LEAR CORPORATION EXECUTIVE OVERVIEW We are a leading Tier 1 supplier to the global automotive industry. We supply seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to all of the world's major automotive manufacturers. We use our product, design and technological expertise, global reach and competitive manufacturing footprint to achieve our financial goals and objectives of continuing to deliver profitable growth (balancing risks and returns), maintaining a strong balance sheet with investment grade credit metrics and consistently returning excess cash to our stockholders. Our Seating business consists of the design, development, engineering, just-in-time assembly and delivery of complete seat systems, as well as the design, development, engineering and manufacture of all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests. Further, we have capabilities in active sensing and comfort for seats, utilizing electronically controlled sensor and adjustment systems and internally developed algorithms. OurE-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution systems, as well as sophisticated electronic control modules, electrification products, connectivity products and software solutions for the cloud, vehicles and mobile devices. Electrical distribution systems route networks and electrical signals and manage electrical power within the vehicle for all types of powertrains - from traditional internal combustion engine ("ICE") architectures to the full range of hybrid, plug-in hybrid and battery electric architectures. Key components in our electrical distribution portfolio include wire harnesses, terminals and connectors and junction boxes for both ICE and electrification architectures that require management of higher voltage and power. Electronic control modules facilitate signal, data and power management within the vehicle and include the associated software required to facilitate these functions. Key components in our electronic control module portfolio include body control modules, wireless receiver and transmitter technology and lighting and audio control modules, as well as products specific to electrification and connectivity trends. Electrification products include charging systems (onboard charging modules and cord set charging equipment), battery electronics (battery disconnect units, cell monitoring supervisory systems and integrated total battery control modules) and other power management modules, including converter and inverter systems which may be integrated into other modules or sold separately. Connectivity products include gateway modules and communication modules to manage both wired and wireless networks and data in vehicles. In addition to fully functional electronic modules, we offer software that includes cybersecurity, advanced vehicle positioning for automated and autonomous driving applications, roadside modules that communicate real-time traffic information and full capabilities in both dedicated short-range communication and cellular protocols for vehicle connectivity. Our software solutions also include Xevo Journeyware, a thin-client platform for the cloud, vehicles and mobile devices that enables consumer e-commerce, multi-media applications and enterprise services to improve performance and safety, deliver an artificial intelligence-enhanced driving experience and provide new monetization opportunities for us and the automotive manufacturers, and Xevo Market, an in-vehicle commerce and service platform that connects customers with their favorite brands and services by delivering highly-contextual sales offers through vehicle touch screens and vehicle-branded mobile applications. We serve all of the world's major automotive manufacturers across both our Seating andE-Systems businesses, and we have automotive content on more than 400 vehicle nameplates worldwide. It is common to have both seating and electrical content on the same and multiple vehicle platforms with a single customer. Further, the seat is becoming a more dynamic and integrated system requiring increased levels of electrical and electronic integration, which is accelerating the convergence of our Seating andE-Systems businesses. We are the only global automotive supplier with complete capabilities in both of these critical business segments. Our businesses benefit globally from leveraging common operating standards and disciplines, including world-class product development and manufacturing processes, as well as common customer support and regional infrastructures. Our core capabilities are shared across component categories and include high-precision manufacturing and assembly with short lead times, management of complex supply chains, global engineering and program management skills, the agility to establish and/or transfer production between facilities quickly and a unique customer-focused culture. Our businesses utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating support functions, such as logistics, supply chain management, quality and health and safety, as well as all major administrative functions. For further information related to industry trends and our strategy, see Part 1 - Item 1, "Business - Industry and Strategy," of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 34
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LEAR CORPORATION
COVID-19 Pandemic
Industry overview
Unprecedented industry disruptions related to the COVID-19 pandemic during the
first half of 2020 impacted operations in every region of the world. Global
automotive industry production volumes in the first six months of 2020, as
compared to the first six months of 2019, are shown below (in millions of
units):
Six Months Ended
July 4,
2020 (1) June 29, 2019 (1) (2) % Change
North America 5.1 8.5 (40 )%
Europe and Africa 6.9 11.6 (41 )%
Asia 15.9 21.8 (27 )%
South America 0.8 1.6 (51 )%
Other 0.6 0.7 (14 )%
Global light vehicle production 29.3 44.2 (34 )%
(1) Production data based onIHS Automotive (2) Production data for 2019 has been updated to reflect actual production levels Our operations inChina were impacted first, with most plants in the country closed for several weeks during the first quarter. At the end of the first quarter, all of our facilities inChina were operating and capacity utilization was increasing. Beginning in mid-March, our operations inEurope ,North America ,South America andAsia (outside ofChina ) were impacted, with virtually all of our plants closed at the end of the first quarter and closures continuing throughout April and, in most cases, a portion of May. Although manufacturing resumed gradually, most of our plants in our major markets were operating at pre-COVID-19 levels at the end of the second quarter. While we experienced significant inefficiencies and incremental costs related to the COVID-19 pandemic in the first half of the year, these inefficiencies began to diminish toward the end of the second quarter. Although industry production has returned to pre-COVID-19 levels, partially due to our customers' need to replenish inventory levels, it is likely that, for a period of time, the global automotive industry will experience lower demand for new vehicles as a result of the global economic slowdown caused by the COVID-19 pandemic, as new vehicle sales are typically correlated with positive consumer confidence and low unemployment. Further, a resurgence of the virus with corresponding shelter-in-place orders impacting industry production later in the year could also impact our financial results. Our percentage of consolidated net sales by region in the first six months of 2020 and 2019 is shown below: Six Months Ended July 4, June 29, 2020 2019 North America 38 % 37 % Europe and Africa 37 % 41 % Asia 22 % 19 % South America 3 % 3 % Total 100 % 100 % We are continuing to monitor our supply base, as well as related production constraints imposed by various governments, to minimize the impact on our manufacturing operations. Liquidity actions In response to the COVID-19 pandemic, we have taken a number of proactive steps to preserve cash and maximize our financial flexibility, including the reduction of discretionary spending, the implementation of salary reductions and deferrals, the reduction of capital expenditures, the aggressive management of working capital and the suspension of share repurchases and quarterly dividends. In addition, we borrowed$1.0 billion under our revolving credit facility inMarch 2020 and are maximizing opportunities offered under government incentive programs throughout the world. With$1.78 billion of cash on hand at the end of the second quarter,$750 million of remaining availability on our revolving credit facility and no near-term debt maturities, we are well positioned to withstand the continuing effects of the COVID-19 pandemic. 35
