Lear's Plunging Profit to Send Jobs Packing

From Detroit Free Press

SOUTHFIELD, MI — The bug afflicting Detroit’s automotive industry is infecting even the healthiest companies now.

Auto supplier Lear Corp. on Friday said it is planning an aggressive cost-cutting strategy, which includes moving manufacturing and engineering work to low-cost countries, after it posted a $75.8-million decline in profits during the first quarter of the year.

The auto industry’s largest interior supplier, which makes seats, electronics and other parts found inside cars and trucks, was blindsided by a industry wide drop in truck demand. Southfield, Mich.-based Lear has 280 facilities worldwide, employing 110,000 workers.

In Michigan, Lear is the seventh-largest publicly traded company and employs 9,403 workers. That includes 5,654 hourly workers in at least 15 plants and distribution centers from Detroit to Grand Rapids, Mich.

While big auto suppliers like Visteon Corp. and Delphi Corp. have struggled for years, Lear has been considered one of the region’s healthier companies. It reported a net profit of $422.2 million, or $5.77 per share, on revenue of $17 billion in 2004.

But its profits plunged 82.9 percent during the first quarter, which ended April 2, causing company officials to acknowledge that Lear has fallen on tough times like many of its peers in the auto supplier community.

Morgan Stanley auto analyst Steven Girsky, criticized the performance as “well below our estimates and consensus’ estimates.”

High raw-material costs and declining demand and production of key vehicles, especially domestic SUVs, caused most of the pain. Demand for General Motors Corp. and Ford Motor Co. cars and trucks has waned considerably in recent months, causing both automakers to post market share losses and cut production — moves that have caused a ripple effect through this auto-centric economy.

About 67 percent of Lear’s business comes from GM, Ford and DaimlerChrysler AG, whose Chrysler Group is based in Auburn Hills, compared to about 37 percent for competitor Johnson Controls Inc.

Lear was incorporated in 1928, and company executives characterized the last three months as one of the most difficult quarters in the company’s history. They said a variety of changes are needed to better position Lear for the future.

“We will accelerate growth in low-cost manufacturing and engineering locations,” Robert Rossiter, Lear’s chairman and chief executive officer, said during a conference call with auto industry analysts and journalists. “We’re also going to be announcing some plant closures in the next several months, and it’s tough on people, but we have to do what we have to do to save this business.”

He declined to elaborate on whether the United Auto Workers was working with Lear on any potential changes.

“Talking about plant closings on an open line is a difficult thing to do because it’s going to affect a lot of lives,” he said.

“I will say this. As much as we’re working to try to save those plants, … we are going to have to take action ,” Rossiter said, adding that the “UAW does understand the situation. Obviously, they are working hard for their people, but in the end, Lear has to do what it has to do. I don’t really want to comment on that anymore because people’s lives are going to be affected by this, and I really don’t want to see it in the headlines.”

Several times, Rossiter seemed apologetic for the changes that the company was preparing to make.

“We’re looking and speeding up our sourcing in low-cost countries,” he said. “It’s not that we really want to do that. We’re forced to do that. And unfortunately we’re looking at that from an engineering standpoint, too.”

Rossiter also noted that the company was exploring “every little thing” it could to offset its increasing costs and the difficult market environment, including outsourcing the manufacturing of some parts, especially unprofitable resin-based products, consolidating some operations and buying other companies to grow. Lear officials said the company was “caught by surprise” by changes in the marketplace that reduced demand for its interiors.

The company was especially hard-hit by slumping production of domestic trucks, for which it supplies a lot of content. Production of the top 15 vehicles lines that Lear supplies parts to fell 11 percent in the first quarter from a year ago, and seven of those top 10 were trucks, Lear spokeswoman Andrea Puchalsky said.

Consequently, Lear sales fell to $4.3 billion in its first quarter, or 4.6 percent, from $4.5 billion during the same three-month period a year ago. Net income, meanwhile, declined to $15.6 million, or 23 cents a share, in the first quarter from $91.4 million, or $1.34 a share, a year ago.

Had it not been for a onetime tax benefit, the company would have lost 3 cents a share. Before taxes, Lear lost a total of $2.9 million during the first quarter, compared to a pre tax profit of $126 million during the same quarter a year ago.

Aside from announcing plans to cut costs, Lear executives tried to soften the blow of its weak performance by characterizing 2005 as a transitional year. Officials noted that 43 percent of Lear’s sales are connected to vehicles that are being replaced or redesigned this year, and that business is expected to improve.

“We see a strong 2006 and 2007,” Rossiter said. “Why? Because our backlog is strong and balanced with good growth from our Asian customers.”

Over the next 18 months, Lear has plans to launch 77 new products.

Lear executives tried to convey confidence that the company will succeed in positioning itself for a more profitable future.

“We’ve been through these times before,” Rossiter said. “We understand what we have to do.”

James Vandenberghe, Lear’s vice chairman, also noted that the supplier’s customer base is being diversified away from the traditional domestic automakers: GM, Ford and the Chrysler Group.

“Business outside of this traditional customer base has grown to represent 46 percent of our business,” he said. “Our presence in Asia positions us for future growth. We have significant infrastructure in place, including 13” joint ventures “in China, 7 engineering centers in the region and 21 manufacturing facilities.”

Based on its production and market condition estimates, Lear advised investors that it expects to earn from 20 cents to 40 cents a share during the second quarter. For the full year, Lear has estimated earnings of $2.75 to $3.25 a share, excluding any restructuring charges.

On Wall Street on Friday, shares of Lear closed at $36.77, down $3.51 per share, or 8.71 percent. By comparison, shares of Lear have traded as high as $68.88 as recently as January 2004.

_______________________________________

Click here to view the rest of today’s headlines.