Lear Corporation 2012 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier operating in 36 countries through 221 facilities. Its two reportable segments are Seating and Electrical Power Management Systems (EPMS). The filing covers the fiscal year ended December 31, 2012; quarterly data uses a thirteen-week reporting calendar. Lear supplies virtually all major global automakers, with General Motors, Ford and BMW representing approximately 21%, 20% and 11% of 2012 sales, respectively.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $14,567.0 million | $14,156.5 million | +3% |
| Gross profit | $1,217.5 million | $1,193.2 million | +2% |
| Gross margin | 8.4% | 8.4% | Flat |
| Income before taxes and affiliate income | $648.9 million | $615.7 million | +5% |
| Net income attributable to Lear | $1,282.8 million | $540.7 million | +137% |
| Diluted EPS | $12.85 | $5.08 | +153% |
| Operating cash flow | $729.8 million | $790.3 million | -8% |
| Capital expenditures | $458.3 million | $329.5 million | +39% |
- Seating sales were $11.0 billion, up 1%; segment earnings declined to $661.7 million from $703.7 million, and margin declined to 6.0% from 6.4%.
- EPMS sales were $3.5 billion, up 10%; segment earnings increased to $254.9 million from $185.1 million, and margin improved to 7.2% from 5.8%.
- Fourth-quarter 2012 sales were $3,719.4 million, compared with $3,508.5 million in the fourth quarter of 2011. Fourth-quarter net income attributable to Lear was $881.9 million, compared with $106.5 million.
- Cash and cash equivalents were $1,402.2 million at year-end, versus $1,754.3 million in 2011. Current assets were $4,873.5 million and current liabilities were $3,216.9 million.
- Long-term debt was $626.3 million at December 31, 2012, consisting of senior notes due 2018 and 2020. No borrowings were outstanding under the $500 million revolving credit facility at year-end.
- Equity increased to $3,612.2 million from $2,561.1 million, primarily reflecting net income, partly offset by share repurchases and dividends.
Material changes versus the prior comparable period
- Sales growth was driven by new business and the Guilford acquisition, partly offset by $553 million of unfavorable foreign exchange effects.
- Lear acquired Guilford Mills on May 31, 2012, for approximately $243.9 million net of cash acquired. The acquisition added automotive fabric capabilities and contributed approximately $197 million of 2012 sales.
- Capital investment increased substantially to support the sales backlog, emerging-market capacity and component manufacturing capabilities.
- Operating cash flow decreased despite higher earnings, primarily because of changes in recoverable customer engineering, development and tooling costs and working capital.
- Restructuring charges declined to $55.1 million from $68.2 million in 2011. The company had $44.2 million of restructuring accruals remaining at year-end and expected approximately $28.9 million of additional costs for actions initiated through December 31, 2012.
- Net income benefited from a $638.0 million income-tax benefit, including approximately $764 million of net discrete tax benefits, primarily from reversing the U.S. deferred-tax-asset valuation allowance. This benefit materially affects comparability and is not representative of recurring operating performance.
- Lear repurchased 5.36 million shares for $222.8 million in 2012 and paid $54.6 million of dividends. In January 2013, the repurchase authorization was increased to $1.5 billion, with approximately $998 million available.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2013 capital expenditures at approximately $450 million.
- Sales backlog for 2013–2015 was approximately $1.8 billion, including $850 million expected in 2013. Management stated that seating represented approximately $1.0 billion and EPMS approximately $800 million of backlog; the backlog is subject to vehicle volumes, foreign exchange, launch timing and customer program changes.
- Management’s strategy emphasizes profitable global growth, expansion in emerging and low-cost markets, selective acquisitions, vertical integration, technology investment, balance-sheet strength and shareholder returns.
- Key industry risks include cyclical vehicle production, European market weakness, customer concentration, pricing pressure, raw-material and commodity volatility, supplier disruptions, labor disputes, foreign exchange, program-launch execution and competition.
- Approximately 82% of Lear’s unionized workforce was covered by labor agreements scheduled to expire during 2013. Management did not anticipate significant renewal difficulties, but disruptions could affect production and cash flow.
- At year-end, projected pension and other postretirement benefit obligations were approximately $1.2 billion and $176 million, respectively; unfunded obligations were $357 million and $176 million. Expected 2013 pension contributions were $20–$25 million.
- Legal reserves included $12.8 million for legal disputes, $22.7 million for product liability and warranty claims, and $5.2 million for environmental matters. The automotive wire-harness antitrust litigation remained unresolved, and potential loss could not reasonably be estimated.
- In January 2013, Lear issued $500 million of 4.75% senior notes due 2023. In January 2013, it also increased its revolving credit facility to $1.0 billion and extended maturity to January 2018. These events occurred after the balance-sheet date but materially affect subsequent liquidity and capitalization.
- The company emerged from Chapter 11 in November 2009 and continues to have tax attributes subject to Internal Revenue Code ownership-change limitations.
- Ernst & Young issued unqualified opinions on the 2012 financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Separate recurring operating earnings from the $764 million of 2012 tax benefits and other unusual items, including insurance recoveries and restructuring costs.
- Assess whether Seating can restore margins after the decline from 6.4% to 6.0%, while EPMS sustains its improved 7.2% margin.
- Reconcile the higher capital-spending program and acquisition activity with operating cash flow, working-capital requirements and shareholder returns.
- Review pro forma leverage and interest expense after the 2023 notes issuance, planned 2013 debt redemptions and expanded revolving facility.
- Test the sales backlog against actual vehicle production, customer concentration, foreign exchange assumptions and program-launch timing.
- Monitor European production trends, commodity costs, supplier and labor conditions, pension funding, tax-attribute realizability and unresolved antitrust litigation.