What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-08 compared with 2023-02-09 · 145 added, 217 removed, 379 unchanged (49% of the section changed)

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Executive Overview

We are a global automotive technology leader in Seating and E-Systems, enabling superior in-vehicle experiences for consumers around the world.

We supply complete seat systems, key seat components, electrical distribution and connection systems, battery disconnect units ("BDUs") and other electronic products to all of the world's major automotive manufacturers.

Lear Corporation is a global automotive technology leader in Seating and E-Systems, enabling superior in-vehicle experiences for consumers around the world.

We supply complete seat systems, key seat components, complete electrical distribution and connection systems, high-voltage power distribution products, including battery disconnect units ("BDUs"), low-voltage power distribution products, electronic controllers and other electronic products to all of the world's major automotive manufacturers.

Lear is 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, as well as our global reach and competitive manufacturing footprint, to achieve our financial goals and objectives.

These include 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 capital to our stockholders.

Further, we have aligned our strategy with the key trends affecting our business — electrification and shared mobility.

These include 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 capital to our stockholders.

Further, we have aligned our strategy with key trends affecting our business — primarily electrification.

At Lear, we are Making every drive better TM by providing technology for safer, smarter and more comfortable journeys, while adhering to our values — Be Inclusive.

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Our capabilities in operations and supply chain management enable synchronized assembly and just-in-time delivery of complex complete seat systems at high volumes to our customers.

Included in our complete seat systems and components are our advanced comfort solutions, including thermal, safety and wellness products, as well as configurable seating product technologies.

All of these products are compatible with traditional internal combustion engine ("ICE") architectures and electrified powertrains, including the full range of hybrid, plug-in hybrid and battery electric architectures.

Our advanced comfort solutions are facilitated by our seat system, component and integration capabilities, together with our competencies in electronics, sensors, software and algorithms.

As the most vertically integrated global seat supplier, our key seat component product offerings include seat trim covers;

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seat mechanisms;

thermal comfort solutions such as seat massage, lumbar, heat and ventilation products;

thermal comfort systems such as seat heating, ventilation, active cooling, pneumatic lumbar and massage products;

and headrests.

Our E-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution and connection systems, BDUs and other electronic products.

Our thermal comfort systems are facilitated by our seat system, component and integration capabilities, together with our competencies in electronics, sensors, software and algorithms.

Our E-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution and connection systems;

high-voltage power distribution products, including BDUs;

and low-voltage power distribution products, electronic controllers and other electronic products.

These capabilities enable us to provide our customers with customizable solutions with optimized designs at competitive costs for both low-voltage and high-voltage vehicle architectures.

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High-voltage battery connection systems include intercell connect boards, bus bars and main battery connection systems.

BDUs control all electrical energy flowing into and out of high voltage batteries on electrified vehicles.

Our other electronic products facilitate signal, data and power management within the vehicle and include the associated software required to facilitate these functions.

High-voltage power distribution products control the flow and distribution of high-voltage power throughout electrified vehicles and include BDUs which control all electrical energy flowing into and out of high-voltage batteries in electrified vehicles.

Low-voltage power distribution products, electronic controllers and other electronic products facilitate signal, data and/or power management within the vehicle and include the associated software required to facilitate these functions.

Key components of our other electronic products portfolio include zone control modules, body domain control modules and low-voltage and high-voltage power distribution modules.

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Our customers traditionally have sourced our electronic hardware together with the software that we embed in it.

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 450 vehicle nameplates worldwide.

We serve all of the world's major automotive manufacturers through both our Seating and E-Systems businesses, and we have automotive content on more than 475 vehicle nameplates worldwide.

It is common for us to have both seating and electrical and/or electronic content on the same vehicle platform.

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;

complex, global supply chain management;

global engineering and program management;

the agility to establish and/or transfer production between facilities quickly;

and a unique, customer-focused culture.

Our core capabilities are shared across component categories and include high-precision manufacturing and assembly with short lead times, complex, global supply chain management, global engineering and program management, the agility to establish and/or transfer production between facilities quickly, and a unique, customer-focused culture.

In select instances, we are able to manufacture both Seating and E-Systems components in the same facility.

Our businesses also utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating support functions.

These functions include health and safety, logistics, quality, supply chain management and all major administrative functions such as corporate finance, executive administration, human resources, information technology and legal.

These functions include health and safety, logistics,

quality, supply chain management and all major administrative functions, such as corporate finance, executive administration, human resources, information technology and legal.

We continue to build on our reputation for operational excellence through investment in Industry 4.0 technologies.

Industry 4.0 refers to the current era of digital transformation in manufacturing.

It involves the integration of new technologies, such as Industrial Internet of Things (IIoT), cloud computing, artificial intelligence (AI), machine learning and advanced automation, into production facilities and business operations.

These technologies enable smart and automated machines and smart factories to communicate, analyze and optimize processes and products, resulting in higher efficiency, quality and responsiveness to customers.

Industry Overview

Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles and the availability of raw materials and components, and our content per vehicle.

Due to the evolving global economic co nditions since 2020, initially as a result of the COVID-19 pandemic, the automotive industry experienced a decline in global customer sales and production volumes.

Alth ough industry production has recovered modestly with production increasing 7% in 2022 compared to 2021 and expected to increase 3% in 2023 compared to 2022 (based on Janu ary 2023 S&P Global Mobility, formerly IHS Markit, projections), production remains well below recent historic levels.

Global industry production in 2022 was approximately 8% bel ow 2019 pre-pandemic levels and 16% below 2017 peak levels.

