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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 2020.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number: 001-11311
 https://cdn.kscope.io/38d55dea361c9bea39306f2458df5119-learlogoa21.jpg
(Exact name of registrant as specified in its charter) 
_______________________________________  
Delaware
 
13-3386776
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
21557 Telegraph Road, Southfield, MI 48033
(Address of principal executive offices)
(248) 447-1500
(Registrant’s telephone number, including area code)
_______________________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, par value $0.01
LEA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
 
Accelerated filer
Non-accelerated filer
 
 
Smaller reporting company
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
As of July 31, 2020, the number of shares outstanding of the registrant’s common stock was 59,943,580 shares.
 


LEAR CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JULY 4, 2020

INDEX

 
Page No.
 
 
Item 3 – Quantitative and Qualitative Disclosures about Market Risk (included in Item 2)
 
 

2

LEAR CORPORATION AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the unaudited condensed consolidated financial statements of Lear Corporation and subsidiaries pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended December 31, 2019.
The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.


3

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)

 
July 4,
 2020(1)
 
December 31,
2019
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,775.5

 
$
1,487.7

Accounts receivable
2,354.9

 
2,982.6

Inventories
1,245.4

 
1,258.2

Other
673.1

 
678.2

Total current assets
6,048.9

 
6,406.7

LONG-TERM ASSETS:
 
 
 
Property, plant and equipment, net
2,618.3

 
2,704.2

Goodwill
1,606.1

 
1,614.3

Other
1,995.7

 
1,955.5

Total long-term assets
6,220.1

 
6,274.0

Total assets
$
12,269.0

 
$
12,680.7

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
7.1

 
$
19.2

Revolving credit facility borrowings
1,000.0

 

Accounts payable and drafts
1,902.6

 
2,821.7

Accrued liabilities
1,859.9

 
1,811.2

Current portion of long-term debt
17.2

 
14.1

Total current liabilities
4,786.8

 
4,666.2

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
2,302.7

 
2,293.7

Other
1,082.0

 
1,101.3

Total long-term liabilities
3,384.7

 
3,395.0

 
 
 
 
Redeemable noncontrolling interest
114.3

 
118.4

 
 
 
 
EQUITY:
 
 
 
Preferred stock, 100,000,000 shares authorized (including 10,896,250 Series A convertible preferred stock authorized); no shares outstanding

 

Common stock, $0.01 par value, 300,000,000 shares authorized; 64,563,291 shares issued as of July 4, 2020 and December 31, 2019
0.6

 
0.6

Additional paid-in capital
955.6

 
969.1

Common stock held in treasury, 4,623,508 and 4,127,806 shares as of July 4, 2020 and December 31, 2019, respectively, at cost
(612.6
)
 
(563.1
)
Retained earnings
4,447.1

 
4,715.8

Accumulated other comprehensive loss
(923.0
)
 
(772.7
)
Lear Corporation stockholders’ equity
3,867.7

 
4,349.7

Noncontrolling interests
115.5

 
151.4

Equity
3,983.2

 
4,501.1

Total liabilities and equity
$
12,269.0

 
$
12,680.7

 (1)  
Unaudited.
The accompanying notes are an integral part of these condensed consolidated balance sheets.

4

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in millions, except share and per share data)

 
Three Months Ended
 
Six Months Ended
 
July 4,
2020
 
June 29,
2019
 
July 4,
2020
 
June 29,
2019
Net sales
$
2,444.5

 
$
5,007.6

 
$
6,902.2

 
$
10,167.7

 
 
 
 
 
 
 
 
Cost of sales
2,571.9

 
4,529.4

 
6,695.4

 
9,216.3

Selling, general and administrative expenses
150.9

 
157.1

 
294.6

 
305.4

Amortization of intangible assets
16.0

 
15.9

 
33.1

 
28.6

Interest expense
27.2

 
24.5

 
51.6

 
45.4

Other (income) expense, net
(3.2
)
 
13.8

 
37.3

 
18.2

Consolidated income (loss) before provision (benefit) for income taxes and equity in net income of affiliates
(318.3
)
 
266.9

 
(209.8
)
 
553.8

Provision (benefit) for income taxes
(41.0
)
 
73.3

 
(14.5
)
 
116.4

Equity in net income of affiliates
(7.8
)
 
