UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 30, 2019.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-11311
(Exact name of registrant as specified in its charter)
_______________________________________
Delaware | 13-3386776 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
21557 Telegraph Road, Southfield, MI | 48033 | |
(Address of principal executive offices) | (Zip code) | |
(248) 447-1500
(Registrant’s telephone number, including area code)
________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | ||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | ||
Emerging growth company | ¨ | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 23, 2019, the number of shares outstanding of the registrant’s common stock was 62,261,160 shares.
LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 30, 2019
INDEX
Page No. | |
Item 3 – Quantitative and Qualitative Disclosures about Market Risk (included in Item 2) | |
2
LEAR CORPORATION AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the unaudited condensed consolidated financial statements of Lear Corporation and subsidiaries pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended December 31, 2018.
The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.
3
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 30, 2019 (1) | December 31, 2018 | |||||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | $ | $ | ||||
Accounts receivable | ||||||
Inventories | ||||||
Other | ||||||
Total current assets | ||||||
LONG-TERM ASSETS: | ||||||
Property, plant and equipment, net | ||||||
Goodwill | ||||||
Other | ||||||
Total long-term assets | ||||||
Total assets | $ | $ | ||||
LIABILITIES AND EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Short-term borrowings | $ | $ | ||||
Accounts payable and drafts | ||||||
Accrued liabilities | ||||||
Current portion of long-term debt | ||||||
Total current liabilities | ||||||
LONG-TERM LIABILITIES: | ||||||
Long-term debt | ||||||
Other | ||||||
Total long-term liabilities | ||||||
Redeemable noncontrolling interest | ||||||
EQUITY: | ||||||
Preferred stock, 100,000,000 shares authorized (including 10,896,250 Series A convertible preferred stock authorized); no shares outstanding | ||||||
Common stock, $0.01 par value, 300,000,000 shares authorized; 64,563,291 shares issued as of March 30, 2019 and December 31, 2018 | ||||||
Additional paid-in capital | ||||||
Common stock held in treasury, 2,147,928 and 1,623,678 shares as of March 30, 2019 and December 31, 2018, respectively, at cost | ( | ) | ( | ) | ||
Retained earnings | ||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||
Lear Corporation stockholders’ equity | ||||||
Noncontrolling interests | ||||||
Equity | ||||||
Total liabilities and equity | $ | $ | ||||
(1) |
The accompanying notes are an integral part of these condensed consolidated balance sheets.
4
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in millions, except share and per share data)
Three Months Ended | ||||||
March 30, 2019 | March 31, 2018 | |||||
Net sales | $ | $ | ||||
Cost of sales | ||||||
Selling, general and administrative expenses | ||||||
Amortization of intangible assets | ||||||
Interest expense | ||||||
Other (income) expense, net | ( | ) | ||||
Consolidated income before provision for income taxes and equity in net income of affiliates | ||||||
Provision for income taxes | ||||||
Equity in net income of affiliates | ( | ) | ( | ) | ||
Consolidated net income | ||||||
Less: Net income attributable to noncontrolling interests | ||||||
Net income attributable to Lear | $ | $ | ||||
Basic net income per share available to Lear common stockholders (Note 13) | $ | $ | ||||
Diluted net income per share available to Lear common stockholders (Note 13) | $ | $ | ||||
Cash dividends declared per share | $ | $ | ||||
Average common shares outstanding | ||||||
Average diluted shares outstanding | ||||||
Consolidated comprehensive income (Condensed Consolidated Statements of Equity) | $ | $ | ||||
Less: Comprehensive income attributable to noncontrolling interests | ||||||
Comprehensive income attributable to Lear | $ | $ | ||||
The accompanying notes are an integral part of these condensed consolidated statements.
5
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions, except share and per share data)
Three Months Ended March 30, 2019 | ||||||||||||
Common Stock | Additional Paid-In Capital | Common Stock Held in Treasury | Retained Earnings | |||||||||
Balance at January 1, 2019 | $ | $ | $ | ( | ) | $ | ||||||
Comprehensive income (loss): | ||||||||||||
Net income | — | — | — | |||||||||
Other comprehensive income (loss): | — | — | — | — | ||||||||
Total comprehensive income (loss) | — | — | — | |||||||||
Stock-based compensation | — | — | — | |||||||||
Net issuance of 280,020 shares held in treasury in settlement of stock-based compensation | — | ( | ) | ( | ) | |||||||
Repurchase of 804,270 shares of common stock at average price of $146.56 per share | — | — | ( | ) | — | |||||||
Dividends declared to Lear Corporation stockholders | — | — | — | ( | ) | |||||||
Dividends declared to non-controlling interest holders | — | — | — | — | ||||||||
Redeemable non-controlling interest adjustment | — | — | — | |||||||||
Balance at March 30, 2019 | $ | $ | $ | ( | ) | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
6
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)
(In millions, except share and per share data)
Three Months Ended March 30, 2019 | |||||||||||||||||
Accumulated Other Comprehensive Loss, Net of Tax | Lear Corporation Stockholders' Equity | Non-controlling Interests | Equity | Redeemable Non-controlling Interests | |||||||||||||
Balance at January 1, 2019 | $ | ( | ) | $ | $ | $ | $ | ||||||||||
Comprehensive income (loss): | |||||||||||||||||
Net income | — | ||||||||||||||||
Other comprehensive income (loss): | ( | ) | ( | ) | ( | ) | |||||||||||
Total comprehensive income (loss) | ( | ) | |||||||||||||||
Stock-based compensation | — | — | — | ||||||||||||||
Net issuance of 280,020 shares held in treasury in settlement of stock-based compensation | — | ( | ) | — | ( | ) | — | ||||||||||
Repurchase of 804,270 shares of common stock at average price of $146.56 per share | — | ( | ) | — | ( | ) | — | ||||||||||
Dividends declared to Lear Corporation stockholders | — | ( | ) | — | ( | ) | — | ||||||||||
Dividends declared to non-controlling interest holders | — | — | ( | ) | ( | ) | — | ||||||||||
Redeemable non-controlling interest adjustment | — | — | ( | ) | |||||||||||||
Balance at March 30, 2019 | $ | ( | ) | $ | $ | $ | $ | ||||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
7
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)
(In millions, except share and per share data)
Three Months Ended March 31, 2018 | ||||||||||||
Common Stock | Additional Paid-In Capital | Common Stock Held in Treasury | Retained Earnings | |||||||||
Balance at January 1, 2018 | $ | $ | $ | ( | ) | $ | ||||||
Comprehensive income: | ||||||||||||
Net income | — | — | — | |||||||||
Other comprehensive income: | — | — | — | — | ||||||||
Total comprehensive income | — | — | — | |||||||||
Stock-based compensation | — | — | — | |||||||||
Net issuance of 327,498 shares held in treasury in settlement of stock-based compensation | — | ( | ) | — | ||||||||
Repurchase of 829,360 shares of common stock at average price of $187.41 per share | — | — | ( | ) | — | |||||||
Dividends declared to Lear Corporation stockholders | — | — | — | ( | ) | |||||||
Dividends declared to non-controlling interest holders | — | — | — | — | ||||||||
Adoption of ASU 2016-16 | — | — | — | |||||||||
Affiliate transaction | — | — | — | — | ||||||||
Redeemable non-controlling interest adjustment | — | — | — | ( | ) | |||||||
Acquisition of outstanding non-controlling interest | — | — | — | — | ||||||||
Balance at March 31, 2018 | $ | $ | $ | ( | ) | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
8
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)
(In millions, except share and per share data)
Three Months Ended March 31, 2018 | |||||||||||||||||
Accumulated Other Comprehensive Loss, Net of Tax | Lear Corporation Stockholders' Equity | Non-controlling Interests | Equity | Redeemable Non-controlling Interests | |||||||||||||
Balance at January 1, 2018 | $ | ( | ) | $ | $ | $ | $ | ||||||||||
Comprehensive income: | |||||||||||||||||
Net income | — | ||||||||||||||||
Other comprehensive income: | |||||||||||||||||
Total comprehensive income | |||||||||||||||||
Stock-based compensation | — | — | — | ||||||||||||||
Net issuance of 327,498 shares held in treasury in settlement of stock-based compensation | — | ( | ) | — | ( | ) | — | ||||||||||
Repurchase of 829,360 shares of common stock at average price of $187.41 per share | — | ( | ) | — | ( | ) | — | ||||||||||
Dividends declared to Lear Corporation stockholders | — | ( | ) | — | ( | ) | — | ||||||||||
Dividends declared to non-controlling interest holders | — | — | ( | ) | ( | ) | — | ||||||||||
Adoption of ASU 2016-16 | — | — | — | ||||||||||||||
Affiliate transaction | — | — | — | ||||||||||||||
Redeemable non-controlling interest adjustment | — | ( | ) | — | ( | ) | |||||||||||
Acquisition of outstanding non-controlling interest | — | — | ( | ) | ( | ) | — | ||||||||||
Balance at March 31, 2018 | $ | ( | ) | $ | $ | $ | $ | ||||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
9
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Three Months Ended | ||||||
March 30, 2019 | March 31, 2018 | |||||
Cash Flows from Operating Activities: | ||||||
Consolidated net income | $ | $ | ||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | ||||||
Net change in recoverable customer engineering, development and tooling | ( | ) | ||||
Net change in working capital items (see below) | ( | ) | ( | ) | ||
Other, net | ( | ) | ( | ) | ||
Net cash provided by operating activities | ||||||
Cash Flows from Investing Activities: | ||||||
Additions to property, plant and equipment | ( | ) | ( | ) | ||
Other, net | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||
Cash Flows from Financing Activities: | ||||||
Credit agreement repayments | ( | ) | ( | ) | ||
Short-term borrowings, net | ||||||
Repurchase of common stock | ( | ) | ( | ) | ||
Dividends paid to Lear Corporation stockholders | ( | ) | ( | ) | ||
Dividends paid to noncontrolling interests | ( | ) | ( | ) | ||
Other, net | ( | ) | ( | ) | ||
Net cash used in financing activities | ( | ) | ( | ) | ||
Effect of foreign currency translation | ||||||
Net Change in Cash, Cash Equivalents and Restricted Cash | ( | ) | ( | ) | ||
Cash, Cash Equivalents and Restricted Cash as of Beginning of Period | ||||||
Cash, Cash Equivalents and Restricted Cash as of End of Period | $ | $ | ||||
Changes in Working Capital Items: | ||||||
Accounts receivable | $ | ( | ) | $ | ( | ) |
Inventories | ( | ) | ( | ) | ||
Accounts payable | ||||||
Accrued liabilities and other | ||||||
Net change in working capital items | $ | ( | ) | $ | ( | ) |
Supplementary Disclosure: | ||||||
Cash paid for interest | $ | $ | ||||
Cash paid for income taxes, net of refunds received | $ | $ | ||||
The accompanying notes are an integral part of these condensed consolidated statements.