Since 2020, industry and economic conditions have been influenced directly and indirectly by macroeconomic events such as the COVID-19 pandemic and, beginning in the first quarter of 2022, the Russia-Ukraine conflict, resulting in unfavorable conditions, including shortages of semiconductor chips and other components, elevated inflation levels, higher interest rates, and labor and energy shortages in certain markets.

These factors, among others, are impacting consumer demand as well as the ability of automotive manufacturers to produce vehicles to meet demand.

Our strategy to mitigate these impacts encompasses our comprehensive cost management process, including value added value engineering (cost technology optimization), actions to further align our manufacturing capacity to the current industry production environment, investments in Industry 4.0 technologies to enhance operational efficiencies and utilization of existing capital to reduce future expenditures.

For risks related to the COVID-19 pandemic, including supply shortages, see Item 1A, "Risk Factors."

In March 2022, as our customers began to suspend their Russian operations as a result of Russia's invasion of Ukraine, we similarly began to suspend our Russian operations.

Since the first quarter of 2022, we have suspended all production in Russia (but for certain de minimis operations) and significantly decreased our workforce in the country.

In 2022, we recorded charges of approximately $19 million related to impairments of substantially all of our operating assets in Russia, including inventory, property, plant and equipment and right-of-use assets.

Although our net sales and total assets in Russia represented less than 1% of our consolidated net sales and total assets prior to the suspension of operations, the Russia-Ukraine conflict and sanctions imposed on Russia globally have resulted in economic and supply chain disruptions affecting the overall automotive industry, the ultimate financial impact of which cannot be reasonably estimated.

Further, although we do not have operations in Ukraine, the Ukrainian operations of certain of our suppliers and suppliers of our customers have been and will likely continue to be disrupted by the Russia-Ukraine conflict.

For further information, see Note 2, "Current Operating Environment," Note 3, "Summary of Significant Accounting Policies," Note 8, "Leases," and Note 16, "Financial Instruments," to the consolidated financial statements included in this Report.

In 2020, the automotive industry experienced a significant decline in global production volumes as a result of the COVID-19 pandemic.

In 2022, industry production recovered modestly, increasing 8% compared to 2021.

In 2023, industry production increased 9% compared to 2022.

This reflects a return to 2019 pre-pandemic production levels but remains 5% below 2017 peak levels.

Since 2020, the global economy, as well as the automotive industry, have been influenced directly and indirectly by macroeconomic events resulting in unfavorable conditions, including shortages of semiconductor chips and other components, elevated inflation levels on commodities and labor , higher interest rates, and labor and energy shortages in certain markets.

Beginning in the third quarter of 2023 and continuing into the fourth quarter of 2023, the automotive industry was impacted by labor strikes and related disruptions at certain facilities in the United States.

Certain of these factors, among others, continue to impact consumer demand, as well as the ability of automotive manufacturers to produce vehicles to meet demand.

Our strategy to mitigate these impacts encompasses our comprehensive cost management process, including cost technology optimization, actions to further align our manufacturing capacity to the current industry production environment and investments in Industry 4.0 technologies.

This will allow us to enhance operational efficiencies, improve the utilization of existing facilities and equipment to reduce future expenditures, and streamline and automate administrative functions.

For a description of risks related to macroeconomic events, see Item 1A, "Risk Factors."

Global automotive industry production volumes in 2023, as compared to 2022, are shown below (in thousands of units):

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(2) Production data for 2022 has been updated from our 2022 Annual Report on Form 10-K to reflect actual production levels.

In addition to the factors noted above, 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 level of vertical integration and profitability of the products that we supply for these platforms.

Automotive sales and production can also be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues and shortages, fuel prices, regulatory requirements, government initiatives, trade agreements, tariffs and other non-tariff trade barriers, the availability and cost of credit, the availability and cost of critical components needed to complete the production of vehicles, logistics issues, restructuring actions of our customers and suppliers, facility closures and increased competition, as well as consumer preferences regarding vehicle powertrains (including preferences regarding hybrid and electric vehicles), size, configuration and features, among 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, including the level of vertical integration, 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.

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Our ability to reduce the risks inherent in certain concentrations of our 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.

The automotive industry, and our business, continue to be shaped by the broad trends of electrification and, to a lesser extent, shared mobility.

Demand for, and regulatory developments related to, improved energy efficiency, sustainability, and enhanced safety and communications (e.g., government mandates related to fuel economy, carbon emissions and safety equipment) are significant drivers of these trends.

Electrification, in particular, is likely to be at the forefront of our industry for the foreseeable future.

Through our products, technology and strategic initiatives, we are well positioned to capture business growth opportunities resulting from current industry tre nds.

The automotive industry, and our business, continue to be shaped by the broad trend of electrification, which is likely to be at the forefront of the industry for the foreseeable future.

Demand for, and regulatory developments related to, improved energy efficiency and sustainability (e.g., government mandates related to fuel economy and carbon emissions) are significant drivers of this trend.

Through our products, technology and strategic initiatives, we are well positioned to capitalize on business growth opportunities.

We are focused on profitably growing our businesses and have implemented a strategy designed to deliver industry-leading, long-term financial returns.

This strategy is based upon the following four pillars designed to capitalize on current industry trends and drive growth and profitability in both of our business segments:

• Extend our market leadership position in Seating with priceable content;

• Transform our E-Systems business through accelerated growth in connection systems, vehicle architecture evolution and electrification;

This strategy is based on the following four pillars designed to drive growth and profitability in both of our business segments:

• Extend our market leadership position in Seating with priceable features;

• Transform our E-Systems business through accelerated growth in connection systems, vehicle architecture evolution and electrification, and the rationalization of our product portfolio to improve profitability;

• Build on our reputation for operational excellence through investment in Industry 4.0 technologies;

• Prioritize people and the planet through our Environmental, Social and Governance ("ESG") initiatives.

