# Lear Corp: Form 10-Q for the period ended Oct 1, 2022

- Company: [Lear Corp](/companies/lea.md) (CIK 842162)
- Form: 10-Q
- Filed: 2022-11-01
- Accepted by EDGAR: Nov 1, 2022, 09:12 ET
- Period: 2022-10-01
- Accession: 0000842162-22-000046
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/842162/000084216222000046/lear-20221001.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/842162/000084216222000046/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-03 to 2022-10-01 | $5.24bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-10-01 | $15.52bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-03 to 2022-10-01 | $4.86bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-10-01 | $14.48bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2022-07-03 to 2022-10-01 | $163.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-10-01 | $512.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-03 to 2022-10-01 | $197.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-10-01 | $470.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-03 to 2022-10-01 | $24.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-10-01 | $74.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-03 to 2022-10-01 | $41.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-10-01 | $85.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-03 to 2022-10-01 | $92.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-10-01 | $210.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-03 to 2022-10-01 | $1.54 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-10-01 | $3.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-03 to 2022-10-01 | $1.55 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-10-01 | $3.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-03 to 2022-10-01 | 59,785,860 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-10-01 | 60,031,484 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-10-01 | $484.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-07-03 to 2022-10-01 | $140.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2022-01-01 to 2022-10-01 | $442.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-01-01 to 2022-10-01 | $139.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-01-01 to 2022-10-01 | $75.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-10-01 | $842.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-10-01 | $6.92bn | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-01 | $13.38bn | us-gaap:Assets |
| Current liabilities | at 2022-10-01 | $5.19bn | us-gaap:LiabilitiesCurrent |
| Short-term borrowings | at 2022-10-01 | $3.9m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-10-01 | $4.30bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 66,641 characters.

### 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 and electronic systems to all of the world's major automotive manufacturers.

Lear is built on a foundation and strong culture of innovation, operational excellence, and engineering and program management capabilities. We use our product, design and technological expertise, as well as our global reach and competitive manufacturing footprint, to achieve our financial goals and objectives. These include continuing to deliver profitable growth (balancing risks and returns); investing in innovation to drive business growth and profitability; maintaining a strong balance sheet with investment grade credit metrics; and consistently returning capital to our stockholders. Further, we have aligned our strategy with the key trends affecting our business — electrification, connectivity, autonomy and shared mobility. At Lear, we are *Making every drive better*TM by providing technology for safer, smarter and more comfortable journeys, while adhering to our values — *Be Inclusive. 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 and safety offerings, as well as configurable seating product technologies. Our advanced comfort, wellness and safety offerings are facilitated by our system, component and integration capabilities, together with our in-house electronics, sensor, software and algorithm competencies. Our comfort offerings have been enhanced by our first quarter 2022 acquisition of substantially all of Kongsberg Automotive's Interior Comfort Systems business unit ("Kongsberg ICS"), which specializes in comfort seating solutions, including massage, lumbar, seat heat and ventilation. 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, as well as advanced comfort offerings of massage, lumbar, seat heat and ventilation. All of these products are compatible with traditional internal combustion engine ("ICE") architectures and the full range of hybrid, plug-in hybrid and battery electric architectures (collectively, "electrified powertrains").

Our E-Systems business consists of the design, development, engineering and manufacture of complete electrical distribution and connection systems and electronic systems. The 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 wire, high voltage wire, 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 electrified powertrains. Key components in our electrical distribution and connection systems portfolio include wire harnesses, terminals and connectors and engineered components for both ICE architectures and electrified powertrains 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 and zone control modules and products specific to electrification and connectivity. Electrification products include integrated power modules and battery disconnect units, as well as on-board battery chargers, power conversion modules, high voltage battery management systems and high voltage power distribution boxes. Connectivity products include telematics control units ("TCU") and gateway modules to manage both wired and wireless networks and data in vehicles. In addition to electronic modules, we offer software that includes cybersecurity 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.

We serve all of the world's major automotive manufacturers across both our Seating and E-Systems businesses, and we have automotive content on more than 450 vehicle nameplates worldwide. It is common for us to have both seating and electrical and/or electronic content on the same vehicle platform.

Our businesses benefit globally from leveraging common operating standards and disciplines, including world-class product development and manufacturing processes, as well as common customer support and regional infrastructures, all of which contribute to our reputation for operational excellence. Our core capabilities are shared across component categories and include: high-precision manufacturing and assembly with short lead times; management of complex supply chains; global engineering and program management skills; the agility to establish and/or transfer production between facilities quickly; and a unique customer-focused culture. Our businesses utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating support functions. These functions include logistics, supply chain management, quality, health and safety, and 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. Due to the overall global economic conditions in 2020, largely as a result of the COVID-19 pandemic, the automotive industry experienced a decline in global customer sales and production volumes. Although industry production increased 3% in 2021 over 2020 and is expected to increase 7% in 2022 over 2021 (based on October 2022 S&P Global Mobility, formerly IHS Markit, projections), production remains well below recent historic levels and consumer demand. This is largely due to the continuing impact of the COVID-19 pandemic, particularly through supply shortages and, to a lesser extent, the resurgence of the virus in China with corresponding "stay at home" government orders, as well as the Russia-Ukraine conflict. The most significant supply shortage relates to semiconductor chips, which is impacting global vehicle production and resulting in reductions and cancellations of planned production. In addition, we are experiencing increased costs related to labor inefficiencies and shortages, which are likely to continue. Increases in certain commodity costs, as well as transportation, logistics and utility costs, are also impacting, and will continue to impact, our operating results for the foreseeable future. Further resurgences of the COVID-19 virus or its variants in other regions, including corresponding "stay at home" or similar government orders impacting industry production, could also 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, 2021, as supplemented and updated by Part II — Item 1A, "Risk Factors," in this Report.