10
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED 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.
(2) Restructuring
In the first three months of 2019, the Company recorded charges of $54.3 million in connection with its restructuring actions. These charges consist of $48.6 million recorded as cost of sales and $5.7 million recorded as selling, general and administrative expenses. The restructuring charges consist of employee termination costs of $49.1 million, fixed asset impairment charges of $2.1 million and contract termination costs of $1.5 million, as well as other related costs of $1.6 million. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Fixed asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $2.1 million in excess of related estimated fair values.
The Company expects to incur approximately $51 million of additional restructuring costs related to activities initiated as of March 30, 2019, 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.
Accrual as of | 2019 | Utilization | Accrual as of | ||||||||||||||||
January 1, 2019 | Charges | Cash | Non-cash | March 30, 2019 | |||||||||||||||
Employee termination benefits | $ | $ | $ | ( | ) | $ | $ | ||||||||||||
Asset impairment charges | ( | ) | |||||||||||||||||
Contract termination costs | ( | ) | |||||||||||||||||
Other related costs | ( | ) | |||||||||||||||||
Total | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||
11
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) Inventories
March 30, 2019 | December 31, 2018 | ||||||
Raw materials | $ | $ | |||||
Work-in-process | |||||||
Finished goods | |||||||
Reserves | ( | ) | ( | ) | |||
Inventories | $ | $ | |||||
(4) Pre-Production Costs Related to Long-Term Supply Agreements
During the first three months of 2019 and 2018, the Company capitalized $58.8 million and $33.5 million, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first three months of 2019 and 2018, the Company also capitalized $47.0 million and $31.8 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 condensed consolidated balance sheets.
During the first three months of 2019 and 2018, the Company collected $95.8 million and $79.0 million, respectively, of cash related to E&D and tooling costs.
March 30, 2019 | December 31, 2018 | ||||||
Current | $ | $ | |||||
Long-term | |||||||
Recoverable customer E&D and tooling | $ | $ | |||||
(5) Long-Term Assets
Property, Plant and Equipment
12
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 30, 2019 | December 31, 2018 | ||||||
Land | $ | $ | |||||
Buildings and improvements | |||||||
Machinery and equipment | |||||||
Construction in progress | |||||||
Total property, plant and equipment | |||||||
Less – accumulated depreciation | ( | ) | ( | ) | |||
Property, plant and equipment, net | $ | $ | |||||
Depreciation expense was $110.9 million and $107.1 million in the three months ended March 30, 2019 and March 31, 2018, respectively.
(6) Goodwill
Seating | E-Systems | Total | |||||||||
Balance at January 1, 2019 | $ | $ | $ | ||||||||
Foreign currency translation and other | ( | ) | |||||||||
Balance at March 30, 2019 | $ | $ | $ | ||||||||
13
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) Debt
March 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||
Debt Instrument | Long-Term Debt | Debt Issuance Costs (2) | Long-Term Debt, Net | Weighted Average Interest Rate | Long-Term Debt | Debt Issuance Costs (2) | Long-Term Debt, Net | Weighted Average Interest Rate | |||||||||||||||||||
Credit Agreement — Term Loan Facility | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||
5.375% Senior Notes due 2024 (the "2024 Notes") | ( | ) | ( | ) | |||||||||||||||||||||||
5.25% Senior Notes due 2025 (the "2025 Notes") | ( | ) | ( | ) | |||||||||||||||||||||||
3.8% Senior Notes due 2027 (the "2027 Notes") (1) | ( | ) | ( | ) | |||||||||||||||||||||||
Other | N/A | N/A | |||||||||||||||||||||||||
$ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||
Less — Current portion | ( | ) | ( | ) | |||||||||||||||||||||||
Long-term debt | $ | $ | |||||||||||||||||||||||||
(1) Net of unamortized original issue discount of $4.5 million and $4.6 million as of March 30, 2019 and December 31, 2018, respectively
(2) Unamortized portion
Senior Notes
The issuance date, maturity date and interest payable dates of the Company's senior unsecured 2024 Notes, 2025 Notes and 2027 Notes (together, the "Notes") are as shown below:
Note | Issuance Date | Maturity Date | Interest Payable Dates | ||
2024 Notes | March 2014 | March 15, 2024 | March 15 and September 15 | ||
2025 Notes | November 2014 | January 15, 2025 | January 15 and July 15 | ||
2027 Notes | August 2017 | September 15, 2027 | March 15 and September 15 | ||
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 indenture governing the 2024 Notes limits the ability of the Company to enter into sale and leaseback transactions. The indentures governing the Notes also provide for customary events of default.
As of March 30, 2019, the Company was in compliance with all covenants under the indentures governing the Notes.
Credit Agreement
The Company's 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 $250.0 million term loan facility (the "Term Loan Facility"). On March 27, 2019, the Company entered into an agreement to extend the maturity date of the Revolving Credit Facility by one year to August 8, 2023. The maturity date of the Term Loan Facility remains August 8, 2022.
As of March 30, 2019 and December 31, 2018, there were no borrowings outstanding under the Revolving Credit Facility and $240.6 million and $242.2 million, respectively, of borrowings outstanding under the Term Loan Facility. In the first three months of 2019, the Company made required principal payments of $1.6 million under the Term Loan Facility.
14
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. The range and the rate as of March 30, 2019, are shown below (in percentages):
Eurocurrency Rate | Base Rate | |||||||||||||||||
Minimum | Maximum | Rate as of March 30, 2019 | Minimum | Maximum | Rate as of March 30, 2019 | |||||||||||||
Revolving Credit Facility | % | % | % | % | % | % | ||||||||||||
Term Loan Facility | % | % | % | % | % | % | ||||||||||||
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 March 30, 2019, the Company was in compliance with all covenants under the Credit Agreement.
Other
As of March 30, 2019, other long-term debt consists of amounts outstanding under finance leases.
(8) Leases
On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, "Leases," which requires lessees to record right-of-use assets and corresponding liabilities on the balance sheet, as well as disclose key information regarding leasing arrangements. Adoption of the standard resulted in the recognition of right-of-use assets of $438.1 million and related lease obligations of $445.8 million as of January 1, 2019. The standard did not have a significant impact on the Company's operating results or cash flows.
Transition
As permitted by the transition guidance, the Company adopted the standard by applying the modified retrospective method without the restatement of comparative periods. Accordingly, the Company has provided disclosures required by prior lease guidance for comparative periods.
The Company elected the package of practical expedients, which permits a lessee to not reassess under the new standard its prior conclusions regarding lease identification, lease classification and initial direct costs. The Company did not elect the practical expedient which permits the use of hindsight when determining the lease term and assessing right-of-use assets for impairment.
As permitted by the transition guidance, the Company used the remaining lease term as of the date of adoption of the standard to estimate discount rates. As permitted by the standard, the Company elected, for all asset classes, the short-term lease exemption. 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.
Accounting Policy
15
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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.
