in core businesses, expansion in emerging markets and strategic acquisitions such as Guilford will spur growth opportunities for Lear in the future. The company competes with Johnson Controls Inc. (JCI - Analyst Report). Currently, it retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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