In March 2022, as our customers began to suspend their Russian operations as a result of Russia's invasion of Ukraine, we similarly began to suspend our Russian operations. Since the first quarter of 2022, we have suspended all production in Russia (but for certain de minimis operations) and significantly decreased our workforce in the country. Given the continued uncertainty regarding our Russian operations and the military escalation announced by the Russian government in September 2022, we recorded charges of approximately $20 million in the third quarter of 2022 related to impairments of substantially all of our operating assets, including inventory, property, plant and equipment and right-of-use assets. Although our net sales and total assets in Russia represent less than 1% of our consolidated net sales and total assets, the Russia-Ukraine conflict and sanctions imposed on Russia globally have resulted in economic and supply chain disruptions affecting the overall automotive industry, the ultimate financial impact of which cannot be reasonably estimated. Further, although we do not have operations in Ukraine, the Ukrainian operations of certain of our suppliers and suppliers of our customers have been and will likely continue to be disrupted by the Russia-Ukraine conflict. For further information, see Note 2, "Current Operating Environment," Note 7, "Long-Lived Assets," Note 10, "Leases," and Note 19, "Financial Instruments," to the condensed consolidated financial statements included in this Report.

Global automotive industry production volumes in the first nine months of 2022, as compared to the first nine months of 2021, are shown below (in thousands of units):

|  | Nine Months Ended October 1, 2022 (1) | October 2, 2021 (1) (2) | % Change |
| --- | ---: | ---: | ---: |
| North America | 10,790.4 | 9,753.7 | 11% |
| Europe and Africa | 11,767.4 | 12,205.9 | (4)% |
| Asia | 33,080.5 | 29,660.2 | 12% |
| South America | 2,012.1 | 1,829.0 | 10% |
| Other | 1,435.3 | 1,128.6 | 27% |
| Global light vehicle production | 59,085.7 | 54,577.4 | 8% |

(1) Production data based on S&P Global Mobility

(2) Production data for 2021 have been updated from our third quarter 2021 Quarterly Report on Form 10-Q to reflect actual production levels

In addition to the factors noted above, automotive sales and production can be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles, restructuring actions of our customers and suppliers, facility closures, changing consumer attitudes toward vehicle ownership and usage and other factors. Our operating results are also significantly impacted by the overall commercial success of the vehicle platforms for which we supply particular products, as well as the level of vertical integration and profitability of the products that we supply for these platforms. 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 nine months of 2022 and 2021 is shown below:

|  | Nine Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| North America | 43% | 39% |
| Europe and Africa | 33% | 36% |
| Asia | 20% | 21% |
| South America | 4% | 4% |
| Total | 100% | 100% |

Our ability to reduce the risks inherent in certain concentrations of our business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall.

The automotive industry, and our business, continue to be shaped by the broad trends of electrification, connectivity, autonomy, and shared mobility. We also consider demand and regulatory requirements related to improved energy efficiency, sustainability, enhanced safety and communications (e.g., government mandates related to fuel economy, carbon emissions and safety equipment) to be significant drivers of these trends, each of which is likely to be at the forefront of our industry for the foreseeable future.

In addition to key foundational attributes imperative for success as an automotive supplier (quality, service and cost), our strategic initiatives focus on furthering our competitive differentiation through vertical integration, disruptive innovation and advanced manufacturing technology. We have expanded key component capabilities through organic investment and acquisitions to ensure a full complement of the best solutions for our customers. We have restructured, and continue to align, our manufacturing and engineering footprint to attain a leading competitive cost position globally. We have established or expanded activities in new and growing markets, in support of our customers' growth initiatives and in pursuit of opportunities with new customers. These initiatives have helped us achieve our financial goals overall, as well as more regional, customer and vehicle segment diversification in our business.

For further information related to these trends and our strategy, see Item 1, "Business — Industry and Strategy," in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 offset these price reductions with product cost reductions through product design enhancement, supply chain management, 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 and anticipate 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 66.4% in the first nine months of 2022, as compared to 65.0% in the first nine months of 2021, reflecting increases in certain commodity costs. Raw material, energy and commodity costs can be volatile, reflecting, among other things, changes in supply and demand, logistics issues, global trade and tariff policies, and geopolitical issues. Our primary commodity cost exposures relate to steel, copper and leather. 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, contractual recovery mechanisms and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. Further, our exposure to changes in steel prices is primarily indirect, through purchased components, and a significant portion of our copper, leather and direct steel purchases are subject to price index agreements with our customers and suppliers. Certain of these strategies also may limit our opportunities in a declining commodity price environment. In the current environment of escalating raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, have only offset a portion of the adverse impact. 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, 2021, as supplemented and updated by Part II — Item 1A, "Risk Factors," in this Report.

#### Financial Measures

In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. Our strategy includes expanding our business with new and existing customers globally through new products, including electrification. We also have selectively increased our vertical integration capabilities globally, as well as expanded our component manufacturing capacity in Asia, Eastern Europe, Mexico and Northern Africa and our low-cost engineering capabilities in Asia, Eastern Europe and Northern Africa.

Our 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 supplier payment terms with our customer payment terms. However, our ability to continue to do so may be impacted by adverse automotive industry conditions, including inconsistent production schedules due to supply shortages, 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.

#### Acquisitions

On February 28, 2022, we completed the acquisition of Kongsberg ICS, which specializes in comfort seating solutions. With almost 50 years of experience in comfort seating solutions, Kongsberg ICS has leading technology, a well-balanced customer portfolio built on longstanding relationships with leading premium automotive manufacturers, and an experienced team. The Kongsberg ICS acquisition is expected to further advance our seat component capabilities into specialized comfort seating solutions that further differentiate our product offerings and improve vehicle performance and packaging — important features across various vehicle segments. The transaction is valued at approximately $189 million, on a cash and debt free basis.

On May 19, 2022, we completed the acquisition of Thagora Technology SRL ("Thagora"), a privately held company specializing in material utilization hardware and software technologies based in Iasi, Romania. We expect that Thagora's innovative technologies will complement our sustainable manufacturing processes by reducing scrap and lowering energy usage during production.