(8.4
)
 
(9.4
)
 
(10.7
)
Consolidated net income (loss)
(269.5
)
 
202.0

 
(185.9
)
 
448.1

Less: Net income attributable to noncontrolling interests
24.4

 
19.2

 
31.6

 
36.4

Net income (loss) attributable to Lear
$
(293.9
)
 
$
182.8

 
$
(217.5
)
 
$
411.7

 
 
 
 
 
 
 
 
Basic net income (loss) per share available to Lear common stockholders (Note 14)
$
(4.89
)
 
$
2.92

 
$
(3.61
)
 
$
6.68

 
 
 
 
 
 
 
 
Diluted net income (loss) per share available to Lear common stockholders (Note 14)
$
(4.89
)
 
$
2.92

 
$
(3.61
)
 
$
6.66

 
 
 
 
 
 
 
 
Cash dividends declared per share
$

 
$
0.75

 
$
0.77

 
$
1.50

 
 
 
 
 
 
 
 
Average common shares outstanding
60,102,925

 
62,191,022

 
60,310,559

 
62,501,419

 
 
 
 
 
 
 
 
Average diluted shares outstanding
60,102,925

 
62,354,334

 
60,310,559

 
62,734,494

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (loss) (Condensed Consolidated Statements of Equity)
$
(142.1
)
 
$
208.4

 
$
(339.9
)
 
$
456.6

Less: Comprehensive income attributable to noncontrolling interests
25.5

 
12.3

 
27.9

 
37.3

Comprehensive income (loss) attributable to Lear
$
(167.6
)
 
$
196.1

 
$
(367.8
)
 
$
419.3

The accompanying notes are an integral part of these condensed consolidated statements.

5

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in millions, except share and per share data)

 
Three Months Ended July 4, 2020
 
Common Stock
Additional Paid-In Capital
Common Stock Held in Treasury
Retained Earnings
Accumulated Other Comprehensive Loss, Net of Tax
Lear Corporation Stockholders' Equity
Balance April 4, 2020
$
0.6

$
946.0

$
(615.6
)
$
4,741.8

$
(1,049.3
)
$
4,023.5

Comprehensive income (loss):
 
 
 
 
 
 
Net income (loss)



(293.9
)

(293.9
)
Other comprehensive income




126.3

126.3

Total comprehensive income (loss)



(293.9
)
126.3

(167.6
)
Stock-based compensation

12.5




12.5

Net issuance of 21,616 shares held in treasury in settlement of stock-based compensation

(2.9
)
3.0

(0.8
)

(0.7
)
Dividends declared to non-controlling interest holders






Balance at July 4, 2020
$
0.6

$
955.6

$
(612.6
)
$
4,447.1

$
(923.0
)
$
3,867.7

 
Six Months Ended July 4, 2020
 
Common Stock
Additional Paid-In Capital
Common Stock Held in Treasury
Retained Earnings
Accumulated Other Comprehensive Loss, Net of Tax
Lear Corporation Stockholders' Equity
Balance at January 1, 2020
$
0.6

$
969.1

$
(563.1
)
$
4,715.8

$
(772.7
)
$
4,349.7

Comprehensive income (loss):
 
 
 
 
 
 
Net income (loss)



(217.5
)

(217.5
)
Other comprehensive loss




(150.3
)
(150.3
)
Total comprehensive income (loss)



(217.5
)
(150.3
)
(367.8
)
Adoption of accounting standard update 2016-13 (Note 18)



(0.8
)

(0.8
)
Stock-based compensation

16.4




16.4

Net issuance of 145,447 shares held in treasury in settlement of stock-based compensation

(29.9
)
20.5

(2.5
)

(11.9
)
Repurchase of 641,149 shares of common stock at average price of $109.22 per share


(70.0
)


(70.0
)
Dividends declared to Lear Corporation stockholders



(46.8
)

(46.8
)
Dividends declared to non-controlling interest holders






Redeemable non-controlling interest adjustment



(1.1
)

(1.1
)
Balance at July 4, 2020
$
0.6

$
955.6

$
(612.6
)
$
4,447.1

$
(923.0
)
$
3,867.7

The accompanying notes are an integral part of these condensed consolidated statements.

