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 and 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. 29
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Industry Overview
Our sales are driven by the number of vehicles produced by the automotive
manufacturers, which is ultimately dependent on consumer demand for automotive
vehicles, and our content per vehicle. Global automotive industry production
volumes in 2019, as compared to 2018, are shown below (in millions of units):
2019 (1) 2018 (1) (2) % Change
North America 16.3 17.0 (4 %)
Europe and Africa 21.7 22.6 (4 %)
Asia 44.6 47.7 (7 %)
South America 3.1 3.2 (4 %)
Other 1.4 2.0 (27 %)
Global light vehicle production 87.1 92.5 (6 %)
(1) Production data based on
(2) Production data for 2018 has been updated to reflect actual production
levels.
Automotive sales and production can be affected by the age of the vehicle fleet
and related scrappage rates, labor relations issues, fuel prices, regulatory
requirements, government initiatives, trade agreements, the availability and
cost of credit, the availability of critical components needed to complete the
production of vehicles, restructuring actions of our customers and suppliers,
facility closures, changing consumer attitudes toward vehicle ownership and
usage and other factors. Our operating results are also significantly impacted
by the overall commercial success of the vehicle platforms for which we supply
particular products, as well as the profitability of the products that we supply
for these platforms. The loss of business with respect to any vehicle model for
which we are a significant supplier, or a decrease in the production levels of
any such models, could adversely affect our operating results. In addition,
larger cars and light trucks, as well as vehicle platforms that offer more
features and functionality, such as luxury, sport utility and crossover
vehicles, typically have more content and, therefore, tend to have a more
significant impact on our operating results.
Our percentage of consolidated net sales by region in 2019 and 2018 is shown
below:
2019 2018
North America 37 % 36 %
Europe and Africa 39 % 41 %
Asia 20 % 19 %
South America 4 % 4 %
Total 100 % 100 %
Our ability to reduce the risks inherent in certain concentrations of business,
and thereby maintain our financial performance in the future, will depend, in
part, on our ability to continue to diversify our sales on a customer, product,
platform and geographic basis to reflect the market overall.
Key trends that specifically affect our business include automotive
manufacturers' utilization of global vehicle platforms, increasing demand for
luxury and performance features, including increasing levels of electrical and
electronic content, and China's emergence as the single largest automotive
market in the world, as well as the shift toward crossover and sport utility
vehicles, where our content can be significantly higher than our average content
per vehicle. In addition, we believe that demand for efficiency, enhanced
communications and safety are driving the technology trends of autonomy,
connectivity and electrification. These trends, along with the trend toward
shared mobility, are likely to be at the forefront of our industry for the
foreseeable future with each converging long-term toward fully autonomous,
connected, electric or hybrid electric vehicles.
Our sales and marketing approach is based on addressing these trends, while our
strategy focuses on the major imperatives for success as an automotive supplier:
quality, service, cost and efficiency and innovation and technology. We have
expanded key component and software capabilities through organic investment and
acquisitions to ensure a full complement of the highest quality solutions for
our customers. We have restructured, and continue to align, our manufacturing
and engineering footprint to attain a leading competitive position globally. We
have established or expanded our capabilities in new and growing markets,
especially China , in support of our customers' growth and global platform
initiatives. These initiatives have helped us achieve our financial goals
overall, as well as a more balanced regional, customer and vehicle segment
diversification in our business.
For further information related to these trends and our strategy, see Part 1 -
Item 1, "Business - Industry and Strategy."
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Our customers typically require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through product design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business. Our material cost as a percentage of net sales was 65.0% in 2019, as compared to 64.4% in 2018 and 64.5% in 2017. 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 environment. In addition, the availability of raw materials, commodities and product components fluctuates from time to time due to factors outside of our control. If these costs increase or availability is restricted, it could have an adverse impact on our operating results in the foreseeable future. See Part I - 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," and "- Forward-Looking Statements." Financial Measures In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. In addition to maintaining and expanding our business with our existing customers in our more established markets, our expansion plans are focused primarily on emerging markets.Asia , andChina in particular, continues to present long-term growth opportunities, as we focus on expanding our market share and content per vehicle, as demand for luxury and performance features increases in this region. In addition to our wholly owned locations, we currently have twelve operating joint ventures with operations inAsia , as well as two additional joint ventures inNorth America dedicated to serving Asian automotive manufacturers. We also have aggressively pursued this strategy by selectively increasing our vertical integration capabilities globally, as well as expanding our component manufacturing capacity inAsia ,Brazil ,Eastern Europe ,Mexico andNorthern Africa . Furthermore, we have expanded our low-cost engineering capabilities inAsia ,Eastern Europe andNorthern Africa . Our success in generating cash flow will depend, in part, on our ability to manage working capital effectively. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. Historically, we generally have been successful in aligning our vendor payment terms with our customer payment terms. However, our ability to continue to do so may be impacted by adverse automotive industry conditions, changes to our customers' payment terms and the financial condition of our suppliers, as well as our financial condition. In addition, our cash flow is impacted by our ability to manage our inventory and capital spending effectively. We utilize return on invested capital as a measure of the efficiency with which our assets generate earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency. Acquisitions Xevo InApril 2019 , we completed the acquisition ofXevo Inc. ("Xevo"), aSeattle -based, global leader in connected car software, by acquiring all of Xevo's outstanding shares for$322 million , net of cash acquired. Xevo is a supplier of software solutions for the cloud, vehicles and mobile devices that are deployed in millions of vehicles worldwide. For further information, see Note 3, "Acquisitions," to the consolidated financial statements included in this Annual Report on Form 10-K (this "Report"). EXO InJanuary 2018 , we completed the acquisition ofIsrael -based EXO Technologies ("EXO"), a leading developer of differentiated GPS technology providing high-accuracy positioning solutions for autonomous and connected vehicle applications. EXO has operations inSan Mateo, California andTel Aviv, Israel and has developed core technology that addresses the need for high-accuracy positioning of a vehicle. Its proprietary technology works with existing GPS receivers to provide centimeter-level accuracy anywhere on the globe without the need for terrestrial base-station networks. The integration of this technology with our vehicle and connectivity expertise enables an industry-leading vehicle positioning solution. 31
