Lear Corporation 2018 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier operating through two segments: Seating and E-Systems. Products include complete seat systems and components, electrical distribution systems, electronic modules, electrification products, connectivity hardware and software. The company operated 261 facilities in 39 countries and employed approximately 169,000 people at December 31, 2018.
The filing reports the fiscal year ended December 31, 2018. Fourth-quarter 2018 results were reported for the 13 weeks ended December 31, 2018, although this is an annual Form 10-K rather than a quarterly filing.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $21.15 billion | $20.47 billion | +3% |
| Gross profit | $2.32 billion | $2.29 billion | +1% |
| Gross margin | 11.0% | 11.2% | Down 20 bps |
| Income before tax and equity earnings | $1.54 billion | $1.53 billion | +1% |
| Net income attributable to Lear | $1.15 billion | $1.31 billion | -12% |
| Diluted EPS | $17.22 | $18.59 | -7% |
| Operating cash flow | $1.78 billion | $1.78 billion | Approximately flat |
| Capital expenditures | $677 million | $595 million | +14% |
Seating generated $16.02 billion of sales, up 1%, with segment earnings of $1.26 billion and a 7.9% margin, unchanged from 2017. E-Systems generated $5.13 billion of sales, up 12%, but segment earnings declined to $629 million from $642 million and its margin fell to 12.3% from 14.0%.
At year-end, cash and cash equivalents were $1.49 billion, total current assets were $6.28 billion and current liabilities were $4.50 billion. Long-term debt was $1.94 billion, with approximately $2.0 billion of total outstanding indebtedness including current debt and short-term borrowings. Lear had no borrowings under its $1.75 billion revolving credit facility and was in compliance with debt covenants.
Cash used in financing activities was $1.03 billion, including $705 million of share repurchases, $186 million of dividends to Lear stockholders and $79 million of dividends to noncontrolling interest holders. The remaining share-repurchase authorization was approximately $800 million, expiring December 31, 2020.
Material changes versus the prior comparable period
- Sales increased $681.5 million, driven by new business, foreign exchange, consolidation of affiliates and the full-year contribution from the 2017 Antolin Seating acquisition. These benefits were partly offset by lower production volumes on key Lear platforms.
- Global light-vehicle production declined 1% to approximately 92.5 million units. China production declined 3%, while South America increased 3%.
- Net income attributable to Lear declined $163.6 million, primarily reflecting a higher effective tax rate, lower equity earnings from affiliates, higher other expense and the absence of certain significant 2017 tax benefits and affiliate gains.
- The effective tax rate increased to 20.3% from 12.9%. The 2017 rate benefited from substantial tax reform-related discrete benefits, including foreign tax credits and deferred-tax valuation allowance reversals.
- Restructuring charges increased to $88 million from approximately $73 million, and related manufacturing inefficiency charges were approximately $16 million in 2018. Lear expects approximately $43 million of additional restructuring costs related to actions initiated by year-end.
- Lear acquired EXO Technologies in January 2018 and obtained control of Changchun Lear FAWSN Automotive Electrical and Electronics Co., recognizing a gain of approximately $10 million on remeasurement of its prior investment.
- The quarterly dividend increased to $0.70 per share from $0.50 per share. Lear repurchased 4.3 million shares during 2018, compared with 3.0 million shares in 2017.
Guidance, outlook, commentary and risks
Management did not provide a specific consolidated revenue or earnings forecast in the filing. It estimated 2019 capital expenditures at approximately $700 million. The sales backlog for formally awarded programs for 2019 through 2021 was $3.35 billion, up 5% from January 2018, with $1.4 billion related to 2019; backlog remains subject to vehicle volumes, foreign exchange, launch timing and customer development changes. Backlog at non-consolidated joint ventures was an additional $500 million.
Management emphasized long-term opportunities from increasing vehicle content, crossover and sport utility vehicle production, electrification, connectivity, autonomy, cybersecurity and shared mobility. However, global automotive production is cyclical, and customer pricing reductions require continuing productivity and cost improvements.
- Customer concentration is material: General Motors represented 18% of 2018 sales and Ford represented 16%.
- Key risks include lower vehicle production, loss of major vehicle platforms, customer pricing pressure, raw-material and energy costs, tariffs and trade-policy changes, supply-chain disruption, labor disputes, foreign exchange volatility and joint-venture execution.
- Approximately 72% of Lear’s global unionized workforce was covered by labor agreements scheduled to expire during 2019.
- Warranty, product liability, recall, environmental and commercial claims may exceed recorded reserves. Year-end reserves included $11 million for legal disputes, $28.5 million for product liability and warranty claims, and $9 million for environmental matters.
- Brexit-related uncertainty was significant because Lear had integrated operations and supply chains in the United Kingdom and European Union.
- Goodwill was $1.41 billion. Management’s 2018 qualitative assessment concluded that no reporting unit was at risk of impairment, but adverse industry or operating conditions could result in future impairment charges.
- Operating lease commitments totaled $556 million, and 2019 minimum pension contributions were expected to be approximately $10 million to $15 million.
Most important facts for investors to verify
- Reconcile the decline in reported earnings and EPS with the tax-rate increase, discrete tax items, restructuring costs and lower affiliate earnings.
- Assess whether E-Systems margin pressure is temporary or reflects continuing pricing, launch, production-volume or execution issues.
- Evaluate the sustainability of $1.78 billion of operating cash flow after $677 million of capital expenditures and substantial shareholder returns.
- Review customer concentration and the effect of 2019 vehicle production, platform awards and customer-imposed price reductions on backlog conversion.
- Confirm the timing and cash impact of the approximately $43 million of remaining restructuring costs and the planned $700 million of 2019 capital expenditures.
- Monitor approximately $2.0 billion of debt, the 2022 term-loan maturity, interest-rate exposure and continued access to the $1.75 billion revolving facility.
- Review pending labor-agreement expirations, supply-chain and tariff exposures, foreign exchange sensitivity, product-liability claims and environmental contingencies.
- Note that the filing received unqualified audit opinions on the consolidated financial statements and internal control over financial reporting.