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LEAR CORPORATION Employee protection Our top priority is to ensure the health and safety of our employees. We have restricted business travel, established protocols for visitors entering our facilities, enhanced disinfection and cleaning procedures at our facilities, promoted social distancing and required employees to work from home wherever possible. We have created a Safe Work Playbook, which provides a standardized approach for each of our facilities to create a consistent and safe work environment and offers insights into navigating operational challenges related to the COVID-19 pandemic. The playbook is publicly available and includes health and safety information related to plant operating protocols; employee education, training and feedback; facility assessments; and phased reopening of engineering and administrative centers. Our plant employees have returned to work and are efficiently working within the new safety protocols. For risks related to the COVID-19 pandemic, see Part II - Item 1A, "Risk Factors," included in this Report. Financing Transactions Senior Notes InFebruary 2020 , we issued$350 million in aggregate principal amount at maturity of 2030 notes (the "2030 Notes") and an additional$300 million in aggregate principal amount at maturity of 2049 notes (the "2049 Notes"). The 2030 Notes have a stated coupon rate of 3.5% and were issued at 99.774% of par, resulting in a yield to maturity of 3.525%. The 2049 Notes have a stated coupon rate of 5.25% and were issued at 106.626% of par, resulting in a yield to maturity of 4.821%. The net proceeds from the offering were$669 million after original issue discount. The proceeds were used to redeem the$650 million in aggregate principal amount of 2025 notes (the "2025 Notes") at a redemption price equal to 102.625% of the principal amount of such 2025 Notes, plus accrued interest. In connection with these transactions, we recognized a loss of$21 million on the extinguishment of debt and paid related issuance costs of$6 million . For further information, see "- Liquidity and Capital Resources - Capitalization - Senior Notes" below and Note 8 "Debt," to the condensed consolidated financial statements included in this Report. Credit Agreement Our unsecured credit agreement (the "Credit Agreement"), datedAugust 8, 2017 , consists of a$1.75 billion revolving credit facility (the "Revolving Credit Facility") and a$250 million term loan facility (the "Term Loan Facility"). InFebruary 2020 , we entered into an agreement to extend the maturity date of the Revolving Credit Facility by one year toAugust 8, 2024 , and paid related issuance costs of$1 million . The maturity date of the Term Loan Facility remainsAugust 8, 2022 . OnMarch 26, 2020 , as a proactive measure in response to the COVID-19 pandemic, we announced the borrowing of$1.0 billion under the Revolving Credit Facility, resulting in remaining availability of$750 million . For further information, see "- Liquidity and Capital Resources - Capitalization - Credit Agreement" below and Note 8, "Debt," to the condensed consolidated financial statements included in this Report. Operational Restructuring In the first half of 2020, we incurred pretax restructuring costs of$70 million and related manufacturing inefficiency charges of approximately$3 million , as compared to pretax restructuring costs of$91 million and related manufacturing inefficiency charges of approximately$3 million in the first half of 2019. None of the individual restructuring actions initiated during the first half of 2020 were material. Our restructuring actions include plant closures and workforce reductions and are initiated to maintain our competitive footprint or are in response to customer initiatives or changes in global and regional automotive markets. The decrease in restructuring costs in 2020, as compared to 2019, is primarily attributable to an elevated level of customer actions in 2019. Our restructuring actions are designed to maintain or improve our future operating results and profitability throughout the automotive industry cycles. Restructuring actions are generally funded within twelve months of initiation and are funded by cash flows from operating activities and existing cash balances. There have been no changes in previously initiated restructuring actions that have resulted (or will result) in a material change to our restructuring costs. We expect to incur approximately$48 million of additional restructuring costs related to activities initiated as ofJuly 4, 2020 , all of which are expected to be incurred by the end of 2020. We plan to implement additional restructuring actions in response to the COVID-19 pandemic in order to align our manufacturing capacity and other costs with prevailing regional automotive production levels. Such future restructuring actions are dependent on market conditions, customer actions and other factors. For further information, see Note 3, "Restructuring," and Note 17, "Segment Reporting," to the condensed consolidated financial statements included in this Report. 36
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LEAR CORPORATION
Share Repurchase Program and Quarterly Cash Dividends
Since the first quarter of 2011, our Board of Directors has authorized $6.1
billion in share repurchases under our common stock share repurchase program. In
March 2020 , as a proactive measure in response to the COVID-19 pandemic, we
suspended share repurchases under our share repurchase program. Prior to the
suspension, we repurchased $70 million of shares in the first quarter of 2020
and have a remaining repurchase authorization of $1.4 billion , which will expire
on December 31, 2022 .
In March 2020 , as a proactive measure in response to the COVID-19 pandemic, we
suspended our quarterly cash dividend. Prior to the suspension, our Board of
Directors declared a cash dividend of $0.77 per share of common stock in the
first quarter of 2020.
For further information related to our common stock share repurchase program and
our quarterly cash dividends, see "- Liquidity and Capital Resources -
Capitalization" below and Note 15, "Comprehensive Income (Loss) and Equity," to
the condensed consolidated financial statements included in this Report.
Other Matters
In the three months ended July 4, 2020 , we recognized tax expense of $23 million
related to the establishment of a valuation allowance on deferred tax assets of
a foreign subsidiary and net tax benefits of $21 million related to
restructuring charges and various other items. In the six months ended July 4,
2020 , we recognized net tax benefits of $31 million related to a loss on the
extinguishment of debt, restructuring charges and various other items partially
offset by tax expense of $22 million related to the net increase in valuation
allowances on deferred tax assets of foreign subsidiaries.
In the three months ended June 29, 2019 , we recognized tax expense of $10
million related to the establishment of a valuation allowance on deferred tax
assets of a foreign subsidiary and net tax benefits of $11 million related to
restructuring and various other items. In the six months ended June 29, 2019 , we
recognized tax benefits of $18 million related to changes in the tax status of
certain affiliates, $3 million related to share-based compensation and $27
million related to restructuring and various other items partially offset by tax
expense of $10 million related to the establishment of a valuation allowance on
deferred tax assets of a foreign subsidiary.