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 condensed consolidated balance sheet are shown below (in millions):
March 30, 2019 | |||
Right-of-use assets under operating leases: | |||
Other long-term assets | $ | ||
Lease obligations under operating leases: | |||
Accrued liabilities | $ | ||
Other long-term liabilities | |||
$ | |||
March 30, 2019 | |||
2019 (1) | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total undiscounted cash flows | |||
Less: Imputed interest | ( | ) | |
Lease obligations under operating leases | $ | ||
In addition, the Company entered into a contract, for which a lease is expected to begin in the third quarter of 2019. The related right-of-use asset and corresponding lease obligation are expected to be approximately $63 million with a lease term of approximately ten years .
16
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Ended | |||
March 30, 2019 | |||
Non-cash activity: | |||
Right-of-use assets obtained in exchange for operating lease obligations | $ | ||
Operating cash flows: | |||
Cash paid related to operating lease obligations | $ | ||
Three Months Ended | |||
March 30, 2019 | |||
Operating lease expense | $ | ||
Short-term lease expense | |||
Variable lease expense | |||
Total lease expense | $ | ||
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 expense in these arrangements is not material.
In the first three months of 2018, the Company recorded rent expense of $41.4 million.
March 30, 2019 | ||
Weighted average remaining lease term (in years) | ||
Weighted average discount rate | % | |
17
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(9) Pension and Other Postretirement Benefit Plans
The Company sponsors defined benefit pension plans and other postretirement benefit plans (primarily for the continuation of medical benefits) for eligible employees in the United States and certain other countries.
Net Periodic Pension and Other Postretirement Benefit (Credit) Cost
Three Months Ended | |||||||||||||||
March 30, 2019 | March 31, 2018 | ||||||||||||||
U.S. | Foreign | U.S. | Foreign | ||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of actuarial loss | |||||||||||||||
Settlement loss | |||||||||||||||
Net periodic benefit (credit) cost | $ | $ | $ | ( | ) | $ | |||||||||
Three Months Ended | |||||||||||||||
March 30, 2019 | March 31, 2018 | ||||||||||||||
U.S. | Foreign | U.S. | Foreign | ||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Amortization of actuarial gain | ( | ) | ( | ) | |||||||||||
Amortization of prior service credit | ( | ) | |||||||||||||
Net periodic benefit (credit) cost | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
Contributions
In the three months ended March 30, 2019, employer contributions to the Company’s domestic and foreign defined benefit pension plans were $3.5 million.
(10) Revenue Recognition
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 (some of which is accounted for as variable consideration). The Company does not believe that there will be significant changes to its estimates of variable consideration.
18
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
The Company records a contract liability for advances received from its customers. As of March 30, 2019, there were no significant contract liabilities recorded. Further, there were no significant contract liabilities recognized in revenue during the first three months of 2019.
Amounts billed to customers related to shipping and handling costs are included in net sales in the condensed consolidated statements of comprehensive income. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales in the condensed consolidated statements of comprehensive income.
Three Months Ended | |||||||||||||||||||||||
March 30, 2019 | March 31, 2018 | ||||||||||||||||||||||
Seating | E-Systems | Total | Seating | E-Systems | Total | ||||||||||||||||||
North America | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Europe and Africa | |||||||||||||||||||||||
Asia | |||||||||||||||||||||||
South America | |||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
(11) Other (Income) Expense, Net
Other (income) 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, the non-service cost components of net periodic benefit cost and other miscellaneous income and expense.
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Other expense | $ | $ | |||||
Other income | ( | ) | ( | ) | |||
Other (income) expense, net | $ | $ | ( | ) | |||
In the three months ended March 30, 2019, other expense includes net foreign currency transaction losses of $5.8 million.
19
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(12) Income Taxes
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Provision for income taxes | $ | $ | |||||
Pretax income before equity in net income of affiliates | $ | $ | |||||
Effective tax rate | % | % | |||||
In the first three months of 2019 and 2018, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In addition, the Company recognized tax benefits (expense) related to the significant, discrete items shown below (in millions):
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Restructuring charges and various other items | $ | $ | |||||
Reversal of valuation allowances on deferred tax assets of a foreign subsidiary | |||||||
Share-based compensation | |||||||
Increase in foreign withholding tax on certain undistributed foreign earnings | ( | ) | |||||
Change in tax status of certain affiliates | |||||||
$ | $ | ||||||
In addition, in the first quarter of 2018, the Company recognized a gain of $10.0 million related to obtaining control of an affiliate, for which no tax expense was provided.
Excluding the items above, the effective tax rate for the first quarters of 2019 and 2018 approximated the U.S. federal statutory income tax rate of 21 %, adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
20
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) Net Income Per Share Attributable to Lear
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Net income attributable to Lear | $ | $ | |||||
Less: Redeemable noncontrolling interest adjustment | ( | ) | |||||
Net income available to Lear common stockholders | $ | $ | |||||
Average common shares outstanding | |||||||
Dilutive effect of common stock equivalents | |||||||
Average diluted shares outstanding | |||||||
Basic net income per share available to Lear common stockholders | $ | $ | |||||
Diluted net income per share available to Lear common stockholders | $ | $ | |||||
21
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) Comprehensive Income and Equity
Comprehensive Income
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.
Accumulated Other Comprehensive Loss
Three Months Ended March 30, 2019 | |||
Defined benefit plans: | |||
Balance at beginning of period | $ | ( | ) |
Reclassification adjustments (net of tax expense of $0.4 million) | |||
Other comprehensive loss recognized during the period (net of tax impact of $— million) | ( | ) | |
Balance at end of period | $ | ( | ) |
Derivative instruments and hedging: | |||
Balance at beginning of period | $ | ( | ) |
Reclassification adjustments (net of tax benefit of $2.1 million) | ( | ) | |
Other comprehensive income recognized during the period (net of tax expense of $2.3 million) | |||
Balance at end of period | $ | ( | ) |
Foreign currency translation: | |||
Balance at beginning of period | $ | ( | ) |
Other comprehensive loss recognized during the period (net of tax impact of $— million) | ( | ) | |
Balance at end of period | $ | ( | ) |
Total accumulated other comprehensive loss | $ | ( | ) |
In the three months ended March 30, 2019, foreign currency translation adjustments are primarily related to the weakening of the Euro, offset by the strengthening of the Chinese renminbi, relative to the U.S. dollar and include pretax gains of $0.1 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
22
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Ended March 31, 2018 | |||
Defined benefit plans: | |||
Balance at beginning of period | $ | ( | ) |
Reclassification adjustments (net of tax expense of $0.3 million) | |||
Other comprehensive income recognized during the period (net of tax impact of $— million) | |||
Balance at end of period | $ | ( | ) |
Derivative instruments and hedging: | |||
Balance at beginning of period | $ | ( | ) |
Reclassification adjustments (net of tax benefit of $0.7 million) | ( | ) | |
Other comprehensive income recognized during the period (net of tax expense of $11.0 million) | |||
Balance at end of period | $ | ||
Foreign currency translation: | |||
Balance at beginning of period | $ | ( | ) |
Other comprehensive income recognized during the period (net of tax impact of $— million) | |||
Balance at end of period | $ | ( | ) |
Total accumulated other comprehensive loss | $ | ( | ) |
In the three months ended March 31, 2018, foreign currency translation adjustments are primarily related to the strengthening of the Chinese renminbi and the Euro relative to the U.S. dollar and include pretax losses of $0.3 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
For further information regarding reclassification adjustments related to the Company's defined benefit plans, see Note 9, "Pension and Other Postretirement Benefit Plans." For further information regarding reclassification adjustments related to the Company's derivative and hedging activities, see Note 17, "Financial Instruments."
Lear Corporation Stockholders’ Equity
Common Stock Share Repurchase Program
On February 7, 2019, the Company's Board of Directors authorized an increase to the existing common stock share repurchase program authorization to $1.5 billion and extended the term of the program to December 31, 2021.
Three Months Ended | As of | |||||||||||||||
March 30, 2019 | March 30, 2019 | |||||||||||||||
Aggregate Repurchases (1) | Cash paid for Repurchases | Number of Shares | Average Price per Share (2) | Remaining Purchase Authorization | ||||||||||||
$ | $ | $ | $ | |||||||||||||
(1) Includes $83.0 million of repurchases made prior to the increased authorization
(2) Excludes commissions
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
23
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 condensed consolidated balance sheets as of March 30, 2019 and December 31, 2018.
Quarterly Dividend
In the first three months of 2019 and 2018, the Company’s Board of Directors declared quarterly cash dividends of $0.75 and $0.70 per share of common stock, respectively. Dividends declared and paid are shown below (in millions):
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Dividends declared | $ | $ | |||||
Dividends paid | |||||||
Dividends payable on common shares to be distributed under the Company’s stock-based compensation program and common shares contemplated as part of the Company’s emergence from Chapter 11 bankruptcy proceedings will be paid when such common shares are distributed.
For further information related to the redeemable noncontrolling interest adjustment, see Note 13, "Net Income Per Share Attributable to Lear," as well as Note 5, "Investments in Affiliates and Other Related Party Transactions," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Noncontrolling Interests
(15) Legal and Other Contingencies
As of March 30, 2019 and December 31, 2018, the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $13.3 million and $11.0 million, respectively. Such reserves reflect amounts recognized in accordance with GAAP and exclude the cost of legal representation. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
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
24
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. Future dispositions with respect to the Company’s product liability claims that were subject to compromise under the Chapter 11 bankruptcy proceedings will be satisfied out of a common stock and warrant reserve established for that purpose.