6

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)
(Unaudited; in millions, except share and per share data)

 
Three Months Ended July 4, 2020
 
Lear Corporation Stockholders' Equity
Non-controlling Interests
Equity
 
 
Redeemable Non-controlling Interests
Balance April 4, 2020
$
4,023.5

$
159.8

$
4,183.3

 
 
$
113.5

Comprehensive income (loss):
 
 
 
 
 
 
Net income (loss)
(293.9
)
24.0

(269.9
)
 
 
0.4

Other comprehensive income
126.3

0.7

127.0

 
 
0.4

Total comprehensive income (loss)
(167.6
)
24.7

(142.9
)
 
 
0.8

Stock-based compensation
12.5


12.5

 
 

Net issuance of 21,616 shares held in treasury in settlement of stock-based compensation
(0.7
)

(0.7
)
 
 

Dividends declared to non-controlling interest holders

(69.0
)
(69.0
)
 
 

Balance at July 4, 2020
$
3,867.7

$
115.5

$
3,983.2

 
 
$
114.3

 
Six Months Ended July 4, 2020
 
Lear Corporation Stockholders' Equity
Non-controlling Interests
Equity
 
 
Redeemable Non-controlling Interests
Balance at January 1, 2020
$
4,349.7

$
151.4

$
4,501.1

 
 
$
118.4

Comprehensive income (loss):
 
 
 
 
 
 
Net income (loss)
(217.5
)
35.1

(182.4
)
 
 
(3.5
)
Other comprehensive loss
(150.3
)
(2.0
)
(152.3
)
 
 
(1.7
)
Total comprehensive income (loss)
(367.8
)
33.1

(334.7
)
 
 
(5.2
)
Adoption of accounting standard update 2016-13 (Note 18)
(0.8
)

(0.8
)
 
 

Stock-based compensation
16.4


16.4

 
 

Net issuance of 145,447 shares held in treasury in settlement of stock-based compensation
(11.9
)

(11.9
)
 
 

Repurchase of 641,149 shares of common stock at average price of $109.22 per share
(70.0
)

(70.0
)
 
 

Dividends declared to Lear Corporation stockholders
(46.8
)

(46.8
)
 
 

Dividends declared to non-controlling interest holders

(69.0
)
(69.0
)
 
 

Redeemable non-controlling interest adjustment
(1.1
)

(1.1
)
 
 
1.1

Balance at July 4, 2020
$
3,867.7

$
115.5

$
3,983.2

 
 
$
114.3

The accompanying notes are an integral part of these condensed consolidated statements.

7

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)
(Unaudited; in millions, except share and per share data)

 
Three Months Ended June 29, 2019
 
Common Stock
Additional Paid-In Capital
Common Stock Held in Treasury
Retained Earnings
Accumulated Other Comprehensive Loss, Net of Tax
Lear Corporation Stockholders' Equity
Balance at March 30, 2019
$
0.6

$
961.5

$
(305.6
)
$
4,300.3

$
(711.5
)
$
4,245.3

Comprehensive income (loss):
 
 
 
 
 
 
Net income



182.8


182.8

Other comprehensive income (loss)




13.3

13.3

Total comprehensive income (loss)



182.8

13.3

196.1

Stock-based compensation

4.8




4.8

Net issuance of 4,732 shares held in treasury in settlement of stock-based compensation

(1.0
)
0.6



(0.4
)
Repurchase off 1,182,976 shares of common stock at average price of $136.63 per share


(161.6
)


(161.6
)
Dividends declared to Lear Corporation stockholders



(46.9
)

(46.9
)
Dividends declared to non-controlling interest holders






Acquisition of outstanding non-controlling interest






Redeemable non-controlling interest adjustment



(0.9
)

(0.9
)
Balance at June 29, 2019
$
0.6

$
965.3

$
(466.6
)
$
4,435.3

$
(698.2
)
$
4,236.4

 
Six Months Ended June 29, 2019
 
Common Stock
Additional Paid-In Capital
Common Stock Held in Treasury
Retained Earnings
Accumulated Other Comprehensive Loss, Net of Tax
Lear Corporation Stockholders' Equity
Balance at January 1, 2019
$
0.6

$
1,017.4

$
(225.1
)
$
4,113.6

$
(705.8
)
$
4,200.7

Comprehensive income:
 
 
 
 
 
