Lear(LEA) - 2020 Q4 - Annual Report

PART I ITEM 1. Business Lear Corporation is a leading global automotive supplier of seating and E-Systems, focusing on profitable growth, innovation, and ESG principles across 38 countries - Lear Corporation is a leading Tier 1 vertically integrated supplier to the global automotive industry, providing seating, electrical distribution and connection systems, electronic systems, and software and connected services[16] - Operates 251 manufacturing, engineering, and administrative locations in 38 countries, with 68% of manufacturing facilities and 86% of employees located in low-cost countries[16] - Financial goals include delivering profitable growth, investing in innovation, maintaining a strong balance sheet with investment-grade credit metrics, and consistently returning excess cash to stockholders[17] - Integrated responsible and sustainable environmental, social, and governance (ESG) principles, with ambitious carbon reduction goals by 2030 (100% renewable energy, 50% carbon emission reduction at manufacturing facilities) and an aspiration to be carbon neutral by 2050[23][24] - Innovating and manufacturing products that contribute to a more sustainable economy and future mobility, such as SoyFoam™ (petroleum-based substitute), seat coverings from recycled ocean plastics, on-board battery chargers, battery management systems, and high voltage wiring for hybrid and electric vehicles[25] BUSINESS OF THE COMPANY - General Lear is a global Tier 1 automotive supplier with Seating and E-Systems segments, offering integrated solutions for all vehicle architectures - Seating segment designs, develops, engineers, and manufactures complete seat systems, seat subsystems, and key seat components, including advanced comfort, wellness, safety, and sound offerings compatible with traditional internal combustion engine (ICE) architectures and all hybrid/electric architectures[17] - E-Systems segment designs, develops, engineers, and manufactures complete electrical distribution and connection systems, electronic systems, and software and connected services, including wire harnesses, terminals, connectors, body domain control modules, on-board battery chargers, high voltage battery management systems, gateway modules, and Xevo Market in-vehicle commerce platform[17][18][19] - The combined capabilities of the Seating and E-Systems businesses provide a competitive advantage due to the increasing electrical and electronic integration required in seat systems[20] History Founded in 1917, Lear grew through strategic acquisitions, notably UT Automotive, to become a global seating and E-Systems supplier - Founded in Detroit in 1917 as American Metal Products, manufacturing seating assemblies and other components for the automotive and aircraft industries[31] - Acquired UT Automotive, Inc. in May 1999, marking entry into automotive electrical and electronic systems and forming the basis for the current E-Systems segment[32] - Key acquisitions include Guilford Mills (automotive fabric, 2012), Eagle Ottawa (automotive leather, 2015), Autonet Mobile (wireless communication software, 2015), Arada Systems Inc. (V2X communications, 2015), Grupo Antolin's automotive seating business (2017), EXO Technologies (GPS technology, 2018), and Xevo Inc. (connected car software, 2019)[33] - Launched Lear Innovation Ventures (LIV) in January 2019 to invest in advanced development teams, partnerships, and early-stage technologies[33] Industry and Strategy Automotive industry is cyclical, impacted by COVID-19; Lear's strategy focuses on profitable growth, innovation, and emerging markets - Global automotive industry production volumes declined 6% in 2019 and another 17% in 2020 to 72.6 million units, largely due to the COVID-19 pandemic[34] Light Vehicle Production by Region (2019-2020) | (In thousands of units) | 2020 | 2019 | % Change | | :---------------------- | :----- | :----- | :------- | | North America | 13,027.3 | 16,314.4 | (20%) | | Europe and Africa | 16,873.9 | 21,703.8 | (22%) | | Asia | 39,257.7 | 44,651.8 | (12%) | | South America | 2,163.5 | 3,128.5 | (31%) | | Other | 1,323.5 | 1,417.0 | (7%) | | Total | 72,645.9 | 87,215.5 | (17%) | - Key trends affecting the business include electrification, connectivity, autonomy, consolidation of automotive manufacturers, new non-traditional entrants, collaboration on common vehicle platforms, increasing demand for luxury and performance features, and China's emergence as the largest automotive market[39] - Strategy includes disciplined investment in business to grow and enhance product offerings, strategically focusing on products and technologies to support emerging trends (autonomy, connectivity, electrification, shared mobility), and leveraging an industry-leading cost structure to expand operating margins[22] - The shift toward crossover and sport utility vehicles is benefiting the business, with content on such vehicles significantly higher than average content per vehicle; crossover and SUV production grew to approximately 40% of total vehicle production in 2020 (up from 27% five years ago)[40] Seating Segment Lear is a global leader in vertically integrated seating systems, targeting 28% market share with innovations for comfort, safety, and sustainability - Lear is a recognized global leader in complete automotive seat systems, realizing a 23% global market share in 2020, with a target global market share of 28%[47] - Most vertically integrated global seat supplier, with capabilities in seat trim covers, surface materials (leather and fabric), seat mechanisms, seat foam, and headrests[17][47] - Advanced seating innovations include Intelligent Seating (INTU™ Seating) systems for enhanced wellness, safety, comfort, and sound performance, and Configurable Seating Architecture (ConfigurE+™) products for flexible seat positioning and functionality[52][53][54] - Committed to sustainability, producing "green" products like SoyFoam™ and seat coverings made from recycled ocean plastics[50] - Top five customers of the Seating segment are General Motors, Daimler, Stellantis, Volkswagen, and Ford[61] - Primary global competitors include Adient, plc, Faurecia S.A., Magna International Inc., Toyota Boshoku Corporation, and