Investor Alert

Nov. 2, 2021, 9:07 a.m. EDT


(EDGAR Online via COMTEX) -- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW We are a global automotive technology leader in Seating and E-Systems, enabling superior in-vehicle experiences for consumers around the world. We supply seating, electrical distribution and connection systems, electronic systems, and software to all of the world's major automotive manufacturers. Lear is built on a foundation and strong culture of innovation, operational excellence, and engineering and program management capabilities. We use our product, design and technological expertise, as well as our global reach and competitive manufacturing footprint, to achieve our financial goals and objectives. These include continuing to deliver profitable growth (balancing risks and returns); investing in innovation to drive business growth and profitability; maintaining a strong balance sheet with investment grade credit metrics; and consistently returning excess cash to our stockholders. Further, we have aligned our strategy with the key trends affecting our business - electrification, connectivity and autonomy. At Lear, we are Making every drive betterTM by providing technology for safer, smarter and more comfortable journeys, while adhering to our values - Be Inclusive. Be Inventive. Get Results the Right Way. Our business is organized under two reporting segments: Seating and E-Systems. Each of these segments has a varied product and technology range across a number of component categories. Our Seating business consists of the design, development, engineering and manufacture of complete seat systems, seat subsystems and key seat components. Our capabilities in operations and supply chain management enable synchronized (just-in-time) assembly and delivery of high volumes of complex complete seat systems to our customers. Included in our complete seat system and subsystem solutions are advanced comfort, wellness, safety and sound offerings, as well as configurable seating product technologies, all of which are compatible with traditional internal combustion engine ("ICE") architectures and the full range of hybrid, plug-in hybrid and battery electric architectures. Our advanced comfort, wellness, safety and sound offerings are facilitated by our system, component and integration capabilities, together with our in-house electronics, sensor, software and algorithm competencies. As the most vertically integrated global seat supplier, our key seat component product offerings include seat trim covers, surface materials such as leather and fabric, seat mechanisms, seat foam and headrests. Our E-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution and connection systems, electronic systems, and software. The unique combination of these capabilities enables us to provide our customers with customizable solutions with optimized designs at a competitive cost. Electrical distribution and connection systems utilize low voltage, high voltage, high speed data cables and flat wiring to connect networks and electrical signals and manage electrical power within the vehicle for all types of powertrains - from traditional ICE architectures to the full range of hybrid, plug-in hybrid and battery electric architectures. Key components in our electrical distribution portfolio include wire harnesses, terminals and connectors, and engineered components for both ICE and electrified vehicle architectures that require management of higher voltage and power. Electronic systems facilitate signal, data and power management within the vehicle and include the associated software required to facilitate these functions. Key components in our electronic systems portfolio include body domain control modules and products specific to electrification and connectivity trends. Electrification products include on-board battery chargers, power conversion modules, high voltage battery management systems and high voltage power distribution systems. Connectivity products include gateway modules and communication modules to manage both wired and wireless networks and data in vehicles. In addition to electronic modules, we offer software that includes cybersecurity, advanced vehicle positioning for automated and autonomous driving applications and full capabilities in both dedicated short-range communication and cellular protocols for vehicle connectivity. Our software offerings include embedded control software and cloud and mobile device-based software and services. Our customers traditionally have sourced our electronic hardware together with the software that we embed in it, but such software may also be sourced by our customers independently of the hardware. We serve all of the world's major automotive manufacturers across both our Seating and E-Systems businesses, and we have automotive content on more than 400 vehicle nameplates worldwide. It is common to have both seating and electrical content on the same and multiple vehicle platforms with a single customer. Further, with the seat becoming a more dynamic and integrated system requiring increased levels of electrical and electronic integration, the combined capabilities of our Seating and E-Systems businesses are a competitive advantage. Our businesses benefit globally from leveraging common operating standards and disciplines, including world-class product development and manufacturing processes, as well as common customer support and regional infrastructures, all of which contribute to our reputation for operational excellence. Our core capabilities are shared across component categories and include high-precision manufacturing and assembly with short lead times, management of complex supply chains, global engineering and program management skills, the agility to establish and/or transfer production between facilities quickly and a unique customer-focused culture. Our businesses utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating Table of Contents LEAR CORPORATION support functions, such as logistics, supply chain management, quality and health and safety, as well as all major administrative functions. Industry overview Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on the availability of raw materials and components and consumer demand for automotive vehicles, and our content per vehicle. In 2020, unprecedented industry disruptions related to the COVID-19 pandemic, particularly in the first half of the year, impacted our operations in every region of the world. Although industry production has improved in the first nine months of 2021 relative to 2020, production remains below recent historic levels, and third quarter 2021 production decreased 19% as compared to the third quarter of 2020. This is largely due to the continuing impact of the COVID-19 pandemic in 2021, particularly through supply shortages. The most significant supply shortage relates to semiconductor chips, which is impacting global industry production and resulting in cancellations of planned production. During the first nine months of 2021, production disruptions negatively impacted our net sales by approximately 16%. In addition, we are experiencing increased costs related to labor shortages and inefficiencies and ongoing costs related to personal protective equipment, all of which are likely to continue for a period of time. Increases in certain commodity costs, as well as transportation and logistics costs, are also impacting, and will continue to impact, our operating results for the foreseeable future. Further, a resurgence of the COVID-19 virus or its variants, including corresponding "stay at home" or similar government orders impacting industry production, could impact our financial results. For risks related to the COVID-19 pandemic, including supply shortages, see Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2020, as supplemented and updated by Part II - Item 1A, "Risk Factors," in our Quarterly Report on Form 10-Q for the quarter ended April 3, 2021. Global automotive industry production volumes in the first nine months of 2021, as compared to the first nine months of 2020, are shown below (in millions of units): First Nine Months 2021 (1) 2020 (1) (2) % Change North America 9.8 9.2 7 % Europe and Africa 12.3 11.5 7 % Asia 29.6 26.6 11 % South America 1.8 1.4 28 % Other 1.1 1.1 3 % Global light vehicle production 54.6 49.8 10 %