 
Net income



411.7


411.7

Other comprehensive income




7.6

7.6

Total comprehensive income



411.7

7.6

419.3

Stock-based compensation

14.3




14.3

Net issuance of 284,752 shares held in treasury in settlement of stock-based compensation

(66.4
)
38.0

(1.2
)

(29.6
)
Repurchase of 1,987,246 shares of common stock at average price of $140.65 per share


(279.5
)


(279.5
)
Dividends declared to Lear Corporation stockholders



(94.6
)

(94.6
)
Dividends declared to non-controlling interest holders






Acquisition of outstanding non-controlling interest






Redeemable non-controlling interest adjustment



5.8


5.8

Balance at June 29, 2019
$
0.6

$
965.3

$
(466.6
)
$
4,435.3

$
(698.2
)
$
4,236.4

The accompanying notes are an integral part of these condensed consolidated statements.




8

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)
(Unaudited; in millions, except share and per share data)

 
Three Months Ended June 29, 2019
 
Lear Corporation Stockholders' Equity
Non-controlling Interests
Equity
 
 
Redeemable Non-controlling Interests
Balance at March 30, 2019
$
4,245.3

$
148.4

$
4,393.7

 
 
$
156.6

Comprehensive income (loss):
 
 
 
 
 
 
Net income
182.8

18.1

200.9

 
 
1.1

Other comprehensive income (loss)
13.3

(3.3
)
10.0

 
 
(3.6
)
Total comprehensive income (loss)
196.1

14.8

210.9

 
 
(2.5
)
Stock-based compensation
4.8


4.8

 
 

Net issuance of 4,732 shares held in treasury in settlement of stock-based compensation
(0.4
)

(0.4
)
 
 

Repurchase off 1,182,976 shares of common stock at average price of $136.63 per share
(161.6
)

(161.6
)
 
 

Dividends declared to Lear Corporation stockholders
(46.9
)

(46.9
)
 
 

Dividends declared to non-controlling interest holders

0.1

0.1

 
 

Acquisition of outstanding non-controlling interest

(0.2
)
(0.2
)
 
 

Redeemable non-controlling interest adjustment
(0.9
)

(0.9
)
 
 
0.9

Balance at June 29, 2019
$
4,236.4

$
163.1

$
4,399.5

 
 
$
155.0

 
Six Months Ended June 29, 2019
 
Lear Corporation Stockholders' Equity
Non-controlling Interests
Equity
 
 
Redeemable Non-controlling Interests
Balance at January 1, 2019
$
4,200.7

$
159.9

$
4,360.6

 
 
$
158.1

Comprehensive income:
 
 
 
 
 
 
Net income
411.7

34.1

445.8

 
 
2.3

Other comprehensive income
7.6

0.5

8.1

 
 
0.4

Total comprehensive income
419.3

34.6

453.9

 
 
2.7

Stock-based compensation
14.3


14.3

 
 

Net issuance of 284,752 shares held in treasury in settlement of stock-based compensation
(29.6
)

(29.6
)
 
 

Repurchase of 1,987,246 shares of common stock at average price of $140.65 per share
(279.5
)

(279.5
)
 
 

Dividends declared to Lear Corporation stockholders
(94.6
)

(94.6
)
 
 

Dividends declared to non-controlling interest holders

(31.2
)
(31.2
)
 
 

Acquisition of outstanding non-controlling interest

(0.2
)
(0.2
)
 
 

Redeemable non-controlling interest adjustment
5.8


5.8

 
 
(5.8
)
Balance at June 29, 2019
$
4,236.4

$
163.1

$
4,399.5

 
 
$
155.0

The accompanying notes are an integral part of these condensed consolidated statements.


9

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)

 
Six Months Ended
 
July 4,
2020
 
June 29,
2019
Cash Flows from Operating Activities:
 
 
 
Consolidated net income (loss)
$
(185.9
)
 
$
448.1

Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
260.8

 
251.9

Loss on extinguishment of debt
21.1

 
10.6

Net change in recoverable customer engineering, development and tooling
(58.1
)
 
(59.5
)
Net change in working capital items (see below)
(358.8
)
 
(192.8
)
Other, net
18.7

 
(2.4
)
Net cash provided by (used in) operating activities
(302.2
)
 
455.9

Cash Flows from Investing Activities:
 
 
 
Additions to property, plant and equipment
(195.2
)
 