For further information related to these trends and our strategy, see Part 1 — Item 1, "Business — Industry" and "— Strategy."

• Prioritize people and the planet through our sustainability initiatives to drive business growth, cost reductions and improved employee retention.

For further information related to 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.

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We continually evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.

Our material cost as a percentage of net sales was 66.1% in 2022, as compared to 65.4% in 2021 and 64.3% in 2020, reflecting increases in certain commodity costs.

Our material cost as a percentage of net sales was 65.2% in 2023, as compared to 66.1% in 2022 and 65.4% in 2021.

Raw material, energy, commodity and product component costs can be volatile, reflecting, among other things, changes in supply and demand, logistics issues, global trade and tariff policies, and geopolitical issues.

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Certain of these strategies also may limit our opportunities in a declining price environment.

In the current environment of escalating raw material, energy, commodity and product component costs, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact.

In the current environment of elevated raw material, energy, commodity and product component costs, these strategies, together with commercial negotiations with our customers and suppliers, have offset a significant portion of the adverse impact.

In addition, the availability of raw materials, energy, 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.

See Part I — Item 1A, "Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities, product components and labor 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.

Our strategy includes expanding our business with new and existing customers globally through new products, including electrification.

We also have selectively increased our vertical integration capabilities globally, as well as expanded our component manufacturing capacity in Asia, Eastern Europe, Mexico and Northern Africa and our low-cost engineering capabilities in Asia, Eastern Europe and Northern Africa.

Our strategy includes expanding our business with new and existing customers globally through new products, including those aligned with the trend toward electrification.

We have also increased our vertical integration capabilities globally, as well as expanded our component manufacturing capacity in Asia, Eastern Europe, Mexico and Northern Africa and 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.

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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.

In February 2022, we completed the acquisition of substantially all of Kongsberg Automotive's Interior Comfort Systems business unit ("Kongsberg ICS"), which specializes in thermal comfort solutions.

With almost 50 years of experience in thermal comfort solutions, Kongsberg ICS has leading technology, a well-balanced customer portfolio built on longstanding relationships with leading premium automotive manufacturers, and an experienced team.

The Kongsberg ICS acquisition is further advancing our seat component capabilities into specialized thermal comfort solutions such as seat massage, lumbar, heat and ventilation products that further differentiate our product offerings and improve vehicle performance and packaging — important features across various vehicle segments.

The transaction was valued at approximately $188 million, on a cash and debt free basis.

For further information, see Note 4, "Acquisition of Kongsberg ICS," to the consolidated financial statements included in this Report.

In April 2023, we completed the acquisition of I.G.

Bauerhin ("IGB"), a privately held supplier of automotive seat heating, ventilation and active cooling, steering wheel heating, seat sensors and electronic control modules, headquartered in Grundau-Rothenbergen, Germany.

IGB has more than 4,600 employees at nine manufacturing plants in seven countries.

The acquisition furthers our comprehensive strategy to develop and integrate a complete portfolio of thermal comfort systems for automotive seating.

IGB provides active cooling, as well as additional scale to our seat heating and ventilation capabilities and complements the lumbar and massage capabilities obtained with our acquisition of Kongsberg Automotive's Interior Comfort Systems business unit ("Kongsberg ICS") in February 2022.

Further, the vertical integration opportunities provided by this acquisition help support our goal of achieving global market share gains in seat systems.

We paid approximately $175 million, net of cash acquired, in connection with the acquisition.

On May 1, 2023, we borrowed $150 million under our delayed-draw term loan facility (the "Term Loan") to finance, in part, the acquisition of IGB.

For further information, see Note 4, "Acquisitions," to the consolidated financial statements included in this Report.

In February 2022, we completed the acquisition of substantially all of Kongsberg ICS, which specializes in thermal comfort systems.

With almost 50 years of experience in thermal comfort systems, Kongsberg ICS has leading technology, a well-balanced customer portfolio built on longstanding relationships with leading premium automotive manufacturers, and an experienced team.

The Kongsberg ICS acquisition is advancing our seat component capabilities into specialized thermal comfort systems, such as seat heating, ventilation, lumbar and massage products that further differentiate our product offerings and improve vehicle performance and packaging — important features across various vehicle segments.

We paid approximately $188 million, on a cash and debt free basis, in connection with the acquisition.

For further information, see Note 4, "Acquisitions," to the consolidated financial statements included in this Report.

In May 2022, we completed the acquisition of Thagora Technology SRL ("Thagora"), a privately held company based in Iasi, Romania, to access scalable smart-manufacturing technology.

Thagora's proprietary solutions complement our sustainable manufacturing processes by reducing scrap generated by our Seating segment's surface materials operations and lowering energy usage during production.

Thagora's proprietary solutions complement our sustainable manufacturing processes by improving the production yield of our Seating segment's surface materials operations and lowering energy usage during production.

In addition, Thagora's Industry 4.0 technologies bring significant advances to our manufacturing operations through engineering and logistics enhancements, including improved material traceability and facility footprint utilization capabilities.

The acquisition is not material to the consolidated financial statements included in this Report.

In May 2022, we entered into a definitive agreement to acquire I.G.

IGB has more than 4,000 employees at nine manufacturing plants in seven countries.

The acquisition of IGB is expected to further our vertical integration strategy and advance our vision of being a leading provider of innovative thermal comfort solutions.

The transaction is valued at approximately €140 million, on a cash and debt free basis.