(1) Production data based on IHS Automotive

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                                        LEAR CORPORATION
        Our percentage of consolidated net sales by region in the first nine months of
        2021 and 2020 is shown below:
                                    Nine Months Ended
                                October 2,         October 3,
                                   2021               2020
        North America                    39  %           40  %
        Europe and Africa                36  %           36  %
        Asia                             21  %           21  %
        South America                     4  %            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.

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        declining commodity price 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,
        2020, as supplemented and updated by Part II - Item 1A, "Risk Factors," in this
        Financial Measures
        In evaluating our financial condition and operating performance, we focus
        primarily on earnings, operating margins, cash flows and return on invested
        capital. Our strategy includes expanding our business with new and existing
        customers globally through new products, including electrification. Asia
        continues to present long-term growth opportunities, as we focus on expanding
        our market share and content per vehicle, as demand for luxury and performance
        features increases in this region. In addition to our wholly owned locations, we
        currently have thirteen 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 selectively increased our vertical
        integration capabilities globally, as well as expanded our component
        manufacturing capacity in Asia, Eastern Europe, Mexico and Northern Africa and
        our low-cost engineering capabilities in Asia, Eastern Europe and Northern
        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.
        On October 28, 2021, we entered into a definitive agreement to acquire
        substantially all of Kongsberg Automotive's Interior Comfort Systems business
        unit ("Kongsberg"). Kongsberg specializes in comfort seating solutions,
        including massage, lumbar, seat heat and ventilation. With almost 50 years of
        experience, Kongsberg has cutting-edge technology, a well-balanced customer
        portfolio built on longstanding relationships with leading premium automotive
        manufacturers and an experienced and dedicated team. The Kongsberg acquisition
        is expected to further advance our vertical integration and expand our product
        offerings into specialized comfort seating solutions that improve vehicle
        performance and packaging - important features across various vehicle segments.
        The transaction is valued at approximately ?175 million, on a cash and debt free
        basis. The acquisition, subject to regulatory approvals and customary closing
        conditions and adjustments, is expected to close in the first quarter of 2022.
        On March 25, 2021, we completed the acquisition of M&N Plastics, an injection
        molding specialist and manufacturer of engineered plastic components for
        automotive electrical distribution applications. When combined with our
        continuing organic investments in connection systems, the addition of M&N
        Plastics enhances the ability of our E-Systems segment to vertically integrate
        the engineering and production of complex parts for electrical distribution,
        including high-voltage wire harnesses and power electronics, creating a strong
        platform for future revenue growth and margin expansion in our overall E-Systems
        business. The acquisition is not material to the condensed consolidated
        financial statements included in this Report.
        Financing Transaction
        On October 28, 2021, we entered into an amended and restated unsecured credit
        agreement which increases available borrowings under our revolving credit
        facility from $1.75 billion to $2.0 billion and extends the maturity date from
        August 8, 2024 to October 28, 2026. The amended and restated unsecured credit
        agreement maintains our $250 million term loan facility maturing on August 8,
        Operational Restructuring
        In the first nine months of 2021, we incurred pretax restructuring costs of $78
        million and related manufacturing inefficiency charges of approximately $10
        million, as compared to pretax restructuring costs of $119 million and related
        manufacturing inefficiency charges of approximately $4 million in the first nine
        months of 2020. None of the individual restructuring actions initiated during
        the first nine months of 2021 were material. Further, there have been no changes
        in previously initiated restructuring actions that have resulted (or will
        result) in a material change to our restructuring costs.
        Our restructuring actions include plant closures and workforce reductions and
        are initiated to maintain our competitive footprint or are in response to
        customer initiatives or changes in global and regional automotive markets. Our
        restructuring actions are

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                                        LEAR CORPORATION
        As discussed above, our results for the three and nine months ended October 2,
        2021 and October 3, 2020, reflect the following items (in millions):
                                                                           Three Months Ended                      Nine Months Ended
                                                                    October 2,           October 3,         October 2,         October 3,
                                                                       2021                 2020               2021               2020
        Costs related to restructuring actions, including
        manufacturing inefficiencies of $3 million and $10
        million, respectively, in the three and nine months ended
        October 2, 2021, and $1 million and $4 million,
        respectively, in the three and nine months ended
        October 3, 2020                                            $       49          $        50          $     88          $      123
        Intangible asset impairment                                         -                    -                 9                   -
        Favorable indirect tax ruling in a foreign jurisdiction             1                    -               (46)                  -
        Loss related to affiliate                                           -                    -                 1                   -
        Loss on extinguishment of debt                                      -                    -                 -                  21
        Tax (benefit) expense, net                                          6                   (5)               (4)                (14)

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Nov 02, 2021


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