(259.3
)
Acquisition, net of acquired cash

 
(320.9
)
Other, net
19.2

 
0.1

Net cash used in investing activities
(176.0
)
 
(580.1
)
Cash Flows from Financing Activities:
 
 
 
Revolving credit facility borrowings
1,000.0

 

Term loan repayments
(6.3
)
 
(3.1
)
Short-term borrowings, net
(12.0
)
 
4.7

Proceeds from the issuance of senior notes
669.1

 
693.3

Redemption of senior notes
(667.1
)
 
(333.7
)
Payment of debt issuance and other financing costs
(6.9
)
 
(6.3
)
Repurchase of common stock
(70.0
)
 
(276.5
)
Dividends paid to Lear Corporation stockholders
(47.9
)
 
(95.6
)
Dividends paid to noncontrolling interests
(43.0
)
 
(31.2
)
Other, net
(14.6
)
 
(56.9
)
Net cash provided by (used in) financing activities
801.3

 
(105.3
)
Effect of foreign currency translation
(20.4
)
 
0.6

Net Change in Cash, Cash Equivalents and Restricted Cash
302.7

 
(228.9
)
Cash, Cash Equivalents and Restricted Cash as of Beginning of Period
1,510.4

 
1,519.8

Cash, Cash Equivalents and Restricted Cash as of End of Period
$
1,813.1

 
$
1,290.9

 
 
 
 
Changes in Working Capital Items:
 
 
 
Accounts receivable
$
557.3

 
$
(544.2
)
Inventories
(11.5
)
 
(42.3
)
Accounts payable
(866.8
)
 
196.3

Accrued liabilities and other
(37.8
)
 
197.4

Net change in working capital items
$
(358.8
)
 
$
(192.8
)
 
 
 
 
Supplementary Disclosure:
 
 
 
Cash paid for interest
$
65.0

 
$
50.8

Cash paid for income taxes, net of refunds received
$
63.3

 
$
109.2

The accompanying notes are an integral part of these condensed consolidated statements.

10

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1) Basis of Presentation
Lear Corporation ("Lear," and together with its consolidated subsidiaries, the "Company") and its affiliates design and manufacture automotive seating and electrical distribution systems and related components. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide.
The accompanying condensed consolidated financial statements include the accounts of Lear, a Delaware corporation, and the wholly owned and less than wholly owned subsidiaries controlled by Lear. In addition, Lear consolidates all entities, including variable interest entities, in which it has a controlling financial interest. Investments in affiliates in which Lear does not have control, but does have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method.
In the second quarter of 2019, the Company completed the acquisition of Xevo Inc. ("Xevo"), a Seattle-based, global leader in connected car software, by acquiring all of Xevo's outstanding shares. The acquisition of Xevo has been accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheets as of July 4, 2020 and December 31, 2019. The operating results and cash flows of Xevo are included in the accompanying condensed consolidated financial statements from the date of acquisition and in the Company's E-Systems segment. For further information related to the acquisition of Xevo, see Note 3, "Acquisition," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The Company’s annual financial results are reported on a calendar year basis, and quarterly interim results are reported using a thirteen week reporting calendar.

