Lear Corporation 2017 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier serving major vehicle manufacturers through two segments: Seating and E-Systems. Products include complete seat systems and components, electrical distribution systems, electronic modules, connectivity hardware and software. The filing covers the fiscal year ended December 31, 2017; the company reports quarterly results using a thirteen-week calendar.
Lear operated 257 facilities in 39 countries and employed approximately 165,000 people at year-end. Global light-vehicle production increased 2% to 93.3 million units in 2017.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $20.467 billion | $18.558 billion | +10% |
| Gross profit | $2.291 billion | $2.102 billion | +9% |
| Gross margin | 11.2% | 11.3% | Down 0.1 point |
| Income before tax and equity earnings | $1.527 billion | $1.338 billion | +14% |
| Net income attributable to Lear | $1.313 billion | $975.1 million | +35% |
| Diluted EPS | $18.59 | $13.33 | +39% |
| Operating cash flow | $1.783 billion | $1.619 billion | +10% |
| Capital expenditures | $594.5 million | $528.3 million | +13% |
| Cash and equivalents | $1.500 billion | $1.272 billion | +$228.8 million |
| Long-term debt | $1.952 billion | $1.898 billion | +$53.5 million |
Net income margin attributable to Lear improved to 6.4% from 5.3%. Material costs declined to 64.5% of sales from 64.8%. Cash flow from investing activities was a use of $868.6 million, while financing activities used $742.0 million.
- Seating: Sales of $15.873 billion, up 11%; segment earnings of $1.251 billion; margin was 7.9%, unchanged from 2016.
- E-Systems: Sales of $4.594 billion, up 9%; segment earnings of $641.6 million; margin was 14.0%, compared with 14.1%.
- Liquidity: Lear reported approximately $1.5 billion of cash and $1.75 billion of available revolving-credit capacity at year-end. There was no short-term debt outstanding.
- Shareholder returns: Lear repurchased $454.4 million of common stock in 2017 and declared quarterly dividends of $0.50 per share, or $2.00 for the year. Remaining repurchase authorization was $545.6 million through December 31, 2019.
Material changes versus the prior comparable period
- Sales growth reflected new business of approximately $1.4 billion and approximately $350 million from the April 2017 acquisition of Grupo Antolin’s automotive seating business.
- Operating performance and restructuring benefits improved gross profit by approximately $257 million, but customer selling-price reductions offset much of the benefit and held gross margin broadly flat.
- Net income benefited from higher operating earnings, share-count reduction and an unusually low 12.9% effective tax rate, compared with 27.7% in 2016.
- The 2017 tax rate included significant discrete benefits, including approximately $289.7 million of foreign tax credits related to repatriated earnings and other tax benefits, partly offset by a $131.0 million transition-tax charge and $42.5 million of U.S. tax-rate and other tax-reform expense.
- Lear issued $750 million of 3.8% senior notes due 2027, redeemed the $500 million 2023 notes and refinanced its credit agreement. The new agreement includes a $1.75 billion revolving facility and a $250 million term loan, both maturing in 2022.
- Restructuring charges were approximately $72.6 million, with approximately $21 million of additional costs expected for actions initiated by year-end.
- Lear obtained control of Shanghai Lear STEC, recording a $54.2 million gain and recognizing $153.4 million of redeemable noncontrolling interest.
Guidance, outlook, commentary and risks
Management did not provide a clear consolidated 2018 revenue or earnings guidance figure in the filing. Capital spending for 2018 was estimated at approximately $630 million. The January 2018 sales backlog for 2018–2020 was $3.2 billion, up 14% from the prior year, plus $700 million at nonconsolidated joint ventures; the backlog is subject to production volumes, foreign exchange, launch timing and customer-plan changes.
Management expects growth opportunities from electrification, connectivity, cybersecurity, advanced driver assistance, autonomous vehicles and increasing electronic content. The company also completed the acquisition of GPS-technology developer EXO Technologies in January 2018 and expected to consolidate Lear FAWSN following a January 2018 control transaction.
- Automotive production is cyclical, and sales depend heavily on customer vehicle volumes and the success of specific vehicle platforms.
- Ford and General Motors each represented approximately 18% of 2017 net sales, creating material customer concentration.
- Customer-imposed price reductions, commodity costs, supply-chain disruption, labor disputes and product-launch execution may pressure margins and cash flow.
- Approximately 77% of Lear’s global unionized workforce was covered by agreements scheduled to expire in 2018.
- International operations expose Lear to foreign-exchange, trade, tariff, political, tax and regulatory risks, including uncertainty regarding NAFTA renegotiation and Brexit.
- Debt covenants, pension obligations, cybersecurity incidents, product liability, recalls, environmental matters and legal proceedings could adversely affect results.
- The accounting for the Tax Cuts and Jobs Act was provisional at year-end; adjustments could be recorded no later than the fourth quarter of 2018.
Most important facts for investors to verify
- Reconcile reported earnings growth with the effect of tax reform, foreign tax credits, the Lear STEC gain, restructuring, litigation and debt-extinguishment items.
- Assess whether customer price reductions continue to offset productivity and restructuring gains, particularly in the Seating segment.
- Evaluate the conversion of $1.783 billion of operating cash flow into capital spending, acquisitions, dividends and share repurchases.
- Review debt maturities, covenant compliance and the sustainability of liquidity after planned capital expenditures and shareholder returns.
- Validate the quality and timing of the $3.2 billion sales backlog and the underlying vehicle-production assumptions.
- Monitor customer concentration, 2018 labor-agreement expirations, commodity exposure, foreign exchange and potential trade-policy changes.
- Review the final tax-reform accounting, purchase-price allocations for Antolin Seating and post-year-end acquisitions and control transactions.