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Operational Restructuring In 2019, we incurred pretax restructuring costs of$184 million and related manufacturing inefficiency charges of$6 million , as compared to pretax restructuring costs of$88 million and related manufacturing inefficiency charges of$16 million in 2018. 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 increase in restructuring costs in 2019, as compared to 2018, is primarily attributable to elevated customer actions and a significant reduction in global vehicle production volumes. None of the individual restructuring actions initiated during 2019 were material. Our restructuring actions are designed to maintain or improve our future operating results 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$55 million of additional restructuring costs related to activities initiated as ofDecember 31, 2019 , all of which are expected to be incurred by the end of 2020. We plan to implement additional restructuring actions in the future, if necessary, in order to align our manufacturing capacity and other costs with prevailing regional automotive production levels and locations. Such future restructuring actions are dependent on market conditions, customer actions and other factors. For further information, see Note 4, "Restructuring," and Note 14, "Segment Reporting," to the consolidated financial statements included in this Report. Financing Transactions Senior Notes InMay 2019 , we issued$375 million in aggregate principal amount at maturity of senior unsecured notes due in 2029 (the "2029 Notes") and$325 million in aggregate principal amount at maturity of senior unsecured notes due in 2049 (the "2049 Notes"). The 2029 Notes have a stated coupon rate of 4.25% and were priced at 99.691% of par, resulting in a yield to maturity of 4.288%. The 2049 Notes have a stated coupon rate of 5.25% and were priced at 98.32% of par, resulting in a yield to maturity of 5.363%. The net proceeds from the offering were$693 million after original issue discount. The proceeds were used to redeem the$325 million in aggregate principal amount of senior unsecured notes due in 2024 (the "2024 Notes") at a redemption price equal to 102.688% of the principal amount of such 2024 Notes, plus accrued interest, as well as to finance the acquisition of Xevo and for general corporate purposes. In connection with these transactions, we recognized a loss of$11 million on the extinguishment of debt and paid related issuance costs of$7 million . For further information, see "- Liquidity and Capital Resources - Capitalization - Senior Notes" below and Note 6 "Debt," to the consolidated financial statements included in this Report. Credit Agreement Our 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"). The maturity date of the Revolving Credit Facility isAugust 8, 2023 , and the maturity date of the Term Loan Facility isAugust 8, 2022 . For further information, see "- Liquidity and Capital Resources - Capitalization - Credit Agreement" below and Note 6, "Debt," to the consolidated financial statements included in this Report. Share Repurchase Program and Quarterly Cash Dividends Since the first quarter of 2011, our Board of Directors has authorized$5.8 billion in share repurchases under our common stock share repurchase program. In 2019, we repurchased$380 million of shares and have a remaining repurchase authorization of$1.2 billion , which will expire onDecember 31, 2021 . In 2019, our Board of Directors declared a quarterly cash dividend of$0.75 per share of common stock, reflecting a 7% increase over the quarterly cash dividend declared in 2018. For further information related to our common stock share repurchase program and our quarterly dividends, see Item 5, "Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ," "- Liquidity and Financial Condition - Capitalization" and Note 11, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in this Report. 32
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Other Matters In 2019, we recognized tax benefits of$29 million related to an increase in our research and development tax credits for the years 2013 through 2018,$18 million related to changes in the tax status of certain affiliates,$14 million related to theU.S. tax impact of the foreign tax credit regulations issued in the fourth quarter of 2019,$5 million related to net reductions in tax reserves,$3 million related to share-based compensation,$12 million related to various tax-related items, including the release of valuation allowances, tax rate changes and audit adjustments, and$52 million related to restructuring charges and various other items, offset by tax expense of$11 million related to the establishment of valuation allowances on the deferred tax assets of foreign subsidiaries. In 2018, we acquired an additional 20% interest inChangchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd. ("Lear FAWSN") from a joint venture partner and amended the existing joint venture agreement to eliminate the substantive participating rights of the remaining joint venture partner. Prior to the amendment, Lear FAWSN was accounted for under the equity method. In conjunction with obtaining control of Lear FAWSN and the valuation of our prior equity investment in Lear FAWSN at fair value, we recognized a gain of approximately$10 million . In 2018, we recognized a$5 million settlement charge in connection with our annuity purchase for certain terminated vested plan participants of ourU.S. defined benefit pension plans. In 2018, we recognized tax benefits of$83 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries, share-based compensation, a tax rate change in a foreign subsidiary, an adjustment to the 2017 provisional income tax expense, restructuring charges and various other items, offset by tax expense of$34 million related to an increase in foreign withholding tax on certain undistributed foreign earnings and the establishment of valuation allowances on the deferred tax assets of certain foreign subsidiaries and various other items. In 2017, we amended the joint venture agreement ofShanghai Lear STEC Automotive Parts Co., Ltd. ("Lear STEC") to eliminate the substantive participating rights of our joint venture partner. In conjunction with obtaining control of Lear STEC and the valuation of our prior equity investment in Lear STEC at fair value, we recognized a gain of approximately$54 million . In 2017, we recognized a$15 million litigation charge, of which approximately$13 million is recorded in cost of sales and approximately$2 million is recorded in interest expense, related to an unfavorable ruling issued by a foreign court. In 2017, we recognized tax expense of$131 million related to a one-time transition tax on accumulated foreign earnings and$43 million to reflect the newU.S. corporate tax rate and other tax reform changes to our deferred tax accounts, offset by tax benefits of$290 million related to foreign tax credits on repatriated earnings,$30 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries,$17 million related to share-based compensation,$14 million related to an incentive tax credit in a foreign subsidiary,$8 million related to the redemption of our senior notes due 2023 (the "2023 Notes") and$30 million related to restructuring charges and various other items. As discussed above, our results for the years endedDecember 31, 2019 , 2018 and 2017, reflect the following items (in millions): For the year ended December 31, 2019 2018
2017
Costs related to restructuring actions, including
manufacturing inefficiencies of
