Lear restructuring as inflation, supply chain issues slam auto suppliers

Lear Corp. saw first-quarter revenue and income slide due to inflation and supply chain problems as the Southfield, Mich.-based auto supplier looks to restructure by reducing headcount, exiting underperforming segments and consolidating plants.

At the same time, Lear outperformed the industry in sales and stacked up new business in its seating and e-systems divisions as its competitors face the same financial headwinds.

The supplier took in adjusted net income of $108.1 million, down more than half from last year, on sales of $5.2 billion, a 3 percent year-over-year revenue decrease, according to its earnings report released May 3.

"We're not going to be the victim," CEO Ray Scott said on a call with investors. "I'm not going to sit here and hope that this half is better than the next half or this year is better …We've got to start operating in what's in front of us, and that's exactly what we're doing."

Lear has reduced global headcount by 7,700 since early last year, according to its quarterly presentation to investors. It is unclear how many of the reductions have taken place in Michigan. A company spokesman said a breakdown was not available.

The company also said that it plans to exit its audio and lighting business — a $200 million-a-year product line — by ramping down over the next five years. The primary impact will be a factory closure in Europe.

The other piece of restructuring took place in South America, where a wire plant and JIT seating plant were consolidated. Scott said the success of that model has the company considering implementing it across its global footprint.

"Because of the volatility around volume production, changes in schedules, those types of things, we looked at how we could combine different administrative roles between e-systems and seating," Scott said.

Lear optimized efficiency by combining not only administrative functions such as engineering, purchasing, logistics, sales and marketing, but also manufacturing.

"The bulk of the opportunity really became clear in manufacturing," Scott said. "We combined the two product groups together to really utilize and take full advantage of our efficiencies in our plants. We're able to flex our labor … Can we take that and extrapolate that across both our business segments?"

Scott said the company hired a consultant to answer just that and put together a potential plant consolidation plan for the next three to five years.

The move would be in step with automakers' demands of localizing its supply base around assembly plants and with the drastic, though gradual transition to electric vehicles, which will require great manufacturing flexibility, said Chief Financial Officer Jason Cardew.

"Having an ability to have a flexible manufacturing process that can service multiple customers, multiple programs in a flexible manner [and] move headcount between programs, I think positions us to lower our costs and service our customers," Cardew said.

On headwinds, company executives said they expect a $695 million gross negative impact this year, and $155 million net impact, due primarily to inflation and commodity costs.

"We do have good customer relationships, and we are negotiating those settlements as far as inflationary costs," Scott said. "All customers are slightly different in how they're handling it, but I do believe over time we're going to get some reasonable agreement with each one of our customers on the JIT model."

Regarding new business, the company said it had $200 million in conquest awards. It is also targeting a 55 percent increase in new e-systems business to $500 million this year as it prepares for key launches including the GMC Hummer pickup, Volvo XC90, Mazda MX-30 and an undisclosed global EV automaker.

The company's net sales projection was lowered for the year, from a range of $20.4 billion to $21.2 billion, compared to February's outlook of $20.8 billion to $22.3 billion.

Lear stock was down marginally at $128.93 per share as of late Tuesday morning.

Scott said the supplier is positioned well to withstand inflation and the continued supply chain disruptions. In the long term, he aims to position the company's plants to be flexible for the EV transition of automakers and their supply base.

"We think there's real opportunity here," he said. "We'll be the only company in the world that can flex our plants like this. We have a global footprint that's set up. We just got to look at it, reshape it for localization and our customer needs and flex it around their manufacturing plants."