TS Tech Co., Ltd[63] E-Systems Segment E-Systems leads in electrical distribution, electronic systems, and software for all vehicle architectures, supporting electrification and connectivity - E-Systems segment consists of the design, development, engineering, and manufacture of complete electrical distribution and connection systems, electronic systems, and software and connected services for light vehicles globally[64] - Possesses a competitive advantage as the only automotive supplier with both electrical distribution and electronic capabilities for all vehicle architectures, enabling customized, optimized solutions[65] - Electrified vehicle architectures represent a significant content per vehicle expansion opportunity, with two to three times the potential content per vehicle opportunity of traditional ICE architectures[65] - Product lines include wire harnesses, terminals and connectors, engineered components, body domain control modules, smart and passive junction boxes, gateway and communication modules, integrated power modules (on-board battery chargers, DC/DC converters, high voltage power distribution units), high voltage battery management systems, embedded control software, and Xevo Market in-vehicle commerce platform[66][70][71][72][73][75] - Technology includes expertise in alternative conductor materials (aluminum), proprietary manufacturing process technologies (3D wire harness assembly boards), advanced terminals and connectors, smart junction box technology, ethernet-enabled gateway modules, high efficiency battery chargers, and full software capabilities in-house, 5G cellular expertise, V2X communications, and cybersecurity[79][80][81][82] - Top five customers of the E-Systems segment are Ford, Volkswagen, Renault-Nissan, Jaguar Land Rover, and Geely[76] Customers Lear serves major automotive OEMs, with a $2.8 billion sales backlog for 2021-2023, influenced by production volumes and content per vehicle - In 2020, General Motors accounted for 19% of net sales, Ford for 13%, and Stellantis for 11%[83] - As of January 2021, the 2021 to 2023 sales backlog is $2.8 billion (4% increase from January 2020), with $1.0 billion related to 2021, and 68% for Seating and 32% for E-Systems segments[85] - Sales backlog at non-consolidated joint ventures is approximately $400 million[85] - Net sales for the year ended December 31, 2020, consisted of 31% passenger cars, 52% crossover and sport utility vehicles, and 17% trucks and vans[86] - Agreements with major customers generally provide for annual productivity price reductions, which are historically offset by cost reductions through product design changes, increased manufacturing productivity, and supplier programs[87] Seasonality Operations experience seasonal fluctuations due to automotive production slowdowns for model year changeovers and holidays - Experiences seasonal fluctuations due to automotive vehicle production slowdowns, such as in summer months for model year changeovers, in December for holidays, and during periods of high vehicle inventory[88] Raw Materials Raw materials like fabric, foam, leather, steel, and copper are sourced from multiple suppliers, with some subject to price index agreements - Principal raw materials used in seat systems, electrical distribution and connection systems, and electronic systems are generally available and obtained from multiple suppliers[89] - Key components like fabric, foam, leather, seat mechanisms, terminals and connectors are either manufactured internally or purchased from multiple suppliers[89] - Exposure to changes in steel prices is primarily indirect, through fabricated components like seat frames, recliner mechanisms, and seat tracks[89] - Approximately 92% of copper purchases and a significant portion of leather purchases are subject to price index agreements with customers and suppliers[89][280] Human Capital Management Lear had 174,600 employees in 2020, with a unionized workforce, focusing on health, safety, DEI, and talent development Worldwide Employment Levels (2019-2020) | Region | 2020 | 2019 | | :------------------ | :----- | :----- | | United States and Canada | 10,600 | 10,100 | | Mexico | 55,200 | 50,400 | | Central and South America | 20,900 | 17,000 | | Europe and Africa | 56,500 | 56,800 | | Asia | 31,400 | 29,800 | | Total | 174,600 | 164,100 | - A substantial number of employees (approximately 47%) are members of unions or national trade organizations, with collective bargaining agreements in North America, Mexico, and Europe[90][125][560] - Maintains health and safety programs designed around global standards, compliant with ISO 45001, and created a 'Safe Work Playbook' in 2020 in response to the COVID-19 pandemic[93][94] - Committed to diversity, equity, and inclusion, with initiatives addressing racial inequality, an Executive Diversity Council, and employee resource groups[95] - Delivered over 3.7 million hours of training since 2019, including leadership development programs like Leads Self Lite, Emerging Leaders Development Program, and CEO Academy[96] Intellectual Property Lear holds 2,300 patents and invests in new technologies through global centers, protecting key trademarks like XEVO and INTU - Holds approximately 2,300 patents and patent applications worldwide, though no individual patent or group is critical to business success[97] - Advanced technology development is conducted worldwide at nine advanced technology centers and product engineering centers, with a global innovation and technology center in Southfield, Michigan[98] - Key trademarks include LEAR CORPORATION, XEVO, GUILFORD, EAGLE OTTAWA, ConfigurE+™ seating, INTU™ seating, LEAR CONNEXUS™ signal and data communications, EXO® high-accuracy positioning, JOURNEYWARE™ software, ProTec® active head restraints, SMART JUNCTION BOX™ technology, STRUCSURE™ systems, AVENTINO® leather, and TeXstyle® fabrics[99] Government Regulations and Environmental Matters Lear complies with health, safety, and environmental regulations, committed to sustainability and developing green technologies - Subject to a variety of federal, state, local, and foreign laws and regulations, including those related to health, safety, and environmental matters; compliance costs are not