Lear Corporation Business Macro background American car industry was producing 16-17 million units in 2006 which

h was higher than what normal demand of 14-15 mill units. Credit crisis caused the number of cars to decrease to 9-10 mill units. GM has reduced costs so that it can breakeven at the low end of the cycle where it is producing 2.3 mill units for total 9.5-10 mill total units. $7K contribution margin and a 700k reduction in units caused EBIT to become 0. Ford 10K indicates that there is 30% excess capacity in automotives in US and 20% in Europe and in addition, cheaper car manufacturers from China etc can begin importing into US. So car manufacturing and suppliers dont have pricing power. What is average sales price (app $30K) of a car and its breakdown of economics? Why does Citi research show $7K contribution margin per car for GM to breakeven? Lears Business Sales driver is number of vehicles sold by automotive manufacturers and the specific models/platform the supplier is supporting. Manufacturers provide orders for a year at a time or sometimes for the life of the model. Avg content per car is $340 per vehicle in US. Sale 40% in Europe, 35% in NA and 20% in Asia which is the fastest growing. GM 21%, Ford 18% and BMW 11% are largest customers. They supply in all vehicle segments so no dependence on one model. OEMs award contracts several years before production starts. Sales backlog of $2.2 bill which is new programs less lost programs and doesnt reflect price reductions imposed in new and existing programs. Terminations of programs so far have not been material. Lear sold interior business in 2007 as returns on this business were not good. Seating Business Modular design for a specific program. Try to get the seat JIT matching the shift when needed, so assembly sites are located near customers manufacturing site. Revenues $9.4 bill and pre tax earnings of $655 mill which should match CFO. Global seat market is $50 bill market and Lear is the number two global supplier of car seats. # 1 is Johnson Controls. Interior exited 2006 Includes overhead systems, door panels, flooring and acoustic systems. $3 bill in sales. More cap intensive and susceptible to fluctuations in commodity prices esp resins. Characterised by overcapacity, fragmented supplier base. Further consolidation and restructuring required to return this segment to appropriate profit level. When customers

indicared an intent to focus on purchases rather than total integration they decided to sell the business and got an ownership in a company partly owned by WL Ross. EPMS Electrical distribution systems consisting of wiring, terminals, connectors, junction boxes and electronic modules within the overall architecture of the vehicle, they want to optimally integrate these. Shifiting to industry towards global vehicle platforms. Narrowed focus and exited some businesses. Rev $2.6 bill and operting earnings of $100 mill. Market size of $40 bill seems like 8-10 competitors including Delphi. I am not sure of the pricing dynamic. Management Was paid $21 mill post bankruptcy. B grade at best. Valuation Value Seating business has stickyness and overall beta to global vehicle units. Better than OEMs because little model dependency. Ok to assign 5-6 EBIT. Price: Net debt of -$1 bill mkt cap 4.4 bill so EV of $3.5 bill. EV to EBIT of 5. PE of 8. Does appear undervalued. Catalyst can be increase in earnings by cyclical recovery.