The Company records product warranty reserves when liability is probable and related amounts are reasonably estimable.
Balance at January 1, 2019 | $ | ||
Expense, net (including changes in estimates) | |||
Settlements | ( | ) | |
Foreign currency translation and other | |||
Balance at March 30, 2019 | $ | ||
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 March 30, 2019 and December 31, 2018, the Company had recorded environmental reserves of $9.0 million. 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 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.
(16) Segment Reporting
25
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
control modules, electrification products and connectivity products. Key components in the Company's electrical distribution portfolio include wire harnesses, terminals and connectors and junction boxes for both internal combustion engine and electrification architectures that require management of higher voltage and power. Key components in the Company's electronic control module portfolio include body control modules, wireless receiver and transmitter technology and lighting and audio control modules, as well as portfolios specific to electrification and connectivity trends. Electrification products include charging systems (onboard charging modules, cord set charging equipment and wireless charging systems), battery electronics (battery disconnect units, cell monitoring supervisory systems and integrated total battery control modules) and other power management modules, including converter and inverter systems. Connectivity products include gateway modules and independent communication modules to manage both wired and wireless networks and data in vehicles. 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, corporate finance, legal, executive administration and human resources, as well as advanced engineering expenses.
Three Months Ended March 30, 2019 | |||||||||||||||
Seating | E-Systems | Other | Consolidated | ||||||||||||
Revenues from external customers | $ | $ | $ | $ | |||||||||||
Segment earnings (1) | ( | ) | |||||||||||||
Depreciation and amortization | |||||||||||||||
Capital expenditures | |||||||||||||||
Total assets | |||||||||||||||
Three Months Ended March 31, 2018 | |||||||||||||||
Seating | E-Systems | Other | Consolidated | ||||||||||||
Revenues from external customers | $ | $ | $ | $ | |||||||||||
Segment earnings (1) | ( | ) | |||||||||||||
Depreciation and amortization | |||||||||||||||
Capital expenditures | |||||||||||||||
Total assets | |||||||||||||||
For the three months ended March 30, 2019, segment earnings include restructuring charges of $45.2 million, $8.9 million and $0.2 million in the Seating and E-Systems segments and in the other category, respectively, (Note 2, "Restructuring").
For the three months ended March 31, 2018, segment earnings include restructuring charges of $14.4 million, $1.9 million and $2.1 million in the Seating and E-Systems segments and in the other category, respectively, (Note 2, "Restructuring").
26
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Segment earnings | $ | $ | |||||
Interest expense | |||||||
Other (income) expense, net | ( | ) | |||||
Consolidated income before provision for income taxes and equity in net income of affiliates | $ | $ | |||||
(17) 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):
March 30, 2019 | December 31, 2018 | ||||||
Estimated aggregate fair value (1) | $ | $ | |||||
Aggregate carrying value (1) (2) | |||||||
(1) Term Loan Facility and Notes (excludes "other" debt)
Cash, Cash Equivalents and Restricted Cash
The Company has on deposit, cash that is legally restricted as to use or withdrawal. A reconciliation of cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheets to cash, cash equivalents and restricted cash reported on the condensed consolidated statements of cash flows is shown below (in millions):
March 30, 2019 | March 31, 2018 | ||||||
Balance sheet - cash and cash equivalents | $ | $ | |||||
Restricted cash included in other current assets | |||||||
Restricted cash included in other long-term assets | |||||||
Statement of cash flows - cash, cash equivalents and restricted cash | $ | $ | |||||
Marketable Equity Securities
March 30, 2019 | December 31, 2018 | ||||||
Current assets | $ | $ | |||||
Other long-term assets | |||||||
$ | $ | ||||||
27
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Derivative Instruments and Hedging Activities
For a fair value hedge, the change in the fair value of the derivative is recorded in earnings and reflected in the condensed consolidated statement of comprehensive 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 condensed consolidated balance sheet. 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 condensed consolidated statement of comprehensive 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 condensed consolidated balance sheet. Changes in the fair value of contracts not designated as hedging instruments are recorded in earnings and reflected in the condensed consolidated statement of comprehensive income as other (income) expense, net.
Foreign Exchange
28
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 30, 2019 | December 31, 2018 | ||||||
Fair value of foreign currency contracts designated as cash flow hedges: | |||||||
Other current assets | $ | $ | |||||
Other long-term assets | |||||||
Other current liabilities | ( | ) | ( | ) | |||
Other long-term liabilities | ( | ) | ( | ) | |||
Notional amount | $ | $ | |||||
Outstanding maturities in months, not to exceed | |||||||
Fair value of foreign currency contracts not designated as hedging instruments: | |||||||
Other current assets | $ | $ | |||||
Other current liabilities | ( | ) | ( | ) | |||
( | ) | ||||||
Notional amount | $ | $ | |||||
Outstanding maturities in months, not to exceed | |||||||
Total fair value | $ | $ | |||||
Total notional amount | $ | $ | |||||
Foreign currency derivative contracts not designated as hedging instruments consist principally of hedges of cash transactions, intercompany loans and certain other balance sheet exposures.
Interest Rate Swaps
The Company has entered into forward starting interest rate swap contracts to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate.
March 30, 2019 | December 31, 2018 | ||||||
Fair value of interest rate swap contracts designated as cash flow hedges: | |||||||
Other current liabilities | $ | $ | |||||
Notional amount | $ | $ | |||||
Outstanding maturities in months, not to exceed | |||||||
29
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accumulated Other Comprehensive Loss - Derivative Instruments and Hedging
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Gains (losses) recognized in accumulated other comprehensive loss: | |||||||
Foreign currency contracts | $ | $ | |||||
Interest rate swap contracts | ( | ) | |||||
Foreign currency contract (gains) losses reclassified from accumulated other comprehensive loss to: | |||||||
Net sales | |||||||
Cost of sales | ( | ) | ( | ) | |||
( | ) | ( | ) | ||||
Comprehensive income | $ | $ | |||||
As of March 30, 2019 and December 31, 2018, pretax net losses of approximately $0.8 million and $1.7 million, respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the next twelve month period, the Company expects to reclassify into earnings net gains of approximately $22.5 million recorded in accumulated other comprehensive loss as of March 30, 2019. Such gains will be reclassified at the time that the underlying hedged transactions are realized.
Fair Value Measurements
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. | |
30
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Items Measured at Fair Value on a Recurring Basis
March 30, 2019 | |||||||||||||||||||
Frequency | Asset (Liability) | Valuation Technique | Level 1 | Level 2 | Level 3 | ||||||||||||||
Foreign currency contracts, net | Recurring | $ | Market/ Income | $ | $ | $ | |||||||||||||
Interest rate swap contracts | Recurring | $ | ( | ) | Market/ Income | $ | $ | ( | ) | $ | |||||||||
Marketable equity securities | Recurring | $ | Market | $ | $ | $ | |||||||||||||
December 31, 2018 | |||||||||||||||||||
Frequency | Asset (Liability) | Valuation Technique | Level 1 | Level 2 | Level 3 | ||||||||||||||
Foreign currency contracts, net | Recurring | $ | Market/ Income | $ | $ | $ | |||||||||||||
Interest rate swap contracts | Recurring | $ | ( | ) | Market/ Income | $ | $ | ( | ) | $ | |||||||||
Marketable equity securities | Recurring | $ | Market | $ | $ | $ | |||||||||||||
Items Measured at Fair Value on a Non-Recurring Basis
31
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18) Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, "Leases," which requires lessees to record right-of-use assets and corresponding liabilities on the balance sheet, as well as disclose key information regarding leasing arrangements. On January 1, 2019, the Company adopted the standard by applying the modified retrospective method without the restatement of comparative financial information, as permitted by the transition guidance. See Note 8, "Leases."
