Item 7. Management’s Discussion and Analysis
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
We are a leading Tier 1 vertically integrated supplier to the global automotive industry. We supply seating, electrical distribution and connection systems, electronic systems, and software and connected services, to all of the world's major automotive manufacturers.
Built on a foundation and strong culture of innovation, operational excellence, and engineering and program management capabilities, 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), investing in innovation to drive business growth and profitability, maintaining a strong balance sheet with investment grade credit metrics and consistently returning excess cash to our stockholders.
Our business is organized under two reporting segments: Seating and E-Systems. Each of these segments has a varied product and technology range across a number of component categories.
Our Seating business consists of the design, development, engineering and manufacture of complete seat systems, seat subsystems and key seat components. Our capabilities in operations and supply chain management enable synchronized (just-in-time) assembly and delivery of high volumes of complex complete seat systems to our customers. Included in our complete seat system and subsystem solutions are advanced comfort, wellness, safety and sound offerings, as well as configurable seating product technologies, all of which are compatible with traditional internal combustion engine ("ICE") architectures and the full range of hybrid, plug-in hybrid and battery electric architectures. Our advanced comfort, wellness, safety and sound offerings are facilitated by our system, component and integration capabilities, together with our in-house electronics, sensor, software and algorithm competencies. As the most vertically integrated global seat supplier, our key seat component product offerings include seat trim covers, surface materials such as leather and fabric, seat mechanisms, seat foam and headrests.
Our E-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution and connection systems, electronic systems, and software and connected services. The unique combination of these capabilities enables us to provide our customers with customizable solutions with optimized designs at a competitive cost. Electrical distribution and connection systems utilize low voltage, high voltage, high speed data cables and flat wiring to connect networks and electrical signals and manage electrical power within the vehicle for all types of powertrains – from traditional 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 engineered components for both ICE and electrified vehicle architectures that require management of higher voltage and power. Electronic systems facilitate signal, data and power management within the vehicle and include the associated software required to facilitate these functions. Key components in our electronic systems portfolio include body domain control modules and products specific to electrification and connectivity trends. Electrification products include on-board battery chargers, power conversion modules, high voltage battery management systems and high voltage power distribution systems. Connectivity products include gateway modules and communication modules to manage both wired and wireless networks and data in vehicles. In addition to electronic modules, we offer software that includes cybersecurity, advanced vehicle positioning for automated and autonomous driving applications and full capabilities in both dedicated short-range communication and cellular protocols for vehicle connectivity. Our software and connected services offerings include embedded control software and cloud and mobile device-based software and services. Our customers traditionally have sourced our electronic hardware together with the software that we embed in it, but such software may also be sourced by our customers independently of the hardware. Our connected services software solutions include award-winning 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 and E-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, with the seat becoming a more dynamic and integrated system requiring increased levels of electrical and electronic integration, the combined capabilities of our Seating and E-Systems businesses are a competitive advantage. 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, all of which contribute to our reputation for operational excellence. 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.
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COVID-19 Pandemic
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. Unprecedented industry disruptions related to the COVID-19 pandemic impacted operations in every region of the world. Global automotive industry production volumes in 2020, as compared to 2019, are shown below (in thousands of units):
2020 (1)
2019 (1) (2)
% 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 %)
(1) Production data based on IHS Markit.
(2) Production data for 2019 has been updated from our 2019 Annual Report on Form 10-K to reflect actual production levels.
Our operations in China were impacted first, with most plants in the country closed for several weeks during the first quarter. At the end of the first quarter, all of our facilities in China were operating and capacity utilization was increasing. Beginning in mid-March, our operations in Europe, North America, South America and Asia (outside of China) were impacted, with virtually all of our plants closed at the end of the first quarter and closures continuing throughout April and, in most cases, a portion of May. Although manufacturing resumed gradually, most of our plants in our major markets were operating at pre-COVID-19 levels at the end of the second quarter and throughout the second half of 2020. We experienced significant inefficiencies and incremental costs related to the COVID-19 pandemic in the first half of the year, which diminished toward the end of the second quarter. In the second half of 2020, we experienced less significant but ongoing costs related to personal protective equipment, employee transportation and higher labor costs reflecting an increase in absenteeism.
Although industry production has returned to pre-COVID-19 levels, partially due to our customers' need to replenish inventory levels, it is likely that, for a period of time, the global automotive industry will experience lower demand for new vehicles as a result of the global economic slowdown caused by the COVID-19 pandemic, as new vehicle sales are typically correlated with positive consumer confidence and low unemployment. We are also continuing to monitor our supply base, as well as related production constraints imposed by various governments, to minimize the impact on our manufacturing operations. Further, a resurgence of the virus with corresponding shelter-in-place orders impacting industry production in 2021 could also impact our financial results.
Liquidity actions
In response to the COVID-19 pandemic, we took a number of proactive steps to preserve cash and maximize our financial flexibility, including the reduction of discretionary spending, the implementation of salary reductions and deferrals, the reduction of capital expenditures, the aggressive management of working capital and the suspension of share repurchases and quarterly dividends. We are also continuing to seek opportunities offered under government incentive programs throughout the world. In March 2020, we borrowed $1.0 billion under our revolving credit facility, which was repaid in full in September 2020. With $1.3 billion of cash on hand at the end of the 2020, $1.75 billion of availability under our revolving credit facility and no near-term debt maturities, we believe that we are well positioned to withstand the continuing effects of the COVID-19 pandemic.
Employee protection
Our top priority is to ensure the health and safety of our employees. We have restricted business travel, established protocols for visitors entering our facilities, enhanced disinfection and cleaning procedures at our facilities and promoted social distancing. We have created a Safe Work Playbook, which provides a standardized approach for each of our facilities to create a consistent and safe work environment and offers insights into navigating operational challenges related to the COVID-19 pandemic. The playbook is publicly available and includes health and safety information related to plant operating protocols; employee education, training and feedback; facility assessments; and phased reopening of engineering and administrative centers.
For risks related to the COVID-19 pandemic, see Part I — Item 1A, "Risk Factors — Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, our business, which could adversely affect our financial performance."
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Industry Overview
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 2020 and 2019 is shown below:
2020 2019
North America 39 % 37 %
Europe and Africa 37 % 39 %
Asia 21 % 20 %
South America 3 % 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 affecting our business include electrification, connectivity and autonomy. In addition, our business is affected by the consolidation of automotive manufacturers, as well as new non-traditional entrants to the automotive industry, the collaboration of automotive manufacturers on commonized vehicle platforms, increasing demand for luxury and performance features, including increasing levels of electrical and electronic content, and China’s emergence as the largest automotive market in the world. In particular, we believe that we have a significant opportunity for growth in China with both global and domestic automotive manufacturers. Another key trend benefiting our business is 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 energy efficiency and reduced carbon emissions, as well as the demand for enhanced communications and safety, are driving the technology trends of electrification, connectivity and autonomy. We are focused on those trends which provide us with significant business opportunities where we have competitive differentiation and innovative technology. While both of our businesses are powertrain agnostic, we are well positioned to capitalize on these technology trends, each of which is likely to be at the forefront of our industry for the foreseeable future in light of the long-term convergence toward electric, connected and autonomous vehicles.
Our sales and marketing approach addresses 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 best solutions for our customers. We have restructured, and continue to align, our manufacturing and engineering footprint to attain a leading competitive cost position globally. We have established or expanded activities in new and growing markets, especially China, in support of our customers’ growth initiatives and in pursuit of opportunities with new customers. 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."
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.
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Our material cost as a percentage of net sales was 64.3% in 2020, as compared to 65.0% in 2019 and 64.4% in 2018. 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" below.
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, and China 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 eleven operating joint ventures with operations in Asia, as well as two additional joint ventures in North 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 in Asia, Brazil, Eastern Europe, Mexico and Northern Africa. Furthermore, we have expanded our low-cost engineering capabilities in Asia, Eastern Europe and Northern 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.
Acquisition
Xevo
In April 2019, we completed the acquisition of Xevo Inc. ("Xevo"), a Seattle-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 4, "Acquisition," to the consolidated financial statements included in this Report.
Operational Restructuring
In 2020, we incurred pretax restructuring costs of $145 million and related manufacturing inefficiency charges of $5 million, as compared to pretax restructuring costs of $184 million and related manufacturing inefficiency charges of $6 million in 2019. The decrease in restructuring costs in 2020, as compared to 2019, is primarily related to reduced customer actions. N one of the individual restructuring actions initiated during 2020 were material.
Our restructuring actions include plant closures and workforce reductions and are initiated to maintain our competitive footprint or are in response to customer initiatives or changes in global and regional automotive markets. Our restructuring actions are designed to maintain or improve our operating results and profitability throughout the automotive industry cycles. Restructuring actions are generally funded within twelve months of initiation and are funded by cash flows from operating activities and existing cash balances. There have been no changes in previously initiated restructuring actions that have resulted (or will result) in a material change to our restructuring costs. We expect to incur approximately $18 million of additional restructuring costs related to activities initiated as of December 31, 2020, all of which are expected to be incurred by the end of 2021. We plan to implement additional restructuring actions in order to align our manufacturing capacity and other costs with prevailing regional automotive production levels. Such future restructuring actions are dependent on market conditions, customer actions and other factors.
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For further information, see Note 5, "Restructuring," and Note 15, "Segment Reporting," to the consolidated financial statements included in this Report.
Financing Transactions
Senior Notes
In February 2020, we issued $350 million in aggregate principal amount at maturity of 2030 notes (the "2030 Notes") and an additional $300 million in aggregate principal amount at maturity of 2049 notes (the "2049 Notes"). The 2030 Notes have a stated coupon rate of 3.5% and were issued at 99.774% of par, resulting in a yield to maturity of 3.525%. The 2049 Notes have a stated coupon rate of 5.25% and were issued at 106.626% of par, resulting in a yield to maturity of 4.821%.
The net proceeds from the offering were $669 million after original issue discount. The proceeds were used to redeem the $650 million in aggregate principal amount of 2025 notes (the "2025 Notes") at a redemption price equal to 102.625% of the principal amount of such 2025 Notes, plus accrued interest.
In connection with these transactions, we recognized a loss of $21 million on the extinguishment of debt and paid related issuance costs of $6 million.
In May 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 2049 Notes. The 2029 Notes have a stated coupon rate of 4.25% and were issued 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 issued 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 Financial Condition — Capitalization — Senior Notes" below and Note 7 "Debt," to the consolidated financial statements included in this Report.
Credit Agreement
Our unsecured credit agreement (the "Credit Agreement"), dated August 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"). In February 2020, we entered into an agreement to extend the maturity date of the Revolving Credit Facility by one year to August 8, 2024, and paid related issuance costs of $1 million. The maturity date of the Term Loan Facility is August 8, 2022.
In March 2020, as a proactive measure in response to the COVID-19 pandemic, we borrowed $1.0 billion under the Revolving Credit Facility, which was repaid in full in September 2020, resulting in availability of $1.75 billion as of December 31, 2020.
For further information, see "— Liquidity and Financial Condition — Capitalization — Credit Agreement" below and Note 7, "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 $6.1 billion in share repurchases under our common stock share repurchase program. In March 2020, as a proactive measure in response to the COVID-19 pandemic, we suspended share repurchases under our share repurchase program. Prior to the suspension, we repurchased $70 million of shares in 2020 and have a remaining repurchase authorization of $1.4 billion, which will expire on December 31, 2022.
In March 2020, as a proactive measure in response to the COVID-19 pandemic, we suspended our quarterly cash dividend. Prior to the suspension, our Board of Directors declared a cash dividend of $0.77 per share of common stock in the first quarter of 2020. The quarterly cash dividend was reinstated in the fourth quarter of 2020 at $0.25 per share of common stock.
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 of Equity Securities," "— Liquidity and Financial Condition — Capitalization" below and Note 12, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in this Report.
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Other Matters
In 2020, we recognized tax benefits of $34 million related to restructuring charges and various other items and $15 million related to the U.S. deferred tax effect of our foreign branches, partially offset by tax expense of $29 million related to a net increase in valuation allowances on deferred tax assets.
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 the U.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 in Changchun 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 our U.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.
As discussed above, our results for the years ended December 31, 2020, 2019 and 2018, reflect the following items (in millions):
For the year ended December 31, 2020 2019 2018
Costs related to restructuring actions, including manufacturing inefficiencies of $5 million in 2020, $6 million in 2019 and $16 million in 2018 $ 150 $ 190 $ 104
Acquisition and other related costs — 2 1
Pension settlement charge — — 5
Litigation — 1 (17)
Favorable indirect tax ruling in a foreign jurisdiction — (2) (16)
Loss on extinguishment of debt 21 11 —
(Gain) loss related to investments, net 4 (1) (1)
Tax benefits, net (20) (122) (49)
For further information regarding these items, see Note 4, "Acquisition," Note 5, "Restructuring," Note 6, "Investments in Affiliates and Other Related Party Transactions," Note 7, "Debt," Note 9, "Income Taxes," and Note 10, "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" below.
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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 December 31, 2020 2019 2018
Net sales
Seating $ 12,712.7 74.6 % $ 15,097.2 76.2 % $ 16,021.9 75.8 %
E-Systems 4,332.8 25.4 4,713.1 23.8 5,126.6 24.2
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 %
Year Ended December 31, 2020, Compared With Year Ended December 31, 2019
Net sales for the year ended December 31, 2020 were $17.0 billion, as compared to $19.8 billion for the year ended December 31, 2019, a decrease of $2.8 billion or 14%. Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, negatively impacted net sales by more than $3.3 billion. This decrease was partially offset by the impact of new business in all regions, which increased net sales by more than $0.7 billion.
(in millions) Cost of Sales
2019 $ 18,072.8
Material cost
(1,915.9)
Labor and other
(246.7)
Depreciation
26.4
2020 $ 15,936.6
Cost of sales in 2020 was $15.9 billion, as compared to $18.1 billion in 2019. Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, reduced cost of sales by nearly $2.6 billion. This decrease was partially offset by the impact of new business in all regions, which increase cost of sales by nearly $0.7 billion.
Gross profit and gross margin were $1.1 billion and 6.5% of net sales in 2020, as compared to $1.7 billion and 8.8% of net sales in 2019. Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, and costs related to the COVID-19 pandemic negatively impacted gross profit by $792 million. Favorable operating performance, including the benefit of operational restructuring actions, and lower restructuring costs were partially offset by the impact of selling price reductions. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were $589 million for the year ended December 31, 2020, as compared to $605 million for the year ended December 31, 2019. As a percentage of net sales, selling, general and administrative expenses were 3.5% in 2020, as compared to 3.1% in 2019, reflecting the significant decrease in net sales in 2020.
Amortization of intangible assets was $66 million in 2020, as compared to $62 million in 2019.
Interest expense was $100 million in 2020, as compared to $92 million in 2019.
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
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periodic benefit cost and other miscellaneous income and expense, was $55 million in 2020, as compared to $25 million in 2019. In 2020, we recognized losses of $21 million related to the extinguishment of debt, $13 million related to a pension settlement and $4 million related to the impairment of an investment. 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 2020, the provision for income taxes was $94 million, representing an effective tax rate of 31.4% on pretax income before equity in net income of affiliates of $299 million. 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 $954 million.
In 2020 and 2019, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In 2020, we recognized tax benefits of $34 million related to restructuring charges and various other items and $15 million related to the U.S. deferred tax effect of our foreign branches and tax expense of $29 million related to a net increase in valuation allowances on deferred tax assets. 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 the U.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.
For information related to our valuation allowances, see "Other Matters — Significant Accounting Policies and Critical Accounting Estimates — Income Taxes" below.
Equity in net income of affiliates was $29 million for the year ended December 31, 2020, as compared to $23 million for the year ended December 31, 2019.
Net income attributable to Lear was $159 million, or $2.62 per diluted share, in 2020, as compared to $754 million, or $12.75 per diluted share, in 2019. 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 and E-Systems. For a description of our reportable operating segments, see "Executive Overview" above.
The financial information presented below is for our two reportable operating segments and our other category for the periods presented. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment. Corporate and regional headquarters costs include various support functions, such as information technology, advanced research and development, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment’s pretax income 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 in the United States ("GAAP"). Segment earnings and the related margin are used by management to evaluate the performance of our reportable operating segments. Segment earnings should not be considered in isolation or as a substitute for net income attributable to Lear, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies.
For a reconciliation of consolidated segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates, see Note 15, "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, 2020 2019
Net sales $ 12,712.7 $ 15,097.2
Segment earnings (1)
590.5 961.2
Margin 4.6 % 6.4 %
(1) See definition above.
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Seating net sales were $12.7 billion for the year ended December 31, 2020, as compared to $15.1 billion for the year ended December 31, 2019, a decrease of $2.4 billion or (16%). Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, negatively impacted net sales by nearly $2.7 billion. This decrease was partially offset by the impact of new business, which increased net sales by more than $0.4 billion.
Segment earnings, including restructuring costs, and the related margin on net sales were $591 million and 4.6% in 2020, as compared to $961 million and 6.4% in 2019. Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, and costs related to the COVID-19 pandemic negatively impacted segment earnings by $586 million. Favorable operating performance, including the benefit of operational restructuring actions, and lower restructuring costs were partially offset by the impact of selling price reductions.
E-Systems —
A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):
For the year ended December 31, 2020 2019
Net sales $ 4,332.8 $ 4,713.1
Segment earnings (1)
98.1 366.3
Margin 2.3 % 7.8 %
(1) See definition above.
E-Systems net sales were $4.3 billion for the year ended December 31, 2020, as compared to $4.7 billion for the year ended December 31, 2019, a decrease of $0.4 billion or 8%. Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, negatively impacted net sales by more than $0.6 billion. This decrease was partially offset by the impact of new business, which increased net sales by nearly $0.3 billion.
Segment earnings, including restructuring costs, and the related margin on net sales were $98 million and 2.3% in 2020, as compared to $366 million and 7.8% in 2019. Lower production volumes on Lear platforms globally, largely due to the COVID-19 pandemic, and costs related to the COVID-19 pandemic negatively impacted segment earnings by $234 million. Improved operating performance was more than offset by the impact of selling price reductions and, to a lesser extent, higher restructuring costs.
Other —
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
For the year ended December 31, 2020 2019
Net sales $ — $ —
Segment earnings (1)
(234.5) (257.3)
Margin N/A N/A
(1) See definition above.
Segment earnings related to our other category were ($235) million in 2020, as compared to ($257) million in 2019, primarily reflecting lower compensation-related costs in 2020.
Year Ended December 31, 2019, Compared With Year Ended December 31, 2018
For a discussion of our results of operations for the year ended December 31, 2019, compared with the year ended December 31, 2018, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.
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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. Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance.
Adequacy of Liquidity Sources
As of December 31, 2020, we had approximately $1.3 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 for the foreseeable future and to satisfy ordinary course business obligations.
In response to the COVID-19 pandemic, we took a number of proactive steps to preserve cash and maximize our financial flexibility in order to efficiently manage through the COVID-19 pandemic, including:
• Aggressively reducing operating costs, capital expenditures and working capital, including reducing discretionary spending
• Reducing salaried employee costs throughout the organization through salary reductions and deferrals
• Suspending share repurchases and quarterly dividends
• Maximizing opportunities offered under government incentive programs throughout the world
• Reducing the compensation of the Board of Directors
• Reducing hourly factory worker costs through temporary layoffs
• Delaying planned pension funding and deferring other retirement plan contributions
In the second half of the year, we reversed certain of the employee-related austerity measures as industry production recovered and financial performance improved. Further, we announced the restoration of compensation levels for our Board of Directors and executive officers and reinstated the quarterly cash dividend at $0.25 per share of common stock.
In addition, we expect to continue to pay quarterly cash dividends and resume share repurchases pursuant to our common stock share repurchase program (see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity 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 continuing effects of the COVID-19 pandemic, as well as restructuring activities, automotive industry conditions, the financial condition of our customers and suppliers and other related factors. 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," and "— Executive Overview" above and "— Forward-Looking Statements" below.
Cash Provided by Subsidiaries
A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties, intercompany loan repayments and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations.
As of December 31, 2020 and 2019, cash and cash equivalents of $780 million and $895 million, respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating additional income tax expense. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from our non-U.S. subsidiaries, see "— Adequacy of Liquidity Sources" above and Note 9, "Income Taxes," to the consolidated financial statements included in this Report.