On May 20, 2022, we entered into a definitive agreement to acquire I.G. Bauerhin ("IGB"), a privately held supplier of automotive seat heating, ventilation, active cooling, steering wheel heating, seat sensors and electronic control modules, headquartered in Gruendau-Rothenbergen, Germany. IGB has more than 4,000 employees at nine manufacturing plants in seven countries. The acquisition of IGB is expected to further our vertical integration strategy and advance our vision of being the leading provider of innovative thermal comfort solutions. The transaction is valued at approximately €140 million, on a cash and debt free basis. The acquisition, subject to regulatory approvals and customary closing conditions and adjustments, is expected to close by the first quarter of 2023.

#### Operational Restructuring

In the first nine months of 2022, we incurred pretax restructuring costs of $89 million and related manufacturing inefficiency charges of approximately $5 million, as compared to pretax restructuring costs of $78 million and related manufacturing inefficiency charges of approximately $10 million in the first nine months of 2021. None of the individual restructuring actions initiated in the first nine months of 2022 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 designed to maintain or improve our operating results and profitability throughout the automotive industry cycles. Restructuring actions are generally funded within twelve months of initiation and are funded by cash flows from operating activities and existing cash balances. We expect to incur approximately $50 million of additional restructuring costs related to activities initiated as of October 1, 2022, all of which are expected to be incurred in the next twelve months. We plan to implement additional restructuring actions in order to align our manufacturing capacity and other costs with prevailing regional automotive production levels. Such future restructuring actions are dependent on market conditions, customer actions and other factors.

For further information, see Note 4, "Restructuring," and Note 18, "Segment Reporting," to the condensed consolidated financial statements included in this Report.

#### Share Repurchase Program and Quarterly Cash Dividends

We may implement share repurchases through a variety of methods, including, but not limited to, open market purchases, accelerated stock repurchase programs and structured repurchase transactions. The extent to which we may repurchase our outstanding common stock and the timing of such repurchases will depend upon our financial condition, results of operations, capital requirements, prevailing market conditions, alternative uses of capital and other factors (see "— Forward-Looking Statements" below).

Since the first quarter of 2011, our Board of Directors (the "Board") has authorized $6.1 billion in share repurchases under our common stock share repurchase program. In the first nine months of 2022, we repurchased $75 million of shares. At the end of the third quarter of 2022, we have a remaining repurchase authorization of $1.3 billion, which expires on December 31, 2024.

Our Board declared a quarterly cash dividend of $0.77 per share of common stock in the first, second and third quarters of 2022.

For further information related to our common stock share repurchase program and our quarterly cash dividends, see "— Liquidity and Capital Resources — Capitalization" below and Note 16, "Comprehensive Income (Loss) and Equity," to the condensed consolidated financial statements included in this Report.

#### Other Matters

In the three months ended October 1, 2022, we recognized tax expense of $3 million related to the establishment of a valuation allowance on deferred tax assets of a foreign subsidiary and net tax benefits of $6 million related to restructuring charges and various other items. In the nine months ended October 1, 2022, we recognized net tax benefits of $5 million related to the release of tax reserves at several foreign subsidiaries, net tax expense of $3 million related to changes in valuation allowances on deferred tax assets of foreign subsidiaries and net tax benefits of $26 million related to restructuring charges and various other items.

In the three months ended October 2, 2021, we recognized tax expense of $20 million related to the establishment of valuation allowances on deferred tax assets of foreign subsidiaries, net tax benefits of $7 million related to a favorable indirect tax ruling and net tax benefits of $7 million related to restructuring charges and various other items. In the nine months ended October 2, 2021, we recognized net tax expense of $13 million related to changes in valuation allowances on deferred tax assets of foreign subsidiaries, tax expense of $9 million on a $46 million gain related to a favorable indirect tax ruling in a foreign jurisdiction and net tax benefits of $26 million related to the net release of tax reserves at several foreign subsidiaries, restructuring charges and various other items.

Our results for the three and nine months ended October 1, 2022 and October 2, 2021, reflect the following items (in millions):

|  | Three Months Ended October 1, 2022 | October 2, 2021 | Nine Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: | ---: | ---: |
| Costs related to restructuring actions, including manufacturing inefficiencies of $1 million and $5 million in the three and nine months ended October 1, 2022, respectively, and $3 million and $10 million in the three and nine months ended October 2, 2021, respectively | $19 | $49 | $94 | $88 |
| Acquisition costs | — | — | 10 | — |
| Acquisition-related inventory fair value adjustment | — | — | 1 | — |
| Other acquisition-related costs | 11 | — | 11 | — |
| Impairments related to Russian operations | 20 | — | 20 | — |
| Intangible asset impairment | — | — | 9 | 9 |
| Costs (insurance recoveries) related to typhoon in the Philippines, net | (1) | — | 4 | — |
| Foreign exchange losses due to foreign exchange rate volatility related to Russia | 1 | — | 15 | — |
| Favorable indirect tax ruling in a foreign jurisdiction | — | 1 | — | (46) |
| Loss related to affiliate | — | — | — | 1 |
| Tax (benefit) expense, net | (3) | 6 | (28) | (4) |

For further information regarding these items, see Note 3, "Acquisition of Kongsberg ICS," Note 4, "Restructuring," Note 7, "Long-Lived Assets," Note 8, "Goodwill and Indefinite-Lived Intangible Assets," Note 10, "Leases," Note 13, "Other (Income) Expense, Net," and Note 14, "Income Taxes," to the condensed consolidated financial statements included in this Report.

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 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, 2021, as supplemented and updated by Part II — Item 1A, "Risk Factors," in this Report.