material[100] - Committed to sustainability in operations and products, adhering to environmental laws and developing "green" technology products like SoyFoam™ and technologies for hybrid and electric vehicles[100][101] Joint Ventures and Noncontrolling Interests Lear uses joint ventures to expand in new markets, with 13 operating JVs in five countries, contributing 8% of net sales in 2020 - Forms joint ventures to gain entry into new markets, expand product offerings, and broaden its customer base, particularly with Asian automotive manufacturers in emerging markets[102] - As of December 31, 2020, had thirteen operating joint ventures in five countries (eleven in Asia, two in North America), with four consolidated and nine accounted for using the equity method[103] - Net sales of consolidated joint ventures accounted for approximately 8% of net sales in 2020[103] - Investments in non-consolidated joint ventures totaled $143 million as of December 31, 2020[103] Summary of Non-Consolidated Operating Joint Ventures (Dec 31, 2020) | Country | Name | Ownership Percentage | | :-------- | :---------------------------------------- | :------------------- | | China | Beijing BHAP Lear Automotive Systems Co., Ltd. | 50% | | China | Guangzhou Lear Automotive Components Co., Ltd. | 50 | | China | Jiangxi Jiangling Lear Interior Systems Co., Ltd. | 50 | | China | Lear Dongfeng Automotive Seating Co., Ltd. | 50 | | China | Changchun Lear FAWSN Automotive Seat Systems Co., Ltd. | 49 | | China | Beijing Lear Hyundai Transys Co., Ltd. | 40 | | Honduras | Honduras Electrical Distribution Systems S. de R.L. de C.V. | 49 | | India | Hyundai Transys Lear Automotive Private Limited | 35 | | United States | Kyungshin-Lear Sales and Engineering LLC | 49 | ITEM 1A. Risk factors Lear faces risks from cyclical automotive industry, pandemics, supply chain, competition, international operations, and regulatory changes - The automotive industry is cyclical and sensitive to general economic conditions; a decline in production levels or financial distress of major customers could adversely affect financial performance[108][109] - Pandemics or disease outbreaks, such as COVID-19, have disrupted and may continue to disrupt the global economy and the company's business, leading to reduced orders, supply chain disruptions, and operational inefficiencies[110][111][113] - Inability to achieve product cost reductions to offset customer-imposed annual price reductions could adversely affect financial performance[119] - Increases in the costs and restrictions on the availability of raw materials, energy, commodities, and product components could adversely affect financial performance[120] - Substantial international operations make the company vulnerable to risks associated with doing business in foreign countries, including economic instability, labor unrest, currency fluctuations, and trade barriers[122][123] - Operates in a highly competitive industry, facing efforts by competitors and new non-traditional entrants to gain market share, which could exert downward pressure on pricing and margins[124] - A significant labor dispute involving the company or its customers/suppliers could adversely affect financial performance, especially with labor agreements covering approximately 85% of the global unionized workforce expiring in 2021[125] - Risks related to indebtedness include covenants restricting business activities, potential inability to access capital markets, and changes affecting LIBOR, which could result in higher interest rates[132][133] - Disruptions in information technology systems, including cybersecurity breaches, could lead to business disruption, theft of intellectual property, unauthorized data access, and regulatory actions[114][134] - Changes in U.S. administrative policy, including trade agreements (e.g., USMCA transition) and tariffs (e.g., on China imports), could adversely affect business, financial condition, and operating results[143] ITEM 1B. Unresolved staff comments No unresolved staff comments to report - No unresolved staff comments[147] ITEM 2. Properties Lear operates 251 facilities in 38 countries, including manufacturing, distribution, and technology centers, with headquarters in Southfield, Michigan - As of December 31, 2020, operations were conducted through 251 facilities in 38 countries, including 78 just-in-time manufacturing facilities, 127 dedicated component manufacturing facilities, 5 sequencing and distribution sites, 32 administrative/technical support facilities, and 9 advanced technology centers[150] - Corporate headquarters is located in Southfield, Michigan[150] Selected Facilities by Segment and Country | Seating (Selected) | E-Systems (Selected) | Administrative/Technical (Selected) | | :----------------- | :------------------- | :---------------------------------- | | Argentina, Brazil, Canada, China, Czech Republic, Dominican Republic, France, Germany, Hungary, India, Indonesia, Italy, Macedonia, Malaysia, Mexico, Moldova, Morocco, Poland, Portugal, Romania, Russia, Slovak Republic, South Africa, South Korea, Spain, Thailand, United Kingdom, United States, Vietnam | Argentina, Brazil, China, Czech Republic, Germany, Honduras, Hungary, Japan, Mexico, Morocco, Philippines, Romania, Serbia, South Africa, Spain, Thailand, United States | Belgium, Brazil, China, Czech Republic, France, Germany, India, Israel, Italy, Japan, Malaysia, Mexico, Netherlands, Philippines, South Korea, Spain, Sweden, Thailand, United Kingdom, United States | ITEM 3. Legal proceedings Lear is involved in various legal proceedings, with risks detailed in Item 1A and material cases in Note 14 of financial statements - Involved from time to time in various legal proceedings and claims, including commercial or contractual disputes, product liability claims, and environmental and other matters[154] - Risks related to these proceedings are described in Item 1A, "Risk Factors"[154] - Outstanding material legal proceedings are detailed in Note 14, "Commitments and Contingencies," to the consolidated financial statements[154] ITEM 4. Mine safety disclosures No mine safety disclosures to report - None[156] SUPPLEMENTARY ITEM. Information about our executive officers Provides a list of Lear's executive