The acquisition, subject to regulatory approvals and customary closing conditions and adjustments, is expected to close in 2023.

In November 2022, we completed the acquisition of InTouch Automation ("InTouch"), a privately held supplier of Industry 4.0 technologies and complex automated testing equipment critical in the production of automotive seats.

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The acquisition is not material to the consolidated financial statements included in this Report.

In March 2021, we completed the acquisition of M&N Plastics, an injection molding specialist and manufacturer of engineered plastic components for automotive electrical distribution applications.

When combined with our continuing organic investments in electrical distribution and connection systems, the addition of M&N Plastics significantly expands our capabilities and footprint in engineered components.

Engineered components are applicable to all vehicle architectures and are produced using

molding processes.

The acquisition is not material to the consolidated financial statements included in this Report.

Operational Restructuring

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Financing Transactions

In December 2022, we entered into an unsecured $150 million committed delayed-draw term loan facility (the "Delayed-Draw Facility").

The Delayed-Draw Facility is expected to be used to finance the acquisition of IGB upon closing of the transaction and for general corporate purposes.

As of December 31, 2022, there were no amounts drawn under the Delayed-Draw Facility.

For further information, see "— Liquidity and Capital Resources — Capitalization — Delayed-Draw Facility" below and Note 7, "Debt," to the consolidated financial statements included in this Report.

In May 2023, we borrowed $150 million under our Term Loan to finance, in part, the acquisition of IGB.

In November 2023, we extended the maturity date of our revolving credit facility by one year to October 28, 2027.

For further information related to our acquisition of IGB, see Note 4, "Acquisitions," to the consolidated financial statement included in this Report.

For further information related to our Term Loan and our revolving credit facility, see "— Liquidity and Capital Resources — Capitalization — Credit Agreement" and "— Term Loan" below and Note 7, "Debt," to the consolidated financial statements included in this Report.

Share Repurchase Program and Quarterly Cash Dividends

We may implement share repurchases through a variety of methods, including, but not limited to, open market purchases, accelerated stock repurchase programs and structured repurchase transactions.

The extent to which we may repurchase our outstanding common stock and the timing of such repurchases will depend upon our financial condition, results of operations, capital requirements, prevailing market conditions, alternative uses of capital and other factors (see "— Forward-Looking Statements" below).

(see "— Forward-Looking Statements" below).

Since the first quarter of 2011, our Board of Directors (the "Board") has authorized $6.1 billion in share repurchases under our common stock share repurchase program.

In 2023, we repurchased $313 million of shares.

As of December 31, 2022, we have a remaining repurchase authorization of $1.2 billion, which expires on December 31, 2024.

In 2022, our Board declared quarterly cash dividends of $0.77 per share of common stock in all quarters.

In 2021, our Board declared quarterly cash dividends of $0.25 per share of common stock in the first and second quarters, a quarterly cash dividend of $0.50 per share of common stock in the third quarter and a quarterly cash dividend of $0.77 per share of common stock in the fourth quarter.

In 2020, our Board declared a quarterly cash dividend of $0.77 per share of common stock in the first quarter.

In March 2020, as a proactive measure in response to the COVID-19 pandemic, we suspended our quarterly cash dividend.

The quarterly cash dividend was reinstated in the fourth quarter of 2020 at $0.25 per share of common stock.

As of December 31, 2023, we have a remaining repurchase authorization of $916 million, which expires on December 31, 2024.

In 2023 and 2022, our Board declared a quarterly cash dividend of $0.77 per share of common stock in all quarters.

In 2021, our Board declared a quarterly cash dividend of $0.25 per share of common stock in the first and second quarters, a quarterly cash dividend of $0.50 per share of common stock in the third quarter and a quarterly cash dividend of $0.77 per share of common stock in the fourth quarter.

For further information related to our common stock share repurchase program and our quarterly cash dividends, see Item 5, "Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," "— Liquidity and Capital Resources — Capitalization" below and Note 12, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in this Report.

Other Matters

In 2022, we recognized tax benefits of $34 million related to restructuring charges and various other items and $2 million related to the release of tax reserves at several foreign subsidiaries, partially offset by tax expense of $2 million related to the net increase in valuation allowances on deferred tax assets of foreign subsidiaries.

In 2023, we recognized net tax benefits of $35 million related to restructuring charges, the release of valuation allowances on deferred tax assets of foreign subsidiaries, the release of tax reserves at several foreign subsidiaries and various other items.

In 2022, we recognized net tax benefits of $34 million related to restructuring charges and various other items.

In 2021, we recognized tax benefits of $39 million related to restructuring charges and various other items, partially offset by tax expense of $17 million related to the net increase in valuation allowances on deferred tax assets of foreign subsidiaries and $8 million on a $45 million gain related to a favorable indirect tax ruling in a foreign jurisdiction.

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.

As discussed above, our results for the years ended December 31, 2023, 2022 and 2021, reflect the following items (in millions):

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Acquisition-related inventory fair value adjustment 2 1 —

Gain on acquisition-related foreign exchange contracts (2) — —

Impairments related to Russian operations 2 19 —

Intangible asset impairment 2 9 9

Costs (insurance recoveries) related to typhoon in the Philippines, net (1) 13 —

Foreign exchange losses due to foreign exchange rate volatility related to Russia 10 — —

Insurance (recoveries) costs related to typhoon in the Philippines, net (7) (1) 13

Foreign exchange (gains) losses due to foreign exchange rate volatility related to Russia

Favorable indirect tax ruling in a foreign jurisdiction (1) — (45)

Gain on acquisition-related foreign exchange contracts — (2) —

Loss on extinguishment of debt — — 25

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Tax benefits, net (35) (34) (14)

For further information regarding these items, see Note 2, "Current Operating Environment," Note 3, "Summary of Significant Accounting Policies," Note 4, "Acquisition of Kongsberg ICS," Note 5, "Restructuring," Note 6, "Investments in Affiliates and Other Related Party Transactions," Note 7, "Debt," Note 8, "Leases," and Note 9, "Income Taxes," to the consolidated financial statements included in this Report.