### RESULTS OF OPERATIONS

A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:

| Net sales | Three Months Ended October 1, 2022 |  | October 2, 2021 |  | Nine Months Ended October 1, 2022 |  | October 2, 2021 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Seating | $3,887.8 | 74.2% | $3,166.2 | 74.2% | $11,674.4 | 75.2% | $10,770.4 | 74.9% |
| E-Systems | 1,353.4 | 25.8 | 1,102.0 | 25.8 | 3,846.2 | 24.8 | 3,612.9 | 25.1 |
| Net sales | 5,241.2 | 100.0 | 4,268.2 | 100.0 | 15,520.6 | 100.0 | 14,383.3 | 100.0 |
| Cost of sales | 4,864.3 | 92.8 | 4,041.5 | 94.7 | 14,482.3 | 93.3 | 13,262.4 | 92.2 |
| Gross profit | 376.9 | 7.2 | 226.7 | 5.3 | 1,038.3 | 6.7 | 1,120.9 | 7.8 |
| Selling, general and administrative expenses | 163.9 | 3.1 | 163.3 | 3.8 | 512.4 | 3.3 | 503.0 | 3.5 |
| Amortization of intangible assets | 15.2 | 0.3 | 15.8 | 0.4 | 55.5 | 0.3 | 57.4 | 0.4 |
| Interest expense | 24.8 | 0.5 | 22.6 | 0.5 | 74.6 | 0.5 | 67.2 | 0.5 |
| Other (income) expense, net | 18.1 | 0.3 | 11.1 | 0.3 | 59.8 | 0.4 | (28.7) | (0.2) |
| Provision for income taxes | 41.7 | 0.8 | 20.9 | 0.5 | 85.6 | 0.5 | 119.1 | 0.8 |
| Equity in net (income) loss of affiliates | (6.0) | (0.1) | 1.7 | — | (21.0) | (0.1) | (9.1) | (0.1) |
| Net income attributable to noncontrolling interests | 26.9 | 0.5 | 17.8 | 0.4 | 61.2 | 0.4 | 59.6 | 0.4 |
| Net income (loss) attributable to Lear | $92.3 | 1.8% | $(26.5) | (0.6)% | $210.2 | 1.4% | $352.4 | 2.5% |

40

### Three Months Ended October 1, 2022 vs. Three Months Ended October 2, 2021

Net sales in the third quarter of 2022 were $5.2 billion, as compared to $4.3 billion in the third quarter of 2021, an increase of $1.0 billion or 23%. Higher production volumes on Lear platforms globally and new business globally favorably impacted net sales by $760 million and $321 million, respectively. Net sales also benefited by $148 million and $59 million due to commodity recoveries and our Kongsberg ICS acquisition, respectively. These increases were partially offset by the impact of foreign exchange fluctuations, which reduced net sales by $361 million.

*(in millions)*

|  | Cost of Sales |
| --- | ---: |
| Third quarter 2021 | $4,041.5 |
| Material cost | 672.7 |
| Labor and other | 151.3 |
| Depreciation | (1.2) |
| Third quarter 2022 | $4,864.3 |

Cost of sales was $4.9 billion in the third quarter of 2022, as compared to $4.0 billion in the third quarter of 2021. Higher production volumes on Lear platforms globally and new business globally increased cost of sales. Cost of sales also increased as a result of higher commodity costs and our Kongsberg ICS acquisition. These increases were partially offset by the impact of foreign exchange fluctuations.

Gross profit and gross margin were $377 million and 7.2% of net sales, respectively, in the third quarter of 2022, as compared to $227 million and 5.3% of net sales, respectively, in the third quarter of 2021. Higher production volumes on Lear platforms and new business positively impacted gross profit by $183 million. The impact of selling price reductions and foreign exchange fluctuations was partially offset by favorable operating performance, including the benefit of restructuring actions. These factors had a corresponding impact on gross margin.

Selling, general and administrative expenses, including engineering and development expenses, were $164 million in the third quarter of 2022, as compared to $163 million in the third quarter of 2021. As a percentage of net sales, selling, general and administrative expenses were 3.1% in the third quarter of 2022, as compared to 3.8% in the third quarter of 2021, reflecting higher restructuring costs in the third quarter of 2021.

Amortization of intangible assets was $15 million in the third quarter of 2022, as compared to $16 million in the third quarter of 2021.

Interest expense was $25 million in the third quarter of 2022, as compared to $23 million in the third quarter of 2021.

Other expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the disposal of fixed assets, the non-service cost components of net periodic benefit cost and other miscellaneous income and expense, was $18 million in the third quarter of 2022, as compared to $11 million in the third quarter of 2021. In the third quarter of 2022, we recognized foreign exchange losses of $11 million related to foreign currency contracts of the €140 million IGB purchase price to be paid pending closing of such transaction.

In the third quarter of 2022, the provision for income taxes was $42 million, representing an effective tax rate of 26.9% on pretax income before equity in net income of affiliates of $155 million. In the third quarter of 2021, the provision for income taxes was $21 million, representing an effective tax rate of 150.4% on pretax income before equity in net loss of affiliates of $14 million, for the reasons described below. For further information, see Note 14, "Income Taxes," to the condensed consolidated financial statements included in this Report.

In the third quarters of 2022 and 2021, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In the third quarter of 2022, we recognized tax expense of $3 million related to the establishment of a valuation allowance on deferred tax assets of a foreign subsidiary and net tax benefits of $6 million related to restructuring charges and various other items. In the third quarter of 2021, we recognized tax expense of $20 million related to the establishment of valuation allowances on deferred tax assets of foreign subsidiaries, net tax benefits of $7 million related to a favorable indirect tax ruling and net tax benefits of $7 million related to restructuring charges and various other items.

Excluding these items, the effective tax rate for the third quarters of 2022 and 2021 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) loss of affiliates was income of $6 million in the third quarter of 2022, as compared to a loss of $2 million in the third quarter of 2021, primarily reflecting the earnings of our Shenyang Jinbei Lear Automotive Seating joint venture established in the third quarter of 2021.

