Q3 2025 Earnings Call: Contradictions Emerge on Volume, Backlog, Production Volatility, and Tariff Impact

Date of Call: October 31, 2025

Financials Results

• Revenue: $5.7B, up 2% YOY
• EPS: Adjusted EPS $2.79, compared to $2.89 a year ago
• Operating Margin: Total company operating margin 4.2% (Q3 2025)

Guidance:

• Full-year 2025 revenue ~ $23B (up ~$230M vs prior outlook).
• Core operating earnings ~ $1.025B (unchanged).
• Operating cash flow $1.0B–$1.1B; free cash flow ~ $500M at midpoint (up $30M).
• Restructuring costs increased $20M; capital spending reduced $30M.
• Assumptions: no tariff changes; FX assumptions € = $1.13, RMB = 7.21; JLR disruption impacts embedded.

Business Commentary:

* Revenue and Core Earnings Performance: - Lear Corporation reported revenue of $5.7 billion for Q3 2025, increasing 2% year-over-year. - Core operating earnings were $241 million, with a total company operating margin of 4.2%. - The performance was impacted by a cybersecurity incident with a major customer, Jaguar Land Rover (JLR), which disrupted production for a month, reducing revenue by $111 million.

• Adjusted Earnings and Share Repurchases:
• Adjusted earnings per share were $2.79, compared to $2.89 a year ago.
• Lear repurchased $100 million worth of stock in Q3, exceeding their original target of $250 million for the year.

• The reduction in adjusted earnings was partially offset by the share repurchase program, reflecting Lear's focus on returning excess cash to shareholders.

• Impact of the Jaguar Land Rover Disruption and Outlook:

• The JLR disruption reduced Lear's revenue by $111 million and core operating earnings by $31 million in Q3.
• Despite the disruption, Lear's operating cash flow reached $444 million, highlighting strong cash flow generation.

• The company expects to increase its full-year free cash flow outlook, with an anticipated midpoint increase of $30 million.

• Backlog and Onshoring Opportunities:

• Lear's consolidated backlog for 2026 and 2027 is approximately $1.2 billion, with about $600 million each year.
• The company is seeing significant opportunities from automakers accelerating their U.S. production plans, with an estimated market that could support incremental revenue and margin expansion.
• Lear is well-positioned to maintain or increase its market share due to strong customer relationships, operational excellence, and extensive U.S. manufacturing footprint.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted one of the strongest Q3 operating cash flows ($444M), raised the midpoint of full-year free cash flow, increased net-performance outlook from $150M to $170M, and emphasized new business awards, onshoring tailwinds and automation/AI investments as drivers of future margin expansion.

Q&A:

• Question from Dan Levy (Barclays Bank PLC, Research Division): On guidance — how are you treating risks from Nexperia, Novelis/Ford & Stellantis issues and other supply chain risks; does current guide fully reflect these?
  Response: Guidance is conservative and explicitly embeds potential modest disruptions: roughly $150M of revenue 'protection' from high-end to midpoint for JLR/Novelis/Nexperia risks, with about $55M of Novelis impact already included.

• Question from Dan Levy (Barclays Bank PLC, Research Division): Early thoughts on 2026 backlog given tariff/reshoring/EV shifts — is there still opportunity or risk of an 'air pocket'?
  Response: Management is seeing stabilization and increased confidence: combined 2026–27 backlog ~ $1.2B (net of cancellations/delays) and onshoring opportunities provide meaningful upside for 2027+.

• Question from Joseph Spak (UBS Investment Bank, Research Division): You're ahead on net performance YTD — does that imply fourth-quarter headwinds or simply outperformance you can carry into Q4?
  Response: About $10M of expected commercial performance was pulled into Q3; Q4 will absorb higher engineering spend, timing of customer recoveries and annual compensation increases, so guidance is conservative accordingly.

• Question from Joseph Spak (UBS Investment Bank, Research Division): Clarify the $1.2B backlog figure and any updates on specific wins (e.g., F-Series distribution boxes) and sourcing decisions?
  Response: The $1.2B refers to combined 2026 and 2027 backlog (~50/50 or ~$600M/year); company sees additional upside from onshoring and consolidated JV revenue but will not disclose program award specifics until customers permit.

• Question from Joseph Spak (UBS Investment Bank, Research Division): That's the consolidated backlog number you're referencing, correct?
  Response: Yes — the $1.2B backlog figure is on a consolidated basis.

• Question from Mark Delaney (Goldman Sachs Group, Inc., Research Division): As you onshore more with high automation in the U.S., how should we think about margin implications given higher U.S. labor costs?
  Response: Onshoring with purpose-built automation yields operating margins similar to current North America seating; automation offsets higher U.S. labor and supports strong ROIC despite somewhat higher CapEx.

• Question from Mark Delaney (Goldman Sachs Group, Inc., Research Division): Thoughts on net performance for 2026 — is prior $150M target still reasonable?
  Response: Management expects to replicate net-performance targets of ~40 bps in Seating and ~80 bps in E-Systems in 2026 (north of $100M); achieving the $150–$170M level seen this year is not assumed but remains a target to pursue.

