Lear Corporation 2011 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier operating in seating and electrical power management systems (EPMS). The filing covers the fiscal year ended December 31, 2011. Operations included 207 facilities in 35 countries, approximately 97,800 employees, and 28 operating joint ventures. Results are presented on a Successor basis following Lear’s emergence from Chapter 11 in November 2009 and adoption of fresh-start accounting; predecessor-period results are not fully comparable.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $14,156.5 million | $11,954.6 million | +18% |
| Gross profit / margin | $1,193.2 million / 8.4% | $1,018.3 million / 8.5% | Margin down 0.1 point |
| Income before taxes and affiliate income | $615.7 million | $448.8 million | +37% |
| Net income attributable to Lear | $540.7 million | $438.3 million | +23% |
| Diluted EPS | $5.08 | $4.05 | +25% |
| Cash flow from operations | $790.3 million | $621.9 million | +27% |
| Capital expenditures | $329.5 million | $193.3 million | +70% |
- Segment performance: Seating sales rose 16% to $10.9 billion, with segment earnings of $703.7 million and a 6.4% margin versus 7.0% in 2010. EPMS sales rose 26% to $3.2 billion, with segment earnings of $185.1 million and a 5.8% margin versus 3.9%.
- Balance sheet: Cash and cash equivalents were $1.754 billion, total assets were $7.011 billion, and equity was $2.561 billion at year-end. Current assets were $4.762 billion versus current liabilities of $3.064 billion.
- Debt and liquidity: Long-term debt was $695.4 million, consisting primarily of senior notes due 2018 and 2020. No short-term borrowings or revolver borrowings were outstanding. Lear had a $500 million revolving facility available through June 2016 and reported compliance with applicable covenants.
- Shareholder returns: Lear repurchased $279.1 million of common stock in 2011 and paid $51.1 million in dividends. The repurchase authorization was increased from $400 million to $700 million in January 2012. The quarterly dividend was increased to $0.14 per share for payment in March 2012.
Material changes versus the prior comparable period
- Revenue growth reflected $945 million of new business and $635 million from higher production volumes on Lear platforms, partly offset by customer price reductions and foreign exchange effects.
- Gross profit benefited from improved operating performance, restructuring benefits, and higher volumes, but was pressured by price reductions, commodity costs, and launch costs.
- EPMS profitability improved substantially, primarily from operating improvements, restructuring, increased volumes, and new business. Seating earnings increased in dollars but declined in margin because of price reductions and higher development, launch, and commodity costs.
- Interest expense declined to $39.7 million from $55.4 million, reflecting lower debt levels and a favorable tax-matter settlement.
- Restructuring charges were $68.2 million in 2011, including approximately $3 million of manufacturing inefficiency charges. Cumulative pretax restructuring costs since 2005 reached approximately $804 million, with additional costs expected to moderate in 2012 and thereafter.
- Lear acquired an additional 44% of TS Lear Automotive Sdn Bhd., increasing ownership to 90%, and established a new seating joint venture in China.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide a formal full-year earnings outlook in the filing. It estimated 2012 capital expenditures of approximately $425 million, pension contributions of $35 million to $40 million, postretirement payments of approximately $10 million, and defined-contribution plan payments of approximately $14 million.
- As of January 2012, sales backlog for 2012–2014 was $1.8 billion, including $800 million related to programs beginning in 2012. The backlog depends on production volumes, exchange rates, launch timing, and customer development plans.
- Asia remained a strategic growth area; Asian sales increased to $2.3 billion from $1.9 billion. Hybrid and electric vehicle programs provide additional EPMS content opportunities.
- Unusual 2011 items included approximately $11 million of net losses and incremental costs from a fire at a European production facility, $6 million of affiliate-transaction gains, and $70 million of tax benefits, primarily from reversing valuation allowances at three foreign subsidiaries.
- Key risks include automotive production cyclicality, customer concentration, customer-imposed price reductions, commodity and foreign-exchange volatility, supplier financial distress or disruption, labor negotiations, program-launch execution, competition, joint ventures, product liability and recalls, environmental claims, pension obligations, tax-attribute limitations, and potential impairment charges.
- A putative antitrust class-action litigation relating to automotive wire harnesses was consolidated in February 2012. The bankruptcy court enjoined pre-emergence claims but left post-emergence claims for the district court. The potential loss could not reasonably be estimated.
- Unfunded pension obligations were approximately $306 million and unfunded other postretirement obligations were approximately $184 million. A 100-basis-point decrease in discount rates would materially increase benefit obligations.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2011.
Most important facts for investors to verify
- Reconcile the reported growth in revenue and segment earnings with vehicle production volumes, new program launches, pricing concessions, commodities, and foreign exchange.
- Review the sustainability of the 2011 effective tax rate of 11.2%, including the $70 million of tax benefits and substantial deferred-tax valuation allowances.
- Assess cash conversion after the sharp increase in capital expenditures, projected 2012 spending, working-capital requirements, dividends, and share repurchases.
- Review debt covenants, the 2018 and 2020 note maturities, restricted payments provisions, and the availability of the $500 million revolving facility.
- Monitor the wire-harness antitrust litigation, product liability and warranty reserves, environmental matters, and insurance recovery related to the facility fire.
- Evaluate customer concentration: Ford and General Motors each represented approximately 19% of 2011 sales and BMW approximately 12%.
- Consider the comparability limitations created by fresh-start accounting and the absence of a directly comparable pre-emergence historical period.