Net income (loss) attributable to Lear was $92 million, or $1.54 per diluted share, in the third quarter of 2022, as compared to ($27) million, or ($0.44) per diluted share, in the third quarter of 2021. Net income (loss) and diluted net income (loss) per share increased for the reasons described above.

#### Reportable Operating Segments

We have two reportable operating segments: Seating and E-Systems. For a description of our reportable operating segments, see "Executive Overview" above.

The financial information presented below is for our two reportable operating segments and our other category for the periods presented. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment. Corporate and regional headquarters costs include various support functions, such as information technology, advanced research and development, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment's pretax income (loss) before equity in net income (loss) 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 18, "Segment Reporting," to the condensed consolidated financial statements included in this Report.

#### Seating

A summary of the financial measures for our Seating segment is shown below (dollar amounts in millions):

|  | Three Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| Net sales | $3,887.8 | $3,166.2 |
| Segment earnings (1) | 222.6 | 126.7 |
| Margin | 5.7% | 4.0% |

(1) See definition above

Seating net sales were $3.9 billion in the third quarter of 2022, as compared to $3.2 billion in the third quarter of 2021, reflecting an increase of $722 million or 23%. Higher production volumes on Lear platforms and new business favorably impacted net sales by $554 million and $211 million, respectively. Net sales also benefited by $86 million and $59 million due to commodity recoveries and our Kongsberg ICS acquisition, respectively. These increases were partially offset by foreign exchange fluctuations, which reduced net sales by $237 million.

Segment earnings, including restructuring costs, and the related margin on net sales were $223 million and 5.7% in the third quarter of 2022, as compared to $127 million and 4.0% in the third quarter of 2021. Higher production volumes on Lear platforms and new business positively impacted segment earnings by $131 million. The impact of selling price reductions, impairment charges related to our Russian operations and foreign exchange fluctuations was partially offset by favorable operating performance, including the benefit of operational restructuring actions, and commodity recoveries.

#### E-Systems

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

|  | Three Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| Net sales | $1,353.4 | $1,102.0 |
| Segment earnings(1) | 46.8 | (7.5) |
| Margin | 3.5% | (0.7)% |

(1) See definition above

E-Systems net sales were $1.4 billion in the third quarter of 2022, as compared to $1.1 billion in the third quarter of 2021, reflecting an increase of $251 million or 23%. Higher production volumes on Lear platforms and new business favorably impacted net sales by $206 million and $110 million, respectively. Net sales also benefited by $62 million due to commodity recoveries. These increases were partially offset by foreign exchange fluctuations, which reduced net sales by $124 million.

Segment earnings, including restructuring costs, and the related margin on net sales were $47 million and 3.5% in the third quarter of 2022, as compared to ($8) million and (0.7)% in the third quarter of 2021. Higher production volumes on Lear platforms and new business positively impacted segment earnings by $52 million. Favorable operating performance, including the benefit of operational restructuring actions, and lower restructuring costs was offset by the impact of selling price reductions, increased commodity costs and foreign exchange fluctuations.

#### 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 October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| Net sales | $— | $— |
| Segment earnings (1) | (71.6) | (71.6) |
| Margin | N/A | N/A |

(1) See definition above

Segment earnings related to our other category were ($72) million in the third quarters of 2022 and 2021.

### Nine Months Ended October 1, 2022 vs. Nine Months Ended October 2, 2021

Net sales for the nine months ended October 1, 2022 were $15.5 billion, as compared to $14.4 billion for the nine months ended October 2, 2021, an increase of $1.1 billion or 8%. New business globally and higher production volumes on Lear platforms in North America, South America and Europe favorably impacted net sales by $773 million and $456 million, respectively. Net sales also benefited by $431 million and $141 million due to commodity recoveries and our Kongsberg ICS acquisition, respectively. These increases were partially offset by the impact of foreign exchange rate fluctuations, which reduced net sales by $747 million.

*(in millions)*

|  | Cost of Sales |
| --- | ---: |
| First nine months of 2021 | $13,262.4 |
| Material cost | 937.6 |
| Labor and other | 277.9 |
| Depreciation | 4.4 |
| First nine months of 2022 | $14,482.3 |

Cost of sales in the first nine months of 2022 was $14.5 billion, as compared to $13.3 billion in the first nine months of 2021. New business globally and higher production volumes on Lear platforms in North America, South America and Europe increased cost of sales. Cost of sales also increased as a result of higher commodity costs and our Kongsberg ICS acquisition. These increases were partially offset by the impact of foreign exchange fluctuations, which reduced cost of sales.

Gross profit and gross margin were $1.0 billion and 6.7% of net sales, respectively, for the nine months ended October 1, 2022, as compared to $1.1 billion and 7.8% of net sales, respectively, for the nine months ended October 2, 2021. The impact of selling price reductions, increased commodity costs and foreign exchange fluctuations was partially offset by favorable operating performance, including the benefit of restructuring actions. New business and higher production volumes on Lear platforms positively impacted gross profit by $156 million. These factors had a corresponding impact on gross margin.

Selling, general and administrative expenses, including engineering and development expenses, were $512 million in the first nine months of 2022, as compared to $503 million in the first nine months of 2021, primarily reflecting transaction costs of $10 million related to our Kongsberg ICS acquisition in 2022. As a percentage of net sales, selling, general and administrative expenses were 3.3% in the first nine months of 2022, as compared to 3.5% in the first nine months of 2021.

Amortization of intangible assets was $56 million in the first nine months of 2022, as compared to $57 million in the first nine months of 2021. An impairment charge of $9 million was recognized in the first nine months of 2022 and 2021.

Interest expense was $75 million in the first nine months of 2022, as compared to $67 million in the first nine months of 2021, reflecting financing costs related to our Kongsberg ICS acquisition in 2022.

