Lear Corporation 2019 Form 10-K Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier serving major vehicle manufacturers through two reportable segments: Seating and E-Systems. Products include complete seat systems and components, electrical distribution systems, electronic modules, electrification products, connectivity hardware and software. The filing covers the fiscal year ended December 31, 2019; quarterly data are reported on a 13-week calendar.
Lear operated 257 facilities in 39 countries and employed approximately 164,100 people at year-end. Global light-vehicle production declined 6% in 2019 to 87.1 million units, including declines of 4% in North America and Europe and Africa and 7% in Asia.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $19.81 billion | $21.15 billion | Down 6% |
| Gross profit | $1.74 billion | $2.32 billion | Down 25% |
| Gross margin | 8.8% | 11.0% | Down 220 bps |
| Income before tax and equity income | $953.6 million | $1.54 billion | Down 38% |
| Net income attributable to Lear | $753.6 million | $1.15 billion | Down 34% |
| Diluted earnings per share | $12.75 | $17.22 | Down 26% |
| Cash flow from operating activities | $1.28 billion | $1.78 billion | Down $496 million |
| Capital expenditures | $603.9 million | $677.0 million | Down $73.1 million |
| Cash used in investing activities | $922.4 million | $693.5 million | Increased |
| Cash used in financing activities | $361.9 million | $1.03 billion | Lower use |
Segment sales were $15.10 billion for Seating, down 6%, and $4.71 billion for E-Systems, down 8%. Segment earnings were $961.2 million for Seating, with a 6.4% margin, and $366.3 million for E-Systems, with a 7.8% margin. The 2019 effective tax rate was 15.3%, compared with 20.3% in 2018, principally reflecting the mix of earnings and discrete tax benefits.
At December 31, 2019, Lear reported $1.49 billion of cash and cash equivalents, approximately $2.3 billion of outstanding indebtedness, and $1.75 billion of available borrowing capacity under its revolving credit facility. Long-term debt was $2.29 billion, compared with $1.94 billion in 2018. Current assets were $6.41 billion versus current liabilities of $4.67 billion.
Material changes versus the prior comparable period
- Sales and profitability declined primarily because of lower production volumes on Lear platforms, a prolonged labor strike at the largest customer, foreign-exchange effects and customer price reductions.
- New business increased 2019 sales by approximately $1.1 billion but did not offset the $1.7 billion negative impact from lower production volumes and the $0.7 billion negative foreign-exchange impact.
- Restructuring and related manufacturing inefficiency charges increased to approximately $190 million from $104 million in 2018. Lear expects approximately $55 million of additional restructuring costs related to actions initiated by year-end 2019, substantially all by the end of 2020.
- Lear acquired connected-car software provider Xevo in April 2019 for $321.7 million net of cash acquired. The transaction added approximately $219 million of goodwill and increased amortization expense.
- Lear issued $375 million of 4.25% notes due 2029 and $325 million of 5.25% notes due 2049. Proceeds were used partly to redeem $325 million of notes due 2024 and to finance the Xevo acquisition. The company recognized a $10.6 million loss on extinguishment of debt.
- Share repurchases totaled $380.4 million, and dividends declared to Lear stockholders totaled $186.3 million. The quarterly dividend increased to $0.75 per share from $0.70 in 2018. Remaining repurchase authorization was approximately $1.2 billion at year-end.
- Cash and cash equivalents declined modestly from $1.49 billion at year-end 2018 to $1.49 billion at year-end 2019, despite lower operating cash flow, the Xevo acquisition and continued capital returns.
Guidance, outlook, commentary and risks
Lear estimated 2020 capital expenditures of approximately $600 million. Management stated that liquidity, including cash on hand, operating cash flow and available revolver capacity, should support ordinary-course obligations, dividends and share repurchases. The filing does not provide a full-year 2020 sales or earnings guidance range.
The January 2020 sales backlog for 2020 through 2022 was $2.7 billion, down 19% from January 2019. Approximately $0.8 billion related to 2020, with 65% attributed to Seating and 35% to E-Systems. Backlog depends on vehicle production volumes, foreign-exchange rates, launch timing and customer development plans.
- Major risks include cyclical automotive production, customer concentration, loss or underperformance of vehicle programs, customer-imposed price reductions and intense competition.
- Supply-chain disruption, commodity and energy cost inflation, tariffs, trade restrictions, foreign-exchange movements and international operating conditions may pressure results.
- Approximately 88% of Lear's global unionized workforce agreements were scheduled to expire in 2020, creating potential labor disruption risk.
- Debt includes variable-rate exposure linked to LIBOR; the filing discusses uncertainty regarding LIBOR's expected phaseout after 2021.
- Product liability, warranty, recall, environmental, tax, legal and regulatory matters could produce costs exceeding recorded reserves. Year-end reserves included $14 million for legal disputes, $32 million for product liability and warranty claims and $9.3 million for environmental matters.
- Cybersecurity and information-technology disruptions could affect Lear, its customers, suppliers or connected-vehicle products.
- Pension obligations, goodwill and other asset valuations are sensitive to discount rates, investment returns, automotive production forecasts and other assumptions.
- The filing identifies uncertainty related to Brexit, U.S.-China trade policy, USMCA implementation and changing emissions, fuel-economy, data-privacy and environmental regulations.
Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Xevo was excluded from management's internal-control assessment during its first year of integration; it represented 2.9% of total assets and 0.4% of 2019 revenue.
Most important facts for investors to verify
- Whether vehicle production declines, customer strikes and model mix continue to pressure Seating and E-Systems sales and margins.
- Progress and cash costs of restructuring actions, including the expected approximately $55 million of remaining charges.
- Xevo's contribution to revenue, earnings, cash flow and E-Systems growth, as well as the final purchase-price allocation.
- Debt maturities, variable-rate exposure, covenant compliance and the availability of the $1.75 billion revolving facility.
- Whether operating cash flow remains sufficient to fund approximately $600 million of capital expenditures, dividends, repurchases and restructuring obligations.
- Execution against the $2.7 billion sales backlog and the assumptions underlying production volumes and foreign-exchange rates.
- Exposure to General Motors, Ford and other major customers; in 2019, General Motors and Ford represented 18% and 14% of net sales, respectively.
- Potential changes in warranty, recall, legal, environmental, tax, pension and cybersecurity exposures beyond recorded reserves.