For further information regarding these items, see Note 3, "Summary of Significant Accounting Policies," Note 4, "Acquisitions," Note 5, "Restructuring," Note 6, "Investments in Affiliates and Other Related Party Transactions," Note 7, "Debt," Note 8, "Leases," and Note 9, "Income Taxes," to the consolidated financial statements included in this Report.

This section includes forward-looking statements that are subject to risks and uncertainties.

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Amortization of intangible assets 62.5 0.3 70.8 0.3 73.3 0.4

Interest expense 98.6 0.5 91.8 0.5 99.6 0.6

Interest expense, net 101.1 0.4 98.6 0.5 91.8 0.5

Other expense, net 54.9 0.3 46.4 0.2 0.1 —

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Net sales for the year ended December 31, 2023 were $23.5 billion, as compared to $20.9 billion for the year ended December 31, 2022, an increase of $2.6 billion or 12%.

New business globally and higher production volumes on Lear platforms in North America, Europe and South America favorably impacted net sales by $1.1 billion and $0.8 billion, respectively.

Net sales also benefited by $0.6 billion and $0.2 billion due to commodity recoveries and our Kongsberg ICS acquisition, respectively.

These increases were partially offset by the impact of foreign exchange rate fluctuations, which reduced net sales by $1.1 billion.

Higher production volumes on Lear platforms and new business in every region favorably impacted net sales by $1.4 billion and $0.9 billion, respectively.

(in millions) Cost of Sales

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Cost of sales in 2023 was $21.8 billion, as compared to $19.5 billion in 2022.

New business globally and higher production volumes on Lear platforms in North America, Europe and South America increased cost of sales.

Cost of sales also increased as a result of higher commodity costs and our Kongsberg ICS acquisition.

These increases were partially offset by the impact of foreign exchange fluctuations, which reduced cost of sales.

Higher production volumes on Lear platforms and new business in every region increased cost of sales.

Gross profit and gross margin were $1.7 billion and 7.3% of net sales in 2023, as compared to $1.4 billion and 6.7% of net sales in 2022.

New business and higher production volumes on Lear platforms positively impacted gross profit by $269 million.

The impact of selling price reductions, increased commodity costs and foreign exchange fluctuations was partially offset by favorable operating performance, including the benefit of restructuring actions.

Higher production volumes on Lear platforms and new business positively impacted gross profit by $308 million.

The impact of favorable operating performance, including the benefit of restructuring actions, was offset by selling price reductions.

These factors had a corresponding impact on gross margin.

Selling, general and administrative expenses, including engineering and development expenses, were $685 million for the year ended December 31, 2022, as compared to $643 million for the year ended December 31, 2021, primarily reflecting our Kongsberg ICS acquisition and an increase in engineering costs to support new business.

Selling, general and administrative expenses, including engineering and development expenses, were $715 million for the year ended December 31, 2023, as compared to $685 million for the year ended December 31, 2022, primarily reflecting higher sales and our acquisition of IGB in 2023.

As a percentage of net sales, selling, general and administrative expenses were 3.0% in 2023, as compared to 3.3% in 2022.

Amortization of intangible assets was $71 million in 2022, as compared to $73 million in 2021.

An impairment charge of $9 million was recognized in 2022 and 2021.

Interest expense was $99 million in 2022, as compared to $92 million in 2021, reflecting financing costs related to our Kongsberg ICS acquisition in 2022.

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, the non-service cost components of net periodic benefit cost and other miscellaneous income and expense, was $46 million in 2022, as compared to $— million in 2021.

In 2022, we recognized foreign exchange losses of $10 million related to foreign exchange rate volatility in Russia following the invasion of Ukraine and foreign exchange gains of $2 million related to foreign exchange contracts on the €140 million IGB purchase price.

Amortization of intangible assets was $63 million in 2023, including an impairment charge of $2 million, as compared to $71 million in 2022, including an impairment charge of $9 million.

Interest expense, net was $101 million in 2023, as compared to $99 million in 2022.

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, gains and losses on the disposal of fixed assets, the non-service cost components of net periodic benefit cost and other miscellaneous income and expense, was $55 million in 2023, as compared to $46 million in 2022.

In 2023, we recognized foreign exchange losses of $53 million, including $31 million related to the hyper-inflationary environment and significant currency devaluation in Argentina, and losses of $7 million related to impairments of affiliates.

In 2023, we also recognized gains of $18 million related to the sales of fixed assets and $4 million related to insurance recoveries.

In 2022, we recognized foreign exchange losses of $30 million, including losses of $10 million related to foreign exchange rate volatility in Russia and gains of $2 million related to foreign exchange contracts on the €140 million IGB purchase price.

In 2022, we also recognized a gain of $1 million related to insurance recoveries.

In 2021, we recognized a gain of $45 million related to a favorable indirect tax ruling in a foreign jurisdiction and losses of $25 million related to the extinguishment of debt and $2 million related to the impairment and liquidation of an investment.

In 2023, the provision for income taxes was $181 million, representing an effective tax rate of 23.3% on pretax income before equity in net income of affiliates of $777 million.

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In 2023 and 2022, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions.

In 2022, we recognized net tax benefits of $34 million related to restructuring charges and various other items.