As discussed above, our results for the three and six months ended July 4, 2020
and June 29, 2019 , reflect the following items (in millions):
Three Months Ended Six Months Ended
July 4, June 29, July 4, June 29,
2020 2019 2020 2019
Costs related to restructuring actions,
including manufacturing inefficiencies of
$1 million and $3 million , respectively,
in the three and six months ended July 4,
2020 , and $1 million and $3 million ,
respectively, in the three and six months
ended June 29, 2019 $ 39 $ 38 $ 73 $ 94
Acquisition and other related costs - 1 - 2
Litigation - 1 - 1
Loss on extinguishment of debt - 11 21 11
Gain related to affiliate - (2 ) - (2 )
Tax (benefit) expense, net 2 (1 ) (9 ) (38 )
For further information regarding these items, see Note 3, "Restructuring," Note
8, "Debt," and Note 13, "Income Taxes," to the condensed consolidated financial
statements included in this Report.
This Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," includes forward-looking statements that are subject to
risks and uncertainties. For further information regarding other factors that
have had, or may have in the future, a significant impact on our business,
financial condition or results of operations, see "- Forward-Looking Statements"
below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the
year ended December 31, 2019 .
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LEAR CORPORATION
RESULTS OF OPERATIONS
A summary of our operating results in millions of dollars and as a percentage of
net sales is shown below:
Three Months Ended Six Months Ended
July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019
Net sales
Seating $ 1,754.9 71.8 % $ 3,839.4 76.7 % $ 5,121.5 74.2 % $ 7,753.1 76.3 %
E-Systems 689.6 28.2 1,168.2 23.3 1,780.7 25.8 2,414.6 23.7
Net sales 2,444.5 100.0 5,007.6 100.0 6,902.2 100.0 10,167.7 100.0
Cost of sales 2,571.9 105.2 4,529.4 90.5 6,695.4 97.0 9,216.3 90.6
Gross profit (loss) (127.4 ) (5.2 ) 478.2 9.5 206.8 3.0 951.4 9.4
Selling, general and
administrative expenses 150.9 6.2 157.1 3.1 294.6 4.3 305.4 3.0
Amortization of
intangible assets 16.0 0.6 15.9 0.3 33.1 0.5 28.6 0.3
Interest expense 27.2 1.1 24.5 0.5 51.6 0.7 45.4 0.5
Other (income) expense,
net (3.2 ) (0.1 ) 13.8 0.3 37.3 0.5 18.2 0.2
Provision for income
taxes (41.0 ) (1.7 ) 73.3 1.4 (14.5 ) (0.2 ) 116.4 1.1
Equity in net income of
affiliates (7.8 ) (0.3 ) (8.4 ) (0.2 ) (9.4 ) (0.1 ) (10.7 ) (0.1 )
Net income attributable
to noncontrolling
interests 24.4 1.0 19.2 0.4 31.6 0.5 36.4 0.4
Net income
(loss)attributable to
Lear $ (293.9 ) (12.0 )% $ 182.8 3.7 % $ (217.5 ) (3.2 )% $ 411.7 4.0 %
Three Months Ended July 4, 2020 vs. Three Months Ended June 29, 2019
Net sales in the second quarter of 2020 were $2.4 billion , as compared to $5.0
billion in the second quarter of 2019, a decrease of $2.6 billion or 51%. Lower
production volumes on Lear platforms globally, largely due to the COVID-19
pandemic, negatively impacted net sales by $2.4 billion .
(in millions) Cost of Sales
Second quarter 2019 $ 4,529.4
Material cost (1,688.1 )
Labor and other (271.7 )
Depreciation 2.3
Second quarter 2020 $ 2,571.9
Cost of sales in the second quarter of 2020 was $2.6 billion , as compared to
$4.5 billion in the second quarter of 2019. Lower production volumes on Lear
platforms globally, largely due to the COVID-19 pandemic, reduced cost of sales
by nearly $1.9 billion .
Gross profit (loss) and gross margin were ($127) million and (5.2)% of net
sales, respectively, in the second quarter of 2020, as compared to $478 million
and 9.5% of net sales, respectively, in the second quarter of 2019. Lower
production volumes on Lear platforms globally, largely due to the COVID-19
pandemic, and costs related to the COVID-19 pandemic negatively impacted gross
profit by $559 million . Favorable operating performance, including the benefit
of operational restructuring actions, was more than offset by the impact of
selling price reductions. These factors had a corresponding impact on gross
margin.
Selling, general and administrative expenses, including engineering and
development expenses, were $151 million in the second quarter of 2020, as
compared to $157 million in the second quarter of 2019. As a percentage of net
sales, selling, general and administrative expenses were 6.2% in the second
quarter of 2020, as compared to 3.1% in the second quarter of 2019, reflecting
the significant decrease in net sales in the second quarter of 2020.
Amortization of intangible assets was $16 million in the second quarters of 2020
and 2019.
Interest expense was $27 million in the second quarter of 2020, as compared to
$25 million in the second quarter of 2019.