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Cash Flows
Year Ended December 31, 2020, Compared with Year Ended December 31, 2019
A summary of net cash provided by operating activities is shown below (in millions):
For the year ended December 31, 2020 2019 Increase (Decrease) in Operating
Cash Flow
Consolidated net income and depreciation and amortization $ 774 $ 1,341 $ (567)
Net change in working capital items:
Accounts receivable (165) (116) (49)
Inventory (108) (69) (39)
Other current assets (63) 71 (134)
Accounts payable 214 (6) 220
Accrued liabilities 55 94 (39)
Net change in working capital items (67) (26) (41)
Other (44) (31) (13)
Net cash provided by operating activities $ 663 $ 1,284 $ (621)
In 2020 and 2019, net cash provided by operating activities was $663 million and $1,284 million, respectively. The overall decrease in operating cash flows of $621 million was primarily attributable to lower earnings in 2020. Increases in accounts receivable, inventory and accounts payable primarily reflect higher production volumes at the end of 2020, as compared to the end of 2019.
Net cash used in investing activities was $469 million in 2020, as compared to $922 million in 2019. In 2019, we paid $322 million for the acquisition of Xevo. In 2020, capital spending was $452 million, reflecting a delay in certain program launches and a reduction in discretionary spending in response to the COVID-19 pandemic, as compared to $604 million in 2019. Capital spending in 2021 is estimated at $600 million.
Net cash used in financing activities was $412 million in 2020, as compared to $362 million in 2019. As a proactive measure in response to the COVID-19 pandemic, we borrowed $1.0 billion under the Revolving Credit Facility in the first quarter of 2020, which was repaid in full in the third quarter of 2020. In 2020, we received net proceeds of $669 million related to the issuance of 2030 and 2049 Notes and paid $6 million of related issuance costs and $667 million related to the redemption of the outstanding 2025 Notes. Also in 2020, we paid $70 million for repurchases of our common stock, $67 million of dividends to Lear stockholders and $123 million of dividends to noncontrolling interest holders. In 2019, we received net proceeds of $693 million related to the issuance of 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.
For further information regarding our 2020 and 2019 financing transactions, see "— Capitalization" below and Note 7, "Debt," and Note 12, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in this Report.
Year Ended December 31, 2019, Compared with Year Ended December 31, 2018
For a discussion of our cash flows for the year ended December 31, 2019, compared with the year ended December 31, 2018, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.
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 of December 31, 2020, we had no short-term debt balances outstanding. As of December 31, 2019, we had short-term debt balances outstanding of $19 million. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors.
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Senior Notes
As of December 31, 2020, our senior notes (collectively, the "Notes") consist of the amounts shown below (in millions, except stated coupon rates):
Note Aggregate Principal Amount at Maturity Stated Coupon Rate
Senior unsecured notes due 2027 (the "2027 Notes") $ 750 3.80%
Senior unsecured notes due 2029 (the "2029 Notes") 375 4.25%
2030 Notes 350 3.50%
2049 Notes
625 5.25%
$ 2,100
The issue, maturity and interest payment dates of the Notes are shown below:
Note Issuance Date Maturity Date Interest Payment Dates
2027 Notes August 2017 September 15, 2027 March 15 and September 15
2029 Notes May 2019 May 15, 2029 May 15 and November 15
2030 Notes February 2020 May 30, 2030 May 30 and November 30
2049 Notes May 2019 and February 2020 May 15, 2049 May 15 and November 15
In 2020, we issued $350 million in aggregate principal amount at maturity of 2030 Notes and an additional $300 million in aggregate principal amount at maturity of 2049 Notes. The 2030 Notes have a stated coupon rate of 3.5% and were issued at 99.774% of par, resulting in a yield to maturity of 3.525%. The 2049 Notes have a stated coupon rate of 5.25% and were issued at 106.626% of par, resulting in a yield to maturity of 4.821%.
The net proceeds from the offering were $669 million after original issue discount. The proceeds were used to redeem the $650 million in aggregate principal amount of 2025 Notes at a redemption price equal to 102.625% of the principal amount of such 2025 Notes, plus accrued interest.
In connection with these transactions, we recognized a loss of $21 million on the extinguishment of debt and paid related issuance costs of $6 million.
The indentures governing the Notes contain certain restrictive covenants and customary events of default. As of December 31, 2020, we were in compliance with all covenants under the indentures governing the Notes.
For further information related to the Notes, including information on early redemption, covenants and events of default, see Note 7, "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, dated August 8, 2017, consists of a $1.75 billion Revolving Credit Facility and a $250 million Term Loan Facility. In 2020, we entered into an agreement to extend the maturity date of the Revolving Credit Facility by one year to August 8, 2024, and paid related issuance costs of $1 million. The maturity date of the Term Loan Facility is August 8, 2022. As of December 31, 2020 and 2019, there were no borrowings outstanding under the Revolving Credit Facility and $220 million and $234 million, respectively, outstanding under the Term Loan Facility.
In March 2020, as a proactive measure in response to the COVID-19 pandemic, we borrowed $1.0 billion under the Revolving Credit Facility, which was repaid in full in September 2020.
The Credit Agreement contains various financial and other covenants that require us to remain below a maximum leverage coverage ratio. As of December 31, 2020, we were in compliance with all covenants under the Credit Agreement. Although we expect to maintain compliance with all covenants, the impact of the COVID-19 pandemic may negatively affect our ability to comply with certain of these covenants. In the event that we are unable to maintain compliance with such covenants, we expect to obtain an amendment or waiver from our lenders, refinance the indebtedness subject to the covenants or take other mitigating actions prior to a potential breach.
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For further information related to the Credit Agreement, including information on pricing, covenants and events of default, see Note 7, "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.
Accounts Receivable Factoring
During the second quarter of 2020, we entered into an uncommitted factoring arrangement which provides for aggregate purchases of specified customer accounts in North America. The factoring arrangement results in true sales of the factored receivables, which are excluded from amounts reported in the consolidated balance sheets when the receivables are factored in accordance with ASC 860, "Transfers and Servicing." There were no receivables factored during 2020. We cannot provide any assurances that the factoring arrangement will be available or utilized in the future.
Contractual Obligations
The scheduled maturities of the Notes, obligations under the Credit Agreement and scheduled interest payments on the Notes as of December 31, 2020, are shown below (in millions):
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
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 $49 million as of December 31, 2020, have been excluded from the contractual obligations table above. For further information related to our unrecognized tax benefits, see Note 9, "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 2021 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 $5 million to $10 million in 2021. 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 2021.
For further information related to our pension and other postretirement benefit plans, see "— Other Matters — Pension and Other Postretirement Benefit Plans" below and Note 10, "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 of Equity Securities."
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Dividends
In March 2020, as a proactive measure in response to the COVID-19 pandemic, we suspended our quarterly cash dividend. Prior to the suspension, our Board of Directors declared a cash dividend of $0.77 per share of common stock in the first quarter of 2020. The quarterly cash dividend was reinstated in the fourth quarter of 2020 at $0.25 per share of common stock. In 2019 and 2018, our Board of Directors declared quarterly cash dividends of $0.75 and $0.70, respectively, per share of common stock.
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 "— Forward-Looking Statements" below and Note 7, "Debt," to the consolidated financial statements included in this Report.
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, 2020 2019
Notional amount (contract maturities < 24 months) $ 2,494 $ 2,163
Fair value 48 50
Currently, our most significant foreign currency transactional exposures relate to the Mexican peso, various European currencies, the Chinese renminbi, the Thai baht, the Japanese yen, the Brazilian real and the Honduran lempira. A sensitivity analysis of our net transactional exposure is shown below (in millions):
Potential Earnings Benefit (Adverse Earnings Impact)
December 31, Hypothetical Strengthening % (1)
2020 2019
U.S. dollar
10% $ 23 $ (16)
Euro 10% (4) 19
(1) Relative to all other currencies to which it is exposed for a twelve-month period.
A sensitivity analysis related to the aggregate fair value of our outstanding foreign exchange contracts is shown below (in millions):
Estimated Change in Fair Value
December 31, Hypothetical
Change % (2)
2020 2019
U.S. dollar 10% $ 80 $ 50
Euro 10% 59 69
(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 the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.
In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars ("translational exposure"). In 2020, net sales outside of the United States accounted for 79% of our consolidated net sales, although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate our translational exposure.
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" below.
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 92% 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 16, "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 of December 31, 2020, we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $17 million. In addition, as of December 31, 2020, we had recorded reserves for product liability and warranty claims and environmental matters of $49 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 14, "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 3, "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.
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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. 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 eligible retirees. 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, 2020 $ 1,094 $ 89
Discount rate -
Domestic plans 2.6 % 2.4 %
Foreign plans 2.0 % 2.5 %
Net periodic benefit cost for the year ended December 31, 2020 $ 14 $ 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
Net periodic benefit cost (credit) for the year ending December 31, 2021 (1)
$ (2) $ 1
Discount rate -
Domestic plans 2.6 % 2.4 %
Foreign plans 2.0 % 2.5 %
Expected return on plan assets -
Domestic plans 5.8 % N/A
Foreign plans 5.2 % 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 Benefit Obligation Increase in 2021
Net Periodic Benefit Cost
Pension Other Postretirement Pension Other Postretirement
100 bp decrease in discount rate $ 176 $ 11 $ — $ —
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 10, "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 of December 31, 2020, we had a valuation allowance related to tax loss and credit carryforwards and other deferred tax assets of $19 million in the United States and $379 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" below and Note 9, "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 2020, 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 18, "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;
• the impact of the COVID-19 pandemic on our business and the global economy;
• changes in actual industry vehicle production levels from our current estimates;
• fluctuations in the production of vehicles or the loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier;
• the outcome of customer negotiations and the impact of customer-imposed price reductions;
• the cost and availability of raw materials, energy, commodities and product components and our ability to mitigate such costs;
• disruptions in relationships with our suppliers;
• the financial condition of and adverse developments affecting our customers and suppliers;
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• risks associated with conducting business in foreign countries;
• currency controls and the ability to economically hedge currencies;
• global sovereign fiscal matters and creditworthiness, including potential defaults and the related impacts on economic activity, including the possible effects on credit markets, currency values, monetary unions, international treaties and fiscal policies;
• competitive conditions impacting us and our key customers and suppliers;
• labor disputes involving us or our significant customers or suppliers or that otherwise affect us;
• the operational and financial success of our joint ventures;
• the impact and timing of program launch costs and our management of new program launches;
• 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;
• limitations imposed by our existing indebtedness and our ability to access capital markets on commercially reasonable terms;
• changes affecting the availability of LIBOR;
• disruptions to our information technology systems, or those of our customers or suppliers, including those related to cybersecurity;
• increases in our warranty, product liability or recall costs;
• the outcome of legal or regulatory proceedings to which we are or may become a party;
• the impact of pending legislation and regulations or changes in existing federal, state, local or foreign laws or regulations;
• the impact of regulations on our foreign operations;
• costs associated with compliance with environmental laws and regulations;
• developments or assertions by or against us relating to intellectual property rights;
• the impact of potential changes in tax and trade policies in the United States and related actions by countries in which we do business;
• the anticipated changes in economic and other relationships between the United Kingdom and the European Union; and
• 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 Securities and Exchange Commission.
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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ITEM 8 – CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
55
Consolidated Balance Sheets as of December 31, 2020 and 2019
58
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
59
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
60
Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018
61
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
63
Notes to Consolidated Financial Statements
64
Schedule II – Valuation and Qualifying Accounts
107
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Lear Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lear Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 10, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Revenue recognition
Description of the Matter As discussed in Note 3, Summary of Significant Accounting Policies, the Company’s sales contracts with its customers may provide for annual price reductions over the production life of the vehicle. Prices may also be adjusted on an ongoing basis to reflect changes in product content, product cost and other commercial factors. Some of these price adjustments are non-routine in nature. The amount of revenue recognized by the Company reflects the consideration that the Company expects to be entitled to in exchange for its products based on annual purchase orders, annual price reductions and ongoing price adjustments.
Auditing the consideration that the Company expects to be entitled to in exchange for certain of its products which are subject to non-routine price adjustments is highly judgmental as it relates to evaluating the sufficiency of evidence available from commercial negotiations to support the ultimate consideration that the Company is entitled to in exchange for those products.
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How We Addressed the Matter in Our Audit We identified and tested controls over the identification and evaluation of product sales with non-routine price adjustments, including management’s review of the evidence to support the Company’s measurement of revenue related to those product sales.
Our audit procedures included, among others, inspecting communications between the Company and its customers related to the pricing arrangements, auditing adjustments at period-end related to those product sales, performing retrospective reviews of management’s estimates to identify contrary evidence, if any, and performing inquiries of and obtaining written representations from executives, within the Company, responsible for the respective customer relationships.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Detroit, Michigan
February 10, 2021
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Lear Corporation
Opinion on Internal Control over Financial Reporting
We have audited Lear Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lear Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated February 10, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Detroit, Michigan
February 10, 2021
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
December 31, 2020 2019
Assets
Current Assets:
Cash and cash equivalents $ 1,306.7 $ 1,487.7
Accounts receivable 3,269.2 2,982.6
Inventories 1,401.1 1,258.2
Other 799.7 678.2
Total current assets 6,776.7 6,406.7
Long-Term Assets:
Property, plant and equipment, net 2,736.2 2,704.2
Goodwill 1,655.8 1,614.3
Other 2,029.9 1,955.5
Total long-term assets 6,421.9 6,274.0
Total assets $ 13,198.6 $ 12,680.7
Liabilities and Equity
Current Liabilities:
Short-term borrowings $ — $ 19.2
Accounts payable and drafts 3,141.6 2,821.7
Accrued liabilities 1,920.9 1,811.2
Current portion of long-term debt 14.2 14.1
Total current liabilities 5,076.7 4,666.2
Long-Term Liabilities:
Long-term debt 2,300.3 2,293.7
Other 1,206.7 1,101.3
Total long-term liabilities 3,507.0 3,395.0
Redeemable noncontrolling interest — 118.4
Equity:
Preferred stock, 100,000,000 shares authorized (including 10,896,250 shares
of Series A convertible preferred stock authorized); no shares outstanding
— —
Common stock, $ 0.01 par value, 300,000,000 shares authorized; 64,571,405 and 64,563,291 shares issued as of December 31, 2020 and 2019, respectively
0.6 0.6
Additional paid-in capital 963.6 969.1
Common stock held in treasury, 4,519,891 and 4,127,806 shares
as of December 31, 2020 and 2019, respectively, at cost
( 598.6 ) ( 563.1 )
Retained earnings 4,806.8 4,715.8
Accumulated other comprehensive loss ( 705.1 ) ( 772.7 )
Lear Corporation stockholders’ equity 4,467.3 4,349.7
Noncontrolling interests 147.6 151.4
Equity 4,614.9 4,501.1
Total liabilities and equity $ 13,198.6 $ 12,680.7
The accompanying notes are an integral part of these consolidated balance sheets.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share and per share data)
For the year ended December 31, 2020 2019 2018
Net sales $ 17,045.5 $ 19,810.3 $ 21,148.5
Cost of sales 15,936.6 18,072.8 18,830.2
Selling, general and administrative expenses 588.9 605.0 612.8
Amortization of intangible assets 65.9 62.3 51.4
Interest expense 99.6 92.0 84.1
Other expense, net 55.2 24.6 31.6
Consolidated income before provision for income taxes and equity in net income of affiliates 299.3 953.6 1,538.4
Provision for income taxes 93.9 146.1 311.9
Equity in net income of affiliates ( 28.5 ) ( 23.2 ) ( 20.2 )
Consolidated net income 233.9 830.7 1,246.7
Less: Net income attributable to noncontrolling interests 75.4 77.1 96.9
Net income attributable to Lear $ 158.5 $ 753.6 $ 1,149.8
Basic net income per share available to Lear common stockholders $ 2.63 $ 12.80 $ 17.35
Diluted net income per share available to Lear common stockholders $ 2.62 $ 12.75 $ 17.22
Average common shares outstanding 60,254,380 61,697,192 65,672,164
Average diluted shares outstanding 60,426,962 61,923,528 66,161,816
The accompanying notes are an integral part of these consolidated financial statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
For the year ended December 31, 2020 2019 2018
Consolidated net income $ 233.9 $ 830.7 $ 1,246.7
Other comprehensive income (loss), net of tax:
Defined benefit plan adjustments ( 59.3 ) ( 44.8 ) 11.2
Derivative instruments and hedging activities 2.8 19.5 13.2
Foreign currency translation adjustments 139.7 ( 45.1 ) ( 233.0 )
Total other comprehensive income (loss) 83.2 ( 70.4 ) ( 208.6 )
Consolidated comprehensive income 317.1 760.3 1,038.1
Less: Comprehensive income attributable to noncontrolling interests 91.0 73.6 80.7
Comprehensive income attributable to Lear $ 226.1 $ 686.7 $ 957.4
The accompanying notes are an integral part of these consolidated financial statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In millions, except share data)
Redeemable Non-
controlling Interests Common
Stock Additional Paid-in Capital Common
Stock Held in Treasury Retained
Earnings
Balance as of December 31, 2017 $ 153.4 $ 0.7 $ 1,215.4 $ ( 724.1 ) $ 4,171.9
Comprehensive income (loss): —
Net income 12.9 — — — 1,149.8
Other comprehensive income (loss) ( 9.4 ) — — — —
Total comprehensive income (loss) 3.5 — — — 1,149.8
Adoption of ASU 2016-16 (Note 9, "Income Taxes") — — — — 2.3
Stock-based compensation — — 41.4 — —
Net issuances of 374,267 shares held in treasury in settlement of stock-based compensation
— — ( 81.5 ) 34.0 —
Repurchases of 4,308,418 shares of common stock at an average price of $ 163.69 per share
— — — ( 705.2 ) —
Retirement of 8,000,000 shares held in treasury at average price of $ 146.27 per share
— ( 0.1 ) ( 155.9 ) 1,170.2 ( 1,014.2 )
Dividends declared to Lear Corporation stockholders — — — — ( 185.8 )
Dividends declared to noncontrolling interests ( 9.2 ) — — — —
Affiliate transaction — — — — —
Acquisition of outstanding noncontrolling interests — — ( 2.0 ) — —
Noncontrolling interests — other
— — — — —
Redeemable noncontrolling interest adjustment 10.4 — — — ( 10.4 )
Balance as of December 31, 2018 $ 158.1 $ 0.6 $ 1,017.4 $ ( 225.1 ) $ 4,113.6
Comprehensive income (loss):
Net income 1.8 — — — 753.6
Other comprehensive income (loss) ( 1.8 ) — — — —
Total comprehensive income (loss) — — — — 753.6
Stock-based compensation — — 23.3 — —
Net issuances of 314,953 shares held in treasury in settlement of stock-based compensation
— — ( 71.6 ) 42.4 ( 2.1 )
Repurchases of 2,819,081 shares of common stock at an average price of $ 134.95 per share
— — — ( 380.4 ) —
Dividends declared to Lear Corporation stockholders — — — — ( 186.3 )
Dividends declared to noncontrolling interests ( 2.7 ) — — — —
Noncontrolling interests — other
— — — — —
Disposal of noncontrolling interests — — — — —
Redeemable noncontrolling interest adjustment ( 37.0 ) — — — 37.0
Balance as of December 31, 2019 $ 118.4 $ 0.6 $ 969.1 $ ( 563.1 ) $ 4,715.8
Comprehensive income (loss):
Net income ( 3.5 ) — — — 158.5
Other comprehensive income (loss) 7.7 — — — —
Total comprehensive income (loss) 4.2 — — — 158.5
Adoption of ASU 2016-13 (Note 3, "Accounts Receivable") — — — — ( 0.8 )
Stock-based compensation — — 40.0 — —
Net issuances of 249,064 shares held in treasury in settlement of stock-based compensation
— — ( 46.9 ) 34.5 ( 3.5 )
Repurchases of 641,149 shares of common stock at an average price of $ 109.22 per share
— — — ( 70.0 ) —
Dividends declared to Lear Corporation stockholders — — — — ( 62.1 )
Dividends declared to noncontrolling interests ( 26.8 ) — — — —
Acquisition of outstanding noncontrolling interests ( 96.9 ) — 1.4 — —
Redeemable noncontrolling interest adjustment 1.1 — — — ( 1.1 )
Balance as of December 31, 2020 $ — $ 0.6 $ 963.6 $ ( 598.6 ) $ 4,806.8
The accompanying notes are an integral part of these consolidated financial statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (continued)
(In millions, except share data)
Accumulated Other Comprehensive Loss, net of tax
Defined
Benefit Plans Derivative
Instruments and
Hedge
Activities Cumulative
Translation
Adjustments Lear
Corporation
Stockholders’
Equity Non-controlling
Interests Equity
Balance as of December 31, 2017 $ ( 184.0 ) $ ( 22.9 ) $ ( 306.5 ) $ 4,150.5 $ 142.1 $ 4,292.6
Comprehensive income (loss):
Net income — — — 1,149.8 84.0 1,233.8
Other comprehensive income (loss) 11.2 13.2 ( 216.8 ) ( 192.4 ) ( 6.8 ) ( 199.2 )
Total comprehensive income (loss) 11.2 13.2 ( 216.8 ) 957.4 77.2 1,034.6
Adoption of ASU 2016-16 (Note 9, "Income Taxes") — — — 2.3 — 2.3
Stock-based compensation — — — 41.4 — 41.4
Net issuances of 374,267 shares held in treasury in settlement of stock-based compensation
— — — ( 47.5 ) — ( 47.5 )
Repurchases of 4,308,418 shares of common stock at an average price of $ 163.69 per share
— — — ( 705.2 ) — ( 705.2 )
Retirement of 8,000,000 shares held in treasury at average price of $ 146.27 per share
— — — — — —
Dividends declared to Lear Corporation stockholders — — — ( 185.8 ) — ( 185.8 )
Dividends declared to noncontrolling interests — — — — ( 70.0 ) ( 70.0 )
Affiliate transaction — — — — 14.0 14.0
Acquisition of outstanding noncontrolling interests — — — ( 2.0 ) — ( 2.0 )
Noncontrolling interests — other
— — — — ( 3.4 ) ( 3.4 )
Redeemable noncontrolling interest adjustment — — — ( 10.4 ) — ( 10.4 )
Balance as of December 31, 2018 $ ( 172.8 ) $ ( 9.7 ) $ ( 523.3 ) $ 4,200.7 $ 159.9 $ 4,360.6
Comprehensive income (loss):
Net income — — — 753.6 75.3 828.9
Other comprehensive income (loss) ( 44.8 ) 19.5 ( 41.6 ) ( 66.9 ) ( 1.7 ) ( 68.6 )
Total comprehensive income (loss) ( 44.8 ) 19.5 ( 41.6 ) 686.7 73.6 760.3
Stock-based compensation — — — 23.3 — 23.3
Net issuances of 314,953 shares held in treasury in settlement of stock-based compensation
— — — ( 31.3 ) — ( 31.3 )
Repurchases of 2,819,081 shares of common stock at an average price of $ 134.95 per share
— — — ( 380.4 ) — ( 380.4 )
Dividends declared to Lear Corporation stockholders — — — ( 186.3 ) — ( 186.3 )
Dividends declared to noncontrolling interests — — — — ( 76.3 ) ( 76.3 )
Noncontrolling interests — other
— — — — ( 0.2 ) ( 0.2 )
Disposal of noncontrolling interests — — — — ( 5.6 ) ( 5.6 )
Redeemable noncontrolling interest adjustment — — — 37.0 — 37.0
Balance as of December 31, 2019 $ ( 217.6 ) $ 9.8 $ ( 564.9 ) $ 4,349.7 $ 151.4 $ 4,501.1
Comprehensive income (loss):
Net income — — — 158.5 78.9 237.4
Other comprehensive income (loss) ( 59.3 ) 2.8 124.1 67.6 7.9 75.5
Total comprehensive income (loss) ( 59.3 ) 2.8 124.1 226.1 86.8 312.9
Adoption of ASU 2016-13 (Note 3, "Accounts Receivable") — — — ( 0.8 ) — ( 0.8 )
Stock-based compensation — — — 40.0 — 40.0
Net issuances of 249,064 shares held in treasury in settlement of stock-based compensation
— — — ( 15.9 ) — ( 15.9 )
Repurchases of 641,149 shares of common stock at an average price of $ 109.22 per share
— — — ( 70.0 ) — ( 70.0 )
Dividends declared to Lear Corporation stockholders — — — ( 62.1 ) — ( 62.1 )
Dividends declared to noncontrolling interests — — — — ( 90.6 ) ( 90.6 )
Acquisition of outstanding noncontrolling interests — — — 1.4 — 1.4
Redeemable noncontrolling interest adjustment — — — ( 1.1 ) — ( 1.1 )
Balance as of December 31, 2020 $ ( 276.9 ) $ 12.6 $ ( 440.8 ) $ 4,467.3 $ 147.6 $ 4,614.9
The accompanying notes are an integral part of these consolidated financial statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
For the year ended December 31, 2020 2019 2018
Cash Flows from Operating Activities:
Consolidated net income $ 233.9 $ 830.7 $ 1,246.7
Adjustments to reconcile consolidated net income to net cash provided by operating activities –
Equity in net income of affiliates ( 28.5 ) ( 23.2 ) ( 20.2 )
Loss on extinguishment of debt 21.1 10.6 —
Impairment charges 31.9 14.5 6.1
Deferred tax (benefit) provision
( 84.7 ) ( 38.2 ) 86.7
Depreciation and amortization 539.9 509.9 484.4
Stock-based compensation 40.0 23.3 41.4
Net change in recoverable customer engineering, development and tooling ( 47.0 ) ( 32.4 ) 54.4
Net change in working capital items (see below) ( 66.9 ) ( 25.5 ) ( 118.9 )
Changes in other long-term liabilities 8.3 5.0 ( 23.0 )
Changes in other long-term assets ( 26.5 ) ( 10.1 ) ( 16.7 )
Other, net 41.6 19.7 38.9
Net cash provided by operating activities 663.1 1,284.3 1,779.8
Cash Flows from Investing Activities:
Additions to property, plant and equipment ( 452.3 ) ( 603.9 ) ( 677.0 )
Acquisition of Xevo, net of cash acquired — ( 321.7 ) —
Other, net ( 16.5 ) 3.2 ( 16.5 )
Net cash used in investing activities ( 468.8 ) ( 922.4 ) ( 693.5 )
Cash Flows from Financing Activities:
Revolving credit facility borrowings 1,000.0 — —
Revolving credit facility repayments ( 1,000.0 ) — —
Proceeds from the issuance of senior notes 669.1 693.3 —
Redemption of senior notes ( 667.1 ) ( 333.7 ) —
Term loan repayments ( 14.1 ) ( 7.8 ) ( 6.3 )
Short-term borrowings (repayments), net ( 19.3 ) 9.5 7.3
Payment of debt issuance and other financing costs ( 7.0 ) ( 6.5 ) —
Repurchase of common stock ( 70.0 ) ( 384.7 ) ( 704.9 )
Dividends paid to Lear Corporation stockholders ( 67.3 ) ( 186.3 ) ( 186.3 )
Dividends paid to noncontrolling interests ( 123.3 ) ( 78.9 ) ( 79.1 )
Other, net ( 112.7 ) ( 66.8 ) ( 61.2 )
Net cash used in financing activities ( 411.7 ) ( 361.9 ) ( 1,030.5 )
Effect of foreign currency translation 21.5 ( 9.4 ) ( 36.4 )
Net Change in Cash, Cash Equivalents and Restricted Cash ( 195.9 ) ( 9.4 ) 19.4
Cash, Cash Equivalents and Restricted Cash as of Beginning of Period 1,510.4 1,519.8 1,500.4
Cash, Cash Equivalents and Restricted Cash as of End of Period $ 1,314.5 $ 1,510.4 $ 1,519.8
Changes in Working Capital Items:
Accounts receivable $ ( 164.7 ) $ ( 116.2 ) $ 230.8
Inventories ( 107.7 ) ( 69.1 ) ( 32.5 )
Accounts payable 214.0 ( 5.5 ) ( 199.3 )
Accrued liabilities and other ( 8.5 ) 165.3 ( 117.9 )
Net change in working capital items $ ( 66.9 ) $ ( 25.5 ) $ ( 118.9 )
Supplementary Disclosure:
Cash paid for interest $ 117.8 $ 104.4 $ 97.1
Cash paid for income taxes, net of refunds received of $ 32.5 million in 2020, $ 69.4 million in 2019 and $ 40.6 million in 2018
$ 141.5 $ 172.1 $ 279.2
The accompanying notes are an integral part of these consolidated financial statements.
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Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Basis of Presentation
Lear Corporation ("Lear," and together with its consolidated subsidiaries, the "Company") and its affiliates design and manufacture automotive seating and electrical distribution systems and related components. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide.
The accompanying consolidated financial statements include the accounts of Lear, a Delaware corporation, and the wholly owned and less than wholly owned subsidiaries controlled by Lear.
(2) Impact of COVID-19 Pandemic
Unprecedented industry disruptions related to the COVID-19 pandemic impacted operations in every region of the world. The Company's operations in China were impacted first, with most plants in the country closed for several weeks during the first quarter. At the end of the first quarter, all of the Company's facilities in China were operating and capacity utilization was increasing. Beginning in mid-March, the Company's operations in Europe, North America, South America and Asia (outside of China) were impacted, with virtually all of its plants closed at the end of the first quarter and closures continuing throughout April and, in most cases, a portion of May. Although manufacturing resumed gradually, most of the Company's plants in its major markets were operating at pre-COVID-19 levels at the end of the second quarter and throughout the second half of 2020. The Company experienced significant inefficiencies and incremental costs related to the COVID-19 pandemic in the first half of the year, which diminished toward the end of the second quarter. In the second half of 2020, the Company experienced less significant but ongoing costs related to personal protective equipment, employee transportation and higher labor costs reflecting an increase in absenteeism.
Various government programs have been enacted to provide financial relief for businesses affected by the COVID-19 pandemic. In the year ended December 31, 2020, the Company recognized approximately $ 98 million of government assistance primarily related to the reimbursement of certain employee costs. The Company recognizes such assistance as a reduction of the related costs as such costs are incurred and the Company is reasonably assured to receive payment.
Although industry production has returned to pre-COVID-19 levels, partially due to the customers' need to replenish inventory levels, it is likely that, for a period of time, the global automotive industry will experience lower demand for new vehicles as a result of the global economic slowdown caused by the COVID-19 pandemic, as new vehicle sales are typically correlated with positive consumer confidence and low unemployment. The Company is also continuing to monitor its supply base, as well as related production constraints imposed by various governments, to minimize the impact on its manufacturing operations. Further, a resurgence of the virus with corresponding shelter-in-place orders impacting industry production in 2021 could also impact the Company's financial results.
The accompanying consolidated financial statements reflect estimates and assumptions made by management as of December 31, 2020, and for the year then ended. Such estimates and assumptions affect, among other things, the Company's goodwill, long-lived asset and indefinite-lived intangible asset valuations; inventory valuations; valuation of deferred income taxes and income tax contingencies; and credit losses related to our financial instruments. Events and circumstances arising after December 31, 2020, including those resulting from the impact of the COVID-19 pandemic, will be reflected in management's estimates and assumptions in future periods.
For more information related to goodwill, see Note 3, "Summary of Significant Accounting Policies — Impairment of Goodwill and Intangible Assets." For more information related to income taxes, see Note 3, "Summary of Significant Accounting Policies — Income Taxes," and Note 9, "Income Taxes."
(3) Summary of Significant Accounting Policies
Consolidation
Lear consolidates all entities, including variable interest entities, in which it has a controlling financial interest. Investments in affiliates in which Lear does not have control, but does have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method (Note 6, "Investments in Affiliates and Other Related Party Transactions").
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Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Fiscal Period Reporting
The Company’s annual financial results are reported on a calendar year basis, and quarterly interim results are reported using a thirteen week reporting calendar.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include all highly liquid investments with original maturities of ninety days or less. Restricted cash includes cash that is legally restricted as to use or withdrawal.
Accounts Receivable
The Company records accounts receivable as title is transferred to its customers. The Company’s customers are the world’s major automotive manufacturers. Generally, the Company does not require collateral for its accounts receivable.
On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," using a modified retrospective approach. The standard amends several aspects of the measurement of credit losses related to certain financial instruments, including the replacement of the existing incurred credit loss model and other models with the current expected credit losses ("CECL") model. The cumulative effect of adoption resulted in an increase of $ 0.8 million in the allowance for credit loss and a corresponding decrease in retained earnings as of January 1, 2020.
The Company’s allowance for credit losses on financial assets measured at amortized cost, primarily accounts receivable, reflects management’s estimate of credit losses over the remaining expected life of such assets, measured primarily using historical experience, as well as current conditions and forecasts that affect the collectability of the reported amount. Expected credit losses for newly recognized financial assets, as well as changes to expected credit losses during the period, are recognized in earnings. The Company also considers geographic and segment specific risk factors in the development of expected credit losses. As of December 31, 2020 and 2019, accounts receivable are reflected net of reserves of $ 35.3 million and $ 36.0 million, respectively. Changes in expected credit losses were not significant during the year ended December 31, 2020.
The Company receives bank notes from its customers, which are classified as other current assets in the consolidated balance sheets, for certain amounts of accounts receivable, primarily in Asia. The Company may hold such bank notes until maturity, exchange them with suppliers to settle liabilities or sell them to third-party financial institutions in exchange for cash.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. The Company records reserves for inventory in excess of production and/or forecasted requirements and for obsolete inventory in production and service inventories. A summary of inventories is shown below (in millions):
December 31, 2020 2019
Raw materials $ 1,051.6 $ 906.3
Work-in-process 109.8 107.0
Finished goods 396.9 380.4
Reserves ( 157.2 ) ( 135.5 )
Inventories $ 1,401.1 $ 1,258.2
Engineering and Development ("E&D") and Tooling Costs
In 2020, the Company recorded E&D costs of $ 557.0 million, including $ 280.7 million (or 2 % of related sales) in its Seating business, $ 259.8 million (or 6 % of related sales) in its E-Systems business and $ 16.5 million at its headquarters location.
Pre-Production Costs Related to Long-Term Supply Agreements
The Company incurs pre-production E&D and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the Company does not have a non-cancelable right to use the tooling.
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During 2020 and 2019, the Company capitalized $ 229.7 million and $ 211.2 million, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During 2020 and 2019, the Company also capitalized $ 174.0 million and $ 231.6 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the Company has a non-cancelable right to use the tooling. These amounts are included in other current and long-term assets in the accompanying consolidated balance sheets as of December 31, 2020 and 2019. During 2020 and 2019, the Company collected $ 354.6 million and $ 408.3 million, respectively, of cash related to E&D and tooling costs.
The classification of recoverable customer E&D and tooling costs related to long-term supply agreements is shown below (in millions):
December 31, 2020 2019
Current $ 212.0 $ 157.2
Long-term 121.4 113.8
Recoverable customer E&D and tooling $ 333.4 $ 271.0
Other E&D Costs
Costs incurred in connection with product launches, to the extent not recoverable from the Company’s customers, are recorded in cost of sales as incurred and totaled $ 135.0 million, $ 138.2 million and $ 140.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
All other E&D costs are recorded in selling, general and administrative expenses as incurred and totaled $ 192.3 million, $ 178.4 million and $ 156.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Costs associated with the repair and maintenance of the Company’s property, plant and equipment are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency or safety of the Company’s property, plant and equipment are capitalized and depreciated over the remaining useful life of the related asset. Depreciable property is depreciated over the estimated useful lives of the assets, using principally the straight-line method as follows:
Buildings and improvements 10 to 40 years
Machinery and equipment 5 to 10 years
A summary of property, plant and equipment is shown below (in millions):
December 31, 2020 2019
Land $ 114.1 $ 113.1
Buildings and improvements 880.7 831.3
Machinery and equipment 4,339.2 3,844.1
Construction in progress 311.1 382.4
Total property, plant and equipment 5,645.1 5,170.9
Less – accumulated depreciation ( 2,908.9 ) ( 2,466.7 )
Net property, plant and equipment $ 2,736.2 $ 2,704.2
For the years ended December 31, 2020, 2019 and 2018, depreciation expense was $ 474.0 million, $ 447.6 million and $ 433.0 million, respectively. As of December 31, 2020, 2019 and 2018, capital expenditures recorded in accounts payable totaled $ 118.4 million, $ 131.6 million and $ 156.2 million, respectively.
Impairment of Goodwill
Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a
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qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized.
The Company utilizes an income approach to estimate the fair value of each of its reporting units and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of the Company’s estimated cost of equity and of debt ("cost of capital") derived using both known and estimated customary market metrics. The Company’s weighted average cost of capital is adjusted by reporting unit to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units. The market valuation approach is used to further support the Company’s analysis and is based on recent transactions involving comparable companies.
The annual goodwill impairment assessment was completed as of the first day of the Company's fourth quarter. The Company performed a qualitative assessment for each reporting unit except for one within the Seating operating segment where a quantitative analysis was performed. The qualitative assessments indicated that it was more likely than not that the fair value of each reporting unit exceeded its respective carrying value. The quantitative analysis indicated that the fair value of the reporting unit exceeded its respective carrying value. The quantitative analysis reflected the Company’s best estimates of the COVID-19 pandemic’s ultimate impact on industry conditions, including consumer demand, as well as economic recovery. The reporting unit is at risk of failing a future quantitative assessment if the impact of the COVID-19 pandemic is more severe or if economic recovery is slower or weaker than anticipated. As of December 31, 2020, the goodwill of the reporting unit represents approximately 1 % of the Company’s total goodwill. The Company does not believe that any other reporting units is at risk for impairment.
A summary of the changes in the carrying amount of goodwill for each of the periods in the two years ended December 31, 2020, is shown below (in millions):
Seating E-Systems Total
Balance as of December 31, 2018 $ 1,244.3 $ 161.0 $ 1,405.3
Acquisition — 219.0 219.0
Foreign currency translation and other ( 8.9 ) ( 1.1 ) ( 10.0 )
Balance as of December 31, 2019 1,235.4 378.9 1,614.3
Foreign currency translation and other 33.4 8.1 41.5
Balance as of December 31, 2020 $ 1,268.8 $ 387.0 $ 1,655.8
For further information related to the acquisition, see Note 4, "Acquisition."
Intangible Assets
As of December 31, 2020, intangible assets consist primarily of certain intangible assets recorded in connection with the acquisitions of Guilford Mills in 2012, the parent company of Eagle Ottawa, LLC in 2015, AccuMED Holdings Corp. in 2016, Grupo Antolin's automotive seating business in 2017 and Xevo Inc. ("Xevo") in 2019 (Note 4, "Acquisition"). These intangible assets were recorded at their estimated fair value, based on independent appraisals, as of the transaction or acquisition date. The value assigned to technology intangibles is based on the royalty savings method, which applies a hypothetical royalty rate to projected revenues attributable to the identified technologies. Royalty rates were determined based primarily on analysis of market information. The customer-based intangible asset includes the acquired entity's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. The value assigned to customer-based intangibles is based on the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets.
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A summary of intangible assets as of December 31, 2020, is shown below (in millions):
Gross Carrying
Value Accumulated
Amortization Net Carrying
Value Weighted
Average Useful
Life (years)
Amortized intangible assets:
Customer-based $ 528.0 $ ( 232.0 ) $ 296.0 11.8
Licensing agreements 71.9 ( 24.4 ) 47.5 5.0
Technology 35.1 ( 21.2 ) 13.9 7.2
$ 635.0 $ ( 277.6 ) $ 357.4 10.8
Unamortized intangible assets:
In-process research and development 10.8 — 10.8
Balance as of December 31, 2020 $ 645.8 $ ( 277.6 ) $ 368.2
Intangible assets with a gross carrying value of $ 25.6 million became fully amortized in 2020 and are no longer included in the gross carrying value or accumulated amortization as of December 31, 2020.
A summary of intangible assets as of December 31, 2019, is shown below (in millions):
Gross Carrying
Value Accumulated
Amortization Net Carrying
Value Weighted
Average Useful
Life (years)
Amortized intangible assets:
Customer-based $ 531.9 $ ( 203.0 ) $ 328.9 11.6
Licensing agreements 75.0 ( 10.2 ) 64.8 5.0
Technology 35.0 ( 15.9 ) 19.1 7.0
Other 1.4 ( 1.3 ) 0.1 2.5
$ 643.3 $ ( 230.4 ) $ 412.9 10.5
Unamortized intangible assets:
In-process research and development 10.8 — 10.8
Balance as of December 31, 2019 $ 654.1 $ ( 230.4 ) $ 423.7
Excluding the impact of any future acquisitions, the Company’s estimated annual amortization expense for the five succeeding years is shown below (in millions):
Year Expense
2021 $ 65.3
2022 64.4
2023 62.9
2024 47.4
2025 19.8
Impairment of Long-Lived Assets
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with accounting principles generally accepted in the United States ("GAAP"). If impairment indicators exist, the Company performs the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon a combination of market and cost approaches, as appropriate.
For the years ended December 31, 2020, 2019 and 2018, the Company recognized asset impairment charges of $ 21.3 million, $ 8.7 million and $ 4.7 million, respectively, in conjunction with its restructuring actions (Note 5, "Restructuring"). For the years ended December 31, 2020 and 2018, the Company recognized additional asset impairment charges of $ 4.6 million and $ 1.4 million, respectively. Asset impairment charges are recorded in cost of sales in the accompanying consolidated statements of income for the years ended December 31, 2020, 2019 and 2018.
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Impairment of Investments in Affiliates
The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded book value and the fair value of the investment. Fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values.
Accrued Liabilities
A summary of accrued liabilities as of December 31, 2020 and 2019, is shown below (in millions):
December 31, 2020 2019
Compensation and employee benefits $ 297.7 $ 319.2
Income and other taxes payable 287.7 256.6
Restructuring 139.0 157.7
Current portion of lease obligations 116.3 113.9
Other 1,080.2 963.8
Accrued liabilities $ 1,920.9 $ 1,811.2
Leases
Accounting Policy
The Company determines if an arrangement contains a lease at inception. For all asset classes, the Company utilizes the short-term lease exemption as provided under GAAP. A short-term lease is a lease that, at the commencement date, has a term of twelve months or less and does not include an option to purchase the underlying asset. For all asset classes, the Company accounts for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating a standalone value to each component of a lease.
For purposes of calculating operating lease obligations under the standard, the Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company's leases do not contain material residual value guarantees or material restrictive covenants.
Operating lease expense is recognized on a straight-line basis over the lease terms.
Discount Rate
The discount rate used to measure a lease obligation should be the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
Revenue Recognition and Sales Commitments
The Company enters into contracts with its 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, the Company is often expected to fulfill its customers’ purchasing requirements for the production life of the vehicle. Many of these contracts may be terminated by the Company’s customers at any time. Historically, terminations of these contracts have been infrequent. The Company receives purchase orders from its 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 the Company does not have an enforceable right to payment prior to such transfer. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for those products based on the annual purchase orders, annual price reductions and ongoing price adjustments. In 2020 and 2019, revenue recognized related to prior years represented less than 1 % of consolidated net sales. The Company's customers pay for products received in accordance with payment terms that are customary within the industry. The Company's contracts with its customers do not have significant financing components.
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The Company records a contract liability for advances received from its customers. As of December 31, 2020, there were no significant contract liabilities recorded. Further, there were no significant contract liabilities recognized in revenue during the year ended December 31, 2020.
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 are collected by the Company from a customer are excluded from revenue.
Cost of Sales and Selling, General and Administrative Expenses
Cost of sales includes material, labor and overhead costs associated with the manufacture and distribution of the Company’s products. Distribution costs include inbound freight costs, purchasing and receiving costs, inspection costs, warehousing costs and other costs of the Company’s distribution network. Selling, general and administrative expenses include selling, engineering and development and administrative costs not directly associated with the manufacture and distribution of the Company’s products.
Restructuring Costs
Restructuring costs include employee termination benefits, asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. Employee termination benefits are recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Other incremental costs principally include equipment and personnel relocation costs. In addition to restructuring costs, the Company also incurs incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are recognized in the Company’s consolidated financial statements in accordance with GAAP. Generally, charges are recorded as restructuring actions are approved and/or implemented.
Other Expense, Net
Other expense, net 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. A summary of other expense, net is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Other expense $ 72.2 $ 52.2 $ 43.8
Other income ( 17.0 ) ( 27.6 ) ( 12.2 )
Other expense, net $ 55.2 $ 24.6 $ 31.6
Income Taxes
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.
The Company’s current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. The Company’s 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. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. In completing this evaluation, the Company considers all available evidence in order to determine whether, based on the weight of the evidence, a valuation allowance for its 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), 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 the Company’s deferred tax assets will not be realized, a valuation allowance is recorded. If operating results improve or decline on a continual basis in a particular jurisdiction, the Company’s decision regarding the need for a valuation allowance could change, resulting in either the initial
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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, the Company makes certain estimates and judgments, which affect its evaluation of the carrying value of its deferred tax assets, as well as its calculation of certain tax liabilities.
The calculation of the Company’s gross unrecognized tax benefits and liabilities includes uncertainties in the application of, and changes in, complex tax regulations in a multitude of jurisdictions across its global operations. The Company recognizes tax benefits and liabilities based on its estimates of whether, and the extent to which, additional taxes will be due. The Company adjusts 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 the Company’s estimates.
The Tax Cuts and Jobs Act (the "Act") enacted on December 22, 2017, created the global intangible low-tax income ("GILTI") provision that imposes U.S. tax on certain earnings of foreign subsidiaries that are subject to foreign tax below a certain threshold. GILTI taxes are recorded in current income tax expense as incurred.
Effective January 1, 2019, ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," allows for the reclassification of "stranded" tax effects as a result of the Act from accumulated other comprehensive income to retained earnings. The Company elected not to reclassify such amounts. The Company reclassifies taxes from accumulated other comprehensive loss to earnings as the items to which the tax effects relate are similarly reclassified.
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The standard simplifies the accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company did not early adopt this standard. The adoption of this standard is not expected to have a significant impact on the Company’s financial statements.
Foreign Currency
Assets and liabilities of foreign subsidiaries that use a functional currency other than the U.S. dollar are translated into U.S. dollars at the foreign exchange rates in effect at the end of the period. Revenues and expenses of foreign subsidiaries are translated into U.S. dollars using an average of the foreign exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary’s financial statements from the functional currency to the U.S. dollar are reflected in accumulated other comprehensive loss in the consolidated balance sheets.
Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except certain long-term intercompany transactions, are included in the consolidated statements of income as incurred. For the years ended December 31, 2020, 2019 and 2018, other expense, net includes net foreign currency transaction losses of $ 19.9 million, $ 20.6 million and $ 14.4 million, respectively.
Stock-Based Compensation
The Company measures stock-based employee compensation expense at fair value in accordance with GAAP and recognizes such expense over the vesting period of the stock-based employee awards.
Net Income Per Share Attributable to Lear
Basic net income per share available to Lear common stockholders is computed using the two-class method by dividing net income attributable to Lear, after deducting the redemption adjustment related to redeemable noncontrolling interest, by the average number of common shares outstanding during the period. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement are considered common shares outstanding and are included in the computation of basic net income per share available to Lear common stockholders.
Diluted net income per share available to Lear common stockholders is computed using the two-class method by dividing net income attributable to Lear, after deducting the redemption adjustment related to redeemable noncontrolling interest, by the average number of common shares outstanding, including the dilutive effect of common stock equivalents computed using the treasury stock method and the average share price during the period.
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Notes to Consolidated Financial Statements (continued)
A summary of information used to compute basic and diluted net income per share available to Lear common stockholders is shown below (in millions, except share and per share data):
For the year ended December 31, 2020 2019 2018
Net income attributable to Lear $ 158.5 $ 753.6 $ 1,149.8
Redeemable noncontrolling interest adjustment — 35.9 ( 10.4 )
Net income available to Lear common stockholders $ 158.5 $ 789.5 $ 1,139.4
Average common shares outstanding 60,254,380 61,697,192 65,672,164
Dilutive effect of common stock equivalents 172,582 226,336 489,652
Average diluted shares outstanding 60,426,962 61,923,528 66,161,816
Basic net income per share available to Lear common stockholders $ 2.63 $ 12.80 $ 17.35
Diluted net income per share available to Lear common stockholders $ 2.62 $ 12.75 $ 17.22
For further information related to the redeemable noncontrolling interest adjustment, see Note 6, "Investments in Affiliates and Other Related Party Transactions."
Product Warranty
Losses from warranty obligations are accrued when it is probable that a liability has been incurred and the related amounts are reasonably estimable.
Segment Reporting
The Company has two reportable operating segments: Seating, which consists of the design, development, engineering and manufacture of complete seat systems, seat subsystems and key seat components, and E-Systems, which consists of the design, development, engineering and manufacture of complete electrical distribution and connection systems, electronic systems, and software and connected services. Key components in the Company's complete seat system and subsystem solutions are advanced comfort, wellness, safety and sound offerings, as well as configurable seating product technologies, all of which are compatible with traditional internal combustion engine ("ICE") architectures and the full range of hybrid, plug-in hybrid and battery electric architectures. Key components in the Company's electrical distribution portfolio include wire harnesses, terminals and connectors, and engineered components for both ICE and electrified vehicle architectures that require management of higher voltage and power. Key components in the Company's electronic systems portfolio include body domain control modules and products specific to electrification and connectivity trends. Electrification products include on-board battery chargers, power conversion modules, high voltage battery management systems and high voltage power distribution systems. Connectivity products include gateway modules and communication modules to manage both wired and wireless networks and data in vehicles. In addition to electronic modules, the Company offers software that includes cybersecurity, advanced vehicle positioning for automated and autonomous driving applications and full capabilities in both dedicated short-range communication and cellular protocols for vehicle connectivity. The Company's software and connected services offerings include embedded control software and cloud and mobile device-based software and services. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment. Corporate and regional headquarters costs include various support functions, such as information technology, advanced research and development, corporate finance, legal, executive administration and human resources.
Each of the Company’s operating segments reports its results from operations and makes its requests for capital expenditures directly to the chief operating decision maker. The economic performance of each operating segment is driven primarily by automotive production volumes in the geographic regions in which it operates, as well as by the success of the vehicle platforms for which it supplies products. Also, each operating segment operates in the competitive Tier 1 automotive supplier environment and is continually working with its customers to manage costs and improve quality. The Company’s production processes generally make use of hourly labor, dedicated facilities, sequential manufacturing and assembly processes and commodity raw materials.
The Company evaluates the performance of its operating segments based primarily on (i) revenues from external customers, (ii) pretax income before equity in net income of affiliates, interest expense and other expense ("segment earnings") and (iii) cash flows, being defined as segment earnings less capital expenditures plus depreciation and amortization.
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Notes to Consolidated Financial Statements (continued)
The accounting policies of the Company’s operating segments are the same as those described in this note to the consolidated financial statements.
Derivative Instruments and Hedge Activities
The Company has used derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates and interest rates and the resulting variability of the Company’s operating results. The Company is not a party to leveraged derivatives. The Company’s derivative financial instruments are subject to master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. On the date that a derivative contract for a hedge instrument is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or (4) a contract not designated as a hedge instrument.
For a fair value hedge, the change in the fair value of the derivative is recorded in earnings and reflected in the consolidated statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the consolidated balance sheets. When the underlying hedged transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the consolidated statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the consolidated balance sheets. When the related currency translation adjustment is required to be reclassified, usually upon the sale or liquidation of the investment, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in other expense, net in the consolidated statements of income. Changes in the fair value of contracts not designated as hedge instruments are recorded in earnings and reflected in other expense, net in the consolidated statements of income. Cash flows attributable to derivatives used to manage foreign currency risks are classified on the same line as the hedged item attributable to the hedged risk in the consolidated statements of cash flows. Upon settlement, cash flows attributable to derivatives designated as net investment hedges are classified as investing activities in the consolidated statements of cash flows. Cash flows attributable to forward starting interest rate swaps are classified as financing activities in the consolidated statements of cash flows.
The Company formally documents its hedge relationships, including the identification of the hedge instruments and the related hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded at fair value in other current and long-term assets and other current and long-term liabilities in the consolidated balance sheets. The Company also formally assesses whether a derivative used in a hedge transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a hedged transaction is no longer probable to occur, the Company discontinues hedge accounting.
On January 1, 2018, the Company early adopted ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." The new standard eliminates the requirement to separately measure and report hedge ineffectiveness, due to a difference between the economic terms of the hedge instrument and the underlying transaction, and generally requires, for qualifying hedges, the entire change in the fair value of a hedge instrument to be presented in the same line as the hedged item in the consolidated statements of income. The standard also modifies the accounting for components excluded from the assessment of hedge effectiveness and simplifies the application of hedge accounting in certain situations. The provisions of the standard were applied on a modified retrospective basis, and the effects of adoption were not significant.
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 2020, 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 and unsettled pricing negotiations with customers and suppliers (Note 3, "Summary of Significant Accounting Policies"); acquisitions (Note 4, "Acquisition"); restructuring accruals (Note 5, "Restructuring"); deferred tax asset valuation allowances and income taxes (Note 9, "Income Taxes"); pension and other postretirement benefit plan assumptions (Note 10, "Pension and Other Postretirement Benefit Plans"); accruals related to litigation, warranty and environmental remediation costs (Note 14, "Commitments and Contingencies"); and self-insurance accruals. Actual results may differ significantly from the Company’s estimates.
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Notes to Consolidated Financial Statements (continued)
(4) Acquisition
On April 17, 2019, the Company completed the acquisition of Xevo, a Seattle-based, global leader in connected car software, by acquiring all of Xevo's outstanding shares for $ 321.7 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.
The acquisition of Xevo has been accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying consolidated balances sheets as of December 31, 2020 and 2019. The operating results and cash flows of Xevo are included in the accompanying consolidated financial statements from the date of acquisition and in the Company's E-Systems segment.
The Company incurred transaction costs of $ 1.6 million, which were expensed as incurred and are recorded in selling, general and administrative expenses in the accompanying consolidated statement of income for the year ended December 31, 2019.
The purchase price and allocation are shown below (in millions):
December 31,
2019 Adjustments December 31,
2020
Net purchase price $ 321.7 $ — $ 321.7
Other assets purchased and liabilities assumed, net $ 9.5 $ 2.6 $ 12.1
Goodwill 219.0 0.5 219.5
Intangible assets 93.2 ( 3.1 ) 90.1
Purchase price allocation $ 321.7 $ — $ 321.7
Goodwill recognized in this transaction is primarily attributable to expected synergies related to future growth and commercialization opportunities and is not deductible for tax purposes.
Intangible assets consist primarily of amounts recognized for the fair value of licensing agreements and developed technology and are based on independent appraisals. Licensing agreements represent the fair values of the underlying licensing agreements with Xevo customers with estimated useful lives of approximately five years . Developed technology represents the fair value of Xevo's technology with an estimated useful life of approximately five years .
The pro-forma effects of this acquisition do not materially impact the Company's reported results for any period presented.
For further information related to acquired assets measured at fair value, see Note 16, "Financial Instruments."
(5) Restructuring
2020
In 2020, the Company recorded charges of $ 144.9 million in connection with its restructuring actions. These charges consist of $ 122.3 million recorded as cost of sales, $ 16.4 million recorded as selling, general and administrative expenses and $ 6.2 million recorded as other expense. The restructuring charges consist of employee termination costs of $ 104.2 million, asset impairment charges of $ 23.3 million, contract termination costs of $ 2.0 million and pension benefit plan settlement losses of $ 12.9 million, as well as other related costs of $ 2.5 million. Asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $ 21.3 million in excess of related estimated fair values and the impairment of right-of-use-assets of $ 2.0 million.
The Company expects to incur approximately $ 18 million of additional restructuring costs related to activities initiated as of December 31, 2020, and expects that the components of such costs will be consistent with its historical experience. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
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Notes to Consolidated Financial Statements (continued)
A summary of 2020 activity, excluding the pension benefit plan settlement losses of $ 12.9 million, is shown below (in millions):
Accrual as of 2020 Utilization Accrual as of
January 1, 2020 Charges Cash Non-cash December 31, 2020
Employee termination benefits $ 152.8 $ 104.2 $ ( 122.2 ) $ — $ 134.8
Asset impairments — 23.3 — ( 23.3 ) —
Contract termination costs 4.9 2.0 ( 2.7 ) — 4.2
Other related costs — 2.5 ( 2.5 ) — —
Total $ 157.7 $ 132.0 $ ( 127.4 ) $ ( 23.3 ) $ 139.0
2019
In 2019, the Company recorded charges of $ 183.6 million in connection with its restructuring actions. These charges consist of $ 173.8 million recorded as cost of sales, $ 16.4 million recorded as selling, general and administrative expenses and $ 6.6 million recorded as other income.. The restructuring charges consist of employee termination costs of $ 167.8 million, asset impairment charges of $ 9.5 million, contract termination costs of $ 3.0 million and an other postretirement curtailment gain of $ 10.6 million, as well as other related costs of $ 13.9 million. Asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $ 8.7 million in excess of related estimated fair values and the impairment of right-of-use assets of $ 0.8 million.
A summary of 2019 activity, excluding the other postretirement curtailment gain of $ 10.6 million, is shown below (in millions):
Accrual as of 2019 Utilization Accrual as of
January 1, 2019 Charges Cash Non-cash December 31, 2019
Employee termination benefits $ 103.3 $ 167.8 $ ( 118.3 ) $ — $ 152.8
Asset impairments — 9.5 — ( 9.5 ) —
Contract termination costs 5.4 3.0 ( 3.5 ) — 4.9
Other related costs — 13.9 ( 13.9 ) — —
Total $ 108.7 $ 194.2 $ ( 135.7 ) $ ( 9.5 ) $ 157.7
2018
In 2018, the Company recorded charges of $ 88.0 million in connection with its restructuring actions. These charges consist of $ 63.7 million recorded as cost of sales, $ 24.0 million recorded as selling, general and administrative expenses and $ 0.3 million recorded as other expense. The restructuring charges consist of employee termination costs of $ 74.5 million, asset impairment charges of $ 4.7 million and contract termination costs of $ 1.5 million, as well as other related costs of $ 7.3 million. Asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $ 4.7 million in excess of related estimated fair values.
A summary of 2018 activity is shown below (in millions):
Accrual as of 2018 Utilization Accrual as of
January 1, 2018 Charges Cash Non-cash December 31, 2018
Employee termination benefits $ 93.0 $ 74.5 $ ( 64.2 ) $ — $ 103.3
Asset impairments — 4.7 — ( 4.7 ) —
Contract termination costs 5.0 1.5 ( 1.1 ) — 5.4
Other related costs — 7.3 ( 7.3 ) — —
Total $ 98.0 $ 88.0 $ ( 72.6 ) $ ( 4.7 ) $ 108.7
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Notes to Consolidated Financial Statements (continued)
(6) Investments in Affiliates and Other Related Party Transactions
The Company’s beneficial ownership in affiliates accounted for under the equity method is shown below:
December 31, 2020 2019 2018
Beijing BHAP Lear Automotive Systems Co., Ltd. (China) 50 % 50 % 50 %
Jiangxi Jiangling Lear Interior Systems Co., Ltd. (China) 50 50 50
Lear Dongfeng Automotive Seating Co., Ltd. (China) 50 50 50
Guangzhou Lear Automotive Components Co., Ltd. (China) 50 50 —
Changchun Lear FAWSN Automotive Seat Systems Co., Ltd. (China) 49 49 49
Honduras Electrical Distribution Systems S. de R.L. de C.V. (Honduras) 49 49 49
Kyungshin-Lear Sales and Engineering LLC 49 49 49
Beijing Lear Hyundai Transys Co., Ltd. (China)
40 40 40
Hyundai Transys Lear Automotive Private Limited (India) 35 35 35
Techstars Corporate Partner 2017 LLC 34 38 —
RevoLaze, LLC 20 20 20
Maniv Mobility II A, L.P. 9 8 —
Autotech Fund II, L.P. 4 6 —
Trucks Venture Fund 2, L.P. 3 4 —
Dong Kwang Lear Yuhan Hoesa (Korea) — — 50
Summarized group financial information for affiliates accounted for under the equity method as of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018, is shown below (unaudited; in millions):
December 31, 2020 2019
Balance sheet data:
Current assets $ 1,136.3 $ 856.3
Non-current assets 194.4 173.9
Current liabilities 901.7 739.5
Non-current liabilities 6.2 6.6
For the year ended December 31, 2020 2019 2018
Income statement data:
Net sales $ 1,597.5 $ 1,670.0 $ 1,520.2
Gross profit 83.0 89.2 75.9
Income before provision for income taxes 73.8 85.7 60.0
Net income attributable to affiliates 44.8 53.5 42.2
A summary of amounts recorded in the Company's consolidated balance sheets related to its affiliates is shown below (in millions):
December 31, 2020 2019
Aggregate investment in affiliates $ 142.9 $ 119.5
Receivables due from affiliates (including notes and advances) 142.0 170.5
Payables due to affiliates 1.6 0.1
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A summary of transactions with affiliates accounted for under the equity method and other related parties is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Sales to affiliates $ 656.4 $ 647.2 $ 603.0
Purchases from affiliates 1.9 1.6 2.0
Management and other fees for services provided to affiliates 28.3 35.5 29.6
Dividends received from affiliates 24.6 23.3 39.0
The Company has certain investments with beneficial ownership interests of less than 20% that are accounted for under the equity method as the Company’s beneficial ownership interests in these entities are similar to partnership interests.
2019
In 2019, the Company deconsolidated Guangzhou Automobile Group Component Co., Ltd. ("GACC") as it no longer controls this entity. As a result, the carrying values of the assets and liabilities of GACC are not reflected in the consolidated balance sheet as of December 31, 2019. In addition, the Company recorded a gain of $ 4.0 million related to the excess of the estimated fair value over the carrying value of its interest in GACC immediately prior to deconsolidation. The gain is included in other expense, net in the accompanying consolidated statement of income for the year ended December 31, 2019.
2018
In 2018, the Company gained control of Changchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd. ("Lear FAWSN") by acquiring an additional 20 % interest from a joint venture partner and by amending the 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.
This transaction was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying consolidated balance sheet as of December 31, 2018. The operating results and cash flows of Lear FAWSN are included in the accompanying consolidated financial statements from the effective date of the amended joint venture agreement and are reflected in the Company’s E-Systems segment.
A summary of the fair value of the assets acquired and liabilities assumed in conjunction with the transaction is shown below (in millions):
Property, plant and equipment $ 11.0
Other assets and liabilities assumed, net 5.7
Goodwill 22.4
Intangible assets 7.5
$ 46.6
Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do not qualify for separate recognition.
Intangible assets consist of amounts recognized for the fair value of customer-based assets and were based on an independent appraisal. Customer-based assets include Lear FAWSN's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. It is currently estimated that these intangible assets have a weighted average useful life of approximately ten years .
As of the effective date of the transaction, the fair value of the Company’s previously held equity interest in Lear FAWSN was $ 23.0 million, and the fair value of the noncontrolling interest in Lear FAWSN was $ 14.0 million. As a result of valuing the Company’s previously held equity interest in Lear FAWSN at fair value, the Company recognized a gain of $ 10.0 million, which is included in other expense, net in the accompanying consolidated statement of income for the year ended December 31, 2018.
The pro forma effects of this consolidation would not materially impact the Company’s reported results for any period presented.
For further information related to acquired assets measured at fair value, see Note 16, "Financial Instruments."
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(7) Debt
Short-Term Borrowings
The Company utilizes uncommitted lines of credit as needed for its short-term working capital fluctuations. As of December 31, 2020 and 2019, the Company had lines of credit from banks totaling $ 94.3 million and $ 94.6 million, respectively.
As of December 31, 2020, the Company had no short-term debt balances outstanding related to draws on the lines of credit. As of December 31, 2019, the Company had short-term debt balances outstanding related to draws on the lines of credit of $ 19.2 million.
Long-Term Debt
A summary of long-term debt, net of unamortized debt issuance costs and unamortized original issue premium (discount) and the related weighted average interest rates is shown below (in millions):
December 31, 2020
Debt Instrument Long-Term Debt Unamortized Debt Issuance Costs Unamortized Original Issue Premium (Discount) Long-Term
Debt, Net Weighted
Average
Interest
Rate
Credit Agreement — Term Loan Facility $ 220.3 $ ( 0.6 ) $ — $ 219.7 1.36 %
3.8 % Senior Notes due 2027 (the "2027 Notes")
750.0 ( 4.1 ) ( 3.5 ) 742.4 3.885 %
4.25 % Senior Notes due 2029 (the "2029 Notes")
375.0 ( 2.6 ) ( 1.0 ) 371.4 4.288 %
3.5 % Senior Notes due 2030 (the "2030 Notes")
350.0 ( 2.6 ) ( 0.7 ) 346.7 3.525 %
5.25 % Senior Notes due 2049 (the "2049 Notes")
625.0 ( 6.3 ) 14.2 632.9 5.103 %
Other 1.4 — — 1.4 N/A
$ 2,321.7 $ ( 16.2 ) $ 9.0 2,314.5
Less — Current portion ( 14.2 )
Long-term debt $ 2,300.3
December 31, 2019
Debt Instrument Long-Term Debt Unamortized Debt Issuance Costs Unamortized Original Issue Discount Long-Term
Debt, Net Weighted
Average
Interest
Rate
Credit Agreement — Term Loan Facility $ 234.4 $ ( 1.0 ) $ — $ 233.4 2.880 %
5.25 % Senior Notes due 2025 (the "2025 Notes")
650.0 ( 4.2 ) — 645.8 5.250 %
2027 Notes 750.0 ( 4.7 ) ( 4.1 ) 741.2 3.885 %
2029 Notes 375.0 ( 2.9 ) ( 1.1 ) 371.0 4.288 %
2049 Notes 325.0 ( 3.3 ) ( 5.3 ) 316.4 5.363 %
$ 2,334.4 $ ( 16.1 ) $ ( 10.5 ) 2,307.8
Less — Current portion ( 14.1 )
Long-term debt $ 2,293.7
Senior Notes
The issuance, maturity and interest payment dates of the Company's senior unsecured 2027 Notes, 2029 Notes, 2030 Notes and 2049 Notes (collectively, the "Notes") are as shown below:
Note Issuance Date Maturity Date Interest Payment Dates
2027 Notes August 2017 September 15, 2027 March 15 and September 15
2029 Notes May 2019 May 15, 2029 May 15 and November 15
2030 Notes February 2020 May 30, 2030 May 30 and November 30
2049 Notes May 2019 and February 2020 May 15, 2049 May 15 and November 15
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2027 Notes
In 2017, the Company issued $ 750.0 million in aggregate principal amount at maturity of 2027 Notes at a stated coupon rate of 3.8 %. The 2027 Notes were issued at 99.294 % of par, resulting in a yield to maturity of 3.885 %.
The net proceeds from the offering of $ 744.7 million, after original issue discount, were used to redeem the outstanding $ 500.0 million in aggregate principal amount of the senior unsecured notes due 2023 at a redemption price equal to 100 % of the principal amount thereof, plus a "make-whole" premium of $ 17.0 million, as well as to refinance a portion of the Company's $ 500.0 million prior term loan facility (see "— Credit Agreement" below).
Prior to June 15, 2027, the Company, at its option, may redeem some or all of the 2027 Notes at a redemption price equal to 100 % of the principal amount thereof, plus a "make-whole" premium as of, and accrued and unpaid interest to, the redemption date. At any time on or after June 15, 2027, but prior to the maturity date of September 15, 2027, the Company, at its option, may redeem some or all of the 2027 Notes at a redemption price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest to the redemption date.
2029 and 2049 Notes Issued in 2019
In 2019, the Company issued $ 375.0 million in aggregate principal amount at maturity of 2029 Notes and $ 325.0 million in aggregate principal amount at maturity of 2049 Notes. The 2029 Notes have a stated coupon rate of 4.25 % and were issued 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 issued at 98.32 % of par, resulting in a yield to maturity of 5.363 %.
The net proceeds from the offering were $ 693.3 million after original issue discount. The proceeds were used to redeem the $ 325.0 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 (Note 4, "Acquisition") and for general corporate purposes.
In connection with these transactions, the Company recognized a loss of $ 10.6 million on the extinguishment of debt and paid related issuance costs of $ 6.5 million.
2030 Notes and 2049 Notes Issued in 2020
In 2020, the Company issued $ 350.0 million in aggregate principal amount at maturity of 2030 Notes and $ 300.0 million in aggregate principal amount at maturity of 2049 Notes. The 2030 Notes have a stated coupon rate of 3.5 % and were issued at 99.774 % of par, resulting in a yield to maturity of 3.525 %. The 2049 Notes have a stated coupon rate of 5.25 % and were issued at 106.626 % of par, resulting in a yield to maturity of 4.821 %.
The net proceeds from the offering were $ 669.1 million after original issue discount. The proceeds were used to redeem the $ 650.0 million in aggregate principal amount of 2025 Notes at a redemption price equal to 102.625 % of the principal amount of such 2025 Notes, plus accrued interest.
In connection with these transactions, the Company recognized a loss of $ 21.1 million on the extinguishment of debt and paid related issuance costs of $ 6.0 million.
Covenants
Subject to certain exceptions, the indentures governing the Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) create or permit certain liens and (ii) consolidate, merge or sell all or substantially all of the Company’s assets. The indentures governing the Notes also provide for customary events of default. As of December 31, 2020, the Company was in compliance with all covenants under the indentures governing the Notes.
Credit Agreement
In 2017, the Company entered into an unsecured credit agreement (the "Credit Agreement") consisting of a $ 1.75 billion revolving credit facility (the "Revolving Credit Facility") and a $ 250.0 million term loan facility (the "Term Loan Facility"). In 2020, the Company entered into an agreement to extend the maturity date of the Revolving Credit Facility by one year to August 8, 2024, and paid related issuance costs of $ 1.0 million. The maturity date of the Term Loan Facility is August 8, 2022.
In the first quarter of 2020, as a proactive measure in response to the COVID-19 pandemic, the Company borrowed $ 1.0 billion under the Revolving Credit Facility, which was repaid in full in the third quarter of 2020. In 2019, aggregate borrowings and repayments under the Revolving Credit Facility were $ 30.0 million. In 2018, there were no borrowings or repayments under the
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Revolving Credit Facility. As of December 31, 2020 and 2019, there were no borrowings outstanding under the Revolving Credit Facility.
In 2020, 2019 and 2018, the Company made required principal payments under the Term Loan Facility of $ 14.1 million, $ 7.8 million and $ 6.3 million, respectively.
Advances under the Revolving Credit Facility and the Term Loan Facility generally bear interest based on (i) the Eurocurrency Rate (as defined in the Credit Agreement) or (ii) the Base Rate (as defined in the Credit Agreement) plus a margin, determined in accordance with a pricing grid. As of December 31, 2020, the ranges and rates are as follows (in percentages):
Eurocurrency Rate Base Rate
Minimum Maximum Rate as of
December 31, 2020 Minimum Maximum Rate as of
December 31,
2020
Revolving Credit Facility 1.00 % 1.60 % 1.10 % 0.00 % 0.60 % 0.10 %
Term Loan Facility 1.125 % 1.90 % 1.25 % 0.125 % 0.90 % 0.25 %
A facility fee, which ranges from 0.125 % to 0.30 % of the total amount committed under the Revolving Credit Facility, is payable quarterly.
Covenants
The Credit Agreement contains various customary representations, warranties and covenants by the Company, including, without limitation, (i) covenants regarding maximum leverage, (ii) limitations on fundamental changes involving the Company or its subsidiaries and (iii) limitations on indebtedness and liens. As of December 31, 2020, the Company was in compliance with all covenants under the Credit Agreement.
Other
As of December 31, 2020, other long-term debt, including the current portion, consisted of amounts outstanding under finance leases.
Scheduled Maturities
As of December 31, 2020, scheduled maturities related to the Credit Agreement — Term Loan Facility for the five succeeding years are shown below (in millions):
2021 $ 14.1
2022 206.2
2023 —
2024 —
2025 —
(8) Leases
Right-of-Use Assets and Lease Obligations
The Company has operating leases for production, office and warehouse facilities, manufacturing and office equipment and vehicles. Operating lease assets and obligations included in the accompanying consolidated balance sheet are shown below (in millions):
December 31, 2020 2019
Right-of-use assets under operating leases:
Other long-term assets $ 540.3 $ 527.0
Lease obligations under operating leases:
Accrued liabilities $ 116.3 $ 113.9
Other long-term liabilities 438.9 422.4
$ 555.2 $ 536.3
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Notes to Consolidated Financial Statements (continued)
Maturities of lease obligations as of December 31, 2020, are shown below (in millions):
2021 $ 141.0
2022 111.5
2023 85.9
2024 71.5
2025 58.7
Thereafter 169.7
Total undiscounted cash flows 638.3
Less: Imputed interest ( 83.1 )
Lease obligations under operating leases $ 555.2
The Company entered into two lease contracts, one of which is expected to commence in the first quarter of 2021 with a lease term of five years , and the other of which is expected to commence in the third quarter 2021 with a lease term of ten years . The aggregate right-of-use assets and related lease obligations are expected to be approximately $ 52.0 million.
Cash flow information related to operating leases is shown below (in millions):
For the year ended December 31, 2020 2019
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations $ 135.1 $ 214.3
Operating cash flows:
Cash paid related to operating lease obligations $ 143.8 $ 141.8
Lease expense included in the accompanying consolidated statement of income is shown below (in millions):
For the year ended December 31, 2020 2019
Operating lease expense $ 148.6 $ 140.6
Short-term lease expense 15.4 17.0
Variable lease expense 8.0 6.5
Total lease expense $ 172.0 $ 164.1
The Company's short-term lease expense excludes leases with a duration of one month or less, as permitted by the standard.
Variable lease expense includes payments based on performance or usage, as well as changes to index and rate-based lease payments. Additionally, the Company evaluated its supply contracts with its customers and concluded that variable lease (income) expense in these arrangements is not material.
For the year ended December 31, 2018, the Company recorded rent expense of $ 163.8 million.
For the years ended December 31, 2020 and 2019, the Company recognized impairment charges of $ 2.0 million and $ 0.8 million, respectively, related to its right-of-use assets in conjunction with its restructuring actions (Note 5, "Restructuring").
The weighted average lease term and discount rate for operating leases as of December 31, 2020, are shown below:
Weighted average remaining lease term Seven years
Weighted average discount rate 3.4 %
The Company has entered into certain finance lease agreements which are not material to the consolidated financial statements (Note 7, "Debt").
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(9) Income Taxes
A summary of consolidated income before provision for income taxes and equity in net income of affiliates and the components of provision for income taxes is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Consolidated income before provision for income taxes and equity in net income of affiliates:
Domestic $ ( 145.0 ) $ 317.4 $ 726.2
Foreign 444.3 636.2 812.2
$ 299.3 $ 953.6 $ 1,538.4
Domestic (benefit) provision for income taxes:
Current provision $ 29.0 $ 24.2 $ 35.0
Deferred (benefit) provision ( 106.2 ) ( 52.6 ) 91.5
Total domestic (benefit) provision $ ( 77.2 ) $ ( 28.4 ) $ 126.5
Foreign provision for income taxes:
Current provision $ 149.6 $ 160.1 $ 190.2
Deferred (benefit) provision 21.5 14.4 ( 4.8 )
Total foreign provision $ 171.1 $ 174.5 $ 185.4
Provision for income taxes $ 93.9 $ 146.1 $ 311.9
The Act was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21% beginning in 2018, required companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and created new taxes on certain foreign sourced earnings. In March 2018, the FASB issued ASU 2018-05, "Income Taxes — Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The guidance provided for a provisional one-year measurement period for entities to finalize their accounting for certain tax effects related to the Act. Accordingly, for the year ended December 31, 2018, the Company recognized a favorable adjustment to the 2017 income tax expense of $ 5.3 million related to the remeasurement of the December 31, 2017 deferred tax balances, the one-time transition tax and numerous other items included in the Act. The Company also analyzed the impact of several new provisions of the Act that became effective as of January 1, 2018, such as the GILTI provision, foreign-derived intangible income ("FDII") deduction, a new minimum tax related to payments to foreign subsidiaries and affiliates known as base erosion anti-abuse tax, interest expense limitations under Internal Revenue Code ("IRC") section 163(j), executive compensation limitations under IRC section 162(m) and various other provisions.
The domestic (benefit) provision includes withholding taxes related to dividends and royalties paid by the Company’s foreign subsidiaries, as well as state and local taxes. In 2020, 2019 and 2018, the foreign deferred (benefit) provision includes the benefit of prior unrecognized net operating loss carryforwards of $ 5.3 million, $ 1.8 million and $ 7.1 million, respectively.
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Notes to Consolidated Financial Statements (continued)
A summary of the differences between the provision for income taxes calculated at the United States federal statutory income tax rate of 21% and the consolidated provision for income taxes is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Consolidated income before provision for income taxes and equity in net income of affiliates multiplied by the United States federal statutory income tax rate $ 62.9 $ 200.2 $ 323.1
Differences in income taxes on foreign earnings, losses and remittances 20.7 14.1 53.4
Valuation allowance adjustments 47.7 1.2 ( 38.8 )
Research and development and other tax credits ( 11.8 ) ( 40.8 ) ( 9.9 )
FDII deduction ( 14.6 ) ( 29.3 ) ( 27.6 )
U.S. tax impact of foreign earnings (1)
( 21.1 ) 9.7 7.2
Tax audits and assessments 8.9 0.4 6.9
Change in the tax status of certain affiliates — ( 18.1 ) —
Transition tax on accumulated foreign earnings — — ( 15.1 )
U.S. tax rate change and other tax reform items — — 9.8
Other 1.2 8.7 2.9
Provision for income taxes $ 93.9 $ 146.1 $ 311.9
(1) Reflects the impact on the domestic provision for income taxes related to foreign source income including foreign branch earnings net of the applicable foreign tax credits in the general, foreign branch, GILTI and passive separate limitation categories. This amount includes the U.S. tax impact of apportioning U.S. expenses against the GILTI and foreign branch baskets in calculating the foreign tax credit limitation resulting in no tax benefit for these expenses due to the Company’s excess foreign tax credit position in the GILTI basket for 2020, 2019 and 2018 and foreign branch basket for 2018. In 2020, as a result of the change in the foreign branch basket limitation, the Company recognized tax benefits of $ 15.5 million related to the U.S. deferred tax effect of the foreign branches.
In 2019, the Company completed a U.S. research and development ("R&D") tax credit study for the years 2013 to 2018, the results of which were accepted by the Internal Revenue Service and pursuant to which the Company recognized a tax benefit of $ 28.6 million. The tax benefit is reflected in the table above in research and development and other tax credits.
For the years ended December 31, 2020, 2019 and 2018, income in foreign jurisdictions with tax holidays was $ 29.4 million, $ 89.4 million and $ 107.1 million, respectively. Such tax holidays generally expire from 2020 through 2035.
Deferred income taxes represent temporary differences in the recognition of certain items for financial reporting and income tax purposes. A summary of the components of the net deferred income tax asset is shown below (in millions):
December 31, 2020 2019
Deferred income tax assets (liabilities):
Tax loss carryforwards $ 423.9 $ 419.7
Tax credit carryforwards 280.6 294.0
Retirement benefit plans 82.9 59.1
Accrued liabilities 177.9 136.1
Self-insurance reserves 7.1 5.8
Current asset basis differences 43.3 43.7
Long-term asset basis differences ( 36.5 ) ( 65.4 )
Deferred compensation 22.6 27.2
Recoverable customer engineering, development and tooling 67.1 ( 10.5 )
Undistributed earnings of foreign subsidiaries ( 71.7 ) ( 76.7 )
Derivative instruments and hedging activities ( 5.2 ) ( 5.2 )
Other ( 8.9 ) ( 5.8 )
Net deferred income tax asset before valuation allowance 983.1 822.0
Valuation allowance ( 397.7 ) ( 344.8 )
Net deferred income tax asset $ 585.4 $ 477.2
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As of December 31, 2020 and 2019, the valuation allowance with respect to the Company’s deferred tax assets was $ 397.7 million and $ 344.8 million, respectively, a net increase of $ 52.9 million.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence, such as cumulative losses in recent years, which is objective and verifiable. When measuring cumulative losses in recent years, the Company uses a rolling three-year period of pretax book income, adjusted for permanent differences between book and taxable income and certain other items. As of December 31, 2020, the Company continues to maintain a valuation allowance of $ 18.8 million with respect to certain of its U.S. deferred tax assets that, due to their nature, are not likely to be realized. In addition, the Company continues to maintain a valuation allowance of $ 378.9 million with respect to its deferred tax assets in several international jurisdictions.
The classification of the net deferred income tax asset is shown below (in millions):
December 31, 2020 2019
Long-term deferred income tax assets $ 670.2 $ 563.8
Long-term deferred income tax liabilities ( 84.8 ) ( 86.6 )
Net deferred income tax asset $ 585.4 $ 477.2
As of December 31, 2020, deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries since these earnings will not be taxable upon repatriation to the United States. These earnings will be primarily treated as previously taxed income from either the one-time transition tax or GILTI, or they will be offset with a 100 % dividend received deduction. However, the Company continues to provide a deferred tax liability for foreign withholding tax that will be incurred with respect to the undistributed foreign earnings that are not permanently reinvested.
As of December 31, 2020, the Company had tax loss carryforwards of $ 1.8 billion. Of the total tax loss carryforwards, $ 1.5 billion have no expiration date, and $ 247.9 million expire between 2021 and 2037. In addition, the Company had tax credit carryforwards of $ 280.6 million, comprised principally of U.S. foreign tax credits of $ 114.9 million that expire between 2027 and 2030, U.S. research and development credits of $ 120.1 million that expire between 2024 and 2040 and other tax credits primarily in international jurisdictions of $ 45.6 million that generally expire between 2021 and 2040.
On January 1, 2018, the Company adopted ASU 2016-16, "Income Taxes — Intra-Entity Transfers of Assets Other than Inventory." The new standard requires the recognition of the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the sale or transfer occurs. The standard also requires modified retrospective adoption. Accordingly, the Company recognized a deferred tax asset of $ 2.3 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-16 were not significant.
As of December 31, 2020 and 2019, the Company’s gross unrecognized tax benefits were $ 36.4 million and $ 31.6 million (excluding interest and penalties), respectively, which is recorded in other long-term liabilities in the accompanying consolidated balance sheets. If recognized, all of the Company’s gross unrecognized tax benefits would affect the Company’s effective tax rate.
A summary of the changes in gross unrecognized tax benefits is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Balance at beginning of period $ 31.6 $ 36.7 $ 33.2
Additions (reductions) based on tax positions related to current year 4.9 ( 0.3 ) 7.9
Additions based on tax positions related to prior years 3.6 2.0 0.1
Settlements ( 1.2 ) ( 3.7 ) —
Statute expirations ( 4.7 ) ( 2.8 ) ( 2.7 )
Foreign currency translation 2.2 ( 0.3 ) ( 1.8 )
Balance at end of period $ 36.4 $ 31.6 $ 36.7
The Company recognizes interest and penalties with respect to unrecognized tax benefits as income tax expense. As of December 31, 2020 and 2019, the Company had recorded gross reserves of $ 12.2 million and $ 11.5 million, respectively, related to interest and penalties, all of which, if recognized, would affect the Company’s effective tax rate.
The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign tax authorities. During the next twelve months, it is reasonably possible that, as a result of audit settlements, the conclusion of current examinations and the expiration of the statute of limitations in multiple jurisdictions,
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the Company may decrease the amount of its gross unrecognized tax benefits by $ 8.4 million, all of which, if recognized, would affect the Company’s effective tax rate. The gross unrecognized tax benefits subject to potential decrease involve issues related to transfer pricing and various other tax items in multiple jurisdictions. However, as a result of ongoing examinations, tax proceedings in certain countries, additions to the gross unrecognized tax benefits for positions taken and interest and penalties, if any, arising in 2021, it is not possible to estimate the potential net increase or decrease to the Company’s gross unrecognized tax benefits during the next twelve months.
The Company considers its significant tax jurisdictions to include China, Germany, Italy, Mexico, Morocco, Spain, the United Kingdom and the United States. The Company or its subsidiaries generally remain subject to income tax examination in certain U.S. state and local jurisdictions for years after 2015. Further, the Company or its subsidiaries remain subject to income tax examination in Spain for years after 2005, in Mexico for years after 2013, in Morocco for years after 2014, in Germany, Italy and the United Kingdom for years after 2015, in China for years after 2016 and in the United States generally for years after 2019.
(10) Pension and Other Postretirement Benefit Plans
The Company has noncontributory defined benefit pension plans covering certain domestic employees and certain employees in foreign countries, principally Canada. The Company’s salaried pension plans provide benefits based on final average earnings formulas. The Company’s hourly pension plans provide benefits under flat benefit and cash balance formulas. The Company also has contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund its pension benefit obligation based on legal requirements, tax and liquidity considerations and local practices.
The Company has postretirement benefit plans covering certain domestic and Canadian retirees. The Company’s postretirement benefit plans generally provide for the continuation of medical benefits for eligible retirees. The Company does not fund its postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees.
Obligation
A reconciliation of the change in benefit obligation for the years ended December 31, 2020 and 2019, is shown below (in millions):
Pension Other Postretirement
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
U.S. Foreign U.S. Foreign U.S. Foreign U.S. Foreign
Change in benefit obligation:
Benefit obligation at beginning of period $ 500.8 $ 504.3 $ 438.0 $ 437.1 $ 55.4 $ 25.6 $ 52.4 $ 34.3
Service cost 0.1 5.0 0.1 6.3 — — — 0.3
Interest cost 16.4 12.2 18.6 14.7 1.7 0.7 2.1 1.3
Amendment — — — — 0.4 — — —
Actuarial loss 66.4 39.9 63.0 55.8 6.9 2.1 4.5 0.4
Benefits paid ( 19.3 ) ( 20.0 ) ( 18.9 ) ( 21.5 ) ( 3.2 ) ( 1.5 ) ( 3.6 ) ( 1.3 )
Benefits paid — settlements — ( 29.2 ) — — — — — —
Curtailment — — — ( 2.4 ) — — — ( 10.9 )
Translation adjustment — 17.0 — 14.3 — 0.5 — 1.5
Benefit obligation at end of period $ 564.4 $ 529.2 $ 500.8 $ 504.3 $ 61.2 $ 27.4 $ 55.4 $ 25.6
Actuarial losses
As of December 31, 2020, the increase in pension and other postretirement benefit obligations attributable to actuarial losses primarily relates to a decrease in the discount rate used to determine the benefit obligations (see assumptions below) and, to a lesser extent, changes in mortality assumptions for the Company's U.S. plans. With respect to the other postretirement benefit obligation, actuarial losses were offset by gains related to claims cost updates for the Company's foreign plans. As of December 31, 2019, the increase in pension and other postretirement benefit obligations attributable to actuarial losses primarily relates to a decrease in the discount rate used to determine the benefit obligations (see assumptions below).
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Plan Assets and Funded Status
A reconciliation of the change in plan assets for the years ended December 31, 2020 and 2019, and the funded status as of December 31, 2020 and 2019, is shown below (in millions):
Pension Other Postretirement
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
U.S. Foreign U.S. Foreign U.S. Foreign U.S. Foreign
Change in plan assets:
Fair value of plan assets at
beginning of period $ 376.6 $ 396.8 $ 330.6 $ 351.8 $ — $ — $ — $ —
Actual return on plan assets 41.7 19.8 61.5 42.3 — — — —
Employer contributions 19.2 7.7 3.4 6.6 3.2 1.5 3.6 1.3
Benefits paid ( 19.3 ) ( 20.0 ) ( 18.9 ) ( 21.5 ) ( 3.2 ) ( 1.5 ) ( 3.6 ) ( 1.3 )
Benefits paid — settlements — ( 29.2 ) — — — — — —
Translation adjustment — 7.9 — 17.6 — — — —
Fair value of plan assets at
end of period $ 418.2 $ 383.0 $ 376.6 $ 396.8 $ — $ — $ — $ —
Funded status $ ( 146.2 ) $ ( 146.2 ) $ ( 124.2 ) $ ( 107.5 ) $ ( 61.2 ) $ ( 27.4 ) $ ( 55.4 ) $ ( 25.6 )
A summary of amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019, is shown below (in millions):
Pension Other Postretirement
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
U.S. Foreign U.S. Foreign U.S. Foreign U.S. Foreign
Amounts recognized in the consolidated balance sheet:
Other long-term assets $ — $ 9.1 $ 0.1 $ 23.8 $ — $ — $ — $ —
Accrued liabilities ( 2.5 ) ( 3.2 ) ( 2.6 ) ( 3.3 ) ( 4.0 ) ( 1.5 ) ( 3.9 ) ( 1.4 )
Other long-term liabilities ( 143.7 ) ( 152.1 ) ( 121.7 ) ( 128.0 ) ( 57.2 ) ( 25.9 ) ( 51.5 ) ( 24.2 )
Accumulated Benefit Obligation
As of December 31, 2020 and 2019, the accumulated benefit obligation for all of the Company’s pension plans was $ 1,079.6 million and $ 990.3 million, respectively.
As of December 31, 2020 and 2019, the majority of the Company's pension plans had accumulated benefit obligations in excess of plan assets. Information related to pension plans with accumulated benefit obligations in excess of plan assets is shown below (in millions):
December 31, 2020 2019
Projected benefit obligation $ 813.7 $ 726.3
Accumulated benefit obligation 799.6 711.5
Fair value of plan assets 512.2 470.8
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Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
Pretax amounts recognized in other comprehensive income (loss) for the years ended December 31, 2020 and 2019, are shown below (in millions):
Pension Other Postretirement
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
U.S. Foreign U.S. Foreign U.S. Foreign U.S. Foreign
Actuarial gains (losses) recognized:
Reclassification adjustments $ 2.3 $ 5.2 $ 1.8 $ 7.8 $ ( 1.6 ) $ — $ ( 2.3 ) $ —
Actuarial loss arising during the period ( 46.1 ) ( 39.7 ) ( 21.7 ) ( 33.8 ) ( 6.9 ) ( 2.1 ) ( 4.5 ) —
Effect of curtailment — — — 0.1 — — — —
Effect of settlements 0.3 13.0 0.1 — — — — —
Prior service credit recognized:
Reclassification adjustments — — — — ( 0.2 ) — ( 0.2 ) ( 0.2 )
Prior service cost arising during the period — — — — ( 0.4 ) — — —
Translation adjustment — ( 3.6 ) — ( 3.8 ) — — — —
$ ( 43.5 ) $ ( 25.1 ) $ ( 19.8 ) $ ( 29.7 ) $ ( 9.1 ) $ ( 2.1 ) $ ( 7.0 ) $ ( 0.2 )
In addition, the Company recognized tax benefit (expense) in other comprehensive income (loss) related to its defined benefit plans of $ 18.5 million, $ 13.7 million and ($ 3.0 ) million for the years ended December 31, 2020, 2019 and 2018, respectively.
Pretax amounts recorded in accumulated other comprehensive loss not yet recognized in net periodic benefit cost as of December 31, 2020 and 2019, are shown below (in millions):
Pension Other Postretirement
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
U.S. Foreign U.S. Foreign U.S. Foreign U.S. Foreign
Net unrecognized actuarial gain (loss) $ ( 149.4 ) $ ( 160.7 ) $ ( 105.9 ) $ ( 135.9 ) $ 11.2 $ ( 3.0 ) $ 19.6 $ ( 0.9 )
Prior service (cost) credit — ( 1.5 ) — ( 1.2 ) 1.2 0.1 1.9 0.1
$ ( 149.4 ) $ ( 162.2 ) $ ( 105.9 ) $ ( 137.1 ) $ 12.4 $ ( 2.9 ) $ 21.5 $ ( 0.8 )
The Company uses the corridor approach when amortizing actuarial gains and losses. Under the corridor approach, net unrecognized actuarial gains and losses in excess of 10% of the greater of i) the projected benefit obligation or ii) the fair value of plan assets are amortized over future periods. For plans with little to no active participants, the amortization period is the remaining average life expectancy of the participants. For plans with active participants, the amortization period is the remaining average service period of the active participants. The amortization periods range from 4 to 34 years for the Company's defined benefit pension plans and from 1 to 17 years for the Company's other postretirement benefit plans.
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Net Periodic Pension and Other Postretirement Benefit Cost (Credit)
The components of the Company’s net periodic pension benefit cost (credit) are shown below (in millions):
Year Ended December 31,
2020 2019 2018
Pension U.S. Foreign U.S. Foreign U.S. Foreign
Service cost $ 0.1 $ 5.0 $ 0.1 $ 6.3 $ 0.1 $ 6.9
Interest cost 16.4 12.2 18.6 14.7 19.8 14.7
Expected return on plan assets ( 21.4 ) ( 19.6 ) ( 20.2 ) ( 20.9 ) ( 27.3 ) ( 23.0 )
Amortization of actuarial loss 2.3 5.2 1.8 7.8 2.0 6.2
Curtailment (gain) loss — — — ( 2.3 ) — 0.4
Settlement losses 0.3 13.0 0.1 — 5.7 —
Net periodic benefit cost (credit) $ ( 2.3 ) $ 15.8 $ 0.4 $ 5.6 $ 0.3 $ 5.2
The components of the Company’s net periodic other postretirement benefit cost (credit) are shown below (in millions):
Year Ended December 31,
2020 2019 2018
Other Postretirement U.S. Foreign U.S. Foreign U.S. Foreign
Service cost $ — $ — $ — $ 0.3 $ — $ 0.4
Interest cost 1.7 0.7 2.1 1.3 1.9 1.4
Amortization of actuarial (gain) loss ( 1.6 ) — ( 2.3 ) — ( 2.2 ) 0.2
Amortization of prior service credit ( 0.2 ) — ( 0.2 ) ( 0.2 ) ( 0.2 ) ( 0.3 )
Curtailment gain — — — ( 10.6 ) — —
Net periodic benefit cost (credit) $ ( 0.1 ) $ 0.7 $ ( 0.4 ) $ ( 9.2 ) $ ( 0.5 ) $ 1.7
For the year ended December 31, 2020, the Company recognized pension settlement losses of $ 12.9 million related to its restructuring actions (Note 5, "Restructuring").
For the year ended December 31, 2019, the Company recognized an other postretirement curtailment gain of $ 10.6 million related to its restructuring actions (Note 5, "Restructuring").
For the year ended December 31, 2018, the Company recognized pension settlement losses of $ 5.4 million related to its annuity purchase for certain terminated vested plan participants of its U.S. defined benefit pension plans.
Assumptions
The weighted average actuarial assumptions used in determining the benefit obligations are shown below:
Pension Other Postretirement
December 31, 2020 2019 2020 2019
Discount rate:
Domestic plans 2.6 % 3.4 % 2.4 % 3.2 %
Foreign plans 2.0 % 2.6 % 2.5 % 3.1 %
Rate of compensation increase:
Foreign plans 3.3 % 3.7 % N/A N/A
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The weighted average actuarial assumptions used in determining the net periodic benefit cost (credit) are shown below:
For the year ended December 31, 2020 2019 2018
Pension
Discount rate:
Domestic plans 3.4 % 4.3 % 3.6 %
Foreign plans 2.6 % 3.4 % 3.1 %
Expected return on plan assets:
Domestic plans 5.8 % 6.3 % 6.5 %
Foreign plans 5.4 % 5.9 % 5.9 %
Rate of compensation increase:
Foreign plans 3.7 % 3.4 % 3.3 %
Other postretirement
Discount rate:
Domestic plans 3.2 % 4.2 % 3.5 %
Foreign plans 3.1 % 3.8 % 3.5 %
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.
As of December 31, 2020 and 2019, the weighted-average interest crediting rate used by one of the Company's U.S. pension plans was a minimum of 4.0 %.
Healthcare Trend Rate
The assumed healthcare cost trend rates used to measure the postretirement benefit obligation as of December 31, 2020, are shown below:
U.S. Plans Foreign Plans
Initial healthcare cost trend rate 6.5 % 4.7 %
Ultimate healthcare cost trend rate 4.5 % 4.0 %
Year ultimate healthcare cost trend rate achieved 2028 2040
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Plan Assets
Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s pension plan assets measured at fair value on a recurring basis as of December 31, 2020 and 2019, are shown below (in millions):
December 31, 2020
Total Level 1 Level 2 Level 3 Valuation Technique
U.S. Plans:
Equity securities -
Equity funds $ 104.3 $ 85.9 $ 18.4 $ — Market
Common stock 85.2 53.9 31.3 — Market
Fixed income -
Fixed income funds 84.2 84.2 — — Market
Corporate bonds 66.7 — 66.7 — Market
Government obligations 6.2 — 6.2 — Market
Preferred stock 1.4 0.9 0.5 — Market
Cash and short-term investments 11.9 2.8 9.1 — Market
Assets at fair value 359.9 $ 227.7 $ 132.2 $ —
Investments measured at net asset value -
Alternative investments 58.3
Assets at fair value $ 418.2
Foreign Plans:
Equity securities -
Equity funds $ 138.0 $ — $ 138.0 $ — Market
Common stock 60.9 60.9 — — Market
Fixed income -
Fixed income funds 58.4 — 58.4 — Market
Corporate bonds 30.8 — 30.8 — Market
Government obligations 49.5 — 49.5 — Market
Cash and short-term investments 15.1 7.0 8.1 — Market
Assets at fair value 352.7 $ 67.9 $ 284.8 $ —
Investments measured at net asset value -
Alternative investments 30.3
Assets at fair value $ 383.0
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December 31, 2019
Total Level 1 Level 2 Level 3 Valuation Technique
U.S. Plans:
Equity securities -
Equity funds $ 103.6 $ 81.5 $ 22.1 $ — Market
Common stock 77.4 45.5 31.9 — Market
Fixed income -
Fixed income funds 76.0 76.0 — — Market
Corporate bonds 53.9 — 53.9 — Market
Government obligations 7.3 — 7.3 — Market
Preferred stock 1.2 0.6 0.6 — Market
Cash and short-term investments 14.0 8.4 5.6 — Market
Assets at fair value 333.4 $ 212.0 $ 121.4 $ —
Investments measured at net asset value -
Alternative investments 43.2
Assets at fair value $ 376.6
Foreign Plans:
Equity securities -
Equity funds $ 148.4 $ — $ 148.4 $ — Market
Common stock 66.7 66.7 — — Market
Fixed income -
Fixed income funds 45.6 — 45.6 — Market
Corporate bonds 31.5 — 31.5 — Market
Government obligations 55.8 — 55.8 — Market
Cash and short-term investments 10.9 7.7 3.2 — Market
Assets at fair value 358.9 $ 74.4 $ 284.5 $ —
Investments measured at net asset value -
Alternative investments 37.9
Assets at fair value $ 396.8
For further information on the GAAP fair value hierarchy, see Note 16, "Financial Instruments." Pension plan assets for the foreign plans relate to the Company’s pension plans primarily in Canada and the United Kingdom.
The Company’s investment policies incorporate an asset allocation strategy that emphasizes the long-term growth of capital. The Company believes that this strategy is consistent with the long-term nature of plan liabilities and ultimate cash needs of the plans. For the domestic portfolio, the Company targets a return seeking asset (e.g., equity securities, equity mutual funds and exchange traded funds ("ETFs") and alternative investments) allocation of 45 % — 65 % and a risk mitigating asset (e.g., fixed income securities and fixed income mutual funds and ETFs) allocation of 35 % — 55 %. As the funding ratio for the defined benefit pension plans covering certain domestic employees changes, the proportion of return seeking assets will be adjusted accordingly. For the foreign portfolio, the Company targets an equity allocation of 45 % — 65 % of plan assets, a fixed income allocation of 25 % — 45 %, an alternative investment allocation of 0 % — 25 % and a cash allocation of 0 % — 15 %. Differences in the target allocations of the domestic and foreign portfolios are reflective of differences in the underlying plan liabilities. Diversification within the investment portfolios is pursued by asset class and investment management style. The investment portfolios are reviewed on a quarterly basis to maintain the desired asset allocations, given the market performance of the asset classes and investment management styles. Alternative investments are redeemable in the near term, generally with 90 days notice.
The Company utilizes investment management firms to manage these assets in accordance with the Company’s investment policies. Excluding alternative investments, mutual funds and ETFs, retained investment managers are provided investment guidelines which restrict the use of certain assets, including commodities contracts, futures contracts, options, venture capital, real estate, interest-only or principal-only strips and investments in the Company’s own debt or equity. Derivative instruments
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are also prohibited without the specific approval of the Company. Investment managers are limited in the maximum size of individual security holdings and the maximum exposure to any one industry relative to the total portfolio. Fixed income managers are provided further investment guidelines that indicate minimum credit ratings for debt securities and limitations on weighted average maturity and portfolio duration.
The Company evaluates investment manager performance against market indices which the Company believes are appropriate to the investment management style for which the investment manager has been retained. The Company’s investment policies incorporate an investment goal of aggregate portfolio returns which exceed the returns of the appropriate market indices by a reasonable spread over the relevant investment horizon.
Contributions
In 2021, the Company's minimum required contributions to its domestic and foreign pension plans are expected to be approximately $ 5 million to $ 10 million . The Company may elect to make contributions in excess of minimum funding requirements in response to investment performance or changes in interest rates or when the Company believes that it is financially advantageous to do so and based on its other cash requirements. After 2021, the Company’s minimum funding requirements will depend on several factors, including investment performance and interest rates. The Company’s minimum funding requirements may also be affected by changes in applicable legal requirements.
Benefit Payments
As of December 31, 2020, the Company’s estimate of expected benefit payments in each of the five succeeding years and in the aggregate for the five years thereafter are shown below (in millions):
Pension Other Postretirement
Year U.S. Foreign U.S. Foreign
2021 $ 20.9 $ 19.3 $ 4.0 $ 1.4
2022 22.8 20.5 4.0 1.5
2023 23.5 20.2 4.0 1.5
2024 23.5 21.0 4.0 1.5
2025 24.5 22.0 3.9 1.4
Five years thereafter 130.8 127.9 17.7 6.8
Multi-Employer Pension Plans
The Company currently participates in two multi-employer pension plans, the U.A.W. Labor-Management Group Pension Plan (EIN 51-6099782-001) and UNITE Here National Retirement Fund (EIN 13-6130178-001), for certain of its employees. Contributions to these plans are based on four collective bargaining agreements, which expire between January 31, 2021 and April 25, 2025.
Detailed information related to these plans is shown below (amounts in millions):
Pension Protection Act
Zone Status Contributions to Multiemployer Pension Plans
Employer Identification Number ("EIN") December 31,
2020
Certification December 31,
2019
Certification FIP/RP
Pending or
Implemented Surcharge Year Ended December 31, 2020 Year Ended December 31, 2019 Year Ended December 31, 2018
51-6099782-001 Green Green Yes No $ 0.6 $ 0.5 $ 0.6
13-6130178-001 Red Red Yes No 0.5 0.4 0.4
For its plan years 2020 and 2019, the Company's contributions to the U.A.W. Labor-Management Group Pension Plan represented more than 5 % of the plan's total contributions.
Defined Contribution Plan
The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries. Contributions are determined as a percentage of each covered employee’s salary. For the years ended December 31, 2020, 2019 and 2018, the aggregate cost of the defined contribution plans was $ 17.1 million, $ 14.0 million and $ 13.7 million, respectively.
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The Company also has a defined contribution retirement program for its salaried employees. Contributions to this program are determined as a percentage of each covered employee’s eligible compensation. For the years ended December 31, 2020, 2019 and 2018, the Company recorded expense of $ 18.3 million, $ 17.6 million and $ 21.5 million, respectively, related to this program.
(11) Revenue Recognition
A summary of the Company’s revenue by reportable operating segment and geography is shown below (in millions):
For the year ended December 31, 2020
Seating E-Systems Total
North America $ 5,545.7 $ 1,084.8 $ 6,630.5
Europe and Africa 4,371.4 1,868.9 6,240.3
Asia 2,418.7 1,236.6 3,655.3
South America 376.9 142.5 519.4
$ 12,712.7 $ 4,332.8 $ 17,045.5
For the year ended December 31, 2019
Seating E-Systems Total
North America $ 6,265.2 $ 1,100.3 $ 7,365.5
Europe and Africa 5,620.2 2,165.3 7,785.5
Asia 2,710.7 1,257.6 3,968.3
South America 501.1 189.9 691.0
$ 15,097.2 $ 4,713.1 $ 19,810.3
For the year ended December 31, 2018
Seating E-Systems Total
North America $ 6,549.7 $ 1,110.9 $ 7,660.6
Europe and Africa 6,299.0 2,427.9 8,726.9
Asia 2,624.6 1,415.4 4,040.0
South America 548.6 172.4 721.0
$ 16,021.9 $ 5,126.6 $ 21,148.5
(12) Capital Stock, Accumulated Other Comprehensive Loss and Equity
Common Stock
The Company is authorized to issue up to 300,000,000 shares of Common Stock. The Company’s Common Stock is listed on the New York Stock Exchange under the symbol "LEA" and has the following rights and privileges:
• Voting Rights – All shares of the Company’s common stock have identical rights and privileges. With limited exceptions, holders of common stock are entitled to one vote for each outstanding share of common stock held of record by each stockholder on all matters properly submitted for the vote of the Company’s stockholders.
• Dividend Rights – Subject to applicable law, any contractual restrictions and the rights of the holders of outstanding preferred stock, if any, holders of common stock are entitled to receive ratably such dividends and other distributions that the Company’s Board of Directors, in its discretion, declares from time to time.
• Liquidation Rights – Upon the dissolution, liquidation or winding up of the Company, subject to the rights of the holders of outstanding preferred stock, if any, holders of common stock are entitled to receive ratably the assets of the Company available for distribution to the Company’s stockholders in proportion to the number of shares of common stock held by each stockholder.
• Conversion, Redemption and Preemptive Rights – Holders of common stock have no conversion, redemption, sinking fund, preemptive, subscription or similar rights.
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Common Stock Share Repurchase Program
Since the first quarter of 2011, the Company's Board of Directors has authorized $ 6.1 billion in share repurchases under its common stock share repurchase program. As of December 31, 2020, the Company has paid $ 4.7 billion in aggregate for repurchases of its common stock, at an average price of $ 90.07 per share, excluding commissions and related fees. In March 2020, as a proactive measure in response to the COVID-19 pandemic, the Company suspended share repurchases under its share repurchase program.
Share repurchases are shown below (in millions except for shares and per share amounts):
For the year ended December 31, Aggregate Repurchases Cash paid for Repurchases Number of Shares Average Price per Share (2)
2020 (1)
$ 70.0 $ 70.0 641,149 $ 109.22
2019 $ 380.4 $ 384.7 2,819,081 $ 134.95
2018 $ 705.2 $ 704.9 4,308,418 $ 163.69
(1) Prior to suspension.
(2) Excludes commissions .
As of December 31, 2020, the Company has a remaining repurchase authorization of $ 1.4 billion under its current common stock share repurchase program, which will expire on December 31, 2022. The Company may implement these share repurchases through a variety of methods, including, but not limited to, open market purchases, accelerated stock repurchase programs and structured repurchase transactions. The extent to which the Company will repurchase its outstanding common stock and the timing of such repurchases will depend upon its financial condition, prevailing market conditions, alternative uses of capital and other factors.
In addition to shares repurchased under the Company’s common stock share repurchase program described above, the Company classified shares withheld from the settlement of the Company’s restricted stock unit and performance share awards to cover tax withholding requirements as common stock held in treasury in the accompanying consolidated balance sheets as of December 31, 2020 and 2019.
In 2018, the Company’s Board of Directors approved the retirement of 8 million shares of common stock held in treasury. These retired shares are reflected as authorized, but not issued, in the accompanying consolidated balance sheets as of December 31, 2020 and 2019. The retirement of shares held in treasury resulted in a reduction in the par value of common stock, additional paid-in capital and retained earnings of $ 0.1 million, $ 155.9 million and $ 1,014.2 million, respectively. These reductions were offset by a corresponding reduction in shares held in treasury of $ 1,170.2 million. Accordingly, there was no effect on stockholders' equity as a result of this transaction.
Quarterly Dividend
In March 2020, as a proactive measure in response to the COVID-19 pandemic, the Company suspended its quarterly cash dividend. Prior to the suspension, the Company’s Board of Directors declared a cash dividend of $ 0.77 per share of common stock in the first quarter of 2020. The quarterly cash dividend was reinstated in the fourth quarter of 2020 at $ 0.25 per share of common stock. In 2019 and 2018, the Company’s Board of Directors declared quarterly cash dividends of $ 0.75 and $ 0.70 , respectively, per share of common stock.
Dividends declared and paid are shown below (in millions):
For the year ended December 31, 2020 2019 2018
Dividends declared $ 62.1 $ 186.3 $ 185.8
Dividends paid $ 67.3 $ 186.3 $ 186.3
Dividends payable on common shares to be distributed under the Company’s stock-based compensation program will be paid when such common shares are distributed.
Accumulated Other Comprehensive Loss
Comprehensive income is defined as all changes in the Company’s net assets except changes resulting from transactions with stockholders. It differs from net income in that certain items recorded in equity are included in comprehensive income.
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A summary of changes in accumulated other comprehensive loss, net of tax is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Defined benefit plans:
Balance at beginning of year $ ( 217.6 ) $ ( 172.8 ) $ ( 184.0 )
Reclassification adjustments (net of tax expense of $ 4.7 million in 2020, $ 2.0 million in 2019 and $ 2.4 million in 2018)
14.3 5.0 9.0
Other comprehensive income (loss) recognized during the period (net of tax benefit (expense) of $ 23.2 million in 2020, $ 15.7 million in 2019 and ($ 0.6 ) million in 2018)
( 73.6 ) ( 49.8 ) 2.2
Balance at end of year $ ( 276.9 ) $ ( 217.6 ) $ ( 172.8 )
Derivative instruments and hedge activities:
Balance at beginning of year $ 9.8 $ ( 9.7 ) $ ( 22.9 )
Reclassification adjustments (net of tax benefit (expense) of ($ 1.8 ) million in 2020, $ 10.2 million in 2019 and $ 4.1 million in 2018)
7.5 ( 38.0 ) ( 15.2 )
Other comprehensive income (loss) recognized during the period (net of tax benefit (expense) of $ 1.0 million in 2020, ($ 15.7 ) million in 2019 and ($ 7.4 ) million in 2018)
( 4.7 ) 57.5 28.4
Balance at end of year $ 12.6 $ 9.8 $ ( 9.7 )
Currency translation adjustments:
Balance at beginning of year $ ( 564.9 ) $ ( 523.3 ) $ ( 306.5 )
Other comprehensive income (loss) recognized during the period (net of tax benefit of $ 3.8 million in 2020, $ 0.9 million in 2019 and $ 2.3 million in 2018)
124.1 ( 41.6 ) ( 216.8 )
Balance at end of year $ ( 440.8 ) $ ( 564.9 ) $ ( 523.3 )
For the years ended December 31, 2020, 2019 and 2018, other comprehensive income (loss) related to currency translation adjustments includes pretax losses related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future of $ 0.6 million, $ 0.5 million and $ 1.2 million, respectively.
For the years ended December 31, 2020 and 2019, other comprehensive income (loss) related to currency translation adjustments also includes net investment hedge losses of $ 18.3 million and $ 4.4 million, respectively.
Redeemable Noncontrolling Interest
In accordance with GAAP, the Company records redeemable noncontrolling interests at the greater of (1) the initial carrying amount adjusted for the noncontrolling interest holder’s share of total comprehensive income or loss and dividends ("noncontrolling interest carrying value") or (2) the redemption value as of and based on conditions existing as of the reporting date. Required redeemable noncontrolling interest adjustments are recorded as an increase to redeemable noncontrolling interests, with an offsetting adjustment to retained earnings. The redeemable noncontrolling interest is classified in mezzanine equity in the accompanying consolidated balance sheet as of December 31, 2019.
In 2020, the noncontrolling interest holder in Shanghai Lear STEC Automotive Parts Co., Ltd. exercised its option requiring the Company to purchase its 45 % redeemable noncontrolling interest. The transaction was completed in the fourth quarter of 2020 for $ 95.5 million plus undistributed retained earnings of $ 26.8 million. These amounts are reflected in cash flows from financing activities in the accompanying statement of cash flows for the year ended December, 31, 2020.
For further information related to the redeemable noncontrolling interest adjustment, see Note 3, "Summary of Significant Accounting Policies — Net Income Per Share Attributable to Lear."
Noncontrolling Interests
In 2019, the Company deconsolidated GACC as it no longer controls the entity. In 2018, the Company gained control of Lear FAWSN. For further information related to these transactions, see Note 6, "Investments in Affiliates and Other Related Party Transactions."
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(13) Stock-Based Compensation
As of November 9, 2009, the Company adopted the Lear Corporation 2009 Long-Term Stock Incentive Plan (as amended, the "2009 LTSIP"). The 2009 LTSIP reserved 11,815,748 shares of common stock for issuance under stock option, restricted stock, restricted stock unit, restricted unit, performance share, performance unit and stock appreciation right awards. As of May 16, 2019, the Company adopted the Lear Corporation 2019 Long-Term Stock Incentive Plan (the "2019 LTSIP"), after which no awards will be issued under the 2009 LTSIP. The 2019 LTSIP reserves 2,526,858 shares of common stock plus shares of common stock awarded under the 2009 LTSIP that are cancelled subsequent to May 16, 2019, for issuance under stock option, restricted stock, restricted stock unit, restricted unit, performance share, performance unit and stock appreciation right awards. In addition, the Company adopted the Lear Corporation 2019 Inducement Grant Plan ("Inducement Plan") as of April 17, 2019, in conjunction with the acquisition of Xevo. The Inducement Plan reserved 146,516 shares of common stock for issuance under restricted stock and restricted stock unit awards, of which 145,202 awards were granted on April 17, 2019. The remaining shares under the Inducement Plan will not be awarded.
Under the 2009 LTSIP, the 2019 LTSIP and the Inducement Plan, the Company has granted restricted stock units, performance shares and stock options to certain of its employees, all of which generally vest in three years following the grant date. For the years ended December 31, 2020, 2019 and 2018, the Company recognized compensation expense related to these awards of $ 39.0 million, $ 22.3 million and $ 40.1 million, respectively. Unrecognized compensation expense related to these awards of $ 65.5 million will be recognized over th e next 1.9 years on a weighted average basis. In accordance with the provisions of the awards, the Company withholds shares from the settlement of such awards to cover minimum statutory tax withholding requirements. The withheld shares are classified as common stock held in treasury in the accompanying consolidated balance sheets as of December 31, 2020 and 2019.
A summary of restricted stock units, performance shares and stock options for the year ended December 31, 2020, is shown below:
Restricted
Stock Units Weighted Average Grant Date
Fair Value Performance
Shares Weighted Average Grant Date
Fair Value Stock Options Weighted Average Grant Date
Fair Value
Outstanding as of December 31, 2019 705,136 $ 128.71 849,544 $ 140.83 —
Granted 168,811 $ 129.40 346,317 $ 147.53 108,446 $ 30.32
Distributed (vested) ( 220,122 ) ( 129,920 ) —
Cancelled ( 37,241 ) ( 256,470 ) —
Outstanding as of December 31, 2020 (1)
616,584 $ 124.83 809,471 $ 143.48 108,446 $ 30.32
Vested or expected to vest as of December 31, 2020 616,584 299,390 108,446
(1) Outstanding performance shares are reflected at the maximum possible payout that may be earned during the relevant performance periods.
The grant date fair value of restricted stock units is based on the share price on the grant date. The weighted average grant date fair value of restricted stock units granted in 2019 and 2018 was $ 134.65 and $ 168.86 , respectively. The grant date fair value of performance shares was based on a Monte Carlo simulation in 2020 and 2019 and on the share price on the grant date in 2018. The weighted average grant date fair value of performance shares granted in 2019 and 2018 was $ 124.48 and $ 179.40 , respectively. The grant date fair value of stock options is based on a Black-Scholes model.
(14) Commitments and Contingencies
Legal and Other Contingencies
As of December 31, 2020 and 2019, the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $ 17.2 million and $ 14.0 million, respectively. Such reserves reflect amounts recognized in accordance with GAAP and typically exclude the cost of legal representation. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
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Commercial Disputes
The Company is involved from time to time in legal proceedings and claims, including, without limitation, commercial or contractual disputes with its customers, suppliers and competitors. These disputes vary in nature and are usually resolved by negotiations between the parties.
Product Liability and Warranty Matters
In the event that use of the Company’s products results in, or is alleged to result in, bodily injury and/or property damage or other losses, the Company may be subject to product liability lawsuits and other claims. Such lawsuits generally seek compensatory damages, punitive damages and attorneys’ fees and costs. In addition, if any of the Company’s products are, or are alleged to be, defective, the Company may be required or requested by its customers to participate in a recall or other corrective action involving such products. Certain of the Company’s customers have asserted claims against the Company for costs related to recalls or other corrective actions involving its products. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend such claims.
To a lesser extent, the Company is a party to agreements with certain of its customers, whereby these customers may pursue claims against the Company for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims.
In certain instances, allegedly defective products may be supplied by Tier 2 suppliers. The Company may seek recovery from its suppliers of materials or services included within the Company’s products that are associated with product liability and warranty claims. The Company carries insurance for certain legal matters, including product liability claims, but such coverage may be limited. The Company does not maintain insurance for product warranty or recall matters.
The Company records product warranty reserves when liability is probable and related amounts are reasonably estimable.
A summary of the changes in reserves for product liability and warranty claims for each of the periods in the two years ended December 31, 2020, is shown below (in millions):
Balance as of January 1, 2019 $ 28.5
Expense, net, including changes in estimates 17.9
Settlements ( 15.2 )
Foreign currency translation and other 0.8
Balance as of December 31, 2019 32.0
Expense, net, including changes in estimates 26.1
Settlements ( 10.3 )
Foreign currency translation and other 0.9
Balance as of December 31, 2020 $ 48.7
Environmental Matters
The Company is subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. The Company’s policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance with this standard. However, the Company currently is, has been and in the future may become the subject of formal or informal enforcement actions or procedures.
As of December 31, 2020 and 2019, the Company had recorded environmental reserves of $ 8.9 million and $ 9.3 million, respectively. The Company does not believe that the environmental liabilities associated with its current and former properties will have a material adverse impact on its business, financial condition, results of operations or cash flows; however, no assurances can be given in this regard.
Other Matters
The Company is involved from time to time in various other legal proceedings and claims, including, without limitation, intellectual property matters, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, the Company does not believe that any of the other legal proceedings or claims in which the Company is
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currently involved, either individually or in the aggregate, will have a material adverse impact on its business, financial condition, results of operations or cash flows. However, no assurances can be given in this regard.
Although the Company records reserves for legal disputes, product liability and warranty claims and environmental and other matters in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain. Actual results may differ significantly from current estimates.
Employees
Approximately 47 % of the Company’s employees are members of industrial trade unions and are employed under the terms of various labor agreements. Labor agreements covering approximately 85 % of the Company’s global unionized workforce of approximately 82,500 employees, including labor agreements in the United States and Canada covering approximately 1 % of the Company’s global unionized workforce, are scheduled to expire in 2021. Management does not anticipate any significant difficulties with respect to the renewal of these agreements.
(15) Segment Reporting
A summary of revenues from external customers and other financial information by reportable operating segment is shown below (in millions):
Year Ended December 31, 2020
Seating E-Systems Other Consolidated
Revenues from external customers $ 12,712.7 $ 4,332.8 $ — $ 17,045.5
Segment earnings (1)
590.5 98.1 ( 234.5 ) 454.1
Depreciation and amortization 348.1 176.6 15.2 539.9
Capital expenditures 257.2 179.3 15.8 452.3
Total assets 7,596.1 3,403.3 2,199.2 13,198.6
Year Ended December 31, 2019
Seating E-Systems Other Consolidated
Revenues from external customers $ 15,097.2 $ 4,713.1 $ — $ 19,810.3
Segment earnings (1)
961.2 366.3 ( 257.3 ) 1,070.2
Depreciation and amortization 331.0 163.0 15.9 509.9
Capital expenditures 370.4 213.9 19.6 603.9
Total assets 7,277.6 3,068.1 2,335.0 12,680.7
Year Ended December 31, 2018
Seating E-Systems Other Consolidated
Revenues from external customers $ 16,021.9 $ 5,126.6 $ — $ 21,148.5
Segment earnings (1)
1,263.6 628.5 ( 238.0 ) 1,654.1
Depreciation and amortization 323.5 146.2 14.7 484.4
Capital expenditures 459.8 208.4 8.8 677.0
(1) For a definition of segment earnings, see Note 3 , "Summary of Significant Accounting Policies — Segment Reporting."
For the year ended December 31, 2020, segment earnings include restructuring charges of $ 83.1 million, $ 54.5 million and $ 1.1 million in the Seating and E-Systems segments and in the other category, respectively. The Company expects to incur approximately $ 11 million and approximately $ 7 million of additional restructuring costs in the Seating and E-Systems segments, respectively, related to activities initiated as of December 31, 2020, and expects that the components of such costs will be consistent with its historical experience.
For the year ended December 31, 2019, segment earnings include restructuring charges of $ 150.1 million, $ 38.0 million and $ 2.1 million in the Seating and E-Systems segments and in the other category, respectively.
For the year ended December 31, 2018, segment earnings include restructuring charges of $ 62.3 million, $ 20.9 million and $ 4.8 million in the Seating and E-Systems segments and in the other category, respectively.
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For further information, see Note 5, "Restructuring."
A reconciliation of segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Segment earnings $ 688.6 $ 1,327.5 $ 1,892.1
Corporate and regional headquarters and elimination of intercompany activity ("Other") ( 234.5 ) ( 257.3 ) ( 238.0 )
Consolidated income before interest, other expense, provision for income taxes and equity in net income of affiliates 454.1 1,070.2 1,654.1
Interest expense 99.6 92.0 84.1
Other expense, net 55.2 24.6 31.6
Consolidated income before provision for income taxes and equity in net income of affiliates $ 299.3 $ 953.6 $ 1,538.4
Revenues from external customers and tangible long-lived assets for each of the geographic areas in which the Company operates is shown below (in millions):
For the year ended December 31, 2020 2019 2018
Revenues from external customers
United States $ 3,599.1 $ 3,658.5 $ 3,717.7
Mexico 2,528.4 3,058.6 3,236.9
China 2,592.7 2,579.7 2,781.5
Germany 1,288.3 1,698.7 2,187.2
Other countries 7,037.0 8,814.8 9,225.2
Total $ 17,045.5 $ 19,810.3 $ 21,148.5
December 31, 2020 2019
Tangible long-lived assets (1)
United States $ 534.0 $ 549.8
Mexico 689.9 700.1
China 458.2 450.2
Germany 205.8 204.9
Other countries 1,388.6 1,326.2
Total $ 3,276.5 $ 3,231.2
(1) Tangible long-lived assets include property, plant and equipment and right-of-use assets.
The following is a summary of the percentage of revenues from major customers:
For the year ended December 31, 2020 2019 2018
General Motors 18.7 % 18.2 % 18.1 %
Ford 13.5 % 13.8 % 15.6 %
Daimler 11.9 % 11.1 % 9.9 %
Volkswagen 11.7 % 10.9 % 9.6 %
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(16) Financial Instruments
Debt Instruments
The carrying values of the Notes vary from their fair values. The fair values of the Notes were determined by reference to the quoted market prices of these securities (Level 2 input based on the GAAP fair value hierarchy). The carrying value of the Company’s Term Loan Facility approximates its fair value (Level 3 input based on the GAAP fair value hierarchy). The estimated fair value, as well as the carrying value, of the Company's debt instruments are shown below (in millions):
December 31, 2020 2019
Estimated aggregate fair value (1)
$ 2,633.3 $ 2,384.6
Aggregate carrying value (1) (2)
2,320.3 2,334.4
(1) Includes Term Loan Facility and Notes (excludes "other" debt).
(2) Excludes the impact of unamortized debt issuance costs and unamortized original issue premium (discount).
Cash, Cash Equivalents and Restricted Cash
The Company has cash on deposit that is legally restricted as to use or withdrawal. A reconciliation of cash and cash equivalents reported on the accompanying consolidated balance sheets to cash, cash equivalents and restricted cash reported on the consolidated statements of cash flows is shown below (in millions):
December 31, 2020 2019 2018
Balance sheet — cash and cash equivalents $ 1,306.7 $ 1,487.7 $ 1,493.2
Restricted cash included in other current assets 5.1 15.9 8.7
Restricted cash included in other long-term assets 2.7 6.8 17.9
Statement of cash flows — cash, cash equivalents and restricted cash $ 1,314.5 $ 1,510.4 $ 1,519.8
Accounts Receivable Factoring
During the second quarter of 2020, the Company entered into an uncommitted factoring arrangement which provides for aggregate purchases of specified customer accounts in North America. The factoring arrangement results in true sales of the factored receivables, which are excluded from amounts reported in the consolidated balance sheets when the receivables are factored in accordance with ASC 860, "Transfers and Servicing." There were no receivables factored during the year ended December 31, 2020. The Company cannot provide any assurances that the factoring arrangement will be available or utilized in the future.
Marketable Equity Securities
Marketable equity securities, which the Company accounts for under the fair value option, are included in the accompanying consolidated balance sheets as shown below (in millions):
December 31, 2020 2019
Other current assets $ 9.3 $ 17.1
Other long-term assets 49.4 42.1
$ 58.7 $ 59.2
Unrealized gains and losses arising from changes in the fair value of the marketable equity securities are recognized in other expense, net in the accompanying consolidated statements of income. The fair value of the marketable equity securities is determined by reference to quoted market prices in active markets (Level 1 input based on the GAAP fair value hierarchy).
Equity Securities Without Readily Determinable Fair Values
As of December 31, 2020 and 2019, investments in equity securities without readily determinable fair values of $ 11.2 million and $ 15.2 million, respectively, are included in other long-term assets in the accompanying consolidated balance sheets. Such investments are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. For the years ended December 31, 2020 and 2019, the Company recognized impairment charges
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of $ 4.0 million and $ 5.0 million, respectively, related to investments in equity securities without readily determinable fair values.
Derivative Instruments and Hedging Activities
Foreign Exchange
The Company uses forwards, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates on known foreign currency exposures. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce exposure to fluctuations in foreign exchange rates. The principal currencies hedged by the Company include the Mexican peso, various European currencies, the Japanese yen, the Philippine peso, the Chinese renminbi, the Thai baht and the Brazilian real.
Foreign currency derivative contracts not designated as hedging instruments consist principally of hedges of cash transactions, intercompany loans and certain other balance sheet exposures.
Net Investment Hedges
The Company uses cross-currency interest rate swaps which are designated as net investment hedges of the foreign currency rate exposure of its investment in certain Euro-denominated subsidiaries. For the years ended December 31, 2020 and 2019, contra interest expense on net investment hedges of $ 6.5 million and $ 1.8 million, respectively, is included in interest expense in the accompanying consolidated statements of income.
Balance Sheet Classification
The notional amount, estimated aggregate fair value and related balance sheet classification of the Company's foreign currency and net investment hedge contracts are shown below (in millions, except for maturities):
December 31, 2020 2019
Fair value of foreign currency contracts designated as cash flow hedges:
Other current assets $ 49.7 $ 44.0
Other long-term assets 13.0 7.3
Other current liabilities ( 14.1 ) ( 4.5 )
Other long-term liabilities ( 0.8 ) ( 0.2 )
47.8 46.6
Notional amount $ 1,353.3 $ 1,465.8
Outstanding maturities in months, not to exceed 24 24
Fair value of derivatives designated as net investment hedges:
Other long-term liabilities $ ( 22.6 ) $ ( 4.4 )
Notional amount $ 300.0 $ 300.0
Outstanding maturities in months, not to exceed 45 57
Fair value of foreign currency contracts not designated as hedge instruments:
Other current assets $ 5.8 $ 6.9
Other current liabilities ( 6.1 ) ( 3.2 )
( 0.3 ) 3.7
Notional amount $ 1,140.8 $ 697.0
Outstanding maturities in months, not to exceed 12 12
Total fair value $ 24.9 $ 45.9
Total notional amount $ 2,794.1 $ 2,462.8
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Accumulated Other Comprehensive Loss — Derivative Instruments and Hedge Activities
Pretax amounts related to foreign currency, interest rate swap and net investment hedge contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):
For the year ended December 31, 2020 2019 2018
Gains (losses) recognized in accumulated other comprehensive loss:
Foreign currency contracts $ ( 5.7 ) $ 82.4 $ 50.5
Interest rate swap contracts — ( 9.2 ) ( 14.7 )
Net investment hedges ( 18.3 ) ( 4.4 ) —
( 24.0 ) 68.8 35.8
(Gains) losses reclassified from accumulated other comprehensive loss to:
Net sales ( 0.6 ) 3.8 2.3
Cost of sales 7.6 ( 52.6 ) ( 21.6 )
Interest expense 2.4 1.1 —
Other expense, net ( 0.1 ) — —
9.3 ( 47.7 ) ( 19.3 )
Comprehensive income (loss) $ ( 14.7 ) $ 21.1 $ 16.5
As of December 31, 2020 and 2019, pretax net gains $ 4.7 million and $ 19.4 million, respectively, related to the Company’s derivative instruments and hedge activities were recorded in accumulated other comprehensive loss.
During the next twelve month period, net gains (losses) expected to be reclassified into earnings are shown below (in millions):
Foreign currency contracts $ 35.6
Interest rate swap contracts ( 2.4 )
Total $ 33.2
Such gains and losses will be reclassified at the time that the underlying hedged transactions are realized.
For the years ended December 31, 2020, 2019 and 2018, the Company recognized tax expense of $ 0.8 million, $ 5.5 million and $ 3.3 million, respectively, in other comprehensive income related to its derivative instruments and hedge activities.
Fair Value Measurements
GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:
Market: This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income: This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
Cost: This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:
Level 1: Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.
Level 3: Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.
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The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.
Items Measured at Fair Value on a Recurring Basis
Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019, are shown below (in millions):
December 31, 2020
Frequency Asset
(Liability) Valuation
Technique Level 1 Level 2 Level 3
Foreign currency contracts, net Recurring $ 47.5 Market / Income $ — $ 47.5 $ —
Net investment hedges Recurring ( 22.6 ) Market / Income — ( 22.6 ) —
Marketable equity securities Recurring 58.7 Market 58.7 — —
December 31, 2019
Frequency Asset
(Liability) Valuation
Technique Level 1 Level 2 Level 3
Foreign currency contracts, net Recurring $ 50.3 Market / Income $ — $ 50.3 $ —
Net investment hedges Recurring ( 4.4 ) Market / Income — ( 4.4 ) —
Marketable equity securities Recurring 59.2 Market 59.2 — —
The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, the Company adjusts these discount rates, if required, by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. If an estimate of the credit spread is required, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy. As of December 31, 2020 and 2019, there were no derivative contracts that were classified within Level 3 of the fair value hierarchy. In addition, there were no transfers in or out of Level 3 of the fair value hierarchy during 2020 and 2019.
For further information on fair value measurements and the Company’s defined benefit pension plan assets, see Note 10, "Pension and Other Postretirement Benefit Plans."
Items Measured at Fair Value on a Non-Recurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy.
In 2020 and 2019, the Company completed quantitative goodwill impairment analyses for selected reporting units (Note 3, "Summary of Significant Accounting Policies — Impairment of Goodwill"). The Level 3 fair value estimate of the reporting units was based on a third-party valuation and/or management's estimates, using a combination of the discounted cash flow method and guideline public company method.
In 2019, as a result of the acquisition of Xevo (Note 4, "Acquisition"), Level 3 fair value estimates of $ 90.1 million related to intangible assets are recorded in the accompanying consolidated balance sheets as of December 31, 2020 and 2019. The estimated fair values of these assets were based on third-party valuations and management's estimates, generally utilizing the income and cost approaches.
In 2019, as a result of the deconsolidation of GACC (Note 6, "Investments in Affiliates and Other Related Party Transactions"), the Company is accounting for its investment in GACC under the equity method. The Level 3 fair value estimate related to the Company's equity interest was based on the present value of future cash flows and reflects a discount for the lack of control and the lack of marketability associated with equity interests.
In 2018, as a result of the Lear FAWSN transaction (Note 6, "Investments in Affiliates and Other Related Party Transactions"), Level 3 fair value estimates related to property, plant and equipment of $ 11.0 million, intangible assets of $ 7.5 million and noncontrolling interests of $ 14.0 million are recorded in the accompanying consolidated balance sheets as of December 31, 2020 and 2019. In addition, the Lear FAWSN transaction required a Level 3 fair value estimate related to the Company's
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Notes to Consolidated Financial Statements (continued)
previously held equity interest of $ 23.0 million. These Level 3 fair value estimates were determined as of the effective date of the transaction.
Fair value estimates of property, plant and equipment were based on independent appraisals, giving consideration to the highest and best use of the assets. Key assumptions used in the appraisals were based on a combination of market and cost approaches, as appropriate. Fair value estimates of customer-based intangible assets were based on the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets. Fair value estimates of noncontrolling and equity interests were based on the present value of future cash flows and a value to earnings multiple approach and reflect discounts for the lack of control and the lack of marketability associated with noncontrolling and equity interests.
As of December 31, 2020 and 2019, there were no additional significant assets or liabilities measured at fair value on a non-recurring basis.
(17) Quarterly Financial Data (unaudited)
(In millions, except per share data)
Thirteen Weeks Ended
April 4,
2020 July 4,
2020 October 3,
2020 December 31,
2020
Net sales $ 4,457.7 $ 2,444.5 $ 4,900.1 $ 5,243.2
Gross profit 334.2 ( 127.4 ) 442.8 459.3
Consolidated net income (loss) 83.6 ( 269.5 ) 197.1 222.7
Net income (loss) attributable to Lear 76.4 ( 293.9 ) 174.4 201.6
Basic net income (loss) per share attributable to Lear 1.26 ( 4.89 ) 2.90 3.35
Diluted net income (loss) per share attributable to Lear 1.26 ( 4.89 ) 2.89 3.33
In the first quarter of 2020, the Company recognized tax benefits of $ 10.6 million related to a loss on the extinguishment of debt, restructuring charges and various other items. The Company also recognized a loss of $ 21.1 million related to the extinguishment of debt.
In the second quarter of 2020, the Company recognized tax expense of $ 22.8 million related to the establishment of a valuation allowance on deferred tax assets of a foreign subsidiary and net tax benefits of $ 21.1 million related to restructuring charges and various other items.
In the third quarter of 2020, the Company recognized tax benefits of $ 9.8 million related to the release of a valuation allowance on deferred tax assets and $ 5.0 million related to an increase in our research and development tax credits resulting from the completion of a research and development tax credit study and net tax expense of $ 10.2 million related to restructuring charges and various other items. The Company also recognized a pension benefit plan settlement loss of $ 10.2 million related to its restructuring actions.
In the fourth quarter of 2020, the Company recognized tax benefits of $ 8.1 million related to restructuring charges and various other items and $ 15.5 million related to the U.S. deferred tax effect of our foreign branches and tax expense of $ 16.7 million related to a net increase in valuation allowances on deferred tax assets. The Company also recognized pension benefit plan settlement losses of $ 2.7 million related to its restructuring actions and an impairment charge of $ 4.0 million related to an investment.
For further information, see Note 6, "Investments in Affiliates and Other Related Party Transactions," Note 7, "Debt," Note 9, "Income Taxes," and Note 10, "Pension and Other Postretirement Benefit Plans."
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Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Thirteen Weeks Ended
March 30,
2019 June 29,
2019 September 28,
2019 December 31,
2019
Net sales $ 5,160.1 $ 5,007.6 $ 4,825.0 $ 4,817.6
Gross profit 473.2 478.2 459.3 326.8
Consolidated net income 246.1 202.0 238.6 144.0
Net income attributable to Lear 228.9 182.8 215.9 126.0
Basic net income per share attributable to Lear 3.75 2.92 3.59 2.51
Diluted net income per share attributable to Lear 3.73 2.92 3.58 2.50
In the first quarter of 2019, the Company recognized tax benefits of $ 18.4 million related to changes in the tax status of certain affiliates, $ 3.2 million related to share-based compensation and $ 15.6 million related to restructuring charges and various other items.
In the second quarter of 2019, the Company recognized tax benefits of $ 11.0 million related to restructuring charges and various other items and tax expense of $ 10.4 million related to the establishment of a valuation allowance on the deferred tax assets of a foreign subsidiary. The Company also recognized a loss of $ 10.6 million related to the extinguishment of debt.
In the third quarter of 2019, the Company recognized tax benefits of $ 28.6 million related to research and development tax credits and $ 9.1 million related to restructuring charges and various other items. The Company also recognized a gain of $ 4.0 million related to the deconsolidation of an affiliate.
In the fourth quarter of 2019, the Company recognized tax benefits of $ 14.1 million related to the U.S. tax impact of the foreign tax credit regulations and $ 32.2 million related to restructuring charges and various other items. The Company also recognized curtailment gains of $ 12.9 million related to certain foreign pension and postretirement benefit plans and an impairment charge of $ 5.0 million related to an investment.
For further information see, Note 6, "Investments in Affiliates and Other Related Party Transactions," Note 7, "Debt," Note 9, "Income Taxes," and Note 10, "Pension and Other Postretirement Benefit Plans ."
( 18) Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued by the FASB.
The Company considered the ASUs summarized below, effective for 2020:
Measurement of Credit Losses on Financial Instruments
See Note 3, "Summary of Significant Accounting Policies — Accounts Receivable."
Simplifying the Test for Goodwill Impairment
Effective January 1, 2020, the standard simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based on the amount of a reporting unit's carrying value in excess of its fair value. This eliminates the requirement to calculate the implied fair value of goodwill (i.e., "Step 2" under current guidance).
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The guidance provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications and hedge relationships prospectively through December 31, 2022. The adoption of this guidance is not expected to have a significant impact on the Company's financial statements.
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Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Disclosure Requirements for Defined Benefit Plans
In December 2020, the Company adopted ASU 2018-14, "Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans," which provides minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The adoption of this standard did not have a significant impact on the Company's financial statements.
The Company considered the ASUs summarized below, effective after 2020:
Simplifying the Accounting for Income Taxes
See Note 3 "Summary of Significant Accounting Policies — Income Taxes."
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LEAR CORPORATION AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Balance
as of Beginning
of Period Additions Retirements Other
Changes Balance
as of End
of Period
For the year ended December 31, 2020
Valuation of accounts deducted from related assets:
Allowance for doubtful accounts $ 36.0 $ 7.0 $ ( 9.8 ) $ 2.1 $ 35.3
Allowance for deferred tax assets 344.8 81.4 ( 43.5 ) 15.0 397.7
Total $ 380.8 $ 88.4 $ ( 53.3 ) $ 17.1 $ 433.0
Balance
as of Beginning
of Period Additions Retirements Other
Changes Balance
as of End
of Period
For the year ended December 31, 2019
Valuation of accounts deducted from related assets:
Allowance for doubtful accounts $ 33.2 $ 14.3 $ ( 10.9 ) $ ( 0.6 ) $ 36.0
Allowance for deferred tax assets 350.4 31.3 ( 30.7 ) ( 6.2 ) 344.8
Total $ 383.6 $ 45.6 $ ( 41.6 ) $ ( 6.8 ) $ 380.8
Balance
as of Beginning
of Period Additions Retirements Other
Changes Balance
as of End
of Period
For the year ended December 31, 2018
Valuation of accounts deducted from related assets:
Allowance for doubtful accounts $ 41.8 $ 11.4 $ ( 17.5 ) $ ( 2.5 ) $ 33.2
Allowance for deferred tax assets 402.2 24.5 ( 56.7 ) ( 19.6 ) 350.4
Total $ 444.0 $ 35.9 $ ( 74.2 ) $ ( 22.1 ) $ 383.6
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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.