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 $33 million for the year ended December 31, 2022, as compared to $16 million for the year ended December 31, 2021, primarily reflecting the earnings of our Shenyang Jinbei Lear Automotive Seating joint venture established in the third quarter of 2021.

Equity in net income of affiliates was $49 million for the year ended December 31, 2023, as compared to $33 million for the year ended December 31, 2022, primarily reflecting the higher earnings of certain of our joint ventures in Asia.

Net income attributable to Lear was $573 million, or $9.68 per diluted share, in 2023, as compared to $328 million, or $5.47 per diluted share, in 2022.

Net income and diluted net income per share decreased for the reasons described above.

Net income and diluted net income per share increased for the reasons described above.

Reportable Operating Segments

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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").

Financial measures regarding each segment's pretax income before equity in net income of affiliates, interest expense, net 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.

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Segment earnings (1)

1,066.9 893.0

Margin 6.1 % 5.7 %

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Seating net sales were $17.5 billion for the year ended December 31, 2023, as compared to $15.7 billion for the year ended December 31, 2022, an increase of $1.8 billion or 12%.

New business and higher production volumes on Lear platforms favorably impacted net sales by $805 million and $540 million, respectively.

Net sales also benefited by $319 million and $198 million due to commodity recoveries and our Kongsberg ICS acquisition, respectively.

These increases were partially offset by foreign exchange fluctuations, which reduced net sales by $750 million.

Segment earnings, including restructuring costs, and the related margin on net sales were $893 million and 5.7% in 2022, as compared to $851 million and 5.9% in 2021.

New business and higher production volumes on Lear platforms positively impacted segment earnings by $204 million.

The impact of selling price reductions, higher commodity costs, foreign exchange fluctuations and impairment charges related to our Russian operations was partially offset by favorable operating performance, including the benefit of operational restructuring actions.

Higher production volumes on Lear platforms and new business favorably impacted net sales by $1.0 billion and $0.6 billion, respectively.

Our acquisitions of IGB and Kongsberg ICS also increased net sales $0.2 billion.

Segment earnings, including restructuring costs, and the related margin on net sales were $1.1 billion and 6.1% in 2023, as compared to $893 million and 5.7% in 2022.

Higher production volumes on Lear platforms and new business positively impacted segment earnings by $215 million.

The impact of selling price reductions and higher restructuring costs were offset by favorable operating performance, including the benefit of commodity recoveries and operational restructuring actions.

A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):

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E-Systems net sales were $5.9 billion for the year ended December 31, 2023, as compared to $5.2 billion for the year ended December 31, 2022, an increase of $738 million or 14%.

New business and higher production volumes on Lear platforms favorably impacted net sales by $279 million and $200 million, respectively.

Net sales also benefited by $274 million due to commodity recoveries.

These increases were partially offset by foreign exchange fluctuations, which reduced net sales by $376 million.

Higher production volumes on Lear platforms and new business favorably impacted net sales by $0.4 billion and $0.3 billion, respectively.

Segment earnings, including restructuring costs, and the related margin on net sales were $229 million and 3.9% in 2023, as compared to $74 million and 1.4% in 2022.

The impact of selling price reductions, higher commodity costs, increased restructuring costs and foreign exchange fluctuations reduced segment earnings.

These decreases were partially offset by favorable operating performance, including the benefit of operational restructuring actions.

New business and higher production volumes on Lear platforms also positively impacted segment earnings of $65 million.

Higher production volumes on Lear platforms and new business positively impacted segment earnings by $93 million.

The impact of favorable operating performance, including the benefit of operational restructuring actions, and lower restructuring costs was partially offset by selling price reductions.

A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):

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(1) See definition above.

Segment earnings related to our other category were ($313) million in 2022, as compared to ($297) million in 2021, primarily reflecting transaction costs of $10 million related to our Kongsberg ICS acquisition.

Segment earnings related to our other category were ($363) million in 2023, as compared to ($313) million in 2022, primarily reflecting higher compensation-related costs and costs related to our efficiency initiatives including investments in information technology.

Year Ended December 31, 2022, Compared With Year Ended December 31, 2021

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As of December 31, 2023 and 2022, cash and cash equivalents of $803 million and $790 million, respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends.

There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear.

There are no material 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.

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Adequacy of Liquidity Sources

As of December 31, 2022, we had approximately $1.1 billion of cash and cash equivalents on hand, $2.0 billion in available borrowing capacity under our revolving credit facility and $150 million in available borrowing capacity under our Delayed-Draw Facility which is expected to be used to finance the acquisition of IGB upon closing of the transaction and for general corporate purposes.

As of December 31, 2023, we had approximately $1.2 billion of cash and cash equivalents on hand and $2.0 billion in available borrowing capacity under our credit agreement.

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.

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Net cash used in financing activities $ (420) $ (387) $ (33)

Net cash provided by operating activ ities was $1,021 million i n 2022, as compared to $670 million in 2021 .

The increase in operating cash flow was largely driven by a relatively small increase in working capital in 2022 as compared to a larger increase in working capital in 2021.

Net cash provided by operating activ ities was $1.2 billion i n 2023, as compared to $1.0 billion in 2022 .

The overall increase in operating cash flow primarily reflects our higher earnings in 2023 as compared to 2022.

Net cash used in investing activities was $762 million in 2023, as compared to $830 million in 2022.

In 2023, we paid $175 million for our IGB acquisition.

In 2022, we paid $188 million for our Kongsberg ICS acquisition and $15 million related to investments in affiliates.

In 2021, we paid $50 million related to investments in affiliates.

