Lear Corporation 2015 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier of seating systems and components, electrical distribution systems, electronic modules and related software. The company operates through Seating and Electrical segments, with 240 facilities in 36 countries. This Form 10-K reports the fiscal year ended December 31, 2015; fourth-quarter results are included in the annual filing.
Global light-vehicle production increased 2% to 86.9 million units in 2015. North American, European and African, and Asian production increased, while South American production declined 20%. Ford and General Motors represented 22.5% and 20.0% of consolidated sales, respectively, and BMW represented 10.5%.
Financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $18.211 billion | $17.727 billion | 3% increase |
| Gross profit | $1.820 billion | $1.493 billion | 22% increase |
| Gross margin | 10.0% | 8.4% | Up 160 basis points |
| Net income attributable to Lear | $745.5 million | $672.4 million | 11% increase |
| Diluted EPS | $9.59 | $8.23 | 16% increase |
| Operating cash flow | $1.271 billion | $927.8 million | 37% increase |
| Capital expenditures | $485.8 million | $424.7 million | Increase |
Material cost declined to 66.6% of sales from 67.8%. SG&A increased to $580.5 million from $529.9 million, primarily reflecting Eagle Ottawa, while amortization increased to $52.5 million from $33.7 million. Interest expense increased to $86.7 million from $67.5 million due largely to acquisition financing.
Fourth-quarter 2015 net sales were $4.725 billion, gross profit was $490.7 million, net income attributable to Lear was $235.3 million and diluted EPS was $3.07, compared with fourth-quarter 2014 sales of $4.550 billion, gross profit of $392.0 million, net income attributable to Lear of $261.8 million and diluted EPS of $3.24. Fourth-quarter 2014 benefited from substantially larger tax benefits.
Segment performance
| Segment | 2015 sales | 2014 sales | 2015 segment earnings | 2015 margin |
|---|---|---|---|---|
| Seating | $14.099 billion | $13.311 billion | $907.0 million | 6.4% |
| Electrical | $4.113 billion | $4.417 billion | $554.4 million | 13.5% |
- Seating sales increased 6%, driven by the Eagle Ottawa acquisition, new business and higher production volumes, partially offset by foreign exchange. Segment margin improved from 4.9% to 6.4%.
- Electrical sales declined 7%, primarily because of foreign exchange, while segment earnings were broadly stable and margin improved from 12.6% to 13.5%.
- Management is targeting growth from connectivity, safety, vehicle electrification, higher electronic content and autonomous-driving-related technologies.
Material changes versus the prior comparable period
- Lear acquired Eagle Ottawa on January 5, 2015, for approximately $843.9 million, strengthening its automotive leather and premium seating capabilities. Eagle Ottawa contributed approximately $820 million of consolidated sales in 2015.
- Lear acquired Autonet Mobile technology and Arada Systems, expanding cellular connectivity, vehicle-to-vehicle and vehicle-to-infrastructure communications capabilities.
- The company incurred $88.8 million of restructuring charges and approximately $8 million of related manufacturing inefficiency charges, compared with approximately $115 million of restructuring and related charges in 2014. Approximately $25 million of additional restructuring costs were expected for activities initiated by year-end.
- Net foreign-exchange effects reduced sales by approximately $1.5 billion but also reduced cost of sales by approximately $1.4 billion. Foreign-currency translation reduced accumulated other comprehensive income by $247.2 million.
- Net debt increased following the $500 million term loan used to help finance Eagle Ottawa. Lear redeemed its remaining 8.125% senior notes due 2020 and recognized a $14.3 million extinguishment loss.
- Lear repurchased $487.4 million of common stock in 2015 and declared quarterly dividends of $0.25 per share, compared with $0.20 per share in 2014.
Liquidity, debt and capital allocation
| Balance-sheet or liquidity item | December 31, 2015 |
|---|---|
| Cash and cash equivalents | $1.197 billion |
| Total debt, including current portion | Approximately $1.955 billion carrying value |
| Revolving credit facility | $1.25 billion capacity; no borrowings outstanding |
| Term loan outstanding | $490.6 million principal carrying amount |
| Share-repurchase authorization remaining | $512.6 million, expiring December 2017 |
Management stated that cash on hand, operating cash flow and available revolving-credit capacity should satisfy ordinary-course liquidity needs. Planned 2016 capital expenditures were approximately $525 million. Contractual obligations included $1.475 billion of senior notes due after 2020, $490.6 million of credit-agreement obligations, $650.6 million of scheduled interest payments and $457.1 million of operating lease commitments.
Guidance, outlook, commentary and risks
- The three-year sales backlog for 2016 through 2018 was approximately $2.0 billion, consistent with the prior-year backlog. Approximately 75% related to Seating and 25% to Electrical.
- Management expects long-term opportunities from higher vehicle content, premium seating, connectivity, advanced safety systems, hybrid and electric vehicles, and software-enabled vehicle architectures. The filing does not provide a clear consolidated revenue or earnings forecast for 2016.
- Key risks include automotive cyclicality, customer and vehicle-platform concentration, customer-imposed price reductions, raw-material and commodity volatility, foreign-exchange exposure, supply-chain disruption, labor disputes and international operating risks.
- Approximately 88% of Lear’s unionized workforce was covered by labor agreements scheduled to expire during 2016, creating potential disruption risk.
- Product liability, warranty and recall exposure is not fully insured; reserves at year-end included $33.0 million for product liability and warranty claims, $9.1 million for environmental matters and $9.2 million for legal disputes.
- The company remained in compliance with debt covenants. Pension and other postretirement obligations were material, including $224 million of unfunded pension obligations and $115 million of unfunded postretirement obligations.
- The filing identifies an unresolved antitrust settlement matter: the end-payor class settlement remained subject to final court approval as of the filing date.
- Management and the auditor concluded that internal control over financial reporting was effective, although Eagle Ottawa was excluded from management’s 2015 controls evaluation under SEC rules while integration continued. Eagle Ottawa represented 11% of total assets and 5% of 2015 sales.
Important facts for investors to verify
- Assess the sustainability of the 2015 margin improvement after excluding Eagle Ottawa, restructuring benefits and other unusual items.
- Review the impact of foreign-exchange translation and transaction exposure, particularly the euro, on sales, earnings and cash flow.
- Verify Eagle Ottawa integration progress, expected synergies, contingent consideration and incremental amortization.
- Monitor debt repayment requirements, variable-rate exposure, covenant headroom and the balance between acquisitions, share repurchases and dividends.
- Evaluate customer concentration, especially Ford, General Motors and BMW, and the risk of vehicle-platform volume changes or lost programs.
- Review restructuring execution, potential additional charges and the effect of 2016 labor-agreement expirations.
- Track warranty, recall, environmental, antitrust and other legal contingencies, as ultimate losses may differ from recorded reserves.
- Consider the effect of tax valuation allowances, unrecognized tax benefits and the company’s ability to utilize tax attributes.