Lear Corporation a leading global supplier of automotive seating systems, electrical distribution systems and electronic products, reported financial results for the third quarter of 2008.
The production environment in the third quarter was extremely challenging. In North America, industry production was down 17% and Lear's top fifteen platforms were down 33%. In Europe, industry production was down 3% and Lear's top five customers were down 8%.
"We are experiencing recessionary conditions in North America, and there is increasing weakness in Europe," said Bob Rossiter, Lear's chairman, chief executive officer and president. "As a result, industry production in these mature markets is down sharply. In response, the Company has been very aggressive in reducing structural costs."
In response to rapidly evolving industry conditions, Lear has been aggressively reducing costs and restructuring its global operations. These actions have been designed to better align the Company's manufacturing capacity, lower operating costs and streamline the Company's organizational structure. Since mid-2005, the Company has implemented major structural changes, including a reduction of excess capacity, consolidation of administrative functions, establishment of global operating units and a significant improvement in its low-cost footprint.
As a result, the Company has lowered ongoing operating costs by more than $250 million and is presently able to operate more efficiently at significantly lower production volumes.
Third-Quarter Financial Results
For the third quarter of 2008, Lear reported net sales of $3.1 billion and a pretax loss of $77.3 million, including restructuring costs of $45.8 million. This compares with net sales of $3.6 billion and pretax income of $60.1 million, including restructuring costs of $37.3 million and other special items of $8.0 million, for the third quarter of 2007.
Net loss was $98.2 million, or $1.27 per share, for the third quarter of 2008 as compared with net income of $41.0 million, or $0.52 per share, for the third quarter of 2007.
Income before interest, other expense, income taxes, restructuring costs and other special items (core operating earnings) was $46.1 million for the third quarter of 2008. This compares with core operating earnings of $170.4 million for the third quarter of 2007.
The decline in net sales for the quarter primarily reflects a significant reduction in production of our key platforms in North America and Europe, offset partially by favorable foreign exchange.
In the seating segment, net sales were down $403 million. Operating margins declined sharply, reflecting primarily the impact of lower vehicle production. In the electrical and electronic segment, net sales were down $38 million and operating margins were about flat.
In the third quarter of 2008, free cash flow was negative $16.7 million, as compared with free cash flow of $90.8 million in the third quarter of 2007. The decline in free cash flow compared with a year ago primarily reflects lower earnings.
Operating Improvement Plan
The Company recently announced a $150 million operating improvement plan to strengthen operating results and increase financial flexibility over the next twelve months. This initiative is comprised of actions to further reduce structural costs and other measures intended to preserve financial flexibility. Specific actions include:
-- Reducing program development costs, consistent with the significantly lower production outlook
-- Acceleration of low-cost engineering and sourcing initiatives
-- More targeted investments in growth initiatives, focused on high priority programs
-- Further reductions in procurement, manufacturing, engineering and logistics costs to reflect present business conditions
-- Further census reductions, temporary layoffs and additional thrifting of personnel-related costs
-- Re-timing and selective reductions in restructuring spending
-- Aggressive working capital management and capital spending efficiencies
-- Other commercial actions and supply base consolidation
Rossiter continued, "We have faced challenging conditions before, and each time, we have emerged as an even stronger company. Going forward, we intend to focus on those things within our control, including further improvements to our cost structure, maintain our focus on strategic priorities and do whatever it takes to position the Company for future success. We are committed to weathering the downturn and emerging as an even stronger competitor when the headwinds subside."
Lear continues to make progress on its strategic priorities, including the global restructuring initiative, further growth and diversification of its global sales and the longer-term growth and business improvement plan for the electrical and electronic segment. The Company intends to maintain its commitment to these strategic priorities, notwithstanding adverse business conditions.
For the first nine months of 2008, approximately two-thirds of Lear's net sales were generated outside of North America. In addition, Lear continues to win new business globally and has been awarded over $700 million in net new business since January, with more than half in the electrical and electronic segment.
Lear's cash position and access to liquidity remain strong, and the Company has no near-term debt maturities. In addition, the Company expects to generate positive free cash flow in the fourth quarter and for the full year of 2008. The Company's primary liquidity sources are:
-- Cash and cash equivalents (at 09/27/08) $ 523 million
-- Revolving credit facility $ 1.3 billion
At September 27, 2008, there were no borrowings under the Company's revolving credit facility. In October, Lear
elected to borrow $400 million under its revolving credit facility to protect against possible short-term disruptions in the credit markets.These funds have been temporarily invested in safe, short-term investments.
"We remain focused on maintaining ample financial flexibility. Our global restructuring actions, together with the recently announced operating improvement plan, are designed to respond to the sharply lower industry production levels we are experiencing. The Company will continue to closely monitor overall business conditions and industry production levels. We will implement necessary additional actions in response to any further industry weakness," Rossiter concluded.