officers, their ages, positions, and business experience, appointed annually by the Board Executive Officers of Lear Corporation | Name | Age | Position | | :-------------- | :-- | :-------------------------------------------- | | Shari L. Burgess | 62 | Vice President and Treasurer | | Jason M. Cardew | 50 | Senior Vice President and Chief Financial Officer | | Alicia J. Davis | 50 | Senior Vice President, Corporate Development and Investor Relations | | Thomas A. DiDonato | 62 | Senior Vice President and Chief Administrative Officer | | Amy A. Doyle | 53 | Vice President and Chief Accounting Officer | | Carl A. Esposito | 53 | Senior Vice President and President, E-Systems | | Harry A. Kemp | 45 | Senior Vice President, General Counsel and Corporate Secretary | | Frank C. Orsini | 48 | Executive Vice President and President, Seating | | Raymond E. Scott | 55 | President and Chief Executive Officer | - Executive officers are appointed annually by the Board of Directors and serve at the pleasure of the Board[157] PART II ITEM 5. Market for the Company's common equity, related stockholder matters and issuer purchases of equity securities Lear's common stock (LEA) is on NYSE; dividends reinstated in Q4 2020, and a $1.4 billion share repurchase program was suspended - Common stock is listed on the New York Stock Exchange under the symbol "LEA"[163] - Quarterly cash dividends were suspended in March 2020 in response to the COVID-19 pandemic and reinstated in the fourth quarter of 2020 at $0.25 per share[163][212][271] - Board of Directors authorized $6.1 billion in share repurchases since Q1 2011; $1.4 billion remaining authorization as of December 31, 2020, expiring December 31, 2022[165][211][531] - Share repurchases under the program were suspended in March 2020 as a proactive measure in response to the COVID-19 pandemic[165][211][528] Common Stock Repurchases (2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------------- | :------------------------------- | :--------------------------- | | October 4, 2020 through October 31, 2020 | — | $— | | November 1, 2020 through November 28, 2020 | — | — | | November 29, 2020 through December 31, 2020 | — | — | | Total | — | $— | ITEM 6. Selected financial data Provides a five-year summary of selected financial data, highlighting the COVID-19 impact on net sales, gross profit, and net income in 2020 Selected Income Statement Data (in millions) | For the year ended December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------ | :---------- | :---------- | :---------- | :---------- | :---------- | | Net sales | $17,045.5 | $19,810.3 | $21,148.5 | $20,467.0 | $18,557.6 | | Gross profit | $1,108.9 | $1,737.5 | $2,318.3 | $2,291.1 | $2,122.6 | | Net income attributable to Lear | $158.5 | $753.6 | $1,149.8 | $1,313.4 | $975.1 | | Basic net income per share | $2.63 | $12.80 | $17.35 | $18.79 | $13.48 | | Diluted net income per share | $2.62 | $12.75 | $17.22 | $18.59 | $13.33 | | Dividends per share | $1.02 | $3.00 | $2.80 | $2.00 | $1.20 | Selected Cash Flow Data (in millions) | For the year ended December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------ | :-------- | :-------- | :-------- | :-------- | :-------- | | Cash flows from operating activities | $663.1 | $1,284.3 | $1,779.8 | $1,783.1 | $1,619.3 | | Cash flows from investing activities | $(468.8) | $(922.4) | $(693.5) | $(868.6) | $(637.1) | | Cash flows from financing activities | $(411.7) | $(361.9) | $(1,030.5) | $(742.0) | $(872.9) | | Capital expenditures | $452.3 | $603.9 | $677.0 | $594.5 | $528.3 | Selected Balance Sheet Data (in millions) | As of December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Total assets | $13,198.6 | $12,680.7 | $11,600.7 | $11,945.9 | $9,900.6 | | Long-term debt | $2,300.3 | $2,293.7 | $1,941.0 | $1,951.5 | $1,898.0 | | Equity | $4,614.9 | $4,501.1 | $4,360.6 | $4,292.6 | $3,192.9 | Selected Other Data | Other Data (unaudited) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--------------------- | :------ | :------ | :------ | :------ | :------ | | Employees at year end | 174,600 | 164,100 | 169,000 | 165,000 | 148,400 | | North American content per vehicle | $509 | $451 | $452 | $456 | $422 | | European content per vehicle | $370 | $359 | $385 | $354 | $316 | ITEM 7. Management's discussion and analysis of financial condition and results of operations Management discusses Lear's financial performance, condition, and operations, focusing on COVID-19 impact, liquidity, and strategic objectives - Strategic objectives include delivering profitable growth, investing in innovation, maintaining a strong balance sheet with investment-grade credit metrics, and consistently returning excess cash to stockholders[179] - Financial performance is primarily evaluated based on earnings, operating margins, cash flows, and return on invested capital[198] - Material cost as a percentage of net sales was 64.3% in 2020, compared to 65.0% in 2019 and 64.4% in 2018[197] Executive Overview Lear is a leading Tier 1 global automotive supplier of Seating and E-Systems, focused on profitable growth, innovation, and shareholder returns - Lear is a leading Tier 1 vertically integrated supplier to the global automotive industry, supplying seating, electrical distribution and connection systems, electronic systems, and software and connected services[178] - The Seating business designs, develops, engineers, and manufactures complete seat systems, seat subsystems, and key seat components, including advanced comfort, wellness, safety, and configurable seating product technologies[181] - The E-Systems business designs, develops, engineers, and manufactures complete electrical distribution and connection systems, electronic systems, and software and connected services, providing customizable solutions for all types of powertrains[182] - The combined capabilities of the Seating and E-Systems businesses offer a competitive advantage due to the increasing levels of electrical and electronic integration required in seat systems[183] COVID-19 Pandemic COVID-19 caused a 17% decline in global light vehicle production, leading to operational disruptions and proactive liquidity measures Global Light Vehicle Production (2019-2020) | | 2020 (thousands of units) | 