Other (income) expense, net, which includes non-income related taxes, foreign
exchange gains and losses, gains and losses related to certain derivative
instruments and hedging activities, losses on the extinguishment of debt, gains
and losses on the
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LEAR CORPORATION disposal of fixed assets, gains and losses on the consolidation and deconsolidation of affiliates, the non-service cost components of net periodic benefit cost and other miscellaneous income and expense, was income of$3 million in the second quarter of 2020, as compared to expense of$14 million in the second quarter of 2019. In the second quarter of 2019, we recognized a loss of$11 million related to the extinguishment of debt. In the second quarter of 2020, the benefit for income taxes was$41 million , representing an effective tax rate of 12.9% on pretax loss before equity in net income of affiliates of$318 million . In the second quarter of 2019, the provision for income taxes was$73 million , representing an effective tax rate of 27.5% on pretax income before equity in net income of affiliates of$267 million , for the reasons described below. In the second quarters of 2020 and 2019, the benefit and provision for income taxes, respectively, was primarily impacted by the level and mix of earnings among tax jurisdictions. In the second quarter of 2020, we recognized tax expense of$23 million related to the establishment of a valuation allowance on deferred tax assets of a foreign subsidiary and net tax benefits of$21 million related to restructuring charges and various other items. Additionally, we recognized tax benefits of$28 million related to changes in theU.S. net operating loss carryback rules provided under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which include the positive and negative tax rate impact of variousU.S. permanent and temporary differences, including the negative tax rate impact from the inclusion of foreign branch income. In the second quarter of 2019, we recognized tax expense of$10 million related to the establishment of a valuation allowance on deferred tax assets of a foreign subsidiary and net tax benefits of$11 million related to restructuring and various other items. Excluding these items, the effective tax rate for the second quarters of 2020 and 2019 approximated theU.S. federal statutory income tax rate of 21%, adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items. In the second quarter of 2020, we measured our tax expense based on the discrete effective tax rate method, as allowed by Accounting Standards Codification ("ASC") Topic 740, "Income Taxes." In the second quarter of 2019, we measured our tax expense based on the estimated annual effective rate. For further information, see Note 13 "Income Taxes," to the condensed consolidated financial statements included in this Report. Equity in net income of affiliates was$8 million in the second quarters of 2020 and 2019. Net income (loss) attributable to Lear was($294) million , or ($4.89 ) per diluted share, in the second quarter of 2020, as compared to$183 million , or$2.92 per diluted share, in the second quarter of 2019. Net income (loss) and diluted net income (loss) per share decreased for the reasons described above. In addition, diluted net income (loss) per share was impacted by the decrease in average shares outstanding between periods. Reportable Operating Segments We have two reportable operating segments: Seating andE-Systems . For a description of our reportable operating segments, see "Executive Overview" above. The financial information presented below is for our two reportable operating segments and our other category for the periods presented. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment. Corporate and regional headquarters costs include various support functions, such as information technology, advanced research and development, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment's pretax income (loss) before equity in net income of affiliates, interest expense and other (income) expense, net ("segment earnings") and segment earnings divided by net sales ("margin") are not measures of performance under accounting principles generally accepted inthe United States ("GAAP"). Segment earnings and the related margin are used by management to evaluate the performance of our reportable operating segments. Segment earnings should not be considered in isolation or as a substitute for net income attributable to Lear, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income (loss) before provision for income taxes and equity in net income of affiliates, see Note 17, "Segment Reporting," to the condensed consolidated financial statements included in this Report. 39
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LEAR CORPORATION
Seating
A summary of the financial measures for our Seating segment is shown below (dollar amounts in millions):
Three Months Ended
July 4,
2020 June 29, 2019
Net sales $ 1,754.9 $ 3,839.4
Segment earnings (1) (116.4 ) 283.2
Margin (6.6 )% 7.4 %
(1) See definition above
Seating net sales were $1.8 billion in the second quarter of 2020, as compared
to $3.8 billion in the second quarter of 2019, a decrease of $2.1 billion or
54%. Lower production volumes on Lear platforms globally, largely due to the
COVID-19 pandemic, negatively impacted net sales by nearly $2.0 billion .
Segment earnings, including restructuring costs, and the related margin on net
sales were ($116) million and (6.6)% in the second quarter of 2020, as compared
to $283 million and 7.4% in the second quarter of 2019. Lower production volumes
on Lear platforms globally, largely due to the COVID-19 pandemic, and costs
related to the COVID-19 pandemic negatively impacted segment earnings by $411
million . Favorable operating performance, including the benefit of operational
restructuring actions, was offset by the impact of selling price reductions.
Segment earnings were also favorably impacted by lower restructuring costs.
E-Systems
A summary of financial measures for our E-Systems segment is shown below (dollar
amounts in millions):
Three Months Ended
July 4,
2020 June 29, 2019
Net sales $ 689.6 $ 1,168.2
Segment earnings(1) (113.4 ) 84.7
Margin (16.4 )% 7.3 %
(1) See definition above
E-Systems net sales were $0.7 billion in the second quarter of 2020, as compared
to $1.2 billion in the second quarter of 2019, a decrease of $479 million or
41%. Lower production volumes on Lear platforms globally, largely due to the
COVID-19 pandemic, negatively impacted net sales by more than $400 million .
Segment earnings, including restructuring costs, and the related margin on net
sales were ($113) million and (16.4)% in the second quarter of 2020, as compared
to $85 million and 7.3% in the second quarter of 2019. Lower production volumes
on Lear platforms globally, largely due to the COVID-19 pandemic, and costs
related to the COVID-19 pandemic negatively impacted segment earnings by $161
million . Improved operating performance was more than offset by the impact of
selling price reductions and higher restructuring costs.
Other
A summary of financial measures for our other category, which is not an
operating segment, is shown below (dollar amounts in millions):
Three Months Ended
July 4,
2020 June 29, 2019
Net sales $ - $ -
Segment earnings (1) (64.5 ) (62.7 )
Margin N/A N/A
(1) See definition above
Segment earnings related to our other category were ($65) million in the second
quarter of 2020, as compared to ($63) million in the second quarter of 2019,
reflecting lower compensation-related costs in 2020 offset by costs related to
the COVID-19 pandemic.
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Six Months Ended July 4, 2020 vs. Six Months Ended June 29, 2019
Net sales for the six months ended July 4, 2020 , were $6.9 billion , as compared
to $10.2 billion for the six months ended June 29, 2019 , a decrease of $3.3
billion or 32%. Lower production volumes on Lear platforms globally, largely due
to the COVID-19 pandemic, negatively impacted net sales by more than $3.0
billion .
(in millions) Cost of Sales
First six months of 2019 $ 9,216.3
Material cost (2,170.0 )
Labor and other (355.7 )
Depreciation 4.8
First six months of 2020 $ 6,695.4
Cost of sales in the first six months of 2020 were $6.7 billion , as compared to
$9.2 billion in the first six months of 2019. Lower production volumes on Lear
platforms globally, largely due to the COVID-19 pandemic, reduced cost of sales
by nearly $2.4 billion .
Gross profit and gross margin were $207 million and 3.0% of net sales,
respectively, for the six months ended July 4, 2020 , as compared to $951 million
and 9.4% of net sales, respectively, for the six months ended June 29, 2019 .
Lower production volumes on Lear platforms globally, largely due to the COVID-19
pandemic, and costs related to the COVID-19 pandemic negatively impacted gross
profit by $721 million . Favorable operating performance, including the benefit
of operational restructuring actions, was more than offset by the impact of
selling price reductions. These factors had a corresponding impact on gross
margin.
Selling, general and administrative expenses, including engineering and
development expenses, were $295 million in the first six months of 2020, as
compared to $305 million in the first six months of 2019. As a percentage of net
sales, selling, general and administrative expenses were 4.3% in the first six
months of 2020, as compared to 3.0% in the first six months of 2019, reflecting
the significant decrease in net sales in the second quarter of 2020.
Amortization of intangible assets was $33 million in the first six months of
2020, as compared to $29 million in the first six months of 2019, reflecting the
acquisition of Xevo Inc. ("Xevo").
Interest expense was $52 million in the first six months of 2020, as compared to
$45 million in the first six months of 2019, reflecting our 2019 financing
transactions related to the acquisition of Xevo.