• Question from Emmanuel Rosner (Wolfe Research, LLC): Can you dimension the onshoring opportunity in units or revenue — how many units might customers bring to the U.S. and on what time frame?
  Response: Management declined to quantify units/revenue now, preferring to use a market-share framework (Seating target from 26% to 29%); it's premature to give specific dollar or unit estimates.

• Question from Emmanuel Rosner (Wolfe Research, LLC): Breakdown of backlog between Seating and E-Systems and how E-Systems growth should be thought about given wind-downs?
  Response: For 2026, Seating backlog is > $700M while E-Systems is roughly -$100M due to wind-downs; E-Systems will be weighed down near-term but has conquest wins that should help in 2027+.

• Question from Emmanuel Rosner (Wolfe Research, LLC): Clarification — does the E-Systems wind-down already feed into the negative 2026 backlog and can you provide 2027 split now?
  Response: Yes — the negative 2026 E-Systems backlog includes the wind-down; 2027 composition is more balanced and management will provide detail on the Q4 call.

• Question from Colin Langan (Wells Fargo Securities, LLC, Research Division): For modeling 2026 margins, should we start from a JLR-adjusted exit rate of 4.7% and then layer automation ($65–75M) and other puts/takes?
  Response: Yes — use the JLR-adjusted operating margin exit rate of ~4.7% as a baseline; expect revenues and margins to be higher in 2026 with additional margin expansion (especially in E-Systems) from net performance and automation.

• Question from Colin Langan (Wells Fargo Securities, LLC, Research Division): On buybacks — is the current pace (~$100M this quarter) indicative of the cadence going forward and how much will be allocated to buybacks?
  Response: Capital allocation prioritizes share repurchases; targeting about $300M of repurchases for the year with opportunistic continuation into next year, subject to Board approval and free cash flow visibility.

• Question from Colin Langan (Wells Fargo Securities, LLC, Research Division): Just to confirm — was the $300M figure for the year or Q4?
  Response: Clarification: $300M is the target for the full year.

Contradiction Point 1

Volume and Revenue Assumptions

It involves changes in financial forecasts, specifically regarding volume and revenue assumptions, which are critical indicators for investors and stakeholders.

What impact did the Novelis issue have on Ford and Stellantis, and is it fully reflected in the guidance? - Dan Levy (Barclays Bank PLC, Research Division)

2025Q3: We've included about $55 million of impact due to Novelis issues in the guidance. We're cautious with volume and production assumptions due to potential risks from Novelis, JLR ramp-up, and Nexperia. - Jason Cardew(CFO)

Why does the sales and volume outlook include a $481 million additional headwind compared to the previous outlook? - Mark Delaney (Goldman Sachs Group, Inc., Research Division)

2025Q2: The $481 million additional headwind is due to a reduction in assumptions for volumes on certain programs, such as the Audi Q5 changeover and JLR Range Rover, as well as lower production in Europe due to tariffs. - Jason Cardew(CFO)

Contradiction Point 2

Backlog Outlook and Update

It involves changes in the backlog outlook and updates, which are critical for understanding the company's growth trajectory and customer commitments.

Does the $1.2 billion backlog cover both 2026 and 2027? Can you update us on the Ford F-Series distribution box program? - Joseph Spak (UBS Investment Bank, Research Division)

2025Q3: The $1.2 billion is a combined number for 2026 and 2027, roughly $600 million per year. - Jason Cardew(CFO)

When do you expect an update to the backlog outlook, given the progress and delays? - Joseph Spak (UBS)

2025Q2: We expect to provide an update on our backlog outlook likely in the third or fourth quarter of this year. - Raymond Scott(CEO)

Contradiction Point 3

Production Volatility and Revenue Expectations

It involves differing expectations about production volatility and its impact on revenue, which are critical for company performance and investor expectations.

Is there still an opportunity for a healthy backlog in 2026 due to tariff and reshoring impacts? - Dan Levy (Barclays Bank PLC, Research Division)

2025Q3: The industry is stabilizing, and we're seeing confidence in customer plans for timing and volume. We have a solid backlog for 2026 and 2027 after adjusting for program cancellations. - Ray Scott(President, CEO & Director)

Have you observed any significant changes to production schedules yet or are you only anticipating them? Are additional major schedule changes expected? Why did you decide to withdraw guidance at this time? - Joe Spak (UBS)

2025Q1: The environment remains dynamic. We decided to withdraw guidance because the wide range we would need to guide to account for all the variability in the production outlook is too wide to be helpful. - Jason Cardew(SVP and CFO)

Contradiction Point 4

Tariff Impact and Production Strategy

It involves differing strategies regarding the impact of tariffs and the decision to move production, which affects operational costs and profitability.

Net performance targets have been exceeded year-to-date. Does this indicate potential negative factors in Q4? - Joseph Spak (UBS Investment Bank, Research Division)

2025Q3: We are considering moving some production based on the tariff rates, but this depends on what the final tariffs will look like. - Ray Scott(President, CEO & Director)

Can customers qualify as approved importers of record to claim the 3.75% reimbursement? How does the country's exposure and expected reimbursement reduction affect your business? Are you considering relocating production? - Dan Levy (Barclays)

2025Q1: The exposure in Honduras is significant due to its inclusion on the annex for Section 232 tariffs. We think the tariff rate will likely adjust to the 10% reciprocal rate, making Honduras competitive with Mexico. - Ray Scott(President, CEO & Director)