2019 (thousands of units) | % Change | | :------------------------ | :------------------------ | :------------------------ | :------- | | North America | 13,027.3 | 16,314.4 | (20 %) | | Europe and Africa | 16,873.9 | 21,703.8 | (22 %) | | Asia | 39,257.7 | 44,651.8 | (12 %) | | South America | 2,163.5 | 3,128.5 | (31 %) | | Other | 1,323.5 | 1,417.0 | (7 %) | | Global light vehicle production | 72,645.9 | 87,215.5 | (17 %) | - Operations in China were first impacted, followed by widespread plant closures in Europe, North America, South America, and Asia (outside of China) from mid-March through April/May 2020[186] - Experienced significant inefficiencies and incremental costs related to the COVID-19 pandemic in the first half of 2020, diminishing toward the end of Q2, but ongoing costs for personal protective equipment, employee transportation, and higher labor costs due to absenteeism in H2 2020[186] - Took proactive steps to preserve cash and maximize financial flexibility, including reducing discretionary spending, implementing salary reductions/deferrals, cutting capital expenditures, managing working capital, and suspending share repurchases and quarterly dividends (reinstated Q4 2020)[188] - Ended 2020 with $1.3 billion of cash on hand and $1.75 billion of availability under the revolving credit facility, positioning the company to withstand continuing effects of the pandemic[188] Industry Overview Lear's results depend on production volumes and content per vehicle, with diversified sales across regions and a focus on emerging trends Consolidated Net Sales by Region (2019-2020) | | 2020 | 2019 | | :---------------- | :--- | :--- | | North America | 39 % | 37 % | | Europe and Africa | 37 % | 39 % | | Asia | 21 % | 20 % | | South America | 3 % | 4 % | | Total | 100 % | 100 % | - Key trends affecting the business include electrification, connectivity, autonomy, consolidation of automotive manufacturers, new non-traditional entrants, commonized vehicle platforms, increasing demand for luxury and performance features, and China's emergence as the largest automotive market[193] - Strategy focuses on quality, service, cost and efficiency, and innovation and technology, including expanding key component and software capabilities, aligning manufacturing and engineering footprint for competitive cost, and expanding in new/growing markets like China[195] - Material cost as a percentage of net sales was 64.3% in 2020, compared to 65.0% in 2019 and 64.4% in 2018[197] - Strategies to mitigate higher raw material, energy, and commodity costs include selective in-sourcing, supply base consolidation, longer-term purchase commitments, low-cost country sourcing and engineering, value engineering, and product benchmarking[197] Financial Measures Lear evaluates performance by earnings, operating margins, cash flows, and ROI, focusing expansion on emerging markets - Focuses primarily on earnings, operating margins, cash flows, and return on invested capital in evaluating financial condition and operating performance[198] - Expansion plans are focused primarily on emerging markets, particularly Asia and China, to expand market share and content per vehicle[198] - Success in generating cash flow depends on effective working capital management (aligning vendor/customer payment terms, managing inventory) and capital spending[199] Acquisition In 2019, Lear acquired Xevo Inc. for $322 million, integrating its connected car software into the E-Systems segment - Completed the acquisition of Xevo Inc., a Seattle-based, global leader in connected car software, in April 2019[200] - Acquired all of Xevo's outstanding shares for $322 million, net of cash acquired[200] - Xevo is a supplier of software solutions for the cloud, vehicles, and mobile devices deployed in millions of vehicles worldwide; its operating results are included in the E-Systems segment[200][420] Operational Restructuring Lear incurred $145 million in pretax restructuring costs in 2020 to optimize its footprint and improve profitability - Incurred pretax restructuring costs of $145 million and related manufacturing inefficiency charges of $5 million in 2020, compared to $184 million and $6 million in 2019[201] - Restructuring actions include plant closures and workforce reductions, initiated to maintain a competitive footprint or in response to customer initiatives/market changes, designed to improve operating results and profitability[202] - Expects to incur approximately $18 million of additional restructuring costs related to activities initiated as of December 31, 2020, all expected by the end of 2021[202] Financing Transactions In 2020, Lear issued $650 million in new notes to redeem existing debt, extending its revolving credit facility to August 2024 - In February 2020, issued $350 million of 3.5% 2030 Notes and an additional $300 million of 5.25% 2049 Notes, with net proceeds of $669 million used to redeem $650 million of 2025 Notes, resulting in a $21 million loss on extinguishment[204][205] - In May 2019, issued $375 million of 4.25% 2029 Notes and $325 million of 5.25% 2049 Notes, with net proceeds of $693 million used to redeem $325 million of 2024 Notes and finance the acquisition of Xevo, resulting in an $11 million loss on extinguishment[206][207][208] - Extended the maturity date of the $1.75 billion Revolving Credit Facility by one year to August 8, 2024[209] - Borrowed $1.0 billion under the Revolving Credit Facility in March 2020 as a proactive COVID-19 measure, which was repaid in full in September 2020[210] Other Matters Details non-operating financial impacts including tax benefits/expenses, valuation allowances, and a 2018 gain from affiliate control - In 2020, recognized $34 million in tax benefits related to restructuring and other items, and $15 million related to U.S. deferred tax effect of foreign branches, partially offset by $29 million in tax expense from a net increase in valuation allowances on deferred tax assets[214] - In 2019, recognized $29 million in tax benefits from increased R&D tax credits (2013-2018), $18 million from changes in affiliate tax status, $14 million from foreign tax credit regulations, and $52 million from restructuring and other items, offset by $11 million in tax