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, 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 expense of $60 million in the nine months ended October 1, 2022, as compared to income of $29 million in the nine months ended October 2, 2021. In the first nine months of 2022, we recognized foreign exchange losses of $15 million related to foreign exchange rate volatility in Russia following the invasion of Ukraine and $11 million related to foreign currency contracts of the €140 million IGB purchase price to be paid pending closing of such transaction. In the first nine months of 2021, we recognized a gain of $46 million related to a favorable indirect tax ruling in a foreign jurisdiction and a loss of $1 million related to the impairment of an affiliate.

For the nine months ended October 1, 2022, the provision for income taxes was $86 million, representing an effective tax rate of 25.5% on pretax income before equity in net income of affiliates of $336 million. For the nine months ended October 2, 2021, the provision for income taxes was $119 million, representing an effective tax rate of 22.8% on pretax income before equity in net income of affiliates of $522 million, for reasons described below. For further information, see Note 14, "Income Taxes," to the condensed consolidated financial statements included in this Report.

In the first nine months of 2022 and 2021, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In the first nine months of 2022, we recognized net tax benefits of $5 million related to the release of tax reserves at several foreign subsidiaries, net tax expense of $3 million related to changes in valuation allowances on deferred tax assets of foreign subsidiaries and net tax benefits of $26 million related to restructuring charges and various other items. In the first nine months of 2021, we recognized net tax expense of $13 million related to changes in valuation allowances on deferred tax assets of foreign subsidiaries, tax expense of $9 million on a $46 million gain related to a favorable indirect tax ruling in a foreign jurisdiction and net tax benefits of $26 million related to the net release of tax reserves at several foreign subsidiaries, restructuring charges and various other items. Excluding these items, the effective tax rate for the first nine months of 2022 and 2021 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 $21 million in the first nine months of 2022, as compared to $9 million in the first nine months of 2021, primarily reflecting the earnings of our Shenyang Jinbei Lear Automotive Seating joint venture established in the third quarter of 2021.

Net income attributable to Lear was $210 million, or $3.50 per diluted share, for the nine months ended October 1, 2022, as compared to $352 million, or $5.83 per diluted share, for the nine months ended October 2, 2021. Net income and diluted net income per share decreased for the reasons described above.

#### Reportable Operating Segments

We have two reportable operating segments: Seating and E-Systems. For a description of our reportable operating segments, see "Executive Overview" and "Three Months Ended October 1, 2022 vs. Three Months Ended October 2, 2021 — Reportable Operating Segments" above.

#### Seating

A summary of the financial measures for our Seating segment is shown below (dollar amounts in millions):

|  | Nine Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| Net sales | $11,674.4 | $10,770.4 |
| Segment earnings (1) | 636.6 | 670.9 |
| Margin | 5.5% | 6.2% |

(1) See definition above

Seating net sales were $11.7 billion for the nine months ended October 1, 2022, as compared to $10.8 billion for the nine months ended October 2, 2021, an increase of $904 million or 8%. New business and higher production volumes on Lear platforms favorably impacted net sales by $569 million and $344 million, respectively. Net sales also benefited by $231 million and $141 million due to commodity recoveries and our Kongsberg ICS acquisition, respectively. These increases were partially offset by the impact of foreign exchange fluctuations, which reduced net sales by $501 million.

Segment earnings, including restructuring costs, and the related margin on net sales were $637 million and 5.5% for the nine months ended October 1, 2022, as compared to $671 million and 6.2% for the nine months ended October 2, 2021. The impact of selling price reductions, increased commodity costs, foreign exchange fluctuations and impairment charges related to our Russian operations was partially offset by favorable operating performance, including the benefit of operational restructuring actions. New business and higher production volumes on Lear platforms positively impacted segment earnings by $124 million.

#### E-Systems

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

|  | Nine Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| Net sales | $3,846.2 | $3,612.9 |
| Segment earnings (1) | 64.7 | 108.4 |
| Margin | 1.7% | 3.0% |

(1) See definition above

E-Systems net sales were $3.8 billion for the nine months ended October 1, 2022, as compared to $3.6 billion for the nine months ended October 2, 2021, an increase of $233 million or 6%. New business and higher production volumes on Lear platforms favorably impacted net sales by $204 million and $112 million, respectively. Net sales also benefited by $200 million due to commodity recoveries. These increases were partially offset by foreign exchange fluctuations, which reduced net sales by $246 million.

Segment earnings, including restructuring costs, and the related margin on net sales were $65 million and 1.7% for the nine months ended October 1, 2022, as compared to $108 million and 3.0% for the nine months ended October 2, 2021. The impact of selling price reductions, increased commodity costs and foreign exchange fluctuations was partially offset by favorable operating performance, including the benefit of operational restructuring actions. New business and higher production volumes on Lear platforms positively impacted segment earnings by $32 million.

#### Other

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

|  | Nine Months Ended October 1, 2022 | October 2, 2021 |
| --- | ---: | ---: |
| Net sales | $— | $— |
| Segment earnings(1) | (230.9) | (218.8) |
| Margin | N/A | N/A |

(1) See definition above

Segment earnings related to our other category were ($231) million in the first nine months of 2022, as compared to ($219) million in the first nine months of 2021, primarily reflecting transactions costs of $10 million related to our Kongsberg ICS acquisition.

### 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. Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance.

### Cash Provided by Subsidiaries

A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties, intercompany loan repayments and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations.

As of October 1, 2022 and December 31, 2021, cash and cash equivalents of $529 million and $661 million, respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear.

For further information related to potential dividends from our non-U.S. subsidiaries, see Note 9, "Income Taxes," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

### Adequacy of Liquidity Sources

As of October 1, 2022, we had $0.8 billion of cash and cash equivalents on hand and $2.0 billion in available borrowing capacity under our revolving credit facility. Together with cash provided by operating activities, we believe that this will enable us to meet our liquidity needs for the foreseeable future and to satisfy ordinary course business obligations. In addition, we expect to continue to pay quarterly cash dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program, although such actions are at the discretion of the Board and will depend upon our financial condition, results of operations, capital requirements, prevailing market conditions, alternative uses of capital and other factors that our Board may consider at its discretion.