Other expense, net, which includes non-income related taxes, foreign exchange
gains and losses, gains and losses related to certain derivative instruments and
hedging activities, losses on the extinguishment of debt, gains and losses on
the disposal of fixed assets, gains and losses on the consolidation and
deconsolidation of affiliates, the non-service cost components of net periodic
benefit cost and other miscellaneous income and expense, was expense of $37
million for the six months ended July 4, 2020 , as compared to $18 million for
the six months ended June 29, 2019 . In the first six months of 2020 and 2019, we
recognized losses of $21 million and $11 million , respectively, related to the
extinguishment of debt. In the first six months of 2020 and 2019, we recognized
foreign exchange losses of $17 million and $7 million , respectively.
For the six months ended July 4, 2020 , the benefit for income taxes was $15
million , representing an effective tax rate of 6.9% on pretax loss before equity
in net income of affiliates of $210 million . For the six months ended June 29,
2019 , the provision for income taxes was $116 million , representing an effective
tax rate of 21.0% on pretax income before equity in net income of affiliates of
$554 million , for the reasons described below.
In the first six months of 2020 and 2019, the benefit and provision for income
taxes, respectively, was primarily impacted by the level and mix of earnings
among tax jurisdictions. In the first six months of 2020, we recognized net tax
benefits of $31 million related to a loss on the extinguishment of debt,
restructuring charges and various other items partially offset by tax expense of
$22 million related to the net increase of valuation allowances on deferred tax
assets of foreign subsidiaries. Additionally, we recognized tax benefits of $28
million related to changes in the U.S. net operating loss carryback rules
provided under the CARES Act, which include the positive and negative tax rate
impact of various U.S. permanent and temporary differences, including the
negative tax rate impact from the inclusion of foreign branch income. In the
first six months of 2019, we recognized tax benefits of $18 million related to
changes in the tax status of certain affiliates, $3 million related to
share-based compensation and $27 million related to restructuring and various
other items, partially offset by tax expense of $10 million related to the
establishment of a valuation allowance on deferred tax assets of a foreign
subsidiary. Excluding these items, the effective tax rate for the first six
months of 2020 and 2019 approximated the U.S. federal statutory income tax rate
of 21% adjusted for income taxes on foreign earnings, losses and remittances,
valuation allowances, tax credits, income tax incentives and other permanent
items.
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In the first six months of 2020, we measured our tax expense based on the
discrete effective tax rate method, as allowed by ASC Topic 740, "Income Taxes."
In the first six months of 2019, we measured our tax expense based on the
estimated annual effective rate. For further information, see Note 13 "Income
Taxes," to the condensed consolidated financial statements included in this
Report.
Equity in net income of affiliates was $9 million in the first six months of
2020, as compared to $11 million in the first six months of 2019.
Net income (loss) attributable to Lear was ($218) million , or ($3.61 ) per
diluted share, for the six months ended July 4, 2020 , as compared to $412
million , or $6.66 per diluted share, for the six months ended June 29, 2019 . Net
income (loss) and diluted net income (loss) per share decreased for the reasons
described above. In addition, diluted net income (loss) per share was impacted
by the decrease in average shares outstanding between periods.
Reportable Operating Segments
We have two reportable operating segments: Seating and E-Systems . For a
description of our reportable operating segments, see "Executive Overview" and
"Three Months Ended July 4, 2020 vs. Three Months Ended June 29, 2019 -
Reportable Operating Segments" above.
Seating
A summary of the financial measures for our Seating segment is shown below
(dollar amounts in millions):
Six Months Ended
July 4, 2020 June 29, 2019
Net sales $ 5,121.5 $ 7,753.1
Segment earnings (1) 69.7 535.5
Margin 1.4 % 6.9 %
(1) See definition above
Seating net sales were $5.1 billion for the six months ended July 4, 2020 , as
compared to $7.8 billion for the six months ended June 29, 2019 , a decrease of
$2.6 billion or 34%. Lower production volumes on Lear platforms globally,
largely due to the COVID-19 pandemic, negatively impacted net sales by nearly
$2.5 billion .
Segment earnings, including restructuring costs, and the related margin on net
sales were $70 million and 1.4% for the six months ended July 4, 2020 , as
compared to $536 million and 6.9% for the six months ended June 29, 2019 . Lower
production volumes on Lear platforms globally, largely due to the COVID-19
pandemic, and costs related to the COVID-19 pandemic negatively impacted segment
earnings by $535 million . Favorable operating performance, including the benefit
of operational restructuring actions, was partially offset by the impact of
selling price reductions. Segment earnings were also favorably impacted by lower
restructuring costs.
E-Systems
A summary of financial measures for our E-Systems segment is shown below (dollar
amounts in millions):
Six Months Ended
July 4, 2020 June 29, 2019
Net sales $ 1,780.7 $ 2,414.6
Segment earnings (1) (81.0 ) 213.0
Margin (4.5 )% 8.8 %
(1) See definition above
E-Systems net sales were $1.8 billion for the six months ended July 4, 2020 , as
compared to $2.4 billion for the six months ended June 29, 2019 , a decrease of
$634 million or 26%. Lower production volumes on Lear platforms globally,
largely due to the COVID-19 pandemic, negatively impacted net sales by nearly
$600 million .
Segment earnings, including restructuring costs, and the related margin on net
sales were ($81) million and (4.5)% for the six months ended July 4, 2020 , as
compared to $213 million and 8.8% for the six months ended June 29, 2019 . Lower
production volumes on Lear platforms globally, largely due to the COVID-19
pandemic, and costs related to the COVID-19 pandemic
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negatively impacted segment earnings by $211 million . Improved operating
performance was more than offset by the impact of selling price reductions and,
to a lesser extent, higher restructuring costs.
Other
A summary of financial measures for our other category, which is not an
operating segment, is shown below (dollar amounts in millions):
Six Months Ended
July 4, 2020 June 29, 2019
Net sales $ - $ -
Segment earnings(1) (109.6 ) (131.1 )
Margin N/A N/A
(1) See definition above
Segment earnings related to our other category were ($110) million in the first
six months of 2020, as compared to ($131) million in the first six months of
2019, primarily reflecting lower compensation-related costs in 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund general business requirements, including
working capital requirements, capital expenditures, operational restructuring
actions and debt service requirements. Our principal sources of liquidity are
cash flows from operating activities, borrowings under available credit
facilities and our existing cash balance.