expense from valuation allowances on foreign subsidiaries[215] - In 2018, recognized a $10 million gain from obtaining control of Changchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd. and revaluing its prior equity investment at fair value[216] - In 2018, recognized a $5 million pension settlement charge in connection with an annuity purchase for certain U.S. defined benefit pension plan participants[217] Results of Operations Net sales decreased 14% to $17.0 billion in 2020 due to COVID-19, significantly impacting gross profit and net income Consolidated Operating Results (in millions, except percentages) | For the year ended December 31, | 2020 | % of Net Sales | 2019 | % of Net Sales | 2018 | % of Net Sales | | :------------------------------ | :---------- | :------------- | :---------- | :------------- | :---------- | :------------- | | Net sales | $17,045.5 | 100.0 % | $19,810.3 | 100.0 % | $21,148.5 | 100.0 % | | Cost of sales | $15,936.6 | 93.5 | $18,072.8 | 91.2 | $18,830.2 | 89.0 | | Gross profit | $1,108.9 | 6.5 | $1,737.5 | 8.8 | $2,318.3 | 11.0 | | Selling, general and administrative expenses | $588.9 | 3.5 | $605.0 | 3.1 | $612.8 | 2.9 | | Amortization of intangible assets | $65.9 | 0.4 | $62.3 | 0.3 | $51.4 | 0.2 | | Interest expense | $99.6 | 0.6 | $92.0 | 0.5 | $84.1 | 0.4 | | Other expense, net | $55.2 | 0.3 | $24.6 | 0.1 | $31.6 | 0.2 | | Provision for income taxes | $93.9 | 0.6 | $146.1 | 0.7 | $311.9 | 1.5 | | Equity in net income of affiliates | $(28.5) | (0.2) | $(23.2) | (0.1) | $(20.2) | (0.1) | | Net income attributable to noncontrolling interests | $75.4 | 0.4 | $77.1 | 0.4 | $96.9 | 0.5 | | Net income attributable to Lear | $158.5 | 0.9 % | $753.6 | 3.8 % | $1,149.8 | 5.4 % | - Net sales decreased by $2.8 billion (14%) to $17.0 billion in 2020 compared to $19.8 billion in 2019, primarily due to lower global production volumes on Lear platforms (over $3.3 billion negative impact) largely from the COVID-19 pandemic, partially offset by new business (over $0.7 billion)[221] - Gross profit and gross margin were $1.1 billion and 6.5% of net sales in 2020, down from $1.7 billion and 8.8% in 2019, negatively impacted by $792 million from lower production volumes and COVID-19 costs[223] - Selling, general and administrative expenses were $589 million in 2020 (3.5% of net sales), compared to $605 million in 2019 (3.1% of net sales), reflecting the significant decrease in net sales[224] - Net income attributable to Lear was $159 million ($2.62 diluted EPS) in 2020, a significant decrease from $754 million ($12.75 diluted EPS) in 2019[230] Reportable Operating Segments Both Seating and E-Systems segments saw significant declines in net sales and earnings in 2020 due to COVID-19 Segment Financial Measures (2019-2020, in millions) | Segment | Net Sales 2020 | Net Sales 2019 | % Change Net Sales | Segment Earnings 2020 | Segment Earnings 2019 | % Change Segment Earnings | | :-------- | :------------- | :------------- | :----------------- | :-------------------- | :-------------------- | :------------------------ | | Seating | $12,712.7 | $15,097.2 | (16%) | $590.5 | $961.2 | (38.6%) | | E-Systems | $4,332.8 | $4,713.1 | (8%) | $98.1 | $366.3 | (73.2%) | | Other | $— | $— | N/A | $(234.5) | $(257.3) | 8.9% | - Seating net sales decreased by $2.4 billion (16%) in 2020, primarily due to lower production volumes (nearly $2.7 billion negative impact) from COVID-19, partially offset by new business (over $0.4 billion)[235] - E-Systems net sales decreased by $0.4 billion (8%) in 2020, primarily due to lower production volumes (over $0.6 billion negative impact) from COVID-19, partially offset by new business (nearly $0.3 billion)[238] - Segment earnings for the 'Other' category improved from ($257 million) in 2019 to ($235 million) in 2020, primarily reflecting lower compensation-related costs[241] Liquidity and Financial Condition Lear maintains strong liquidity with $1.3 billion cash and $1.75 billion credit facility, taking proactive measures during COVID-19 - Primary liquidity needs are to fund general business requirements, including working capital, capital expenditures, operational restructuring, and debt service[243] - Primary sources of liquidity are cash flows from operating activities, borrowings under available credit facilities, and existing cash balance[243] - As of December 31, 2020, had approximately $1.3 billion of cash and cash equivalents and $1.75 billion in available borrowing capacity under the Revolving Credit Facility[244] - Proactive steps taken in response to COVID-19 to preserve cash included reducing operating costs, capital expenditures, and working capital; implementing salary reductions/deferrals; suspending share repurchases and quarterly dividends; and maximizing government incentive programs[245] - Cash and cash equivalents of $780 million (2020) and $895 million (2019) held in foreign subsidiaries can be repatriated without additional income tax expense[248] Cash Flows Operating cash flow decreased to $663 million in 2020 due to lower earnings, while investing and financing cash flows also shifted - Net cash provided by operating activities decreased by $621 million to $663 million in 2020, compared to $1,284 million in 2019, primarily due to lower earnings[250] - Net cash used in investing activities was $469 million in 2020, down from $922 million in 2019, reflecting lower capital spending ($452 million in 2020 vs. $604 million in 2019) and no acquisition of Xevo (which cost $322 million in 2019)[251] - Net cash used in financing activities was $412 million in 2020, compared to $362 million in 2019[252] - In 2020, financing activities included $1.0 billion revolving credit facility borrowings and repayments, $669 million net proceeds from senior notes issuance, $667 million redemption of senior notes, $70 million common stock repurchases, $67 million dividends to Lear stockholders, and $123 million dividends to noncontrolling interest holders[252] Capitalization Lear's long-term debt was $2.3 billion as of 2020, with a $1.75 billion revolving credit facility and compliance with all covenants Long-Term Debt (Dec 31, 2020, in millions) | Note | Aggregate Principal Amount at Maturity | | :------------------------ | :------------------------------------- | | Senior unsecured notes due 2027 | $750 | | Senior unsecured notes due 2029 | $375 | | 2030 Notes | $350 | | 2049 Notes | $625 | | Total | $2,100 | - Credit Agreement consists of a $1.75 billion Revolving Credit Facility (maturity August 8, 2024) and a $250 million Term Loan Facility (maturity August 8, 2022); no borrowings outstanding under the Revolving Credit Facility as of December 31, 2020[260] - In compliance with all covenants under the indentures governing the Notes and the Credit Agreement as of December 31, 2020[258][262] Contractual Obligations (Dec 31, 2020, in millions) | Obligation | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | | :-------------------------------- | :--- | :--- | :--- | :--- | :--- | :--------- | :---- | | Senior notes | $— | $— | $— | $— | $— | $2,100 | $2,100 | | Credit agreement — term loan facility | $14 | $206 | $— | $— | $— | $— | $220 | | Scheduled interest payments | $90 | $90 | $90 | $90 | $90 | $937 | $1,387 | | Total | $104 | $296 | $90 | $90 | $90 | $3,037 | $3,707 | - Unrecognized tax benefits of $49 million as of December 31, 2020, are excluded from the contractual obligations table due to the uncertainty of the timing of future cash settlement[267] - Minimum required contributions to domestic and foreign pension plans are expected to be approximately $5 million to $10 million in 2021; payments related to postretirement benefit obligation are expected to be approximately $5 million in 2021[268] Market Risk Sensitivity Lear manages market risks from foreign exchange, interest rates, and volatile commodity prices using derivatives and mitigation strategies - Exposed to market risks associated with fluctuations in foreign exchange rates, interest rates, and commodity prices[273] - Mitigates foreign exchange transactional exposure using derivative financial instruments (forward foreign exchange, futures, and option contracts) for currencies such as the Mexican peso, various European currencies, Chinese renminbi, Thai baht, Japanese yen, Brazilian real, and Honduran lempira[274][275] - Translational exposure (impact of translating foreign operating income into U.S. dollars) is not mitigated by foreign exchange contracts; in 2020, net sales outside the United States accounted for 79% of consolidated net sales[278] - Raw material, energy, and commodity costs can be volatile; main cost exposures relate to steel, copper, and leather[279][280] - Strategies to mitigate commodity price impacts include selective in-sourcing, supply base consolidation, longer-term purchase commitments, low-cost country sourcing and engineering, value engineering, and product benchmarking[279] Other Matters Lear maintains reserves for legal disputes ($17 million), product liability ($49 million), and environmental matters ($9 million) Reserves for Legal and Environmental Matters (Dec 31, 2020, in millions) | Category | Amount | | :-------------------------------------- | :----- | | Pending legal disputes | $17 | | Product liability and warranty claims | $49 | | Environmental matters | $9 | - The ultimate outcomes of these matters are inherently uncertain, and actual results may differ significantly from current estimates[282] - Does not believe that environmental liabilities associated with current and former properties will have a material adverse impact on its business, financial condition, results of operations, or cash flows[282][556] Significant Accounting Policies and Critical Accounting Estimates Outlines Lear's significant accounting policies and critical estimates, including revenue recognition, pensions, income taxes, and ASU 2016-13 adoption - Critical accounting estimates include revenue recognition, pension and other postretirement benefit plans, income taxes, 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, litigation, warranty, environmental remediation costs, and self-insurance accruals[284][301] - Revenue is recognized at a point in time when control of the product is transferred to the customer, reflecting the consideration expected based on annual purchase orders, price reductions, and ongoing price adjustments[285][286] - Pension and other postretirement benefit plans' assets and obligations are measured using various actuarial assumptions (discount rates, rate of compensation increase, mortality rates, turnover rates, and health care cost trend rates), which are reviewed annually[289] - Deferred tax assets and liabilities are recognized for temporary differences, with valuation allowances maintained until it is more likely than not that deferred tax assets will be realized[295][296] - Adopted ASU 2016-13, "Financial Instruments — Credit Losses," on January 1, 2020, using a modified retrospective approach, resulting in an increase of $0.8 million in the allowance for credit loss and a corresponding decrease in retained earnings[354] Forward-Looking Statements Provides a safe harbor for forward-looking statements, cautioning that actual results may differ due to economic, industry, and operational risks - The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, identified by words like "will," "may," "expects," "intends," "estimates," etc[303] - Actual results may differ materially from forward-looking statements due to factors such as general economic conditions, the impact of the COVID-19 pandemic, changes in industry vehicle production levels, customer negotiations, raw material costs, supplier disruptions, and international operational risks[304][307] - Other significant risks include competitive conditions, labor disputes, operational and financial success of joint ventures, program launch costs, pension asset returns, impairment charges, ability to execute strategic objectives, limitations from indebtedness, LIBOR changes, IT system disruptions (cybersecurity), warranty/product liability/recall costs, legal/regulatory proceedings, and changes in tax and trade policies[307] - The company does not assume any obligation to update, amend, or clarify forward-looking statements to reflect events, new information, or circumstances occurring after the report date[306] ITEM 8. Consolidated financial statements and supplementary data Presents audited consolidated financial statements for 