(2) Impact of COVID-19 Pandemic
Unprecedented industry disruptions related to the COVID-19 pandemic during the first half of 2020 impacted operations in every region of the world. The Company's operations in China were impacted first, with most plants in the country closed for several weeks during the first quarter. At the end of the first quarter, all of the Company's facilities in China were operating and capacity utilization was increasing. Beginning in mid-March, the Company's operations in Europe, North America, South America and Asia (outside of China) were impacted, with virtually all of its plants closed at the end of the first quarter and closures continuing throughout April and, in most cases, a portion of May. Although manufacturing resumed gradually, most of the Company's plants in its major markets were operating at pre-COVID-19 levels at the end of the second quarter. While the Company experienced significant inefficiencies and incremental costs related to the COVID-19 pandemic in the first half of the year, these inefficiencies began to diminish toward the end of the second quarter.
Various government programs have been enacted to provide financial relief for businesses affected by the COVID-19 pandemic. In the first half of 2020, the Company recognized approximately $80 million of government assistance primarily related to the reimbursement of certain employee costs. The Company recognizes such assistance as a reduction of the related costs as such costs are incurred and the Company is reasonably assured to receive payment.
Although industry production has returned to pre-COVID-19 levels, partially due to the customers' need to replenish inventory levels, it is likely that, for a period of time, the global automotive industry will experience lower demand for new vehicles as a result of the global economic slowdown caused by the COVID-19 pandemic, as new vehicle sales are typically correlated with positive consumer confidence and low unemployment. Further, a resurgence of the virus with corresponding shelter-in-place orders impacting industry production later in the year could also impact the Company's financial results.
The accompanying condensed consolidated financial statements reflect estimates and assumptions made by management as of July 4, 2020, and for the six months then ended. Such estimates and assumptions affect, among other things, the Company's goodwill, long-lived asset and indefinite-lived intangible asset valuations; inventory valuations; assessment of the annual effective tax rate; valuation of deferred income taxes and income tax contingencies; and credit losses related to our financial instruments. Events and circumstances arising after July 4, 2020, including those resulting from the impact of the COVID-19 pandemic, will be reflected in management's estimates and assumptions in future periods.
For information related to goodwill, see Note 7, "Goodwill," herein and Note 2, "Summary of Significant Accounting Policies — Impairment of Goodwill and Intangible Assets," to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. For more information related to income taxes, see Note 13, "Income Taxes," herein and Note 2, "Summary of Significant Accounting Policies — Income Taxes," to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.


11

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(3) Restructuring
Restructuring costs include employee termination benefits, asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. Employee termination benefits are recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Other incremental costs principally include equipment and personnel relocation costs. In addition to restructuring costs, the Company incurs incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are recognized in the Company’s condensed consolidated financial statements in accordance with GAAP. Generally, charges are recorded as restructuring actions are approved and/or implemented.
In the first half of 2020, the Company recorded charges of $70.2 million in connection with its restructuring actions. These charges consist of $49.5 million recorded as cost of sales, $18.0 million recorded as selling, general and administrative expenses and $2.7 million recorded as other expense, net. The restructuring charges consist of employee termination costs of $53.1 million, asset impairment charges of $12.4 million and contract termination costs of $0.6 million, as well as other related costs of $4.1 million. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $10.4 million in excess of related estimated fair values and the impairment of right-of-use assets of $2.0 million.
The Company expects to incur approximately $48 million of additional restructuring costs related to activities initiated as of July 4, 2020, and expects that the components of such costs will be consistent with its historical experience. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
A summary of 2020 activity is shown below (in millions):
 
Accrual as of
 
2020
 
Utilization
 
Accrual as of
 
January 1, 2020
 
Charges
 
Cash
 
Non-cash
 
July 4, 2020
Employee termination benefits
$
152.8

 
$
53.1

 
$
(58.5
)
 
$

 
$
147.4

Asset impairment charges

 
12.4

 

 
(12.4
)
 

Contract termination costs
4.9

 
0.6

 
(0.3
)
 

 
5.2

Other related costs

 
4.1

 
(4.1
)
 

 

Total
$
157.7

 
$
70.2

 
$
(62.9
)
 
$
(12.4
)
 
$
152.6



(4) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. A summary of inventories is shown below (in millions):
 
July 4,
2020
 
December 31,
2019
Raw materials
$
956.3

 
$
906.3

Work-in-process
105.7

 
107.0

Finished goods
353.0

 
380.4

Reserves
(169.6
)
 
(135.5
)
Inventories
$
1,245.4

 
$
1,258.2



(5) Pre-Production Costs Related to Long-Term Supply Agreements
The Company incurs pre-production engineering and development ("E&D") and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the Company does not have a non-cancelable right to use the tooling.
During the first six months of 2020 and 2019, the Company capitalized $91.8 million and $125.8 million, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first six months of

12

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2020 and 2019, the Company also capitalized $90.0 million and $91.3 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the Company has a non-cancelable right to use the tooling. These amounts are included in other current and long-term assets in the accompanying condensed consolidated balance sheets.
During the first six months of 2020 and 2019, the Company collected $127.8 million and $163.7 million, respectively, of cash related to E&D and tooling costs.
The classification of recoverable customer E&D and tooling costs related to long-term supply agreements is shown below (in millions):
 
July 4,
2020
 
December 31,
2019
Current
$
189.6

 
$
157.2

Long-term