Lear Corporation 2016 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier focused on Seating and E-Systems, including complete seat systems, seat components, electrical distribution systems, electronic modules, connectivity, software and high-voltage systems. The filing covers the fiscal year ended December 31, 2016. The company operated 243 facilities in 37 countries and employed approximately 148,400 people.
Global light-vehicle production increased 5% to 91.2 million units in 2016. Lear’s largest customers were Ford and General Motors, each representing approximately 21% of net sales, and BMW, representing approximately 10%.
Financial results and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $18,557.6 million | $18,211.4 million | +2% |
| Gross profit | $2,102.1 million | $1,819.8 million | +16% |
| Gross margin | 11.3% | 10.0% | +130 bps |
| Net income attributable to Lear | $975.1 million | $745.5 million | +31% |
| Diluted EPS | $13.33 | $9.59 | +39% |
| Operating cash flow | $1,619.3 million | $1,271.1 million | +27% |
| Capital expenditures | $528.3 million | $485.8 million | +9% |
| Cash and cash equivalents | $1,271.6 million | $1,196.6 million | +$75.0 million |
| Long-term debt | $1,898.0 million | $1,931.7 million | -$33.7 million |
Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $1.09 billion. Consolidated net income was $1,040.5 million, including $65.4 million attributable to noncontrolling interests. The effective tax rate was 27.7%.
- Seating: Sales of $14.36 billion, up 2%; segment earnings of $1.14 billion, up 25%; margin improved to 7.9% from 6.4%.
- E-Systems: Sales of $4.20 billion, up 2%; segment earnings of $591.3 million, up 7%; margin improved to 14.1% from 13.5%.
- Liquidity: Approximately $1.3 billion of cash and cash equivalents and $1.25 billion of available revolving-credit capacity were reported at year-end. The filing separately states that $767 million of cash was held in foreign subsidiaries.
- Debt: Senior notes totaled $1.475 billion, and $468.7 million remained outstanding under the term loan facility. No borrowings were outstanding under the revolving credit facility. The company reported compliance with all debt covenants.
- Shareholder returns: Lear repurchased $658.8 million of stock in 2016 and paid $88.8 million of common-stock dividends. The quarterly dividend increased to $0.30 per share from $0.25 in 2015. Remaining repurchase authorization was $341.2 million, expiring December 31, 2017.
Fourth-quarter information
For the thirteen weeks ended December 31, 2016, net sales were $4,643.5 million, gross profit was $512.1 million, consolidated net income was $248.5 million, net income attributable to Lear was $229.9 million, and diluted EPS was $3.24. Fourth-quarter results included a $34.2 million non-cash pension settlement charge.
Material changes versus the prior comparable period
- Sales increased $346.2 million, primarily from new business and higher production volumes in Asia, Europe and South America, partly offset by foreign-exchange effects and customer price reductions.
- Gross margin expanded substantially due to improved operating performance, restructuring benefits and lower material costs as a percentage of sales. Material cost declined to 64.8% of sales from 66.6%.
- Operating cash flow increased $348.2 million, supported by higher earnings and working-capital sources, although accounts receivable and inventory consumed cash.
- Restructuring and related manufacturing inefficiency charges declined to approximately $69.6 million from $97.2 million.
- Other expense declined to $6.4 million from $68.6 million, partly because 2016 included a $30.3 million gain from consolidating an affiliate, while 2015 included a $14.3 million debt-extinguishment loss.
- Interest expense decreased to $82.5 million from $86.7 million as debt-related costs declined.
- AccuMED was acquired in December 2016 for $148.6 million net of cash acquired. The acquisition added specialty-fabric capabilities and generated preliminary goodwill of $72.0 million.
- Lear gained control of Beijing BAI during 2016, recognized a $30.3 million gain, and increased its ownership in eLumigen to 46% from 30%.
Guidance, outlook, commentary and risks
The filing does not provide a clear consolidated 2017 revenue or earnings guidance figure. Management expects continued growth from higher vehicle content, crossover and sport-utility production, connectivity, safety, electrification, autonomous-vehicle technologies and expansion in Asia. The 2017 to 2019 sales backlog was $2.8 billion, including $1.25 billion related to 2017; non-consolidated joint ventures had an additional $800 million backlog. Backlog remains subject to production volumes, foreign exchange, launch timing and customer decisions.
Capital spending for 2017 was estimated at approximately $550 million. On February 6, 2017, after year-end, Lear signed an agreement to acquire Grupo Antolin’s automotive seating business for approximately €286 million on a cash- and debt-free basis, subject to customary closing conditions and regulatory approvals.
- Automotive production is cyclical, and Lear is concentrated with major customers and vehicle platforms.
- Ford, General Motors and BMW together represented approximately 52% of 2016 net sales.
- Customer-imposed price reductions require continuing productivity and cost-reduction actions.
- Lear faces foreign-exchange, commodity, supply-chain, labor, cybersecurity, product-liability, recall, environmental and regulatory risks.
- Approximately 78% of the company’s unionized workforce covered by labor agreements was scheduled for contract expiration during 2017.
- Potential changes to U.S. tax, trade and NAFTA-related policies, as well as Brexit-related uncertainty, could affect costs, supply chains and demand.
- Recorded reserves included $49.1 million for product liability and warranty claims, $9.0 million for environmental matters and $11.0 million for pending legal disputes.
- Pension and other postretirement obligations were underfunded by approximately $315 million in aggregate at year-end, and 2017 minimum pension contributions were estimated at $10 million to $15 million.
Important facts for investors to verify
- Reconcile reported earnings growth with the $34.2 million pension settlement charge, $30.3 million affiliate-consolidation gain, restructuring charges and $24 million of net tax benefits.
- Review the sustainability of the 11.3% gross margin and segment-margin improvements after restructuring benefits and favorable operating performance.
- Assess customer concentration and the effect of Ford, General Motors and BMW production volumes, pricing and model launches.
- Evaluate liquidity after the proposed Grupo Antolin acquisition, planned 2017 capital expenditures, dividends, share repurchases and debt maturities.
- Review the $2.8 billion backlog assumptions, including IHS production forecasts, the $1.05 per euro exchange-rate assumption and the timing of awarded programs.
- Confirm the preliminary purchase-price allocation and integration risks associated with AccuMED and the subsequent Grupo Antolin transaction.
- Monitor labor negotiations, commodity costs, foreign exchange, tariffs and trade-policy developments.
- Review pension assumptions, tax valuation allowances, unrecognized tax benefits, warranty reserves and pending legal or environmental matters.