Adequacy of Liquidity Sources
As of July 4, 2020 , we had $1.78 billion of cash and cash equivalents on hand
and $750 million in available borrowing capacity under our Revolving Credit
Facility. Together with cash provided by operating activities, we believe that
this will enable us to meet our liquidity needs for the foreseeable future and
to satisfy ordinary course business obligations.
In response to the COVID-19 pandemic, we have taken a number of proactive steps
to preserve cash and maximize our financial flexibility in order to efficiently
manage through the COVID-19 pandemic. In addition to borrowing $1.0 billion
under our $1.75 billion Revolving Credit Facility in March 2020 (reflected in
cash and cash equivalents above), other actions include:
• Aggressively reducing operating costs, capital expenditures and working
capital, including reducing discretionary spending and adjusting
production activity
• Reducing salaried employee costs throughout the organization through
salary reductions and deferrals
• Suspending share repurchases and quarterly dividends
• Maximizing opportunities offered under government incentive programs
throughout the world
• Reducing the compensation of the Board of Directors
• Reducing hourly factory worker costs through temporary layoffs
• Delaying planned pension funding and deferring other retirement plan
contributions
Our future financial results and our ability to continue to meet our liquidity
needs are subject to, and will be affected by, cash flows from operations,
including the continuing effects of the COVID-19 pandemic, as well as
restructuring activities, automotive industry conditions, the financial
condition of our customers and suppliers and other related factors.
For further discussion of the risks and uncertainties affecting our cash flows
from operations and our overall liquidity, see "- Executive Overview" above, "-
Forward-Looking Statements" below, Part II - Item 1A, "Risk Factors," included
in this Report and Item 1A, "Risk Factors," in our Annual Report on Form 10-K
for the year ended December 31, 2019 .
Cash Provided by Subsidiaries
A substantial portion of our operating income is generated by our subsidiaries.
As a result, we are dependent on the earnings and cash flows of and the
combination of dividends, royalties, intercompany loan repayments and other
distributions and advances from our subsidiaries to provide the funds necessary
to meet our obligations.
As of July 4, 2020 and December 31, 2019 , cash and cash equivalents of $674
million and $895 million , respectively, were held in foreign subsidiaries and
can be repatriated, primarily through the repayment of intercompany loans and
the payment of dividends, without creating additional income tax expense. There
are no significant restrictions on the ability of our subsidiaries to pay
dividends or make other distributions to Lear.
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For further information related to potential dividends from our non-U.S.
subsidiaries, see Note 8, "Income Taxes," to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2019 .
Cash Flows
A summary of net cash provided by operating activities is shown below (in
millions):
Six Months Ended
Increase (Decrease)
July 4, June 29, in Operating
2020 2019 Cash Flow
Consolidated net income and depreciation and
amortization $ 75 $ 700 $ (625 )
Net change in working capital items:
Accounts receivable 557 (544 ) 1,101
Inventory (12 ) (42 ) 30
Accounts payable (867 ) 196 (1,063 )
Accrued liabilities and other (37 ) 197 (234 )
Net change in working capital items (359 ) (193 ) (166 )
Other (18 ) (51 ) 33
Net cash provided by (used in) operating activities
In the first six months of 2020 and 2019, net cash provided by (used in) operating activities was($302) million and$456 million , respectively. The overall decrease in operating cash flows of$758 million was primarily due to lower earnings in 2020, as well as an incremental use of cash related to working capital in the first six months of 2020, as compared to the first six months of 2019. The use of cash related to working capital in the first half of 2020 was largely due to the timing of cash paid for accounts payable, as compared to cash received for accounts receivable. Much of our inventory was purchased and paid for earlier in the period in conjunction with production shutdowns, while much of our accounts receivable relates to the restart of production beginning in mid-May and will be collected outside of the period. Net cash used in investing activities was$176 million in the first six months of 2020, as compared to$580 million in the first six months of 2019. In the first six months of 2019, we paid$321 million for the acquisition of Xevo. Capital spending was$195 million in the first six months of 2020, as compared to$259 million in the first six months of 2019. Capital spending is estimated to be approximately$450 million in 2020, which reflects a reduction in discretionary spending in response to the COVID-19 pandemic. Net cash provided by financing activities was$801 million in the first six months of 2020, as compared to a use of$105 million in the first six months of 2019. In 2020, we borrowed$1.0 billion under the Revolving Credit Facility as a proactive measure in response to the COVID-19 pandemic. In 2020, we received net proceeds of$669 million related to the issuance of the 2030 and 2049 Notes and paid$6 million of related issuance costs and$667 million related to the redemption of the outstanding 2025 Notes. Also in 2020, we paid$70 million for repurchases of our common stock,$48 million of dividends to Lear stockholders and$43 million of dividends to noncontrolling interest holders. In 2019, we received net proceeds of$693 million related to the issuance of the 2029 and 2049 Notes and paid$6 million of related issuance costs and$334 million related to the redemption of the outstanding 2024 Notes. Also in 2019, we paid$277 million for repurchases of our common stock,$96 million of dividends to Lear stockholders and$31 million of dividends to noncontrolling interest holders. Capitalization From time to time, we utilize uncommitted credit facilities to fund our capital expenditures and working capital requirements at certain of our foreign subsidiaries, in addition to cash provided by operating activities. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors. As ofJuly 4, 2020 andDecember 31, 2019 , our short-term borrowings outstanding were$7 million and$19 million , respectively. 44
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Senior Notes
As of July 4, 2020 , our senior notes (collectively, the "Notes") consisted of
the amounts shown below (in millions, except stated coupon rates):
Aggregate
Principal Amount Stated Coupon
Note at Maturity Rate
Senior unsecured notes due 2027 (the "2027 Notes") 750 3.80 %
Senior unsecured notes due 2029 (the "2029 Notes") 375 4.25 %
2030 Notes 350 3.50 %
2049 Notes 625 5.25 %
$ 2,100
The issue, maturity and interest payment dates of the Notes are shown below:
Note Issuance Date Maturity Date Interest Payment Dates
2027 Notes August 2017 September 15, 2027 March 15 and September 15
2029 Notes May 2019 May 15, 2029 May 15 and November 15
2030 Notes February 2020 May 30, 2030 May 30 and November 30
