Lear Corporation 2020 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier with two reporting segments: Seating and E-Systems. Products include complete seating systems, seat components, electrical distribution and connection systems, electronic modules, software, and connected services. The company operated 251 facilities in 38 countries and employed approximately 174,600 people at December 31, 2020.
The filing covers the fiscal year ended December 31, 2020. The annual results were materially affected by COVID-19-related plant closures, lower global vehicle production, production inefficiencies, and additional health and safety costs.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $17.05 billion | $19.81 billion | Down 14% |
| Gross profit | $1.11 billion | $1.74 billion | Down 36% |
| Gross margin | 6.5% | 8.8% | Down 230 bps |
| Net income attributable to Lear | $158.5 million | $753.6 million | Down 79% |
| Diluted EPS | $2.62 | $12.75 | Down 79% |
| Cash flow from operations | $663.1 million | $1.28 billion | Down $621.2 million |
| Capital expenditures | $452.3 million | $603.9 million | Down 25% |
| Cash and cash equivalents | $1.31 billion | $1.49 billion | Down $181.0 million |
| Long-term debt | $2.30 billion | $2.29 billion | Broadly unchanged |
2020 consolidated income before taxes and equity income was $299.3 million, compared with $953.6 million in 2019. The effective tax rate was 31.4%, compared with 15.3% in 2019. Equity in net income of affiliates was $28.5 million.
At December 31, 2020, current assets were $6.78 billion and current liabilities were $5.08 billion. Lear had no borrowings under its $1.75 billion revolving credit facility and had approximately $1.75 billion of undrawn availability. The company reported approximately $2.3 billion of total outstanding indebtedness in its risk disclosures and stated that it was in compliance with applicable debt covenants.
Segment results and material changes
| Segment | 2020 sales | 2019 sales | 2020 segment margin | 2019 segment margin |
|---|---|---|---|---|
| Seating | $12.71 billion | $15.10 billion | 4.6% | 6.4% |
| E-Systems | $4.33 billion | $4.71 billion | 2.3% | 7.8% |
- Global light vehicle production declined 17% to approximately 72.6 million units, including declines of 20% in North America, 22% in Europe and Africa, 12% in Asia, and 31% in South America.
- Lower production volumes reduced Lear’s sales by more than $3.3 billion, partly offset by more than $0.7 billion of new business.
- COVID-19 impacts reduced gross profit by approximately $792 million, including lost volume, shutdown-related inefficiencies, and incremental pandemic costs.
- Restructuring and related manufacturing inefficiency charges were approximately $150 million in 2020, versus $190 million in 2019. Approximately $18 million of additional restructuring costs were expected for activities initiated through year-end 2020.
- Interest expense increased to $99.6 million from $92.0 million, while other expense, net increased to $55.2 million from $24.6 million.
- Cash used in investing activities declined to $468.8 million from $922.4 million, primarily because 2019 included the $321.7 million Xevo acquisition and 2020 capital spending was reduced.
Cash flow, capital allocation, and unusual items
- Operating cash flow was $663.1 million, compared with $1.28 billion in 2019. Working capital reduced operating cash flow by $66.9 million.
- Lear borrowed $1.0 billion under its revolving credit facility in March 2020 as a precaution and repaid the borrowing in full in September 2020.
- The company issued $350 million of 2030 notes and $300 million of additional 2049 notes, using the proceeds principally to redeem $650 million of 2025 notes. The transaction generated a $21.1 million loss on debt extinguishment.
- Share repurchases were suspended in March 2020; $70.0 million was repurchased before suspension. The remaining authorization was approximately $1.4 billion and expires December 31, 2022.
- The quarterly dividend was suspended in March 2020 and reinstated in the fourth quarter at $0.25 per share. Total dividends declared to Lear stockholders were $62.1 million, compared with $186.3 million in 2019.
- The company recognized approximately $98 million of government assistance, primarily reimbursement of certain employee costs.
- Other notable 2020 items included $144.9 million of restructuring charges, $12.9 million of pension settlement losses, a $4.0 million investment impairment, and tax benefits and expenses related to restructuring, foreign branches, and deferred tax valuation allowances.
Guidance, outlook, management commentary, and risks
- Management estimated 2021 capital expenditures of approximately $600 million.
- Lear’s January 2021 sales backlog for 2021–2023 was $2.8 billion, up 4% from the prior year; $1.0 billion related to 2021. The backlog excludes non-consolidated joint ventures, which had approximately $400 million of additional backlog.
- Management stated that production had returned to pre-COVID-19 levels by the second half of 2020, but warned that lower vehicle demand, renewed virus outbreaks, government restrictions, supply-chain disruption, absenteeism, and production constraints could affect 2021 results.
- Longer-term growth opportunities center on electrification, connectivity, autonomy, shared mobility, higher vehicle content, crossover and SUV demand, and expansion in China. These opportunities remain dependent on vehicle production volumes, customer awards, technology adoption, and successful program launches.
- Major customer concentration remains significant: General Motors represented 18.7% of 2020 sales, Ford 13.5%, Daimler 11.9%, and Volkswagen 11.7%.
- Key risks include automotive cyclicality, customer price reductions, raw material and component availability, supplier distress, labor disputes, foreign exchange exposure, cybersecurity, product liability and recalls, legal and environmental matters, pension funding, tax valuation allowances, debt covenant compliance, and the transition away from LIBOR.
- The company had reserves of $17.2 million for legal disputes, $48.7 million for product liability and warranty claims, and $8.9 million for environmental matters at December 31, 2020. Actual outcomes may differ materially from recorded reserves.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts investors should verify
- Whether vehicle production, customer demand, and Lear’s sales volumes recover sustainably after the COVID-19 disruption.
- Whether Seating and E-Systems margins can recover from 2020 levels despite annual customer price reductions and restructuring requirements.
- The company’s ability to generate sufficient operating cash flow while funding approximately $600 million of expected 2021 capital expenditures, debt service, restructuring, pensions, dividends, and potential share repurchases.
- Compliance with debt covenants and the repayment or refinancing requirements for the $220.3 million term loan, including its scheduled 2022 maturity.
- The timing and commercial quality of the $2.8 billion sales backlog, which is subject to production volumes, exchange rates, program launches, and customer changes.
- Exposure to General Motors, Ford, Daimler, and Volkswagen, as well as supplier, labor, semiconductor, commodity, tariff, and geopolitical risks.
- The future realizability of deferred tax assets, including the $397.7 million valuation allowance and $49 million of unrecognized tax benefits including interest and penalties.