Our future financial results and our ability to continue to meet our liquidity needs are subject to, and will be affected by, cash flows from operations, including the continuing effects of the COVID-19 pandemic, as well as restructuring activities, automotive industry conditions, the financial condition of our customers and suppliers, supply chain disruptions and other related factors. Additionally, an economic downturn or further 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, 2021, as supplemented and updated by Part II — Item 1A, "Risk Factors," in this Report.

### Cash Flows

A summary of net cash provided by operating activities is shown below (in millions):

|  | Nine Months Ended October 1, 2022 | October 2, 2021 | Increase (Decrease) in Cash Flow |
| --- | ---: | ---: | ---: |
| Consolidated net income and depreciation and amortization | $706 | $843 | $(137) |
| Net change in working capital items: |  |  |  |
| Accounts receivable | (797) | 356 | (1,153) |
| Inventory | (112) | (393) | 281 |
| Accounts payable | 571 | (225) | 796 |
| Accrued liabilities and other | 123 | (68) | 191 |
| Net change in working capital items | (215) | (330) | 115 |
| Other | (7) | (10) | 3 |
| Net cash provided by operating activities | $484 | $503 | $(19) |
| Net cash used in investing activities | $(617) | $(478) | $(139) |
| Net cash used in financing activities | $(313) | $(232) | $(81) |

#### Operating Activities

In the first nine months of 2022 and 2021, net cash provided by operating activities was $484 million and $503 million, respectively. The impact of lower earnings in 2022 was largely offset by a smaller increase in working capital during the first nine months of 2022, as compared to the first nine months of 2021.

#### Investing Activities

Net cash used in investing activities was $617 million in the first nine months of 2022, as compared to $478 million in the first nine months of 2021. In the first nine months of 2022, we paid $184 million for our Kongsberg ICS acquisition and $10 million related to investments in affiliates. In the first nine months of 2021, we paid $49 million related to investments in affiliates. Capital spending was $443 million in the first nine months of 2022, as compared to $406 million in the first nine months of 2021. Capital spending is estimated to be $675 million to $700 million in 2022.

#### Financing Activities

Net cash used in financing activities was $313 million in the first nine months of 2022, as compared to $232 million in the first nine months of 2021. In the first nine months of 2022, we paid $75 million for repurchases of our common stock, $139 million of dividends to Lear stockholders and $85 million of dividends to noncontrolling interest holders. In the first nine months of 2021, we paid $99 million for repurchases of our common stock, $61 million of dividends to Lear stockholders and $81 million of dividends to noncontrolling interest holders.

### Capitalization

#### Short-Term Borrowings

We utilize uncommitted lines of credit as needed for our short-term working capital fluctuations. As of October 1, 2022 and December 31, 2021, we had lines of credit from banks totaling $259 million and $96 million, respectively. As of October 1, 2022, we had short-term debt balances outstanding related to draws on our lines of credit of $4 million. As of December 31, 2021, there were no short-term debt balances outstanding related to draws on our lines of credit.

#### Senior Notes and Credit Agreement

For information related to our senior notes and credit agreement, see Note 9, "Debt," to the condensed consolidated financial statements included in this Report and Note 7, "Debt," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

#### Common Stock Share Repurchase Program

For information related to our common stock share repurchase program and dividends, see "— Executive Overview — Share Repurchase Program and Quarterly Cash Dividends" above, Note 16, "Comprehensive Income (Loss) and Equity," to the condensed consolidated financial statements included in this Report and Note 12, "Capital Stock, Accumulated Other Comprehensive Loss and Equity," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

### Commodity Prices and Availability

Raw material, energy and commodity costs can be volatile, reflecting, among other things, changes in supply and demand, logistics issues, global trade and tariff policies, and geopolitical issues. We have commodity price risk with respect to purchases of certain raw materials, including steel, copper, diesel fuel, chemicals, resins and leather. Our primary commodity cost exposures relate to steel, copper and leather. 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, contractual recovery mechanisms and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. Further, 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 purchased components. Additionally, approximately 89% of our copper purchases and a significant portion of our leather and direct steel purchases are subject to price index agreements with our customers and suppliers. Certain of these strategies also may limit our opportunities in a declining commodity price environment. In the current environment of escalating raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, have only offset a portion of the adverse impact. 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, 2021, as supplemented and updated by Part II — Item 1A, "Risk Factors," in this Report.

For further information related to the financial instruments described above, see Note 19, "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 October 1, 2022, we have recorded reserves for pending legal disputes, including commercial disputes, product liability claims and other legal matters of $16 million. In addition, as of October 1, 2022, we have recorded reserves for product warranty and recall claims and environmental matters of $36 million and $8 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, 2021. For a more complete description of our outstanding material legal proceedings, see Note 17, "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, 2021. There have been no significant changes in our significant accounting policies or critical accounting estimates during the first nine months of 2022.