Other Standards
The Company adopted the ASUs summarized below, none of which significantly impacted its financial statements:
Standard | Description | Effective Date | ||
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | The standard 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. | January 1, 2019 | ||
ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting | The standard aligns measurement and classification guidance for share-based payments to nonemployees with the guidance applicable to employees. Under the new guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. | January 1, 2019 | ||
Standards Effective After 2019
Standard | Description | Effective Date | ||
ASU 2016-13 and 2018-19, Measurement of Credit Losses on Financial Instruments | The standard changes the impairment model for most financial instruments to an "expected loss" model. The new model will generally result in earlier recognition of credit losses. | January 1, 2020 | ||
ASU 2017-04, Simplifying the Test for Goodwill Impairment | 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 or what is known as "Step 2" under the current guidance. | January 1, 2020 | ||
ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement | The standard eliminates certain fair value disclosures while requiring additional disclosures related to the development of inputs for level 3 of the fair value hierarchy and for entities that use the practical expedient to measure the fair value of certain investments at net asset value. | January 1, 2020 | ||
ASU 2018-15. Customer's Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement that is a Service Contract | The standard requires implementation costs in a cloud computing arrangement that is a service contract to be capitalized and amortized over the non-cancellable term of the contract and any renewals that are reasonably certain. | January 1, 2020 | ||
ASU 2018-17, Related Party Guidance for Variable Interest Entities | The standard changes how entities evaluate decision making fees under the variable interest guidance. | January 1, 2020 | ||
ASU 2018-18, Collaborative Arrangements | The standard requires certain transactions between participants in a collaborative arrangement to be accounted for as revenue under the new revenue standard when the participant is a customer. | January 1, 2020 | ||
ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans | The standard requires specific disclosures for defined benefit plans, including the weighted average interest credit rate for cash balance plans and reasons for significant gains and losses affecting the benefit obligation and plan assets. The standard also eliminates certain other disclosures. | January 1, 2021 | ||
32
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(19) Subsequent Event
On April 17, 2019, the Company completed the acquisition of Xevo Inc. (“Xevo”), a Seattle-based, Tier 1 automotive supplier of software solutions for cloud, car and mobile devices that are deployed in millions of vehicles worldwide. The Company acquired all of the outstanding shares of Xevo for approximately $320 million on a cash and debt free basis (subject to certain adjustments). In conjunction with the acquisition, the Company issued 16,231 shares of restricted stock and 130,285 restricted stock units to certain Xevo employees who joined the Company. These shares of restricted stock and restricted stock units were issued pursuant to the 2019 Inducement Grant Plan which was adopted by the Company's Board of Directors without stockholder approval pursuant to the inducement exemption provided under the New York Stock Exchange listing rules.
33
LEAR CORPORATION
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Executive Overview
We are a leading Tier 1 supplier to the global automotive industry. We supply seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to all of the world's major automotive manufacturers.
We use our product, design and technological expertise, global reach and competitive manufacturing footprint to achieve our financial goals and objectives of continuing to deliver profitable growth (balancing risks and returns), maintaining a strong balance sheet with investment grade credit metrics and consistently returning excess cash to our stockholders.
Our Seating business consists of the design, development, engineering, just-in-time assembly and delivery of complete seat systems, as well as the design, development, engineering and manufacture of all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests. Further, we have capabilities in active sensing and comfort for seats, utilizing electronically controlled sensor and adjustment systems and internally developed algorithms.
Our E-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution systems, as well as sophisticated electronic control modules, electrification products and connectivity products. Electrical distribution systems route networks and electrical signals and manage electrical power within the vehicle for all types of power trains - traditional internal combustion engine ("ICE") architectures to the full range of hybrid, plug-in hybrid and battery electric architectures. Key components in our electrical distribution portfolio include wire harnesses, terminals and connectors and junction boxes for both ICE and electrification architectures that require management of higher voltage and power. Electronic control modules facilitate signal, data and power management within the vehicle and include the associated software required to facilitate these functions. Key components in our electronic control module portfolio include body control modules, wireless receiver and transmitter technology and lighting and audio control modules, as well as portfolios specific to electrification and connectivity trends. Electrification products include charging systems (onboard charging modules, cord set charging equipment and wireless charging systems), battery electronics (battery disconnect units, cell monitoring supervisory systems and integrated total battery control modules) and other power management modules, including converter and inverter systems which may be integrated into other modules or sold separately. Connectivity products include gateway modules and independent communication modules to manage both wired and wireless networks and data in vehicles. In addition to fully functional electronic modules, we offer software that includes cybersecurity, advanced vehicle positioning for automated and autonomous driving applications, roadside modules that communicate real-time traffic information and full capabilities in both dedicated short-range communication ("DSRC") and cellular protocols for vehicle connectivity.
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. Our businesses benefit globally from leveraging common operating standards and disciplines, including world-class product development and manufacturing processes, as well as common customer support and regional infrastructures. Our core capabilities are shared across component categories and include high-precision manufacturing and assembly with short lead times, management of complex supply chains, global engineering and program management skills, the agility to establish and/or move 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. Further, the seat is becoming a more dynamic and integrated system requiring increased levels of electrical and electronic integration and accelerating the convergence of our Seating and E-Systems businesses. We are the only global automotive supplier with complete capabilities in both of these critical business segments.
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Industry Overview
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. Global automotive industry production volumes in the first quarter of 2019, as compared to the first quarter of 2018, are shown below (in millions of units):
Three Months Ended | ||||||
March 30, 2019 (1) | March 31, 2018 (1) (2) | % Change | ||||
North America | 4.3 | 4.4 | (2 | )% | ||
Europe and Africa | 5.8 | 6.1 | (5 | )% | ||
Asia | 11.2 | 12.1 | (8 | )% | ||
South America | 0.7 | 0.8 | (5 | )% | ||
Other | 0.3 | 0.5 | (40 | )% | ||
Global light vehicle production | 22.3 | 23.9 | (7 | )% | ||
(1) Production data based on IHS Automotive
(2) Production data for 2018 has been updated to reflect actual production levels
Automotive sales and production can be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles, restructuring actions of our customers and suppliers, facility closures, changing consumer attitudes toward vehicle ownership and usage and other factors. Our operating results are also significantly impacted by the overall commercial success of the vehicle platforms for which we supply particular products, as well as the profitability of the products that we supply for these platforms. The loss of business with respect to any vehicle model for which we are a significant supplier, or a decrease in the production levels of any such models, could adversely affect our operating results. In addition, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating results.
Our percentage of consolidated net sales by region in the first quarters of 2019 and 2018 is shown below:
Three Months Ended | |||||
March 30, 2019 | March 31, 2018 | ||||
North America | 36 | % | 36 | % | |
Europe and Africa | 42 | % | 43 | % | |
Asia | 19 | % | 18 | % | |
South America | 3 | % | 3 | % | |
Total | 100 | % | 100 | % | |
Our ability to reduce the risks inherent in certain concentrations of business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall.
Key trends that specifically affect our business include automotive manufacturers’ utilization of global vehicle platforms, increasing demand for luxury and performance features, including increasing levels of electrical and electronic content, and China’s emergence as the single largest automotive market in the world, as well as the shift toward crossover and sport utility vehicles, where our content can be significantly higher than our average content per vehicle. In addition, we believe that demand for efficiency, connectivity and safety are driving the technology trends of autonomy, connectivity and electrification. These trends, along with the trend toward shared mobility, are likely to be at the forefront of our industry for the foreseeable future with each converging long-term toward fully autonomous, connected, electric or hybrid electric vehicles.
Our sales and marketing approach is based on addressing these trends, while our strategy focuses on the major imperatives for success as an automotive supplier: quality, service, cost and efficiency and innovation and technology. We have expanded key component and software capabilities through organic investment and acquisitions to ensure a full complement of the highest quality solutions for our customers. We have restructured, and continue to align, our manufacturing and engineering footprint to attain a leading competitive position globally. We have established or expanded our capabilities in new and growing markets, especially China, in support of our customers’ growth and global platform initiatives. These initiatives have helped us achieve our financial goals overall, as well as a more balanced regional, customer and vehicle segment diversification in our business.
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For further information related to these trends and our strategy, see Part 1 — Item 1, "Business — Industry and Strategy" of our Annual Report on Form 10-K for the year ended December 31, 2018.
Our customers typically require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through product design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.
Our material cost as a percentage of net sales was 64.8% in the first quarter of 2019, as compared to 64.9% in the first quarter of 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 "— Forward-Looking Statements" below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 significant growth opportunities, as major global automotive manufacturers implement production expansion plans and local automotive manufacturers aggressively expand their operations to meet increasing demand in this region. In addition to our wholly owned locations, we currently have twelve 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
On April 17, 2019, we completed the acquisition of Xevo Inc. (“Xevo”), a Seattle-based, Tier 1 automotive supplier of software solutions for cloud, car and mobile devices that are deployed in millions of vehicles worldwide. We acquired all of the outstanding shares of Xevo for approximately $320 million on a cash and debt free basis (subject to certain adjustments). In conjunction with the acquisition, we issued 16,231 shares of restricted stock and 130,285 restricted stock units to certain Xevo employees who joined Lear. These shares of restricted stock and restricted stock units were issued pursuant to the 2019 Inducement Grant Plan which was adopted by our Board of Directors without stockholder approval pursuant to the inducement exemption provided under the New York Stock Exchange listing rules.
For further information, see Note 19, "Subsequent Event," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this "Report").
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Financing Transactions
Our 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"). On March 27, 2019, we entered into an agreement ("the Extension Agreement") to extend the maturity date of the Revolving Credit Facility by one year to August 8, 2023. The maturity date of the Term Loan Facility remains August 8, 2022.
For further information, see Note 7, "Debt," to the condensed consolidated financial statements included in this Report.
Operational Restructuring
In the first quarter of 2019, we incurred pretax restructuring costs of approximately $54 million and related manufacturing inefficiency charges of approximately $2 million. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
For further information, see Note 2, "Restructuring," to the condensed consolidated financial statements included in this Report.