$ 190 $ 104 $ 75 Acquisition and other related costs 2 1 4 Acquisition-related inventory fair value adjustment - - 5 Pension settlement charge - 5 - Litigation 1 (17 ) 15 Favorable indirect tax ruling in a foreign (2 ) (16 ) -
jurisdiction
Loss on extinguishment of debt 11 -
21
Gain related to affiliate, net (1 ) (1 ) (54 ) Tax benefits, net (122 ) (49 ) (215 ) For further information regarding these items, see Note 3, "Acquisitions," Note 4, "Restructuring," Note 5, "Investments in Affiliates andOther Related Party Transactions," Note 6, "Debt," Note 8, "Income Taxes," and Note 9, "Pension and Other Postretirement Benefit Plans," to the consolidated financial statements included in this Report. This section includes forward-looking statements that are subject to risks and uncertainties. For further information regarding these and other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see Part I - Item 1A, "Risk Factors," and "- Forward-Looking Statements." 33
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Results of Operations A summary of our operating results in millions of dollars and as a percentage of net sales is shown below: For the year ended 2019 2018 2017 December 31, Net sales Seating$ 15,097.2 76.2 %$ 16,021.9 75.8 %$ 15,873.0 77.6 % E-Systems 4,713.1 23.8 5,126.6 24.2 4,594.0 22.4 Net sales 19,810.3 100.0 21,148.5 100.0 20,467.0 100.0 Cost of sales 18,072.8 91.2 18,830.2 89.0 18,175.9 88.8 Gross profit 1,737.5 8.8 2,318.3 11.0 2,291.1 11.2 Selling, general and administrative expenses 605.0 3.1 612.8 2.9 635.2 3.1 Amortization of 62.3 0.3 51.4 0.2 47.6 0.2 intangible assets Interest expense 92.0 0.5 84.1 0.4 85.7 0.4 Other (income) expense, 24.6 0.1 31.6 0.2 (4.1 ) - net Provision for income 146.1 0.7 311.9 1.5 197.5 1.0 taxes Equity in net income of (23.2 ) (0.1 ) (20.2 ) (0.1 ) (51.7 ) (0.2 ) affiliates Net income attributable to noncontrolling interests 77.1 0.4 96.9 0.5 67.5 0.3
Net income attributable
%$ 1,313.4 6.4 % to Lear Year EndedDecember 31, 2019 , Compared With Year EndedDecember 31, 2018 Net sales for the year endedDecember 31, 2019 were$19.8 billion , as compared to$21.1 billion for the year endedDecember 31, 2018 , a decrease of$1.3 billion or 6%. Lower production volumes on Lear platforms in most regions, including the impact of a prolonged labor strike at our largest customer, and net foreign exchange rate fluctuations negatively impacted net sales by$1.7 billion and$0.7 billion , respectively. These decreases were partially offset by the impact of new business in all regions, which increased net sales by$1.1 billion . (in millions) Cost of Sales 2018$ 18,830.2 Material cost (735.7 ) Labor and other (36.8 ) Depreciation 15.1 2019$ 18,072.8 Cost of sales in 2019 was$18.1 billion , as compared to$18.8 billion in 2018. Lower production volumes on Lear platforms in most regions, including the impact of a prolonged labor strike at our largest customer, and net foreign exchange rate fluctuations reduced cost of sales by$1.9 billion . These decreases were partially offset by the impact of new business in all regions and higher restructuring costs. Gross profit and gross margin were$1.7 billion and 8.8% of net sales in 2019, as compared to$2.3 billion and 11.0% of net sales in 2018. Lower production volumes on Lear platforms, including the impact of a prolonged labor strike at our largest customer, and net foreign exchange rate fluctuations, partially offset by the impact of new business, negatively impacted gross profit by$377 million . The impact of selling price reductions and, to a lesser extent, higher restructuring costs was partially offset by favorable operating performance, including the benefit of operational restructuring actions. These factors had a corresponding impact on gross margin. Selling, general and administrative expenses, including engineering and development expenses, were$605 million for the year endedDecember 31, 2019 , as compared to$613 million for the year endedDecember 31, 2018 . In 2019, selling, general and administrative expenses benefited from lower compensation-related costs and the impact of net foreign exchange fluctuations, largely offset by the operating expenses of our Xevo acquisition. As a percentage of net sales, selling, general and administrative expenses were 3.1% in 2019, as compared to 2.9% in 2018. Amortization of intangible assets was$62 million in 2019, as compared to$51 million in 2018, reflecting the acquisition of Xevo. 34
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Interest expense was$92 million in 2019, as compared to$84 million in 2018, 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$25 million in 2019, as compared to$32 million in 2018. In 2019, we recognized losses of$11 million related to the extinguishment of debt and$5 million related to the impairment of an investment and a gain of$4 million related to the deconsolidation of an affiliate. In 2018, we recognized a gain of$10 million related to obtaining control of an affiliate and a settlement charge of$5 million related to our annuity purchase for certain terminated vested plan participants of ourU.S. defined benefit pension plans. In 2019, the provision for income taxes was$146 million , representing an effective tax rate of 15.3% on pretax income before equity in net income of affiliates of$1.0 billion . In 2018, the provision for income taxes was$312 million , representing an effective tax rate of 20.3% on pretax income before equity in net income of affiliates of$1.5 billion . In 2019 and 2018, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In 2019, we recognized tax benefits of$29 million related to an increase in our research and development tax credits for the years 2013 through 2018,$18 million related to changes in the tax status of certain affiliates,$14 million related to theU.S. tax impact of the foreign tax credit regulations issued in the fourth quarter of 2019,$5 million related to net reductions in tax reserves,$3 million related to share-based compensation,$12 million related to various tax-related items, including the release of valuation allowances, tax rate changes and audit adjustments, and$52 million related to restructuring charges and various other items, offset by tax expense of$11 million related to the establishment of valuation allowances on the deferred tax assets of foreign subsidiaries. In addition, we recognized a gain of$4 million related to the deconsolidation of an affiliate, for which no tax expense was provided. In 2018, we recognized tax benefits of$39 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries,$11 million related to share-based compensation,$7 million related to a tax rate change in a foreign subsidiary,$5 million related to an adjustment to the 2017 provisional income tax expense and$21 million related to restructuring charges and various other items, offset by tax expense of$22 million related to an increase in foreign withholding tax on certain undistributed foreign earnings and$12 million to establish valuation allowances on the deferred tax assets of certain foreign subsidiaries and various other items. In addition, we recognized a gain of$10 million related to obtaining control of an affiliate, for which no tax expense was provided. Excluding these items, the effective tax rate for 2019 and 2018 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. For information related to our valuation allowances, see "Other Matters - Significant Accounting Policies and Critical Accounting Estimates - Income Taxes." Equity in net income of affiliates was$23 million for the year endedDecember 31, 2019 , as compared to$20 million for the year endedDecember 31, 2018 . Net income attributable to Lear was$754 million , or$12.75 per diluted share, in 2019, as compared to$1,150 million , or$17.22 per diluted share, in 2018. Net income and diluted net income per share decreased for the reasons described above. In addition, diluted net income 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, advance research and development, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment's pretax income before equity in net income of affiliates, interest expense and other 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. 35