2049 Notes May 2019 and February 2020 May 15, 2049 InFebruary 2020 , we issued$350 million in aggregate principal amount at maturity of 2030 Notes and an additional$300 million in aggregate principal amount at maturity of 2049 Notes. The 2030 Notes have a stated coupon rate of 3.5% and were issued at 99.774% of par, resulting in a yield to maturity of 3.525%. The 2049 Notes have a stated coupon rate of 5.25% and were issued at 106.626% of par, resulting in a yield to maturity of 4.821%. The net proceeds from the offering were$669 million after original issue discount. The proceeds were used to redeem the$650 million in aggregate principal amount of 2025 Notes at a redemption price equal to 102.625% of the principal amount of such 2025 Notes, plus accrued interest. In connection with these transactions, we recognized a loss of$21 million on the extinguishment of debt and paid related issuance costs of$6 million . The indentures governing the Notes contain certain investment-grade style restrictive covenants and customary events of default. As ofJuly 4, 2020 , we were in compliance with all covenants under the indentures governing the Notes. For further information related to the Notes, including information on early redemption, covenants and events of default, see Note 8, "Debt," to the condensed consolidated financial statements included in this Report and Note 6, "Debt," to the consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Credit Agreement Our Credit Agreement, datedAugust 8, 2017 , consists of a$1.75 billion Revolving Credit Facility and a$250 million Term Loan Facility. InFebruary 2020 , we entered into an agreement to extend the maturity date of the Revolving Credit Facility by one year toAugust 8, 2024 , and paid related issuance costs of$1 million . The maturity date of the Term Loan Facility remainsAugust 8, 2022 . OnMarch 26, 2020 , as a proactive measure in response to the COVID-19 pandemic, we announced the borrowing of$1.0 billion under the Revolving Credit Facility, resulting in remaining availability of$750 million . As ofJuly 4, 2020 , there were$1.0 billion and$228 million of borrowings outstanding under the Revolving Credit Facility and the Term Loan Facility, respectively. As ofDecember 31, 2019 , there were no borrowings outstanding under the Revolving Credit Facility and$234 million of borrowings outstanding under the Term Loan Facility. During the first six months of 2020, we made required principal payments of$6 million under the Term Loan Facility. The Credit Agreement contains various financial and other covenants that require us to maintain a minimum leverage coverage ratio. As ofJuly 4, 2020 , we were in compliance with all covenants under the Credit Agreement. Although we expect to maintain compliance with all covenants, the impact of the COVID-19 pandemic may negatively affect our ability to comply with certain of these covenants. In the event that we are unable to maintain compliance with such covenants, we expect to 45
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obtain an amendment or waiver from our lenders, refinance the indebtedness
subject to the covenants or take other mitigating actions prior to a potential
breach.
For further information related to the Credit Agreement, including information
on pricing, covenants and events of default, see Note 8, "Debt," to the
condensed consolidated financial statements included in this Report and Note 6,
"Debt," to the consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2019 .
Accounts Receivable Factoring
During the second quarter of 2020, we entered into an uncommitted factoring
arrangement which provides for aggregate purchases of specified customer
accounts in North America . The factoring arrangement results in true sales of
the factored receivables, which are excluded from amounts reported in the
consolidated balance sheets when the receivables are factored in accordance with
ASC 860, "Transfers and Servicing." There were no receivables factored during
the second quarter of 2020. We cannot provide any assurances that the factoring
arrangement will be available or utilized in the future.
Common Stock Share Repurchase Program
In March 2020 , as a proactive measure in response to the COVID-19 pandemic, we
suspended share repurchases under our share repurchase program. Share
repurchases prior to the suspension are shown below (in millions except for
shares and per share amounts):
Six Months Ended As of
July 4, 2020 July 4, 2020
Average Price per Remaining Purchase
Aggregate Repurchases Cash paid for Repurchases Number of Shares Share (1) Authorization
$ 70 $ 70 641,149 $ 109.22 $ 1,430
(1) Excludes commissions
Since the first quarter of 2011, our Board of Directors has authorized $6.1
billion in share repurchases under our common stock share repurchase program. As
of the end of the second quarter of 2020, we have repurchased, in aggregate,
$4.7 billion of our outstanding common stock, at an average price of $90.07 per
share, excluding commissions and related fees.
We may implement share repurchases through a variety of methods, including, but
not limited to, open market purchases, accelerated stock repurchase programs and
structured repurchase transactions. The extent to which we will repurchase our
outstanding common stock and the timing of such repurchases will depend upon our
financial condition, prevailing market conditions, alternative uses of capital
and other factors (see "- Forward-Looking Statements").
For further information related to our common stock share repurchase program,
see Note 15, "Comprehensive Income (Loss) and Equity," to the condensed
consolidated financial statements included in this Report.
Dividends
In March 2020 , as a proactive measure in response to the COVID-19 pandemic, we
suspended our quarterly cash dividend. A summary of the first quarter 2020
dividend (prior to the suspension) is shown below:
Payment Date Dividend Per Share Declaration Date Record Date
0.77 February 6, 2020 February 28, 2020
Although we do expect to pay quarterly cash dividends at some point in the
future, such payments are at the discretion of our Board of Directors and will
depend upon our financial condition, results of operations, capital
requirements, alternative uses of capital and other factors that our Board of
Directors may consider in its discretion.
Market Risk Sensitivity
In the normal course of business, we are exposed to market risks associated with
fluctuations in foreign exchange rates, interest rates and commodity prices. We
manage a portion of these risks through the use of derivative financial
instruments in accordance with our policies. We enter into all hedging
transactions for periods consistent with the underlying exposures. We do not
enter into derivative instruments for trading purposes.
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LEAR CORPORATION Foreign Exchange Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies ("transactional exposure"). We may mitigate a portion of this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred where appropriate and included in the measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions. A summary of the notional amount and estimated aggregate fair value of our outstanding foreign exchange contracts is shown below (in millions):July 4 ,December 31, 2020 2019
Notional amount (contract maturities < 24 months)
(29 ) 50
Currently, our most significant foreign currency transactional exposures relate
to the Mexican peso, various European currencies, the Chinese renminbi, the Thai
baht, the Honduran lempira, the Japanese yen and the Brazilian real. A
sensitivity analysis of our net transactional exposure is shown below (in
millions):
Potential Earnings Benefit
(Adverse Earnings Impact)
July 4, December 31,
Hypothetical Strengthening % (1) 2020 2019
U.S. dollar 10% $ 25 $ (16 )
Euro 10% (6 ) 19
(1) Relative to all other currencies to which it is exposed for a twelve-month
period
A sensitivity analysis related to the aggregate fair value of our outstanding
foreign exchange contracts is shown below (in millions):
Estimated Change in Fair Value
July 4, December 31,
Hypothetical Change % (2) 2020 2019
U.S. dollar 10% $ 28 $ 50
Euro 10% 70 69
(2) Relative to all other currencies to which it is exposed for a twelve-month
period
There are certain shortcomings inherent in the sensitivity analyses above. The
analyses assume that all currencies would uniformly strengthen or weaken
relative to the U.S. dollar or Euro. In reality, some currencies may strengthen
while others may weaken, causing the earnings impact to increase or decrease
depending on the currency and the direction of the rate movement.
In addition to the transactional exposure described above, our operating results
are impacted by the translation of our foreign operating income into U.S.
dollars ("translational exposure"). In 2019, net sales outside of the United
States accounted for 82% of our consolidated net sales, although certain
non-U.S. sales are U.S. dollar denominated. We do not enter into foreign
exchange contracts to mitigate our translational exposure.
Interest Rates
Our variable rate debt obligations under our Credit Agreement are sensitive to
changes in interest rates. As of July 4, 2020 , we had $1.0 billion outstanding
under the Revolving Credit Facility and $228 million outstanding under the Term
Loan Facility.
Advances under the Revolving Credit Facility and the Term Loan Facility
generally bear interest based on (i) the Eurocurrency Rate (as defined in the
Credit Agreement) or (ii) the Base Rate (as defined in the Credit Agreement)
plus a margin.
A hypothetical 100 basis point increase in interest rates on our variable rate
debt obligations would increase annual interest expense and related cash
interest payments by approximately $10 million .
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LEAR CORPORATION Commodity Prices Raw material, energy and commodity costs can be volatile, reflecting changes in supply and demand and global trade and tariff policies. We have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, such as the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. However, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. Certain of these strategies also may limit our opportunities in a declining commodity cost environment. If these costs increase, it could have an adverse impact on our operating results in the foreseeable future. See "- Forward-Looking Statements" below and Item 1A, "Risk Factors - Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance," in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We have commodity price risk with respect to purchases of certain raw materials, including steel, copper, diesel fuel, chemicals, resins and leather. Our main cost exposures relate to steel, copper and leather. The majority of the steel used in our products is comprised of fabricated components that are integrated into a seat system, such as seat frames, recliner mechanisms, seat tracks and other mechanical components. Therefore, our exposure to changes in steel prices is primarily indirect, through these purchased components. Approximately 91% of our copper purchases and a significant portion of our leather purchases are subject to price index agreements with our customers and suppliers. For further information related to the financial instruments described above, see Note 18, "Financial Instruments," to the condensed consolidated financial statements included in this Report. OTHER MATTERS Legal and Environmental Matters We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial and contractual disputes, product liability claims and environmental and other matters. As ofJuly 4, 2020 , we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of$15 million . In addition, as ofJuly 4, 2020 , we had recorded reserves for product liability claims and environmental matters of$34 million and$9 million , respectively. Although these reserves were determined in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain, and actual results may differ significantly from current estimates. For a description of risks related to various legal proceedings and claims, see Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . For a more complete description of our outstanding material legal proceedings, see Note 16, "Legal and Other Contingencies," to the condensed consolidated financial statements included in this Report. Significant Accounting Policies and Critical Accounting Estimates Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates. For a discussion of our significant accounting policies and critical accounting estimates, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Accounting Policies and Critical Accounting Estimates," and Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no significant changes in our significant accounting policies or critical accounting estimates during the first half of 2020, with the exception of credit losses. See Note 18, "Financial Instruments - Accounts Receivable," to the condensed consolidated financial statements included in this Report. Recently Issued Accounting Pronouncements For information on the impact of recently issued accounting pronouncements, see Note 19, "Accounting Pronouncements," to the condensed consolidated financial statements included in this Report. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements. We also may provide 48
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LEAR CORPORATION forward-looking statements in oral statements or other written materials released to the public. All such forward-looking statements contained or incorporated in this Report or in any other public statements which address operating performance, events or developments that we expect or anticipate may occur in the future, including, without limitation, statements related to business opportunities, awarded sales contracts, sales backlog and ongoing commercial arrangements, or statements expressing views about future operating results, are forward-looking statements. Actual results may differ materially from any or all forward-looking statements made by us. Important factors, risks and uncertainties that may cause actual results to differ materially from anticipated results include, but are not limited to: • general economic conditions in the markets in which we operate, including
changes in interest rates or currency exchange rates;
• the impact of the COVID-19 pandemic on our business and the global economy;
• changes in actual industry vehicle production levels from our current
estimates;
• fluctuations in the production of vehicles or the loss of business with
respect to, or the lack of commercial success of, a vehicle model for which
we are a significant supplier;
• the outcome of customer negotiations and the impact of customer-imposed price
reductions;
• the cost and availability of raw materials, energy, commodities and product
components and our ability to mitigate such costs;
• disruptions in relationships with our suppliers;
• the financial condition of and adverse developments affecting our customers
and suppliers;
• risks associated with conducting business in foreign countries;
• currency controls and the ability to economically hedge currencies;
• global sovereign fiscal matters and creditworthiness, including potential
defaults and the related impacts on economic activity, including the possible
effects on credit markets, currency values, monetary unions, international
treaties and fiscal policies;
• competitive conditions impacting us and our key customers and suppliers;
• labor disputes involving us or our significant customers or suppliers or that
otherwise affect us;
• the operational and financial success of our joint ventures;
• the impact and timing of program launch costs and our management of new
program launches;
• limitations imposed by our existing indebtedness and our ability to access
capital markets on commercially reasonable terms;
• changes affecting the availability of LIBOR;
• changes in discount rates and the actual return on pension assets;
• impairment charges initiated by adverse industry or market developments;
• our ability to execute our strategic objectives;
• disruptions to our information technology systems, or those of our customers
or suppliers, including those related to cybersecurity;
• increases in our warranty, product liability or recall costs;
• the outcome of legal or regulatory proceedings to which we are or may become
a party;
• the impact of pending legislation and regulations or changes in existing
federal, state, local or foreign laws or regulations;
• the impact of regulations on our foreign operations;
• costs associated with compliance with environmental laws and regulations;
• developments or assertions by or against us relating to intellectual property
rights;
• the impact of potential changes in tax and trade policies in the United
States and related actions by countries in which we do business;
• the anticipated changes in economic and other relationships between the
United Kingdom and theEuropean Union ; and 49
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• other risks described in Item 1A, "Risk Factors," in our Annual Report on
Form 10-K for the year ended
by Part II - Item 1A, "Risk Factors," in our Quarterly Report on Form 10-Q
for the quarter ended
The forward-looking statements in this Report are made as of the date hereof, and we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.
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