Share Repurchase Program and Quarterly Cash Dividends
Since the first quarter of 2011, our Board of Directors has authorized $5.8 billion in share repurchases under our common stock share repurchase program. In the first quarter of 2019, we repurchased $118 million of shares and have a remaining repurchase authorization of $1.5 billion, which will expire on December 31, 2021.
In the first quarter of 2019, our Board of Directors declared a quarterly cash dividend of $0.75 per share of common stock, reflecting a 7% increase over the quarterly cash dividend declared in 2018.
For further information related to our common stock share repurchase program and our quarterly dividends, see "— Liquidity and Capital Resources — Capitalization" below and Note 14, "Comprehensive Income and Equity," to the condensed consolidated financial statements included in this Report.
Other Matters
In the first quarter of 2019, we recognized tax benefits of $18 million related to changes in the tax status of certain affiliates, $3 million related to share-based compensation and $16 million related to restructuring and various other items.
In January 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 the three months ended March 31, 2018.
In the first quarter of 2018, we recognized tax benefits of $35 million related to the reversal of the valuation allowance on the deferred tax assets of a foreign subsidiary, $10 million related to share-based compensation and $4 million related to restructuring charges and various other items, offset by tax expense of $22 million related to an increase in foreign withholding tax on certain undistributed foreign earnings.
As discussed above, our results for the three months ended March 30, 2019 and March 31, 2018, reflect the following items (in millions):
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Costs related to restructuring actions, including manufacturing inefficiencies of $2 million and $6 million in the three months ended March 30, 2019 and March 31, 2018 | $ | 56 | $ | 24 | |||
Gain related to affiliate | — | 10 | |||||
Tax benefit, net | 37 | 27 | |||||
For further information regarding these items, see Note 2, "Restructuring," and Note 12, "Income Taxes," to the condensed consolidated financial statements included in this Report and Note 5, "Investments in Affiliates and Other Related Party Transactions," to the consolidated financial statement included in our Annual Report on Form 10-K for the year ended December 31, 2018.
This Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," includes forward-looking statements that are subject to risks and uncertainties. For further information regarding other factors that have had, or
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may have in the future, a significant impact on our business, financial condition or results of operations, see "— Forward-Looking Statements" below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018.
RESULTS OF OPERATIONS
A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:
Three Months Ended | |||||||||||||
March 30, 2019 | March 31, 2018 | ||||||||||||
Net sales | |||||||||||||
Seating | $ | 3,913.7 | 75.8 | % | $ | 4,329.9 | 75.5 | % | |||||
E-Systems | 1,246.4 | 24.2 | 1,403.8 | 24.5 | |||||||||
Net sales | 5,160.1 | 100.0 | 5,733.7 | 100.0 | |||||||||
Cost of sales | 4,686.9 | 90.8 | 5,102.3 | 89.0 | |||||||||
Gross profit | 473.2 | 9.2 | 631.4 | 11.0 | |||||||||
Selling, general and administrative expenses | 148.3 | 2.9 | 155.4 | 2.7 | |||||||||
Amortization of intangible assets | 12.7 | 0.3 | 13.1 | 0.2 | |||||||||
Interest expense | 20.9 | 0.4 | 20.7 | 0.4 | |||||||||
Other (income) expense, net | 4.4 | 0.1 | (5.6 | ) | (0.1 | ) | |||||||
Provision for income taxes | 43.1 | 0.8 | 77.7 | 1.4 | |||||||||
Equity in net income of affiliates | (2.3 | ) | — | (4.1 | ) | (0.1 | ) | ||||||
Net income attributable to noncontrolling interests | 17.2 | 0.3 | 20.5 | 0.3 | |||||||||
Net income attributable to Lear | $ | 228.9 | 4.4 | % | $ | 353.7 | 6.2 | % | |||||
Three Months Ended March 30, 2019 vs. Three Months Ended March 31, 2018
Net sales in the first quarter of 2019 were $5.2 billion, as compared to $5.7 billion in the first quarter of 2018, a decrease of $574 million or 10%. Lower production volumes on key Lear platforms in all regions and net foreign exchange rate fluctuations negatively impacted net sales by $447 million and $273 million, respectively. These decreases were partially offset by the impact of new business, primarily in Asia and Europe, which increased net sales by $155 million.
(in millions) | Cost of Sales | |||
First quarter 2018 | $ | 5,102 | ||
Material cost | (379 | ) | ||
Labor and other | (40 | ) | ||
Depreciation | 4 | |||
First quarter 2019 | $ | 4,687 | ||
Cost of sales in the first quarter of 2019 was $4.7 billion, as compared to $5.1 billion in the first quarter of 2018. Lower production volumes on key Lear platforms in all regions and net foreign exchange rate fluctuations, partially offset by the impact of new business, primarily in Asia and Europe, reduced cost of sales by $438 million.
Gross profit and gross margin were $473 million and 9.2% of net sales, respectively, in the first quarter of 2019, as compared to $631 million and 11.0% of net sales, respectively, in the first quarter of 2018. Lower production volumes on key Lear platforms and net foreign exchange rate fluctuations, partially offset by the impact of new business, negatively impacted gross profit by $127 million. The impact of selling price reductions and higher restructuring costs was offset by favorable operating performance, including the benefit of operational restructuring actions. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were $148 million in the first quarter of 2019, as compared to $155 million in the first quarter of 2018. As a percentage of net sales, selling, general and administrative expenses were 2.9% in the first quarter of 2019, as compared to 2.7% in the first quarter of 2018.
Amortization of intangible assets was $13 million in the first quarters of 2019 and 2018.
Interest expense was $21 million in the first quarters of 2019 and 2018.
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Other (income) expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, losses on the extinguishment of debt, gains and losses on the disposal of fixed assets, the non-service cost components of net periodic benefit cost and other miscellaneous income and expense, was an expense of $4 million in the first quarter of 2019, as compared to income of $6 million in the first quarter of 2018. In the first quarter of 2018, we recognized a gain of approximately $10 million related to obtaining control of an affiliate.
In the first quarter of 2019, the provision for income taxes was $43 million, representing an effective tax rate of 15.0% on pretax income before equity in net income of affiliates of $287 million. In the first quarter of 2018, the provision for income taxes was $78 million, representing an effective tax rate of 17.4% on pretax income before equity in net income of affiliates of $448 million, for the reasons described below.
In the first quarters of 2019 and 2018, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In the first quarter of 2019, we recognized tax benefits of $18 million related to changes in the tax status of certain affiliates, $3 million related to share-based compensation and $16 million related to restructuring and various other items. In the first quarter of 2018, we recognized tax benefits of $35 million related to the reversal of a valuation allowance on the deferred tax assets of a foreign subsidiary, $10 million related to share-based compensation and $4 million related to restructuring charges and various other items, offset by tax expense of $22 million related to an increase in foreign withholding tax on certain undistributed foreign earnings. In addition, we recognized a gain of approximately $10 million related to obtaining control of an affiliate, for which no tax expense was provided. Excluding these items, the effective tax rate for the first quarters of 2019 and 2018 approximated the U.S. federal statutory income tax rate of 21%, adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
Equity in net income of affiliates was $2 million in the first quarter of 2019, as compared to $4 million in the first quarter of 2018.
Net income attributable to Lear was $229 million, or $3.73 per diluted share, in the first quarter of 2019, as compared to $354 million, or $5.16 per diluted share, in the first quarter of 2018. Net income and diluted net income per share decreased for the reasons described above. In addition, diluted net income per share was impacted by the decrease in average shares outstanding between periods.
Reportable Operating Segments
We have two reportable operating segments: Seating, which includes complete seat systems and all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests, and E-Systems, which includes complete electrical distribution systems, as well as sophisticated electronic control modules, electrification products and connectivity products. Key components in our electrical distribution portfolio include wire harnesses, terminals and connectors and junction boxes for both ICE and electrification architectures that require management of higher voltage and power. Key components in our electronic control module portfolio include body control modules, wireless receiver and transmitter technology and lighting and audio control modules, as well as portfolios specific to electrification and connectivity trends. Electrification products include charging systems (onboard charging modules, cord set charging equipment and wireless charging systems), battery electronics (battery disconnect units, cell monitoring supervisory systems and integrated total battery control modules) and other power management modules, including converter and inverter systems. Connectivity products include gateway modules and independent communication modules to manage both wired and wireless networks and data in vehicles.
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, 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 (income) 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 16, "Segment Reporting," to the condensed consolidated financial statements included in this Report.
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Seating
A summary of the financial measures for our Seating segment is shown below (dollar amounts in millions):
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Net sales | $ | 3,913.7 | $ | 4,329.9 | |||
Segment earnings (1) | 252.3 | 339.5 | |||||
Margin | 6.4 | % | 7.8 | % | |||
(1) See definition above
Seating net sales were $3.9 billion in the first quarter of 2019, as compared to $4.3 billion in the first quarter of 2018, a decrease of $416 million or 10%. Lower production volumes on key Lear platforms and net foreign exchange rate fluctuations negatively impacted net sales by $316 million and $196 million, respectively. These decreases were partially offset by the impact of new business, which increased net sales by $77 million.
