Lear Corporation 2013 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier of seating systems and components and electrical distribution systems. Operations covered 226 facilities in 36 countries, with approximately 122,300 employees at December 31, 2013. The filing reports the fiscal year ended December 31, 2013, including fourth-quarter results for the thirteen weeks ended December 31, 2013.
Global vehicle production increased 4% to 82.6 million units in 2013. Lear generated approximately 38% of sales in Europe and Africa, 38% in North America, 18% in Asia and 6% in South America. Ford and General Motors each represented approximately 22% of sales, while BMW represented approximately 10%.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $16.234 billion | $14.567 billion | Up 11% |
| Gross profit | $1.300 billion | $1.218 billion | Up 7% |
| Gross margin | 8.0% | 8.4% | Down 40 basis points |
| Income before taxes and affiliate income | $610.1 million | $648.9 million | Down 6% |
| Net income attributable to Lear | $431.4 million | $1.283 billion | Down 66% |
| Diluted earnings per share | $4.99 | $12.85 | Down 61% |
| Cash flow from operations | $820.1 million | $729.8 million | Up 12% |
| Capital expenditures | $460.6 million | $458.3 million | Approximately flat |
Fourth-quarter 2013 net sales were $4.256 billion, gross profit was $319.4 million, consolidated net income was $79.9 million and net income attributable to Lear was $72.8 million, or $0.88 diluted earnings per share.
- Seating: Sales were $12.018 billion, up 9%; segment earnings were $576.9 million and margin was 4.8%, compared with 6.0% in 2012.
- Electrical: Sales were $4.216 billion, up 19%; segment earnings were $414.3 million and margin was 9.8%, compared with 7.2% in 2012.
- Liquidity: Cash and cash equivalents were $1.138 billion at year-end. The company reported approximately $1.0 billion of available capacity under its revolving credit facility, with no borrowings outstanding.
- Debt: Long-term debt was $1.057 billion, consisting principally of $280 million of 2018 notes, $280 million of 2020 notes and $500 million of 2023 notes.
- Balance sheet: Total assets were $8.331 billion, current liabilities were $3.579 billion and total equity was $3.150 billion.
- Cash deployment: Lear repurchased $1.000 billion of common stock in 2013 and paid $58.4 million of dividends. Quarterly dividends increased from $0.14 per share in 2012 to $0.17 in 2013.
Material changes versus the prior comparable period
- Sales growth reflected $930 million from new business, $541 million from improved production volumes on key platforms and $142 million from the full-year impact of the Guilford acquisition.
- Gross margin declined because $241 million of selling-price reductions and seating-platform changeovers more than offset favorable operating performance, restructuring benefits and volume growth.
- Seating profitability weakened, while electrical profitability improved materially. Electrical segment earnings rose approximately 63%, supported by new business, higher volumes and favorable operating performance.
- Net income declined sharply because 2012 included a $764 million net tax benefit, primarily from reversing U.S. deferred-tax valuation allowances. The 2013 tax provision was $192.7 million, producing a 31.6% effective tax rate before affiliate income.
- Interest expense increased to $68.4 million from $49.9 million, principally because of the $500 million 2023 notes issued in January 2013.
- Other expense increased to $58.1 million from $6.4 million, including higher foreign-exchange losses and non-income-related taxes.
- Operating cash flow increased despite lower net income, supported by working-capital timing and cash collections of previously capitalized customer engineering, development and tooling costs.
- Restructuring charges were approximately $77.9 million, with approximately $40.2 million of additional costs expected for actions initiated by year-end.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2014 capital expenditures of approximately $450 million. The filing does not provide a clear consolidated 2014 sales or earnings guidance figure.
- Sales backlog for 2014 through 2016 was estimated at $1.9 billion, including $950 million related to 2014; the backlog depends on production volumes, foreign exchange rates, launch timing and customer plans.
- Management expects continued growth from global vehicle platforms, increasing electrical content, hybrid and electric vehicles, directed component sourcing and expansion in emerging and low-cost markets.
- Key risks include automotive cyclicality, customer concentration, vehicle-model losses, customer price reductions, raw-material and commodity volatility, supply-chain disruption, foreign-exchange exposure, labor disputes, international operations, joint ventures, product liability and recalls, legal proceedings, environmental obligations, cybersecurity and debt covenants.
- Approximately 87% of Lear’s unionized workforce had labor agreements scheduled to expire during 2014, creating potential labor-disruption risk.
- The company was defending U.S. and Canadian antitrust class actions concerning alleged automotive wire-harness price fixing. The ultimate outcome and potential loss could not reasonably be determined.
- Recorded reserves at December 31, 2013 included approximately $17.5 million for legal disputes, $28.3 million for product liability and warranty claims and $5.0 million for environmental matters.
- Pension and other postretirement obligations remained material. Unfunded pension obligations were approximately $126 million and unfunded postretirement obligations were approximately $134 million. Expected 2014 pension contributions were $20 million to $25 million.
- The company maintained deferred-tax valuation allowances of approximately $642.6 million, including $36.0 million in the United States and $606.6 million in international jurisdictions.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the sharp decline in reported earnings with the nonrecurring $764 million tax benefit recognized in 2012.
- Assess whether seating margin pressure from price reductions and platform changeovers is offset by restructuring, productivity and new-program benefits.
- Evaluate the sustainability of electrical segment growth and its higher 9.8% segment margin.
- Review the timing and funding of the $1.0 billion share repurchase program, the remaining $750 million authorization and dividend restrictions under the debt agreements.
- Monitor 2018 and 2020 debt maturities, covenant compliance and the company’s ability to maintain approximately $1.0 billion of revolver availability.
- Validate backlog assumptions against actual vehicle production, foreign-exchange rates, program launches and customer awards.
- Review the wire-harness antitrust litigation, product liability and warranty exposures, restructuring accruals and additional expected restructuring costs.
- Consider customer concentration, particularly Ford, General Motors and BMW, which together represented approximately 54% of 2013 sales.