2018-2020, including auditor reports, balance sheets, income, and cash flow statements - Includes Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Income, Comprehensive Income, Equity, and Cash Flows for the years ended December 31, 2020, 2019, and 2018, along with Notes to Consolidated Financial Statements and Schedule II – Valuation and Qualifying Accounts[309][632] - Ernst & Young LLP expressed an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[311][312][322] - A critical audit matter identified was revenue recognition, specifically evaluating the sufficiency of evidence for non-routine price adjustments due to the highly judgmental nature of commercial negotiations[316][317] Key Consolidated Financials (2020 vs 2019, in millions) | Metric | 2020 | 2019 | | :-------------------------------------- | :---------- | :---------- | | Balance Sheet: | | | | Total assets | $13,198.6 | $12,680.7 | | Total liabilities (Current + Long-Term) | $8,583.7 | $8,061.2 | | Total equity | $4,614.9 | $4,501.1 | | Income Statement: | | | | Net sales | $17,045.5 | $19,810.3 | | Gross profit | $1,108.9 | $1,737.5 | | Net income attributable to Lear | $158.5 | $753.6 | | Cash Flow Statement: | | | | Net cash provided by operating activities | $663.1 | $1,284.3 | | Net cash used in investing activities | $(468.8) | $(922.4) | | Net cash used in financing activities | $(411.7) | $(361.9) | ITEM 9. Changes in and disagreements with accountants on accounting and financial disclosure No changes in or disagreements with accountants on accounting and financial disclosure - No changes in and disagreements with accountants on accounting and financial disclosure[615] ITEM 9A. Controls and procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020, providing reasonable assurance of achieving control objectives[617] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the Internal Control-Integrated Framework (2013 framework) issued by COSO[617] - The attestation report of the independent registered public accounting firm (Ernst & Young LLP) expressed an unqualified opinion on the effectiveness of internal control over financial reporting[312][617] - No change in the company's internal control over financial reporting occurred during the fiscal quarter ended December 31, 2020, that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[617] ITEM 9B. Other information No other information is required to be reported - None[619] PART III ITEM 10. Directors, executive officers and corporate governance Incorporates information on directors and corporate governance from the Proxy Statement, with executive officer details in Part I - Information regarding directors and corporate governance matters is incorporated by reference to the Proxy Statement sections entitled "Election of Directors" and "Directors and Corporate Governance"[622] - Information regarding executive officers appears as a supplementary item following Item 4 under Part I of this Report[622] - Adopted a Code of Business Conduct and Ethics, including "Specific Provisions for Executive Officers," available on the company's website (http://www.lear.com)[623](index=623&type=chunk) ITEM 11. Executive compensation Incorporates executive compensation information from the Proxy Statement, including director compensation and committee reports - Information required by Item 11 is incorporated by reference to the Proxy Statement sections entitled "Directors and Corporate Governance — Director Compensation," "Compensation Discussion and Analysis," "Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report"[625] ITEM 12. Security ownership of certain beneficial owners and management and related stockholder matters Incorporates security ownership from Proxy Statement and details equity compensation plans, with 1,534,501 securities outstanding - Information regarding security ownership is incorporated by reference to the Proxy Statement section entitled "Directors and Corporate Governance — Security Ownership of Certain Beneficial Owners, Directors and Management"[626] Equity Compensation Plan Information (As of December 31, 2020) | Metric | Value | | :------------------------------------------------------------------------ | :---------- | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | 1,534,501 | | Weighted average exercise price of outstanding options, warrants and rights | $9.90 | | Number of securities available for future issuance under equity compensation plans | 1,624,471 | - Securities to be issued include 616,584 outstanding restricted stock units, 809,471 outstanding performance shares (at maximum possible payout), and 108,446 outstanding stock options[627] ITEM 13. Certain relationships and related transactions, and director independence Incorporates information on certain relationships, related party transactions, and director independence from the Proxy Statement - Information required by Item 13 is incorporated by reference to the Proxy Statement sections entitled "Certain Relationships and Related Party Transactions" and "Directors and Corporate Governance — Independence of Directors"[629] ITEM 14. Principal accounting fees and services Incorporates information regarding principal accounting fees and services from the Proxy Statement - Information required by Item 14 is incorporated by reference to the Proxy Statement section entitled "Fees of Independent Accountants"[630] PART IV ITEM 15. Exhibits and financial statement schedule Lists consolidated financial statements, supplementary data, and exhibits filed with Form 10-K, including audited financials and corporate documents - Includes Consolidated Financial Statements (Reports of Ernst & Young LLP, Balance Sheets, Statements of Income, Comprehensive Income, Equity, Cash Flows, Notes to Consolidated Financial Statements) and Schedule II – Valuation and Qualifying Accounts[632] - A comprehensive list of exhibits is filed with this Form 10-K or incorporated by reference, including corporate documents (e.g., Certificate of Incorporation, Bylaws), indentures for senior notes, long-term stock incentive plans, executive employment agreements, and credit agreements[636][637][639][640][641] ITEM 16. Form 10-K Summary No Form 10-K Summary is provided - No Form 10-K Summary is provided[635]