Segment earnings, including restructuring costs, and the related margin on net sales were $252 million and 6.4% in the first quarter of 2019, as compared to $340 million and 7.8% in the first quarter of 2018. Lower production volumes on key Lear platforms, higher restructuring costs and net foreign exchange rate fluctuations, partially offset by the impact of new business, negatively impacted segment earnings by $109 million. Favorable operating performance, including the benefit of operational restructuring actions, of $56 million was 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):
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Net sales | $ | 1,246.4 | $ | 1,403.8 | |||
Segment earnings (1) | 128.3 | 190.8 | |||||
Margin | 10.3 | % | 13.6 | % | |||
(1) See definition above
E-Systems net sales were $1.2 billion in the first quarter of 2019, as compared to $1.4 billion in the first quarter of 2018, a decrease of $157 million or 11%. Lower production volumes on key Lear platforms and net foreign exchange rate fluctuations negatively impacted net sales by $131 million and $77 million, respectively. These decreases were partially offset by the impact of new business, which increased net sales by $78 million.
Segment earnings, including restructuring costs, and the related margin on net sales were $128 million and 10.3% in the first quarter of 2019, as compared to $191 million and 13.6% in the first quarter of 2018. Lower production volumes on key Lear platforms, higher restructuring costs and net foreign exchange rate fluctuations, partially offset by the impact of new business, negatively impacted segment earnings by $48 million. Improved operating performance of $13 million was more than offset by the impact of selling price reductions.
Other
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
Three Months Ended | |||||||
March 30, 2019 | March 31, 2018 | ||||||
Net sales | $ | — | $ | — | |||
Segment earnings (1) | (68.4 | ) | (67.4 | ) | |||
Margin | N/A | N/A | |||||
(1) See definition above
Segment earnings related to our other category were ($68) million in the first quarter of 2019, as compared to ($67) million in the first quarter of 2018.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund general business requirements, including working capital requirements, capital expenditures, operational restructuring actions and debt service requirements. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program. Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties, intercompany loan repayments and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations.
As of March 30, 2019 and December 31, 2018, cash and cash equivalents of $934 million and $1,094 million, respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating additional income tax expense. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information related to potential dividends from our non-U.S. subsidiaries, see "— Adequacy of Liquidity Sources" below and Note 7, "Income Taxes," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Cash Flows
A summary of net cash provided by operating activities is shown below (in millions):
Three Months Ended | |||||||||||
March 30, 2019 | March 31, 2018 | Increase (Decrease) in Operating Cash Flow | |||||||||
Consolidated net income and depreciation and amortization | $ | 370 | $ | 494 | $ | (124 | ) | ||||
Net change in working capital items: | |||||||||||
Accounts receivable | (593 | ) | (461 | ) | (132 | ) | |||||
Inventory | (8 | ) | (35 | ) | 27 | ||||||
Accounts payable | 240 | 228 | 12 | ||||||||
Accrued liabilities and other | 73 | 15 | 58 | ||||||||
Net change in working capital items | (288 | ) | (253 | ) | (35 | ) | |||||
Other | (30 | ) | (4 | ) | (26 | ) | |||||
Net cash provided by operating activities | $ | 52 | $ | 237 | $ | (185 | ) | ||||
In the first three months of 2019, lower net income, including the impact of depreciation and amortization, and an incremental increase in working capital reduced cash provided by operating activities by $124 million and $35 million, respectively, between periods.
Net cash used in investing activities was $117 million in the first three months of 2019, as compared to $188 million in the first three months of 2018. Capital spending was $123 million in the first three months of 2019, as compared to $163 million in the first three months of 2018. Capital spending in 2019 is estimated at $700 million.
Net cash used in financing activities was $235 million in the first three months of 2019, as compared to $273 million in the first three months of 2018. In 2019, we paid $122 million for repurchases of our common stock, $50 million of dividends to Lear stockholders and $31 million of dividends to noncontrolling interest holders. In the first three months of 2018, we paid $145 million for repurchases of our common stock, $51 million of dividends to Lear stockholders and $19 million of dividends to noncontrolling interest holders.
Capitalization
From time to time, we utilize uncommitted credit facilities to fund our capital expenditures and working capital requirements at certain of our foreign subsidiaries, in addition to cash provided by operating activities. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors. As of March 30, 2019 and December 31, 2018, our short-term borrowings outstanding were $15 million and $10 million, respectively.
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Senior Notes
As of March 30, 2019, our senior notes (collectively, the "Notes") consisted of the amounts shown below (in millions, except stated coupon rates):
Note | Aggregate Principal Amount at Maturity | Stated Coupon Rate | |||||
Senior unsecured notes due 2024 (the "2024 Notes") | $ | 325 | 5.375 | % | |||
Senior unsecured notes due 2025 (the "2025 Notes") | 650 | 5.25 | % | ||||
Senior unsecured notes due 2027 (the "2027 Notes") | 750 | 3.8 | % | ||||
$ | 1,725 | ||||||
The issue, maturity and interest payable dates of the Notes are shown below:
Note | Issuance Date | Maturity Date | Interest Payable Dates | |||
2024 Notes | March 2014 | March 15, 2024 | March 15 and September 15 | |||
2025 Notes | November 2014 | January 15, 2025 | January 15 and July 15 | |||
2027 Notes | August 2017 | September 15, 2027 | March 15 and September 15 | |||
For further information related to the Notes, including information on early redemption, covenants and events of default, see Note 7, "Debt," to the condensed consolidated financial statements included in this Report and Note 6, "Debt," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
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. On March 27, 2019, we entered into an Extension Agreement to extend the maturity date of the Revolving Credit Facility by one year to August 8, 2023. The maturity date of the Term Loan Facility remains August 8, 2022.
As of March 30, 2019 and December 31, 2018, there were no borrowings outstanding under the Revolving Credit Facility and $241 million and $242 million, respectively, of borrowings outstanding under the Term Loan Facility. During the first three months of 2019, we made required principal payments of $2 million under the Term Loan Facility.
For further information related to the Credit Agreement, including information on pricing, covenants and events of default, see Note 7, "Debt," to the condensed consolidated financial statements included in this Report and Note 6, "Debt," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Scheduled Interest Payment and Covenants
Scheduled cash interest payments on the Notes and the Term Loan Facility are $47 million for the remaining nine months of 2019.
As of March 30, 2019, we were in compliance with all covenants under the Credit Agreement and the indentures governing the Notes.
Common Stock Share Repurchase Program
On February 7, 2019, our Board of Directors authorized an increase to our existing common stock share repurchase program authorization to $1.5 billion and extended the term of the program to December 31, 2021.
Our share repurchases in the first three months of 2019 are shown below (in millions except for shares and per share amounts):
Three Months Ended | As of | |||||||||||||||
March 30, 2019 | March 30, 2019 | |||||||||||||||
Aggregate Repurchases (1) | Cash paid for Repurchases | Number of Shares | Average Price per Share (2) | Remaining Purchase Authorization | ||||||||||||
$ | 118 | $ | 122 | 804,270 | $ | 146.56 | $ | 1,465 | ||||||||
(1) Includes $83 million of repurchases made prior to the increased authorization
(2) Excludes commissions
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Since the first quarter of 2011, our Board of Directors has authorized $5.8 billion in share repurchases under our common stock share repurchase program. As of the end of the first quarter of 2019, we have repurchased, in aggregate, $4.3 billion of our outstanding common stock, at an average price of $88.17 per share, excluding commissions and related fees.
We 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 we will repurchase our outstanding common stock and the timing of such repurchases will depend upon our financial condition, prevailing market conditions, alternative uses of capital and other factors (see "—Forward-Looking Statements").
For further information related to our common stock share repurchase program, see Note 14, "Comprehensive Income and Equity," to the condensed consolidated financial statements included in this Report.
Dividends
The quarterly cash dividend declared in the first quarter of 2019 reflects a 7% increase over the quarterly cash dividend declared in the first quarter of 2018. A summary of the 2019 dividends is shown below:
Payment Date | Dividend Per Share | Declaration Date | Record Date | |||||
March 20, 2019 | $ | 0.75 | February 7, 2019 | March 1, 2019 | ||||
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 in its discretion.
Adequacy of Liquidity Sources
As of March 30, 2019, we had approximately $1.2 billion of cash and cash equivalents on hand and $1.75 billion in available borrowing capacity under our Revolving Credit Facility. Together with cash provided by operating activities, we believe that this will enable us to meet our liquidity needs to satisfy ordinary course business obligations. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program (see "— Common Stock Share Repurchase Program," above). Our future financial results and our ability to continue to meet our liquidity needs are subject to, and will be affected by, cash flows from operations, including the impact of restructuring activities, automotive industry conditions, the financial condition of our customers and suppliers and other related factors. Additionally, an economic downturn or reduction in production levels could negatively impact our financial condition. For further discussion of the risks and uncertainties affecting our cash flows from operations and our overall liquidity, see "— Executive Overview" above, "— Forward-Looking Statements" below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018.
