Lear Corporation (LEA) Earnings

Management highlights

- Overall Financial & Strategic Performance * Delivered 3% YoY Q2 sales growth to $6.2 billion, with record first half revenue exceeding $12 billion * Core operating earnings grew 7% YoY to $313 million (9% growth for H1), adjusted EPS grew 23% YoY to $4.28, operating cash flow grew 55% YoY to $461 million, and free cash flow grew 69% YoY to $288 million * Exceeded 2 percentage points of outperformance versus global market production in Q2, with seating outperforming by approximately 3 percentage points, even after accounting for headwinds from program roll-offs and non-core product wind-downs * Generated $2.9 billion in total business awards year-to-date, with $2.3 billion in seating and over $500 million in eSystems; over 50% of awards are for new or conquest programs, and over 90% of eSystems year-to-date awards are for new or conquest programs - New Business Wins * Secured a major multi-program seating conquest and new business award with Audi: two conquest programs for existing vehicles in Europe, one future new program in North America, all including Lear's Comfort Flex and Flex Air technologies. This is one of Lear's largest conquest awards in recent history * Additional seating wins include complete seats for a Hyundai North American program, and Comfort Flex awards with BMW and a North American EV automaker; total innovative modular seat product awards reached 45 after 7 new wins in Q2 * Won a complete seat program with Leap Motor for its South American expansion, marking Lear's first win with a Chinese automaker in South America * Secured new wire harness awards with a luxury Chinese automaker (NBAIC) and a non-consolidated award with BAIC in eSystems, plus a replacement wire program with Renault that captured additional content from a rival supplier - Idea by Lear Operational Innovation * Opened the Rochester Hills Advanced Manufacturing Integration Center, a working production facility that showcases Lear's automation and digital tool innovations, hosted customer and investor visits with overwhelmingly positive feedback * Key innovations showcased include automated wire taping (from the StoneShield acquisition, expected to launch first production in 2025, addresses 20% of direct wiring labor), automated 2D/3D sewing for seat trim covers (2D sewing already in production across 200+ cells, cutting labor by 50%), and automated just-in-time seat assembly and testing * Successfully piloted a lights-out production shift with 12 fully automated injection molding machines at Lear's Wismar, Germany connection systems plant, proving fully integrated real-time automation capability * On track to deliver $75 million in Idea cost savings in 2026, with $35 million achieved in H1; combined restructuring savings from 2025 investments and 2026 actions are expected to hit $80 million, with $50 million achieved through Q2 - Capital Allocation * Repurchased $100 million of shares in Q2 2026, bringing H1 repurchases to $175 million; raised full year 2026 share repurchase target to at least $350 million * Maintains a strong balance sheet with $3 billion of available liquidity, average cost of debt below 4%, and a weighted average debt maturity of approximately 11 years

Guidance

- Full year 2026 guidance has been upwardly revised: revenue midpoint increased by $165 million to approximately $23.8 billion (1% higher than prior guidance), core operating earnings midpoint increased by $25 million to $1.14 billion (a 2% increase from prior guidance), and free cash flow midpoint increased by $40 million to $640 million - Global industry production is now expected to be down less than 2% on a Lear sales-weighted basis (down from a prior expectation of 1% decline), driven primarily by lower production assumptions for China, partially offset by higher volumes in North America - Full year 2026 core operating margin is expected to be 4.8% at guidance midpoint - H2 2026 revenue is forecasted to be approximately $11.7 billion, lower than H1 actual results, driven by seasonal third quarter shutdowns (especially in Europe), fewer production days from Lear's 4-4-5 fiscal calendar, and planned downtime for GM full-size truck model changeover. These headwinds are partially offset by new seating business and the non-recurrence of one-time tariff recovery adjustments recorded in Q1 - H2 2026 core operating income midpoint is $529 million, with an operating margin of 4.5%; 55 basis points of sequential net operating performance improvement is expected for H2, with both segments projecting sequential margin gains - Management expects 40 basis points of net performance for seating and 80 basis points of net performance for eSystems in 2027, underpinning multi-year margin expansion; the full benefit of recent new business awards will mostly be realized in 2028 and 2029, with limited organic growth expected for 2027 due to non-core product wind-downs and existing platform volume headwinds - Longer term, Lear targets returning to 3-4 percentage points of outperformance versus market growth, with no meaningful increase in CapEx intensity expected (expected to hold near the long-term average of ~2.8% of revenue)

Segment performance

Seating segment: Q2 2026 sales were $4.6 billion, a 3% increase year-over-year, representing 74.2% of total company revenue. Adjusted earnings for the segment were $312 million, a 4% increase year-over-year, with an adjusted operating margin of 6.7%, which was flat year-over-year. The benefit of net performance and margin-accretive backlog was offset by lower volumes on legacy platforms and foreign exchange impacts. eSystems segment: Q2 2026 sales were $1.6 billion, a 2% increase year-over-year, representing 25.8% of total company revenue. Adjusted earnings for the segment were $91 million (5.8% of sales), up from $76 million (4.9% of sales) year-over-year. The 90 basis points of margin expansion was driven by strong net operating performance (155 basis points of net improvement), partially offset by backlog program build-out, wind-down of discontinued product lines, and lower volumes on legacy platforms.