### Recently Issued Accounting Pronouncements

For information on the impact of recently issued accounting pronouncements, see Note 20, "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;
- the impact of the COVID-19 pandemic on our business and the global economy;
- changes in actual industry vehicle production levels from our current estimates;
- fluctuations in the production of vehicles or the loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier;
- the outcome of customer negotiations and the impact of customer-imposed price reductions;
- increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components and our ability to mitigate such costs and insufficient availability;
- 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, including the risk of war or other armed conflicts;
- currency controls and the ability to economically hedge currencies;
- global sovereign fiscal matters and creditworthiness, including potential defaults and the related impacts on economic activity, including the possible effects on credit markets, currency values, monetary unions, international treaties and fiscal policies;
- competitive conditions impacting us and our key customers and suppliers;
- labor disputes involving us or our significant customers or suppliers or that otherwise affect us;
- the operational and financial success of our joint ventures;
- our ability to attract, develop, engage and retain qualified employees;
- our ability to respond to the evolution of the global transportation industry;
- the outcome of an increased emphasis on global climate change and other ESG matters by stakeholders;
- the impact of global climate change;
- the impact and timing of program launch costs and our management of new program launches;
- changes in discount rates and the actual return on pension assets;
- impairment charges initiated by adverse industry or market developments;
- our ability to execute our strategic objectives;
- limitations imposed by our existing indebtedness and our ability to access capital markets on commercially reasonable terms;
- disruptions to our information technology systems, or those of our customers or suppliers, including those related to cybersecurity;
- increases in our warranty, product liability or recall costs;
- the outcome of legal or regulatory proceedings to which we are or may become a party;
- the impact of pending legislation and regulations or changes in existing federal, state, local or foreign laws or regulations;
- the impact of regulations on our foreign operations;
- costs associated with compliance with environmental laws and regulations;
- developments or assertions by or against us relating to intellectual property rights;
- the impact of potential changes in tax and trade policies in the United States and related actions by countries in which we do business; and
- other risks described in Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented and updated by Part II — Item 1A, "Risk Factors," in this Report, and in our other Securities and Exchange Commission 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.

## Market risk

As filed, 3,321 characters.

In the normal course of business, we are exposed to market risks associated with fluctuations in foreign exchange rates, interest rates and commodity prices. We manage a portion of these risks through the use of derivative financial instruments in accordance with our policies. We enter into all hedging transactions for periods consistent with the underlying exposures. We do not enter into derivative instruments for trading purposes.

#### Foreign Exchange

Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies ("transactional exposure"). We may mitigate a portion of this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred where appropriate and included in the measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions.

A summary of the notional amount and estimated aggregate fair value of our outstanding foreign exchange contracts is shown below (in millions):

|  | October 1, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Notional amount (contract maturities \< 24 months) | $1,874 | $1,523 |
| Fair value | 20 | 6 |

49

Currently, our most significant foreign currency transactional exposures relate to the Mexican peso, various European currencies, the Honduran lempira, the Japanese yen, the Chinese renminbi and the Brazilian real.

A sensitivity analysis of our net transactional exposure is shown below (in millions):

|  | Hypothetical Strengthening % (1) | Potential Earnings Benefit (Adverse Earnings Impact) October 1, 2022 | December 31, 2021 |
| --- | ---: | ---: | ---: |
| U.S. dollar | 10% | $4 | $7 |
| Euro | 10% | 22 | (7) |

(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):

|  | Hypothetical Change % (2) | Estimated Change in Fair Value October 1, 2022 | December 31, 2021 |
| --- | ---: | ---: | ---: |
| U.S. dollar | 10% | $69 | $48 |
| Euro | 10% | 49 | 49 |

(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 2021, net sales outside of the United States accounted for 77% 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.

## Controls and procedures

As filed, 2,563 characters.

(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

There was no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended October 1, 2022, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

In February 2022, the Company completed the acquisition of substantially all of Kongsberg Automotive's Interior Comfort Systems business unit ("Kongsberg ICS") and is currently integrating Kongsberg ICS into its operations, compliance programs and internal control processes. Kongsberg ICS constituted approximately 3% of the Company's total assets as of October 1, 2022, including goodwill and intangible assets recorded as part of the purchase price allocations, and approximately 2% of the Company's net sales in the nine months ended October 1, 2022. Securities and Exchange Commission rules and regulations allow companies to exclude acquisitions from their assessment of the internal control over financial reporting during the first year following an acquisition while integrating the acquired company. The Company will exclude the acquired operations of Kongsberg ICS from its assessment of the Company's internal control over financial reporting as of December 31, 2022.

## Risk factors

As filed, 3,559 characters.

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, 2021, except for the modification of the risk factor set forth below:

- ***Our industry is cyclical and a decline in the production levels of our major customers, particularly with respect to models for which we are a significant supplier, or the financial distress of one or more of our major customers could adversely affect our financial performance.***

Our sales are driven by the number of vehicles produced by our automotive manufacturer customers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. The automotive industry is cyclical and sensitive to general economic conditions, including geopolitical issues, global credit markets, interest rates, inflation, consumer credit and consumer spending and preferences. Automotive sales and production can also be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, tariffs and other non-tariff trade barriers, the availability and cost of credit, the costs and availability of critical components needed to complete the production of vehicles, logistics issues, restructuring actions of our customers and suppliers, facility closures and increased competition, as well as consumer preferences regarding vehicle size, configuration and features, including alternative fuel vehicles, changing consumer attitudes toward vehicle ownership and usage, such as ride sharing and on-demand transportation, and other factors.

Due to the overall global economic conditions in 2020, largely as a result of the COVID-19 pandemic, the automotive industry experienced a decline in global customer sales and production volumes. Although industry production increased 3% in 2021 over 2020 and is expected to increase 7% in 2022 over 2021 (based on October 2022 S&P Global Mobility, formerly IHS Markit, projections), production remains well below recent historic levels and consumer demand. This is largely due to the continuing impact of the COVID-19 pandemic, particularly through supply shortages and, to a lesser extent, the resurgence of the virus in certain regions, as well as the Russia-Ukraine conflict. The automotive industry is suffering from supply chain delays and stoppages due to shipping delays resulting in increased freight costs and closed supplier facilities and distribution centers. The industry also is facing workforce and staffing shortages, as well as scarcity and increases in prices of raw materials. As a result, we have experienced and may continue to experience reductions in orders from our customers in certain regions. An economic downturn or other adverse industry conditions that result in a decline in the production levels of our major customers, particularly with respect to models for which we are a significant supplier, or the financial distress of one or more of our major customers could reduce our sales or otherwise adversely affect our financial condition, operating results and cash flows. Further, 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. We may not be successful in such diversification.

Filed Nov 1, 2022.
Source: SEC EDGAR, the filing index for accession 0000842162-22-000046. Last ingested by Listed: Nov 10, 2026, 04:47 ET. No prices; not investment advice.