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For a reconciliation of consolidated segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates, see Note 14, "Segment Reporting," to the consolidated financial statements included in this Report. Seating - A summary of financial measures for our Seating segment is shown below (dollar amounts in millions): For the year ended December 31, 2019 2018 Net sales$ 15,097.2 $ 16,021.9 Segment earnings (1) 961.2 1,263.6 Margin 6.4 % 7.9 % (1) See definition above. Seating net sales were$15.1 billion for the year endedDecember 31, 2019 , as compared to$16.0 billion for the year endedDecember 31, 2018 , a decrease of$925 million or (6%). Lower production volumes on Lear platforms, including the impact of a prolonged labor strike at our largest customer, and net foreign exchange rate fluctuations negatively impacted net sales by$1.3 billion and$0.5 billion , respectively. These decreases were partially offset by the impact of new business, which increased net sales by$0.9 billion . Segment earnings, including restructuring costs, and the related margin on net sales were$1.0 billion and 6.4% in 2019, as compared to$1.3 billion and 7.9% in 2018. Lower production volumes on Lear platforms, including the impact of a prolonged labor strike at our largest customer, and net foreign exchange rate fluctuations, partially offset by the impact of new business, negatively impacted segment earnings by$251 million . Favorable operating performance, including the benefit of operational restructuring actions, of$210 million was partially offset by the impact of selling price reductions. Segment earnings were also negatively impacted by higher restructuring costs.E-Systems - A summary of financial measures for ourE-Systems segment is shown below (dollar amounts in millions): For the year ended December 31, 2019 2018 Net sales$ 4,713.1 $ 5,126.6 Segment earnings (1) 366.3 628.5 Margin 7.8 % 12.3 % (1) See definition above.E-Systems net sales were$4.7 billion for the year endedDecember 31, 2019 , as compared to$5.1 billion for the year endedDecember 31, 2018 , a decrease of$414 million or 8%. Lower production volumes on Lear platforms and net foreign exchange rate fluctuations negatively impacted net sales by$386 million and$200 million , respectively. These decreases were partially offset by the impact of new business, which increased net sales by$180 million . Segment earnings, including restructuring costs, and the related margin on net sales were$366 million and 7.8% in 2019, as compared to$629 million and 12.3% in 2018. Lower production volumes on Lear platforms and net foreign exchange rate fluctuations, partially offset by the impact of new business, negatively impacted segment earnings by$119 million . The impact of selling price reductions and, to a lesser extent, higher restructuring costs, were partially offset by improved operating performance. Other - A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions): For the year ended December 31, 2019 2018 Net sales $ - $ - Segment earnings (1) (257.3 ) (238.0 ) Margin N/A N/A (1) See definition above. 36
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Segment earnings related to our other category were$(257) million in 2019, as compared to$(238) million in 2018, reflecting lower compensation-related costs in 2019 and a favorable litigation settlement in 2018. Year EndedDecember 31, 2018 , Compared With Year EndedDecember 31, 2017 Net sales for the year endedDecember 31, 2018 were$21.1 billion , as compared to$20.5 billion for the year endedDecember 31, 2017 , an increase of$0.7 billion or 3%. New business in all regions, net foreign exchange rate fluctuations, sales as a result of obtaining control of affiliates and the acquisition of Grupo Antolin's automotive seating business ("Antolin Seating") positively impacted net sales by$1,062 million ,$337 million ,$311 million and$215 million , respectively. These increases were partially offset by lower production volumes on key Lear platforms in all regions exceptSouth America , which negatively impacted net sales by$1,261 million . (in millions) Cost of Sales 2017$ 18,175.9 Material cost 314.5 Labor and other 290.8 Depreciation 49.0 2018$ 18,830.2 Cost of sales in 2018 was$18.8 billion , as compared to$18.2 billion in 2017. New business in all regions and net foreign exchange rate fluctuations resulted in an increase in cost of sales of$1,208 million . The impact of lower production volumes on key Lear platforms in all regions exceptSouth America was partially offset by cost of sales as a result of obtaining control of affiliates and the acquisition of Antolin Seating. Gross profit and gross margin were$2.3 billion and 11.0% of net sales in 2018, as compared to$2.3 billion and 11.2% of net sales in 2017. New business and net foreign exchange rate fluctuations positively impacted gross profit by$191 million . The impact of selling price reductions and lower production volumes on key Lear platforms was partially offset by favorable operating performance, including the benefit of operational restructuring actions, gross profit as a result of obtaining control of affiliates and the acquisition of Antolin Seating. These factors had a corresponding impact on gross margin. Selling, general and administrative expenses, including engineering and development expenses, were$613 million for the year endedDecember 31, 2018 , as compared to$635 million for the year endedDecember 31, 2017 . In 2018, the benefit of lower compensation expense was partially offset by the impact of net foreign exchange rate fluctuations and higher restructuring costs. As a percentage of net sales, selling, general and administrative expenses were 2.9% in 2018, as compared to 3.1% in 2017. Amortization of intangible assets was$51 million in 2018, as compared to$48 million in 2017. Interest expense was$84 million in 2018, as compared to$86 million in 2017. 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 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$32 million in 2018, as compared to income of$4 million in 2017. In 2018, we recognized a gain of$10 million related to obtaining control of an affiliate and a settlement charge of$5 million related to our annuity purchase for certain terminated vested plan participants of ourU.S. defined benefit pension plans. In 2017, we recognized a gain of$54 million related to obtaining control of an affiliate and a loss of$21 million related to the extinguishment of debt. In 2018, the provision for income taxes was$312 million , representing an effective tax rate of 20.3% on pretax income before equity in net income of affiliates of$1.5 billion . In 2017, the provision for income taxes was$198 million , representing an effective tax rate of 12.9% on pretax income before equity in net income of affiliates of$1.5 billion , for the reasons described below. In 2018 and 2017, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision for income taxes in 2018 was also impacted by the reduction in theU.S. federal corporate income tax rate from 35% to 21%. In 2018, we recognized tax benefits of$39 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries,$11 million related to share-based compensation,$7 million related to a tax rate change in a foreign subsidiary,$5 million related to an adjustment to the 2017 provisional income tax expense and$21 million related to restructuring charges and various other items, offset by tax expense of$22 million related to an increase in foreign withholding tax on certain undistributed foreign earnings and$12 million to establish valuation allowances on the 37