Risks & headwinds

- Continued pervasive weakness in China's domestic vehicle market, with management embedding continued weakness in H2 2026 guidance and an accelerated 3% share shift from global OEMs to Chinese domestic automakers (up from 1.5% projected at the start of the year) - Uncertainty around potential economic weakness stemming from the ongoing Iran conflict, which could impact vehicle purchase affordability and demand in North America and Europe, factored into the low end of the 2026 guidance range - Volume headwinds from planned program roll-offs and non-core eSystems product wind-down: 90 million yen of non-core revenue will exit in 2026, with an additional 235 million yen exiting in 2027, weighing on 2027 revenue expectations - Higher than usual decremental margins for H2 2026 due to unusual factors including the GM full-size truck model changeover (a heavily vertically integrated platform with higher than average decremental impact), and calendar shift that moved more production days to H1 2026 - Near-term under-indexation to Chinese vehicle exports, creating near-term volume risk as Chinese automakers increase global exports from China

Analyst Q&A

• Q: Dan Levy (Barclays) asked why H2 2026 has steeper decremental margins than expected, and when will net performance finally outweigh volume/mix headwinds to drive broader margin expansion, particularly for eSystems. /

  A: Unusual factors drive the steeper decremental margin, including one-time tariff revenue recorded in H1 with no associated earnings, new Audi business in Europe carrying a new fixed cost structure that creates net incremental conversion headwinds in the near term, fiscal calendar shifts, and the GM full-size truck changeover which has higher than average decremental impact. Strong 55 basis points of sequential net performance improvement is already factored into the H2 outlook. Longer term, Lear has robust new business and conquest backlog that will deliver full revenue and margin benefit mostly in 2028 and 2029. Lear is on track to hit 40 and 80 basis points of net performance for seating and eSystems respectively this year, with another 40/80 basis points expected next year, driving steady margin expansion as non-core product wind-downs complete by the end of the decade.

• Q: Joe Spock (UBS) asked how tariff assumptions changed for 2026 guidance, what cushion remains in guidance, and what investment is needed for the Leap Motor South America win. /

  A: Only 301 and 122 tariff estimates changed, with $40 million less than prior assumptions creating a mechanical revenue impact with no change to earnings. The biggest change to guidance from prior is embedding continued weakness in China's domestic market; if China stimulates demand and volumes recover, Lear could hit the high end of guidance, while the low end protects against Iran conflict-driven demand weakness, leaving a balanced outlook at the midpoint. No major investment is needed for the Leap Motor win: Lear is already the largest seat supplier in South America, has existing excess capacity, and Leap will build vehicles in a Stellantis facility Lear already serves, so this is the first of potentially multiple programs that can fit into the existing just-in-time footprint.

• Q: Itay McCauley (TD Cowen) asked how much of H2 volume weakness is from China, and what organic growth and CapEx intensity should be expected as backlog inflects later this decade. /

  A: China is the main source of H2 volume weakness, with continued H1 weakness embedded in guidance, and an accelerated 3% annual share shift from global to Chinese OEMs now projected. Lear is growing disproportionately with Chinese OEMs, which already represent 20% of year-to-date new awards, and is on track to hit 50% of China revenue from Chinese OEMs by 2027, while protecting margin returns. Longer term, Lear expects to return to 3-4 percentage points of above-market organic growth by 2028-2029. CapEx intensity is expected to remain near the long-term average of ~2.8% of revenue: higher automation investment is offset by 20%+ equipment cost reductions from Lear's acquired manufacturing integration capabilities, plus improved flexibility to re-use modular capital across plants and products.

• Q: Emmanuel Rossner (Wolf Research) asked to confirm 2027 growth expectations and frame the size and timing of the Audi Q2 award. /

  A: Lear expects limited organic growth in 2027, even with over $700 million in backlog, due to non-core eSystems wind-down and expected volume pullbacks on key platforms (JLR, Ford, Stellantis) that had strong 2026 performance. Above-market growth will return in 2028 and accelerate further in 2029 as the new backlog ramps. The Audi award launches in late 2028, with one program launching in 2030, and is ~75% the size of Lear's largest ever prior conquest award, equal to multiple hundreds of millions of dollars in total revenue, with the largest backlog impact coming in 2029.