In 2023, capital spending was $627 million, as compared to $638 million in 2022.

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Net cash used in financing activities was $420 million in 2023, as compared to $387 million in 2022.

In 2022, we paid $100 million for repurchases of our common stock, $186 million in dividends to Lear stockholders and $85 million in dividends to noncontrolling interest holders.

In 2023, we borrowed $150 million under our Term Loan and paid $297 million for repurchases of our common stock, $182 million in dividends to Lear stockholders and $79 million in dividends to noncontrolling interest holders.

In 2022, we paid $100 million for repurchases of our common stock, $186 million in dividends to Lear stockholders and $85 million in dividends to noncontrolling interest holders.

In 2021, we received net proceeds of $699 million related to the issuance of 2032 and 2052 Notes and paid $7 million of related issuance costs.

Also in 2021, we

repurchased $200 million of our outstanding 2027 Notes for $222 million, including an early tender premium and fees, and made principal payments under our term loan facility of $220 million.

For further information regarding our 2023 and 2022 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.

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As of December 31, 2023 and 2022, we had lines of credit from banks totaling $338 million and $298 million, respectively.

As of December 31, 2022, we had short-term debt balances outstanding related to draws on our lines of credit of $10 million.

As of December 31, 2021, there were no short-term debt balances outstanding related to draws on our lines of credit.

As of December 31, 2023 and 2022, we had short-term debt balances outstanding related to draws on our lines of credit of $28 million and $10 million, respectively.

The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors.

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2052 Notes November 2021 January 15, 2052 January 15 and July 15

(1) Commenced July 15, 2022.

In 2021, we issued $350 million in aggregate principal amount at maturity of 2032 Notes and $350 million in aggregate principal amount at maturity of 2052 Notes.

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The 2052 Notes have a stated coupon rate of 3.55% and were issued at 99.845% of par, resulting in a yield to maturity of 3.558%.

The net proceeds from the offering of $699 million, after original issue discount, were used, in part, to fund the tender of $200 million in aggregate principal amount of 2027 Notes and the repayment in full of $206 million outstanding on our term loan facility.

The remaining net proceeds were used to finance the 2022 acquisition of Kongsberg ICS and for general corporate

For further information related to the Kongsberg ICS acquisition, see Note 4, "Acquisition of Kongsberg ICS," to the consolidated financial statements included in this Report.

In connection with these transactions, we recognized a loss of $24 million on the extinguishment of debt and paid related issuance costs of $7 million.

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 of $669 million, after original issue discount, were used to redeem $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.

The remaining net proceeds were used to finance the 2022 acquisition of Kongsberg ICS and for general corporate purposes.

For further information related to the Kongsberg ICS acquisition, see Note 4, "Acquisitions," to the consolidated financial statements included in this Report.

In connection with these transactions, we recognized a loss of $24 million on the extinguishment of debt and paid related issuance costs of $7 million.

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In November 2021, we repaid in full $206 million outstanding on the Term Loan Facility.

In connection with these transactions, we rec ognized a loss of approximately $1 million on the extinguishment of debt and paid related issuance costs of approximately $3 million.

In connection with these transactions, we recognized a loss of approximately $1 million on the extinguishment of debt and paid related issuance costs of approximately $3 million.

In November 2023, we extended the maturity date of the Revolving Credit Facility by one year to October 2 8, 2027.

In 2023 and 2021, there were no borrowings or repayments under the Revolving Credit Facility.

In 2022, aggregate borrowings and repayments under the Revolving Credit Facility were $65 million.

In 2021, there were no borrowings or repayments under the Revolving Credit 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.

As of December 31, 2023 and 2022, there were no borrowings outstanding under the Revolving Credit Facility.

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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 Credit Agreement , which has been incorporated by reference as an exhibit to this Report.

Delayed-Draw Term Loan Facility

In December 2022, we entered into an unsecured $150 million committed Delayed-Draw Facility.

The Delayed-Draw Facility is expected to be used to finance the acquisition of IGB upon closing of the transaction and for general corporate purposes.

As of December 31, 2022, there were no amounts drawn under the Delayed-Draw Facility.

For further information related to the Delayed-Draw Facility, see Note 7, "Debt," to the consolidated financial statements included in this Report

In May 2023, we borrowed $150 million under our Term Loan to finance, in part, the acquisition of IGB.

The Term Loan contains the same covenants as the Credit Agreement.

As of December 31, 2023, we were in compliance with all covenants under the Term Loan.

For further information related to our acquisition of IGB, see Note 4, "Acquisitions," to the consolidated financial statements included in this Report.

For further information related to our Term Loan, see Note 7, "Debt," 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."

In 2022, our Board declared quarterly cash dividends of $0.77 per share of common stock in all quarters.

In 2020, our Board declared a quarterly cash dividend of $0.77 per share of common stock in the first quarter.

In March 2020, as a proactive measure in response to the COVID-19 pandemic, we suspended our quarterly cash dividend.

The quarterly cash dividend was reinstated in the fourth quarter of 2020 at $0.25 per share of common stock.

In 2023 and 2022, our Board declared a quarterly cash dividend of $0.77 per share of common stock in all quarters.

We expect to continue to pay quarterly cash dividends in the future, although such payments are at the discretion of our Board and will depend upon our financial condition, results of operations, capital requirements, prevailing market conditions, alternative uses of capital and other factors that our Board may consider at its discretion.

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Certain of these strategies also may limit our opportunities in a declining commodity price environment.

In the current environment of escalating raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact.

In the current environment of elevated raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, have offset a significant portion of the adverse impact.

If these costs increase, it could have an adverse impact on our operating results in the foreseeable future.