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deferred tax assets of certain foreign subsidiaries and various other items. In addition, we recognized a gain of$10 million related to obtaining control of an affiliate, for which no tax expense was provided. In 2017, we recognized tax expense of$131 million related to a one-time transition tax on accumulated foreign earnings and$43 million to reflect the newU.S. corporate tax rate and other tax reform changes to our deferred tax accounts. In addition, we recognized tax benefits of$290 million related to foreign tax credits on repatriated earnings,$30 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries,$17 million related to share-based compensation,$14 million related to an incentive tax credit in a foreign subsidiary,$8 million related to the redemption of the 2023 Notes and$30 million related to restructuring charges and various other items. In addition, we recognized a gain of$54 million related to obtaining control of an affiliate, for which no tax expense was provided. Excluding these items, the effective tax rate for 2018 and 2017 approximated theU.S. federal statutory income tax rate of 21% and 35%, respectively, adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items. For information related to our valuation allowances, see "Other Matters - Significant Accounting Policies and Critical Accounting Estimates - Income Taxes." Equity in net income of affiliates was$20 million for the year endedDecember 31, 2018 , as compared to$52 million for the year endedDecember 31, 2017 , as a result of lower customer production affecting certain of our affiliates and obtaining control of other affiliates. Net income attributable to Lear was$1,150 million , or$17.22 per diluted share, in 2018, as compared to$1,313 million , or$18.59 per diluted share, in 2017. Net income and diluted net income per share decreased for the reasons described above. In addition, diluted net income per share was impacted by the decrease in average shares outstanding between the periods. Reportable Operating Segments We have two reportable operating segments: Seating andE-Systems . For a description of our reportable operating segments, see "Executive Overview" and "Year EndedDecember 31, 2019 , Compared With Year EndedDecember 31, 2018 - Reportable Operating Segments" above. Seating - A summary of financial measures for our Seating segment is shown below (dollar amounts in millions): For the year ended December 31, 2018 2017 Net sales$ 16,021.9 $ 15,873.0 Segment earnings (1) 1,263.6 1,250.8 Margin 7.9 % 7.9 % (1) See definition above. Seating net sales were$16.0 billion for the year endedDecember 31, 2018 , as compared to$15.9 billion for the year endedDecember 31, 2017 , an increase of$149 million or 1%. New business, net foreign exchange rate fluctuations and the acquisition of Antolin Seating positively impact net sales by$576 million ,$231 million and$215 million , respectively. These increases were partially offset by the impact of lower production volumes on key Lear platforms, which decreased net sales by$888 million . Segment earnings, including restructuring costs, and the related margin on net sales were$1.3 billion and 7.9% in 2018 and 2017. New business, net foreign exchange rate fluctuations and the acquisition of Antolin Seating positively impact segment earnings by$107 million . Favorable operating performance, including the benefit of operational restructuring actions, of$234 million was more than offset by the impact of selling price reductions and lower production volumes on key Lear platforms. E-Systems - A summary of financial measures for ourE-Systems segment is shown below (dollar amounts in millions): For the year ended December 31, 2018 2017 Net sales$ 5,126.6 $ 4,594.0 Segment earnings (1) 628.5 641.6 Margin 12.3 % 14.0 % (1) See definition above. 38
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E-Systems net sales were$5.1 billion for the year endedDecember 31, 2018 , as compared to$4.6 billion for the year endedDecember 31, 2017 , an increase of$533 million or 12%. New business, sales as a result of obtaining control of affiliates and net foreign exchange rate fluctuations positively impacted net sales by$486 million ,$311 million and$106 million , respectively. These increases were partially offset by lower production volumes on key Lear platforms, which reduced net sales by$373 million . Segment earnings, including restructuring costs, and the related margin on net sales were$629 million and 12.3% in 2018, as compared to$642 million and 14.0% in 2017. New business, earnings as a result of obtaining control of affiliates and net foreign exchange rate fluctuations positively impacted segment earnings by$118 million . Improved operating performance of$75 million was more than offset by the impact of lower production volumes on key Lear platforms and selling price reductions. Other - A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions): For the year ended December 31, 2018 2017 Net sales $ - $ - Segment earnings (1) (238.0 ) (284.1 ) Margin N/A N/A (1) See definition above. Segment earnings related to our other category were($238) million in 2018, as compared to($284) million in 2017, reflecting the benefit of lower compensation expense and a favorable litigation settlement of$13 million in 2018. Liquidity and Financial Condition Our primary liquidity needs are to fund general business requirements, including working capital requirements, capital expenditures, operational restructuring actions and debt service requirements. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program (see Item 5, "Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities "). Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance. 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 ofDecember 31, 2019 and 2018, cash and cash equivalents of$895 million and$1,094 million , respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating additional income tax expense. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from our non-U.S. subsidiaries, see "- Adequacy of Liquidity Sources," below and Note 8, "Income Taxes," to the consolidated financial statements included in this Report. 39
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Cash Flows Year EndedDecember 31, 2019 , Compared with Year EndedDecember 31, 2018 A summary of net cash provided by operating activities is shown below (in millions): Increase (Decrease) in Operating For the year ended December 31, 2019 2018 Cash Flow Consolidated net income and depreciation and amortization$ 1,341 $ 1,731 $ (390 ) Net change in working capital items: Accounts receivable (116 ) 231 (347 ) Inventory (69 ) (33 ) (36 ) Other current assets 71 (68 ) 139 Accounts payable (6 ) (199 ) 193 Accrued liabilities 94 (50 ) 144 Net change in working capital items (26 ) (119 ) 93 Other (31 ) 168 (199 )
Net cash provided by operating activities
$ (496 )
In 2019 and 2018, net cash provided by operating activities was$1.3 billion and$1.8 billion , respectively. The overall decrease in operating cash flows of$496 million was primarily attributable to lower net income. The increase in accounts receivable in 2019 was largely due to lower sales at the end of 2018, as compared to the end of 2019. The decrease in accounts receivable in 2018 was largely due to lower sales at the end of 2018, as compared to the end of 2017. The timing of certain customer payments at the end of 2018 impacted both periods. The resulting decrease in operating cash flows between periods of$347 million was more than offset by improved operating cash flows related to other current assets, accounts payable and accrued liabilities. Net cash used in investing activities was$922 million in 2019, as compared to$694 million in 2018. In 2019, we paid$322 million for the acquisition of Xevo. In 2019, capital spending was$604 million , as compared to$677 million in 2018. Capital spending in 2020 is estimated at$600 million . Net cash used in financing activities was$362 million in 2019, as compared to$1,031 million in 2018. In 2019, we received net proceeds of$693 million related to the issuance of the 2029 and 2049 Notes and paid$7 million of related issuance costs and$334 million related to the redemption of the outstanding 2024 Notes. Also in 2019, we paid$385 million for repurchases of our common stock,$186 million of dividends to Lear stockholders and$79 million of dividends to noncontrolling interest holders. In 2018, we paid$705 million for repurchases of our common stock,$186 million of dividends to Lear stockholders and$79 million of dividends to noncontrolling interest holders. For further information regarding our 2019 and 2018 financing transactions, see "- Capitalization" below and Note 6, "Debt," and Note 11, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in this Report. 40
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Year EndedDecember 31, 2018 , Compared with Year EndedDecember 31, 2017 A summary of net cash provided by operating activities is shown below (in millions): Increase (Decrease) in Operating For the year ended December 31, 2018 2017 Cash Flow Consolidated net income and depreciation and amortization$ 1,731 $ 1,809 $ (78 ) Net change in working capital items: Accounts receivable 231 (115 ) 346 Inventory (33 ) (76 ) 43 Other current assets (68 ) 30 (98 ) Accounts payable (199 ) 195 (394 ) Accrued liabilities (50 ) 38 (88 ) Net change in working capital items (119 ) 72 (191 ) Other 168 (98 ) 266
Net cash provided by operating activities
$ (3 ) In 2018, decreases in accounts receivable and accounts payable primarily reflect lower production volumes at the end of 2018, as compared to 2017, and changes in other current assets and accrued liabilities primarily reflect the timing of tax payments and tax receipts. In 2018, other in the table above includes decreases in our net deferred tax assets and our recoverable customer engineering, development and tooling of$87 million and$54 million , respectively. Net cash used in investing activities was$694 million in 2018, as compared to$869 million in 2017. In 2017, we paid$292 million for the acquisition of Antolin Seating. In 2018, capital spending totaled$677 million , as compared to$595 million in 2017. Net cash used in financing activities was$1,031 million in 2018, as compared to$742 million in 2017. In 2018, we paid$705 million for repurchases of our common stock,$186 million of dividends to Lear stockholders and$79 million of dividends to noncontrolling interest holders. In 2017, we received net proceeds of$745 million related to the issuance of our senior notes due 2027 (the "2027 Notes"), paid$517 million related to the redemption of the outstanding 2023 Notes and repaid a net of$203 million in connection with the refinancing of our credit agreement. Also in 2017, we paid$451 million for repurchases of our common stock,$138 million of dividends to Lear stockholders and$82 million of dividends to noncontrolling interest holders. For further information regarding our 2018 and 2017 financing transactions, see "- Capitalization" below and Note 6, "Debt," and Note 11, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in this Report. Capitalization From time to time, we utilize uncommitted lines of credit to fund our capital expenditures and working capital requirements at certain of our foreign subsidiaries, in addition to cash provided by operating activities. As ofDecember 31, 2019 and 2018, we had short-term debt balances outstanding of$19 million and$10 million , respectively. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors. 41
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Senior Notes As ofDecember 31, 2019 , our senior notes (collectively, the "Notes") consist of the amounts shown below (in millions, except stated coupon rates): Aggregate Stated Principal Amount Coupon Note at Maturity Rate Senior unsecured notes due 2025 (the "2025 Notes") $ 650 5.25% 2027 Notes 750 3.8% 2029 Notes 375 4.25% 2049 Notes 325 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 2025 Notes November 2014 January 15, 2025 January 15 and July 15 2027 Notes August 2017 September 15, 2027 March 15 and September 15 2029 Notes May 2019 May 15, 2029 May 15 and November 15 2049 Notes May 2019 May 15, 2049 May 15 and November 15 In 2019, we issued$375 million in aggregate principal amount at maturity of 2029 Notes and$325 million in aggregate principal amount at maturity of 2049 Notes. The 2029 Notes have a stated coupon rate of 4.25% and were priced at 99.691% of par, resulting in a yield to maturity of 4.288%. The 2049 Notes have a stated coupon rate of 5.25% and were priced at 98.32% of par, resulting in a yield to maturity of 5.363%. The net proceeds from the offering were$693 million after original issue discount. The proceeds were used to redeem the$325 million in aggregate principal amount of the 2024 Notes at a redemption price equal to 102.688% of the principal amount of such 2024 Notes, plus accrued interest, as well as to finance the acquisition of Xevo and for general corporate purposes. In connection with these transactions, we recognized a loss of$11 million on the extinguishment of debt and paid related issuance costs of$7 million . The indentures governing the Notes contain certain restrictive covenants and customary events of default. As ofDecember 31, 2019 , 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 6, "Debt," to the consolidated financial statements included in this Report and the indentures governing the Notes which have been incorporated by reference as exhibits to this Report. Credit Agreement Our Credit Agreement, datedAugust 8, 2017 , consists of a$1.75 billion Revolving Credit Facility and a$250 million Term Loan Facility. The maturity date of the Revolving Credit Facility isAugust 8, 2023 , and the maturity date of the Term Loan Facility isAugust 8, 2022 . As ofDecember 31, 2019 and 2018, there were no borrowings outstanding under the Revolving Credit Facility and$234 million and$242 million , respectively, outstanding under the Term Loan Facility. As ofDecember 31, 2019 , we were in compliance with all covenants under the Credit Agreement. For further information related to the Credit Agreement, including information on pricing, covenants and events of default, see Note 6, "Debt," to the consolidated financial statements included in this Report and the amended and restated credit agreement, which has been incorporated by reference as an exhibit to this Report. 42
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Contractual Obligations The scheduled maturities of the Notes, obligations under the Credit Agreement and scheduled interest payments on the Notes as ofDecember 31, 2019 , are shown below (in millions): 2020 2021 2022 2023 2024 Thereafter Total Senior notes $ - $ - $ - $ - $ -$ 2,100 $ 2,100 Credit agreement - term loan facility 14 14 206 - - - 234 Scheduled interest payments 96 96 96 96 96 590 1,070 Total$ 110 $ 110 $ 302 $ 96 $ 96 $ 2,690 $ 3,404 We enter into agreements with our customers to produce products at the beginning of a vehicle's life cycle. Although such agreements do not provide for a specified quantity of products, once we enter into such agreements, we are generally required to fulfill our customers' purchasing requirements for the production life of the vehicle. Prior to being formally awarded a program, we typically work closely with our customers in the early stages of the design and engineering of a vehicle's systems. Failure to complete the design and engineering work related to a vehicle's systems, or to fulfill a customer's contract, could have a material adverse impact on our business. We also enter into agreements with suppliers to assist us in meeting our customers' production needs. These agreements vary as to duration and quantity commitments. Historically, most have been short-term agreements, which do not provide for minimum purchases, or are requirements-based contracts. We may be required to make significant cash outlays related to our unrecognized tax benefits, including interest and penalties. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits, including interest and penalties, of$43 million as ofDecember 31, 2019 , have been excluded from the contractual obligations table above. For further information related to our unrecognized tax benefits, see Note 8, "Income Taxes," to the consolidated financial statements included in this Report. We also have minimum funding requirements with respect to our pension obligation. We may elect to make contributions in excess of the minimum funding requirements in response to investment performance or changes in interest rates or when we believe that it is financially advantageous to do so and based on our other cash requirements. Our minimum funding requirements after 2020 will depend on several factors, including investment performance and interest rates. Our minimum funding requirements may also be affected by changes in applicable legal requirements. Our minimum required contributions to our domestic and foreign pension plans, including distributions to participants in certain of our non-qualified defined benefit plans, are expected to be approximately$15 million to$20 million in 2020. We also have payments due with respect to our postretirement benefit obligation. We do not fund our postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees. We expect payments related to our postretirement benefit obligation to be approximately$5 million in 2020. For further information related to our pension and other postretirement benefit plans, see "- Other Matters - Pension and Other Postretirement Benefit Plans" and Note 9, "Pension and Other Postretirement Benefit Plans," to the consolidated financial statements included in this Report. Common Stock Share Repurchase Program See Item 5, "Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ." Dividends Our Board of Directors declared quarterly cash dividends of$0.75 and$0.70 per share of common stock in 2019 and 2018, respectively. We currently expect to pay quarterly cash dividends in the future, although 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 at its discretion. See Part II - Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements," and Note 6, "Debt," to the consolidated financial statements included in this Report. 43
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Adequacy of Liquidity Sources As ofDecember 31, 2019 , we had approximately$1.5 billion of cash and cash equivalents on hand and$1.75 billion 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 to satisfy ordinary course business obligations. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program (see Item 5, "Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities "). 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 impact of restructuring activities, automotive industry conditions, the financial condition of our customers and suppliers and other related factors. Additionally, an economic downturn or reduction in production levels could negatively impact our financial condition. For further discussion of the risks and uncertainties affecting our cash flows from operations and our overall liquidity, see Part I - Item 1A, "Risk Factors," "- Executive Overview" above and "- Forward-Looking Statements" below. 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. 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): December 31, 2019 2018
Notional amount (contract maturities < 24 months)
50 14
Currently, our most significant foreign currency transactional exposures relate
to the Mexican peso, various European currencies, the Thai baht, the Chinese
renminbi, the Brazilian real, the Japanese yen and the South African rand. A
sensitivity analysis of our net transactional exposure is shown below (in
millions):
Potential Earnings Benefit (Adverse Earnings Impact)
Hypothetical
December 31, Strengthening % (1) 2019 2018
U.S. dollar 10% $ (16 ) $ (19 )
Euro 10% 19 20
(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
Hypothetical
December 31, Change % (2) 2019 2018
U.S. dollar 10% $ 50 $ 37
Euro 10% 69 72
(2) Relative to all other currencies to which it is exposed.
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There are certain shortcomings inherent in the sensitivity analyses above. The analyses assume that all currencies would uniformly strengthen or weaken relative to theU.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 intoU.S. dollars ("translational exposure"). In 2019, net sales outside ofthe United States accounted for 82% of our consolidated net sales, although certain non-U.S. sales areU.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate our translational exposure. 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 Part I - 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," and "- Forward-Looking Statements." 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 15, "Financial Instruments," to the 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 ofDecember 31, 2019 , we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of$14 million . In addition, as ofDecember 31, 2019 , we had recorded reserves for product liability and warranty claims and environmental matters of$32 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 Part I - Item 1A, "Risk Factors." For a more complete description of our outstanding material legal proceedings, see Note 13, "Commitments and Contingencies," to the consolidated financial statements included in this Report. Significant Accounting Policies and Critical Accounting Estimates Our significant accounting policies are more fully described in Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements included in this Report. 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. Accordingly, actual results in these areas may differ significantly from our estimates. We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations. 45
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Revenue Recognition and Sales Commitments
We enter into contracts with our customers to provide production parts generally
at the beginning of a vehicle's life cycle. Typically, these contracts do not
provide for a specified quantity of products, but once entered into, we are
often expected to fulfill our customers' purchasing requirements for the
production life of the vehicle. Many of these contracts may be terminated by our
customers at any time. Historically, terminations of these contracts have been
infrequent. We receive purchase orders from our customers, which provide the
commercial terms for a particular production part, including price (but not
quantities). Contracts may also provide for annual price reductions over the
production life of the vehicle, and prices may be adjusted on an ongoing basis
to reflect changes in product content/cost and other commercial factors.
Revenue is recognized at a point in time when control of the product is
transferred to the customer under standard commercial terms, as we do not have
an enforceable right to payment prior to such transfer. The amount of revenue
recognized reflects the consideration that we expect to be entitled to in
exchange for those products based on the annual purchase orders, annual price
reductions and ongoing price adjustments. Our customers pay for products
received in accordance with payment terms that are customary within the
industry. Our contracts with our customers do not have significant financing
components. We record a contract liability for advances received from our
customers. Amounts billed to customers related to shipping and handling costs
are included in net sales in the consolidated statements of income. Shipping and
handling costs are accounted for as fulfillment costs and are included in cost
of sales in the consolidated statements of income. Taxes assessed by a
governmental authority that are both imposed on and concurrent with a specific
revenue-producing transaction that we collect from a customer are excluded from
revenue.
Pension and Other Postretirement Benefit Plans
We provide certain pension and other postretirement benefits to our employees
and retired employees, including pensions, postretirement health care benefits
and other postretirement benefits.
Approximately 6% of our active workforce is covered by defined benefit pension
plans, and less than 1% of our active workforce is covered by other
postretirement benefit plans. Pension plans provide benefits based on
plan-specific benefit formulas as defined by the applicable plan documents.
Postretirement benefit plans generally provide for the continuation of medical
benefits for all eligible employees. We also have contractual arrangements with
certain employees which provide for supplemental retirement benefits. In
general, our policy is to fund our pension benefit obligation based on legal
requirements, tax and liquidity considerations and local practices. We do not
fund our postretirement benefit obligation.
Plan assets and obligations are measured using various actuarial assumptions,
such as discount rates, rate of compensation increase, mortality rates, turnover
rates and health care cost trend rates, which are determined as of the current
year measurement date. The measurement of net periodic benefit cost is based on
various actuarial assumptions, including discount rates, expected return on plan
assets and rate of compensation increase, which are determined as of the prior
year measurement date. We review our actuarial assumptions on an annual basis
and modify these assumptions when appropriate. As required by GAAP, the effects
of the modifications are recorded currently or are amortized over future
periods.
The determination of the discount rate is generally based on an index created
from a hypothetical bond portfolio consisting of high-quality fixed income
securities with durations that match the timing of expected benefit payments.
Changes in the selected discount rate could have a material impact on the
projected benefit obligations, unfunded status and related net periodic benefit
cost of our pension and other postretirement benefit plans.
The expected return on plan assets is determined based on several factors,
including adjusted historical returns, historical risk premiums for various
asset classes and target asset allocations within the portfolio. Adjustments
made to the historical returns are based on recent return experience in the
equity and fixed income markets and the belief that deviations from historical
returns are likely over the relevant investment horizon.
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Key assumptions are shown below:
Pension Other Postretirement
Benefit obligations as of December 31, 2019 $ 1,005 $ 81
Discount rate -
Domestic plans 3.4 % 3.2 %
Foreign plans 2.6 % 3.1 %
Net periodic benefit cost for the year ended December 31, 2019 $ 6 $ (10 )
Discount rate -
Domestic plans 4.3 % 4.2 %
Foreign plans 3.4 % 3.8 %
Expected return on plan assets -
Domestic plans 6.3 % N/A
Foreign plans 5.9 % N/A
Net periodic benefit cost for the year ended December 31, 2020 (1) $ 1 $ 1
Discount rate -
Domestic plans 3.4 % 3.2 %
Foreign plans 2.6 % 3.1 %
Expected return on plan assets -
Domestic plans 5.8 % N/A
Foreign plans 5.4 % N/A
(1) Forecasted.
The sensitivity to a 100 basis point ("bp") decrease in the discount rate and expected return on plan assets is shown below (in millions):
Increase in 2019
Increase in Benefit Obligation Net Periodic Benefit Cost
Pension OtherPostretirement Pension Other Postretirement 100 bp decrease in discount rate $
158 $ 9 $ 3 $ 1
100 bp decrease in expected return on
plan assets N/A N/A $ 8 N/A
For further information related to our pension and other postretirement benefit
plans, see "- Liquidity and Financial Condition - Capitalization - Contractual
Obligations" above and Note 9, "Pension and Other Postretirement Benefit Plans,"
to the consolidated financial statements included in this Report.
Income Taxes
We account for income taxes in accordance with GAAP. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax loss and credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Our current and future provision for income taxes is impacted by the initial
recognition of and changes in valuation allowances in certain countries. We
intend to maintain these allowances until it is more likely than not that the
deferred tax assets will be realized. Our future provision for income taxes will
include no tax benefit with respect to losses incurred and, except for certain
jurisdictions, no tax expense with respect to income generated in these
countries until the respective valuation allowances are eliminated. Accordingly,
income taxes are impacted by changes in valuation allowances and the mix of
earnings among jurisdictions. We evaluate the realizability of our deferred tax
assets on a quarterly basis. In completing this evaluation, we consider all
available evidence in order to determine whether, based on the weight of the
evidence, a valuation allowance for our deferred tax assets is necessary. Such
evidence includes historical results, future reversals of existing taxable
temporary differences and expectations for future taxable income (exclusive of
the reversal of temporary differences and carryforwards),
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as well as the implementation of feasible and prudent tax planning strategies. If, based on the weight of the evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized, a valuation allowance is recorded. As ofDecember 31, 2019 , we had a valuation allowance related to tax loss and credit carryforwards and other deferred tax assets of$12 million inthe United States and$333 million in several international jurisdictions. If operating results improve or decline on a continual basis in a particular jurisdiction, our decision regarding the need for a valuation allowance could change, resulting in either the initial recognition or reversal of a valuation allowance in that jurisdiction, which could have a significant impact on income tax expense in the period recognized and subsequent periods. In determining the provision for income taxes for financial statement purposes, we make certain estimates and judgments, which affect our evaluation of the carrying value of our deferred tax assets, as well as our calculation of certain tax liabilities. The calculation of our gross unrecognized tax benefits and liabilities includes uncertainties in the application of, and changes in, complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these benefits and liabilities based on changing facts and circumstances; however, due to the complexity of these uncertainties and the impact of tax audits, the ultimate resolutions may differ significantly from our estimates. For further information, see "- Forward-Looking Statements," and Note 8, "Income Taxes," to the consolidated financial statements included in this Report. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires 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. During 2019, there were no material changes in the methods or policies used to establish estimates and assumptions. Other matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of fixed and intangible assets, unsettled pricing discussions with customers and suppliers, restructuring accruals, deferred tax asset valuation allowances and income taxes, pension and other postretirement benefit plan assumptions, accruals related to litigation, warranty and environmental remediation costs and self-insurance accruals. Actual results may differ significantly from our estimates. Recently Issued Accounting Pronouncements For information on the impact of recently issued accounting pronouncements, see Note 17, "Accounting Pronouncements," to the 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 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;
• 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;
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• 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
• other risks, described in Part I - Item 1A, "Risk Factors," as well as the
risks and information provided from time to time in our filings with the
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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