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.
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A summary of the notional amount and estimated aggregate fair value of our outstanding foreign exchange contracts is shown below (in millions):
March 30, 2019 | December 31, 2018 | ||||||
Notional amount (contract maturities < 24 months) | $ | 2,679 | $ | 2,153 | |||
Fair value | 27 | 14 | |||||
Currently, our most significant foreign currency transactional exposures relate to the Mexican peso, various European currencies, the Thai baht, the Chinese renminbi, the Brazilian real, the Japanese yen and the South African rand. A sensitivity analysis of our net transactional exposure is shown below (in millions):
Potential Earnings Benefit (Adverse Earnings Impact) | |||||||||
Hypothetical Strengthening % (1) | March 30, 2019 | December 31, 2018 | |||||||
U.S. dollar | 10% | $ | (18 | ) | $ | (19 | ) | ||
Euro | 10% | 14 | 20 | ||||||
(1) Relative to all other currencies to which it is exposed for a twelve-month period
A sensitivity analysis related to the aggregate fair value of our outstanding foreign exchange contracts is shown below (in millions):
Estimated Change in Fair Value | |||||||||
Hypothetical Change % (2) | March 30, 2019 | December 31, 2018 | |||||||
U.S. dollar | 10% | $ | 41 | $ | 37 | ||||
Euro | 10% | 63 | 72 | ||||||
(2) Relative to all other currencies to which it is exposed for a twelve-month period
There are certain shortcomings inherent in the sensitivity analyses above. The analyses assume that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.
In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars ("translational exposure"). In 2018, net sales outside of the United States accounted for 82% of our consolidated net sales, although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate our translational exposure.
Interest Rate Swaps
Our exposure to market risk associated with changes in variable interest rates impacts our interest payments on current and future debt obligations. We have entered into forward starting interest rate swap contracts ("Interest Rate Swaps") to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate. From time to time, we also utilize interest rate swap and other derivative contracts to convert certain fixed rate debt obligations to variable rate, matching effective and maturity dates to specific debt instruments. All of our Interest Rate Swaps are executed with banks that we believe are creditworthy and are denominated in currencies that match the underlying debt instrument. All of these contracts are designated as cash flow hedges.
A summary of the notional amount, estimated aggregate fair value and contract value of our outstanding Interest Rate Swaps is shown below (in millions):
March 30, 2019 | December 31, 2018 | ||||||
Notional amount (contract maturities < 9 months) | $ | 500 | $ | 500 | |||
Fair value | $ | (29 | ) | $ | (15 | ) | |
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The fair value of all outstanding Interest Rate Swaps is subject to changes in value due to changes in interest rates. A sensitivity analysis related to the aggregate fair value of our outstanding Interest Rate Swaps, is shown below (in millions):
Estimated Change in Fair Value | |||||||||
Hypothetical Parallel Shift - Basis Points | March 30, 2019 | December 31, 2018 | |||||||
Interest rate | 100 | $ | 46 | $ | 46 | ||||
Commodity Prices
Raw material, energy and commodity costs can be volatile, reflecting changes in supply and demand and global trade and tariff policies. We have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, such as the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. However, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. Certain of these strategies also may limit our opportunities in a declining commodity cost environment. If these costs increase, it could have an adverse impact on our operating results in the foreseeable future. See "— Forward-Looking Statements" below and Item 1A, "Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance," in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 90% of our copper purchases and a significant portion of our leather purchases are subject to price index agreements with our customers.
For further information related to the financial instruments described above, see Note 17, "Financial Instruments," to the condensed consolidated financial statements included in this Report.
OTHER MATTERS
Legal and Environmental Matters
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial and contractual disputes, product liability claims and environmental and other matters. As of March 30, 2019, we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $13 million. In addition, as of March 30, 2019, we had recorded reserves for product liability claims and environmental matters of $28 million and $9.0 million, respectively. Although these reserves were determined in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain, and actual results may differ significantly from current estimates. For a description of risks related to various legal proceedings and claims, see Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018. For a more complete description of our outstanding material legal proceedings, see Note 15, "Legal and Other Contingencies," to the condensed consolidated financial statements included in this Report.
Significant Accounting Policies and Critical Accounting Estimates
Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates. For a discussion of our significant accounting policies and critical accounting estimates, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant Accounting Policies and Critical Accounting Estimates," and Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in our significant accounting policies or critical accounting estimates during the first quarter of 2019, with the exception of leases. See Note 8, "Leases," to the condensed consolidated financial statements included in this Report.
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Recently Issued Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see Note 18, "Accounting Pronouncements," to the condensed consolidated financial statements included in this Report.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements. We also may provide forward-looking statements in oral statements or other written materials released to the public. All such forward-looking statements contained or incorporated in this Report or in any other public statements which address operating performance, events or developments that we expect or anticipate may occur in the future, including, without limitation, statements related to business opportunities, awarded sales contracts, sales backlog and ongoing commercial arrangements, or statements expressing views about future operating results, are forward-looking statements. Actual results may differ materially from any or all forward-looking statements made by us. Important factors, risks and uncertainties that may cause actual results to differ materially from anticipated results include, but are not limited to:
• | general economic conditions in the markets in which we operate, including changes in interest rates or currency exchange rates; |
• | changes in actual industry vehicle production levels from our current estimates; |
• | fluctuations in the production of vehicles or the loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier; |
• | the outcome of customer negotiations and the impact of customer-imposed price reductions; |
• | the cost and availability of raw materials, energy, commodities and product components and our ability to mitigate such costs; |
• | disruptions in relationships with our suppliers; |
• | the financial condition of and adverse developments affecting our customers and suppliers; |
• | risks associated with conducting business in foreign countries; |
• | 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; |
• | the operational and financial success of our joint ventures; |
• | 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 impact and timing of program launch costs and our management of new program launches; |
• | limitations imposed by our existing indebtedness and our ability to access capital markets on commercially reasonable terms; |
• | changes in discount rates and the actual return on pension assets; |
• | impairment charges initiated by adverse industry or market developments; |
• | our ability to execute our strategic objectives; |
• | disruptions to our information technology, 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; |
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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; |
• | the anticipated changes in economic and other relationships between the United Kingdom and the European Union; and |
• | other risks described in Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018, and our other Securities and Exchange Commission ("SEC") filings. |
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.
ITEM 4 — CONTROLS AND PROCEDURES
(a) | Disclosure Controls and Procedures |
The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Based on the evaluation described above, the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the desired control objectives were achieved as of the end of the period covered by this Report.
(b) | Changes in Internal Control over Financial Reporting |
During the quarter ended March 30, 2019, we implemented a new lease accounting system and processes in conjunction with the adoption of ASU 2016-02, "Leases," on January 1, 2019. These implementations resulted in a material change in a component of our internal control over financial reporting.
Other than as described above, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial or contractual disputes, product liability claims and environmental and other matters. For a description of risks related to various legal proceedings and claims, see Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018. For a description of our outstanding material legal proceedings, see Note 15, "Legal and Other Contingencies," to the condensed consolidated financial statements included in this Report.
ITEM 1A — RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
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ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As discussed in Part I — Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capitalization — Common Stock Share Repurchase Program," and Note 14, "Comprehensive Income and Equity," to the condensed consolidated financial statements included in this Report, we have a remaining repurchase authorization of $1,465.2 million under our ongoing common stock share repurchase program. A summary of the shares of our common stock repurchased during the quarter ended March 30, 2019, is shown below:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions) | |||||||||
January 1, 2019 through January 26, 2019 | 383,290 | $141.63 | 383,290 | $ | 745.5 | ||||||||
January 27, 2019 through February 23, 2019 | 259,448 | $153.80 | 259,448 | 1,488.9 | (1) | ||||||||
February 24, 2019 through March 30, 2019 | 161,532 | $146.62 | 161,532 | 1,465.2 | |||||||||
Total | 804,270 | $146.56 | 804,270 | $ | 1,465.2 | ||||||||
(1) On February 7, 2019, our Board of Directors authorized an increase to our existing common stock share repurchase program authorization to $1.5 billion.
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ITEM 6 — EXHIBITS
Exhibit Index
Exhibit Number | Exhibit Name | ||
10.1 | |||
10.2 | *** | ||
* | 10.3 | *** | |
* | 10.4 | *** | |
* | 31.1 | ||
* | 31.2 | ||
* | 32.1 | ||
* | 32.2 | ||
** | 101.SCH | XBRL Taxonomy Extension Schema Document. | |
** | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
** | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
** | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
** | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
* | Filed herewith. | ||
** | Submitted electronically with the Report. | ||
*** | Compensatory plan or arrangement. | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
LEAR CORPORATION | |||
Dated: | April 26, 2019 | By: | /s/ Raymond E. Scott |
Raymond E. Scott | |||
President and Chief Executive Officer | |||
By: | /s/ Jeffrey H. Vanneste | ||
Jeffrey H. Vanneste | |||
Senior Vice President and Chief Financial Officer | |||
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