For further information related to the financial instruments described above, see Note 16, "Financial Instruments," to the consolidated financial statements included in this Report.

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Debt obligations and interest expense associated with debt obligations

As of December 31, 2022, we had $2.6 billion of outstanding senior unsecured notes maturing in 2027 through 2052, as well as $2.0 billion in available borrowing capacity under our Revolving Credit Facility and $150 million in available borrowing capacity under our Delayed-Draw Facility.

As of December 31, 2023, we had $2.6 billion of outstanding senior unsecured notes maturing in 2027 through 2052 and a $150 million outstanding Term Loan maturing in 2026, as well as $2.0 billion in available borrowing capacity under our Revolving Credit Facility maturing in 2027.

Interest on the Notes is due biannually at varying dates.

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Scheduled interest payments $ 103 $ 103 $ 103 $ 103 $ 83 $ 1,024 $ 1,519

For further information related to our debt, see "— Capitalization — Senior Notes" and "— Credit Agreement" above and Note 7, "Debt," to the consolidated financial statements included in this Report.

For further information related to our debt, see "— Capitalization — Senior Notes," "— Credit Agreement" and "— Term Loan" above and Note 7, "Debt," to the consolidated financial statements included in this Report.

Purchase obligations

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We do not fund our postretirement benefit obligations and certain of our pension benefit obligations.

Rather, benefit payments are made to eligible participants as incurred.

Rather, benefit payments

are made to eligible participants as incurred.

We expect benefit payments related to our unfunded pension and postretirement benefit obligations to be approximately $7 million and $4 million, respectively, in 2024.

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.

The purchase price for our acquisition of IGB, when paid, will be funded primarily by proceeds from our Delayed-Draw Facility.

For further information related to our Delayed-Draw Facility, see Note 7, "Debt," 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, environmental legal claims and other matters.

As of December 31, 2022, we had recorded reserves for pending legal disputes, including commercial disputes, product liability claims and other legal matters, of $16 million.

In addition, as of December 31, 2022, we had recorded reserves for product warranty and recall claims and environmental matters of $30 million and $8 million, respectively.

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, 2023, we had recorded reserves for pending legal disputes, including commercial and contractual disputes, product liability claims and other legal matters, of $14 million.

In addition, as of December 31, 2023, we had recorded reserves for warranty and recall matters of $32 million and environmental matters of $5 million.

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.

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, "Legal and Other Contingencies," to the consolidated financial statements included in this Report.

Critical Accounting Estimates

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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.

Revenue Recognition and Sales Commitments

Revenue Recognition

We enter into contracts with our customers to provide production parts generally at the beginning of a vehicle's life cycle.

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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 5% 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.

Benefit obligations and net periodic benefit (credit) cost, along with key actuarial assumptions, are shown below (in millions, except discount rate and expected return on plan assets):

Pension Other Postretirement

Benefit obligations as of December 31, 2022

Net periodic benefit (credit) cost for the year ending December 31, 2023 (1)

Discount rate -

Domestic plans 5.5 % 5.5 %

Foreign plans 5.0 % 5.3 %

Expected return on plan assets -

Domestic plans 6.0 % N/A

Foreign plans 5.4 % N/A

Net periodic benefit (credit) cost for the year ended December 31, 2022 $ (4) $ 1

Discount rate -

Domestic plans 3.0 % 2.8 %

Foreign plans 2.5 % 3.1 %

Expected return on plan assets -

Domestic plans 5.5 % N/A

Foreign plans 4.6 % 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 (Decrease) in 2023

Net Periodic Benefit Cost

Pension Other Postretirement Pension Other Postretirement

100 bp decrease in discount rate $ 85 $ 4 $ (2) $ —

100 bp decrease in expected return on plan assets N/A N/A 7 N/A

For further information related to our pension and other postretirement benefit plans, see "— Liquidity and Capital Resources — Capitalization — Contractual Obligations" above and Note 10, "Pension and Other Postretirement Benefit Plans," to the consolidated financial statements included in this Report.

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.

Deferred tax assets and liabilities are measured

using enacted tax rates expected to apply to taxable income for 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.

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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.

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), as well as the implementation of feasible and prudent tax planning strategies.

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During 2023, 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.

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• 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;

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• the outcome of customer negotiations and the impact of customer-imposed price reductions;

• increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components and our ability to mitigate such costs and insufficient availability;

• increases in the costs and restrictions on the availability of raw materials, energy, commodities, product components and labor and our ability to mitigate such costs and insufficient availability;

• disruptions in relationships with our suppliers;

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• 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;

• labor disputes, including disruptions, involving us or our significant customers or suppliers or that otherwise affect us;

• the consequences of violations of law by our employees, agents or business partners, including violations related to anti-bribery, competition, export and import, trade sanctions, data privacy, environmental, human rights and other laws;

• the operational and financial success of our joint ventures;

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• our ability to respond to the evolution of the global transportation industry;

• the outcome of an increased emphasis on global climate change and other ESG matters by stakeholders;

• the outcome of an increased emphasis on global climate change and other sustainability matters by stakeholders;

• the impact of global climate change;

• the impact of pandemics, epidemics, disease outbreaks and other public health crises on our business;

• the impact and timing of program launch costs and our management of new program launches;

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• 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;

• 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 impact of changes in our effective tax rate, the adoption of new tax legislation or exposure to additional income tax liabilities on our profitability;

• the impact of administrative policy, including protectionist trade policies, in the United States and related actions by countries in which we do business;

• other risks, described in Part I — Item 1A, "Risk Factors," as well as the risks and information provided from time to time in our other 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis