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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018.
 
¨
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
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12511334&doc=12
(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)
 
(Zip code)
(248) 447-1500
(Registrant’s telephone number, including area code)
________________________________________________________________ 
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 October 22, 2018, the number of shares outstanding of the registrant’s common stock was 64,173,868 shares.
 


Table of Contents
LEAR CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 29, 2018

INDEX

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

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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, 2017.
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.


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LEAR CORPORATION AND SUBSIDIARIES

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

 
September 29,
2018 (1)
 
December 31,
2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,198.6

 
$
1,500.4

Accounts receivable
3,301.8

 
3,230.8

Inventories
1,285.2

 
1,205.7

Other
782.1

 
676.1

Total current assets
6,567.7

 
6,613.0

LONG-TERM ASSETS:
 
 
 
Property, plant and equipment, net
2,536.2

 
2,459.4

Goodwill
1,409.4

 
1,401.3

Other
1,496.1

 
1,472.2

Total long-term assets
5,441.7

 
5,332.9

Total assets
$
12,009.4

 
$
11,945.9

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
8.2

 
$

Accounts payable and drafts
3,041.8

 
3,167.2

Accrued liabilities
1,720.9

 
1,678.1

Current portion of long-term debt
9.0

 
9.0

Total current liabilities
4,779.9

 
4,854.3

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
1,946.6

 
1,951.5

Other
685.6

 
694.1

Total long-term liabilities
2,632.2

 
2,645.6

 
 
 
 
Redeemable noncontrolling interest
161.6

 
153.4

 
 
 
 
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; 72,563,291 shares issued as of September 29, 2018 and December 31, 2017
0.7

 
0.7

Additional paid-in capital
1,176.0

 
1,215.4

Common stock held in treasury, 8,018,383 and 5,689,527 shares as of September 29, 2018 and December 31, 2017, respectively, at cost
(1,181.7
)
 
(724.1
)
Retained earnings
4,953.8

 
4,171.9

Accumulated other comprehensive loss
(655.9
)
 
(513.4
)
Lear Corporation stockholders’ equity
4,292.9

 
4,150.5

Noncontrolling interests
142.8

 
142.1

Equity
4,435.7

 
4,292.6

Total liabilities and equity
$
12,009.4

 
$
11,945.9

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

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LEAR CORPORATION AND SUBSIDIARIES

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

 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net sales
$
4,891.6

 
$
4,981.5

 
$
16,206.1

 
$
15,103.2

 
 
 
 
 
 
 
 
Cost of sales
4,365.3

 
4,425.6

 
14,410.3

 
13,387.0

Selling, general and administrative expenses
150.3

 
158.2

 
462.5

 
471.1

Amortization of intangible assets
12.7

 
12.5

 
38.9

 
34.1

Interest expense
21.2

 
21.7

 
62.8

 
63.9

Other (income) expense, net
13.2

 
(21.8
)
 
11.3

 
(12.3
)
Consolidated income before provision for income taxes and equity in net income of affiliates
328.9

 
385.3

 
1,220.3

 
1,159.4

Provision for income taxes
57.6

 
77.8

 
233.0

 
240.2

Equity in net income of affiliates
(3.4
)
 
(7.5
)
 
(16.6
)
 
(41.3
)
Consolidated net income
274.7

 
315.0

 
1,003.9

 
960.5

Less: Net income attributable to noncontrolling interests
22.2

 
19.8

 
66.3

 
47.6

Net income attributable to Lear
$
252.5

 
$
295.2

 
$
937.6

 
$
912.9

 
 
 
 
 
 
 
 
Basic net income per share available to Lear common stockholders (Note 12)
$
3.83

 
$
4.00

 
$
13.90

 
$
12.92

 
 
 
 
 
 
 
 
Diluted net income per share available to Lear common stockholders (Note 12)
$
3.80

 
$
3.96

 
$
13.80

 
$
12.80

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.70

 
$
0.50

 
$
2.10

 
$
1.50

 
 
 
 
 
 
 
 
Average common shares outstanding
65,372,829

 
68,061,718

 
66,256,800

 
68,874,682

 
 
 
 
 
 
 
 
Average diluted shares outstanding
65,868,660

 
68,834,279

 
66,709,928

 
69,536,808

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (Note 13)
$
236.1

 
$
392.3

 
$
845.5

 
$
1,265.4

Less: Comprehensive income attributable to noncontrolling interests
11.8

 
22.6

 
50.4

 
53.7

Comprehensive income attributable to Lear
$
224.3

 
$
369.7

 
$
795.1

 
$
1,211.7

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

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LEAR CORPORATION AND SUBSIDIARIES

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

 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
Cash Flows from Operating Activities:
 
 
 
Consolidated net income
$
1,003.9

 
$
960.5

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
361.8

 
313.2

Net change in recoverable customer engineering, development and tooling
(8.5
)
 
(37.4
)
Loss on extinguishment of debt

 
21.2

Net change in working capital items (see below)
(328.8
)
 
(31.0
)
Other, net
(6.8
)
 
(42.2
)
Net cash provided by operating activities
1,021.6

 
1,184.3

Cash Flows from Investing Activities:
 
 
 
Additions to property, plant and equipment
(492.7
)
 
(430.2
)
Acquisition

 
(286.8
)
Other, net
(18.5
)
 
16.9

Net cash used in investing activities
(511.2
)
 
(700.1
)
Cash Flows from Financing Activities:
 
 
 
Credit agreement repayments
(4.7
)
 

Credit agreement borrowings

 
250.0

Prior credit agreement repayments

 
(468.7
)
Short-term borrowings, net
5.6

 
(7.2
)
Proceeds from the issuance of senior notes

 
744.7

Repurchase of senior notes

 
(517.0
)
Payment of debt issuance and other financing costs

 
(11.7
)
Repurchase of common stock
(488.1
)
 
(332.2
)
Dividends paid to Lear Corporation stockholders
(142.1
)
 
(104.4
)
Dividends paid to noncontrolling interests
(64.3
)
 
(42.7
)
Other, net
(59.6
)
 
(56.6
)
Net cash used in financing activities
(753.2
)

(545.8
)
Effect of foreign currency translation
(32.7
)
 
43.7

Net Change in Cash, Cash Equivalents and Restricted Cash
(275.5
)
 
(17.9
)
Cash, Cash Equivalents and Restricted Cash as of Beginning of Period
1,500.4

 
1,271.6

Cash, Cash Equivalents and Restricted Cash as of End of Period
$
1,224.9

 
$
1,253.7

 
 
 
 
Changes in Working Capital Items:
 
 
 
Accounts receivable
$
(173.1
)
 
$
(280.6
)
Inventories
(117.5
)
 
(114.7
)
Accounts payable
(33.2
)
 
245.6

Accrued liabilities and other
(5.0
)
 
118.7

Net change in working capital items
$
(328.8
)
 
$
(31.0
)
 
 
 
 
Supplementary Disclosure:
 
 
 
Cash paid for interest
$
93.7

 
$
91.6

Cash paid for income taxes, net of refunds received
$
225.1

 
$
224.9

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

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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 2017, the Company completed the acquisition of Grupo Antolin's automotive seating business ("Antolin Seating"). The acquisition was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated financial statements from the date of acquisition. For further information on the acquisition of Antolin Seating, 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, 2017.
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.
Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation used in the quarter ended September 29, 2018.

(2) Restructuring
Restructuring costs include employee termination benefits, fixed asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These 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 nine months of 2018, the Company recorded charges of $48.2 million in connection with its restructuring actions. These charges consist of $40.8 million recorded as cost of sales and $7.4 million recorded as selling, general and administrative expenses. The restructuring charges consist of employee termination costs of $38.6 million, fixed asset impairment charges of $2.8 million and contract termination costs of $0.9 million, as well as other related costs of $5.9 million. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Fixed asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $2.8 million in excess of related estimated fair values.
The Company expects to incur approximately $20 million of additional restructuring costs related to activities initiated as of September 29, 2018, 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 2018 activity is shown below (in millions):
 
Accrual as of
 
2018
 
Utilization
 
Accrual as of
 
January 1, 2018
 
Charges
 
Cash
 
Non-cash
 
September 29, 2018
Employee termination benefits
$
93.0

 
$
38.6

 
$
(32.7
)
 
$

 
$
98.9

Asset impairment charges

 
2.8

 

 
(2.8
)
 

Contract termination costs
5.0

 
0.9

 
(0.3
)
 

 
5.6

Other related costs

 
5.9

 
(5.9
)
 

 

Total
$
98.0

 
$
48.2

 
$
(38.9
)
 
$
(2.8
)
 
$
104.5



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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(3) 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):
 
September 29,
2018
 
December 31, 2017
Raw materials
$
928.4

 
$
869.3

Work-in-process
120.2

 
120.8

Finished goods
355.6

 
324.8

Reserves
(119.0
)
 
(109.2
)
Inventories
$
1,285.2

 
$
1,205.7


(4) 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 nine months of 2018 and 2017, the Company capitalized $167.6 million and $190.8 million, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first nine months of 2018 and 2017, the Company also capitalized $121.1 million and $93.5 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 nine months of 2018 and 2017, the Company collected $277.4 million and $247.7 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):
 
September 29,
2018
 
December 31, 2017
Current
$
219.6

 
$
248.1

Long-term
87.3

 
59.3

Recoverable customer E&D and tooling
$
306.9

 
$
307.4


(5) Long-Term Assets
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Costs associated with the repair and maintenance of the Company’s property, plant and equipment are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency or safety of the Company’s property, plant and equipment are capitalized and depreciated over the remaining useful life of the related asset. Depreciable property is depreciated over the estimated useful lives of the assets, using principally the straight-line method.

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of property, plant and equipment is shown below (in millions):
 
September 29,
2018
 
December 31, 2017
Land
$
115.1

 
$
118.8

Buildings and improvements
778.8

 
797.7

Machinery and equipment
3,324.3

 
3,077.4

Construction in progress
426.2

 
355.6

Total property, plant and equipment
4,644.4

 
4,349.5

Less – accumulated depreciation
(2,108.2
)
 
(1,890.1
)
Property, plant and equipment, net
$
2,536.2

 
$
2,459.4

Depreciation expense was $107.1 million and $99.2 million in the three months ended September 29, 2018 and September 30, 2017, respectively, and $322.9 million and $279.1 million in the nine months ended September 29, 2018 and September 30, 2017, respectively.
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP. If impairment indicators exist, the Company performs the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. Except as discussed below, the Company does not believe that there were any indicators that would have resulted in long-lived asset impairment charges as of September 29, 2018. The Company will, however, continue to assess the impact of any significant industry events on the realization of its long-lived assets.
In the first nine months of 2018 and 2017, the Company recognized fixed asset impairment charges of $2.8 million and $0.4 million, respectively, in conjunction with its restructuring actions (Note 2, "Restructuring"), as well as additional fixed asset impairment charges of $1.0 million in the first nine months of 2018.
Investments in Affiliates
In January 2018, the Company gained control of Changchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd. ("Lear FAWSN") by acquiring an additional 20% interest from a joint venture partner and by amending the joint venture agreement to eliminate the substantive participating rights of the remaining joint venture partner. Prior to the amendment, Lear FAWSN was accounted for under the equity method.
This transaction was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheet as of September 29, 2018. The operating results and cash flows of Lear FAWSN are included in the accompanying condensed consolidated financial statements from the effective date of the amended joint venture agreement and are reflected in the Company’s E-Systems segment.
A preliminary summary of the fair value of the assets acquired and liabilities assumed in conjunction with the transaction is shown below (in millions):
Property, plant and equipment
$
11.0

Other assets and liabilities assumed, net
7.2

Goodwill
20.9

Intangible assets
7.5

 
$
46.6

Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do not qualify for separate recognition.
Intangible assets consist of amounts recognized for the fair value of customer-based assets and were based on an independent appraisal. Customer-based assets include Lear FAWSN's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. It is currently estimated that these intangible assets have a weighted average useful life of approximately ten years.

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The fair values of the assets acquired and liabilities assumed in conjunction with the transaction contain preliminary estimates that may be revised as a result of additional information regarding such assets and liabilities.
As of the effective date of the transaction, the fair value of the Company’s previously held equity interest in Lear FAWSN was $23.0 million, and the fair value of the noncontrolling interest in Lear FAWSN was $14.0 million. As a result of valuing the Company’s previously held equity interest in Lear FAWSN at fair value, the Company recognized a gain of $10.0 million, which is included in other (income) expense, net in the accompanying condensed consolidated statements of comprehensive income for the nine months ended September 29, 2018.
Lear FAWSN’s annual sales are approximately $100 million. The pro forma effects of this consolidation would not materially impact the Company’s reported results for any period presented.
For further information related to acquired assets measured at fair value, see Note 16, "Financial Instruments."

(6) Goodwill
A summary of the changes in the carrying amount of goodwill, by operating segment, in the nine months ended September 29, 2018, is shown below (in millions):
 
Seating
 
E-Systems
 
Total
Balance at January 1, 2018
$
1,274.4

 
$
126.9

 
$
1,401.3

Affiliate transaction

 
20.9

 
20.9

Foreign currency translation and other
(25.0
)
 
12.2

 
(12.8
)
Balance at September 29, 2018
$
1,249.4

 
$
160.0

 
$
1,409.4

Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment testing as of the first day of its fourth quarter.
The Company does not believe that there were any indicators that would have resulted in goodwill impairment charges as of September 29, 2018. The Company will, however, continue to assess the impact of significant events or circumstances on its recorded goodwill.
For further information related to the affiliate transaction, see Note 5, "Long-Term Assets."


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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(7) Debt
A summary of long-term debt, net of unamortized debt issuance costs, and the related weighted average interest rates is shown below (in millions):
 
September 29, 2018
 
December 31, 2017
Debt Instrument
Long-Term Debt
 
Debt Issuance Costs (2)
 
Long-Term
Debt, Net
 
Weighted
Average
Interest
Rate
 
Long-Term Debt
 
Debt Issuance Costs (2)
 
Long-Term
Debt, Net
 
Weighted
Average
Interest
Rate
Credit Agreement — Term Loan Facility
$
243.8

 
$
(1.6
)
 
$
242.2

 
3.59%
 
$
248.4

 
$
(1.8
)
 
$
246.6

 
3.0%
5.375% Senior Notes due 2024 (the "2024 Notes")
325.0

 
(2.1
)
 
322.9

 
5.375%
 
325.0

 
(2.4
)
 
322.6

 
5.375%
5.25% Senior Notes due 2025 (the "2025 Notes")
650.0

 
(5.2
)
 
644.8

 
5.25%
 
650.0

 
(5.8
)
 
644.2

 
5.25%
3.8% Senior Notes due 2027 (the "2027 Notes") (1)
745.3

 
(5.4
)
 
739.9

 
3.885%
 
744.9

 
(5.9
)
 
739.0

 
3.885%
Other
5.8

 

 
5.8

 
N/A
 
8.1

 

 
8.1

 
N/A
 
$
1,969.9

 
$
(14.3
)
 
1,955.6

 
 
 
$
1,976.4

 
$
(15.9
)
 
1,960.5

 
 
Less — Current portion
 
 
 
 
(9.0
)
 
 
 
 
 
 
 
(9.0
)
 
 
Long-term debt
 
 
 
 
$
1,946.6

 
 
 
 
 
 
 
$
1,951.5

 
 
(1) Net of unamortized original issue discount of $4.7 million and $5.1 million as of September 29, 2018 and December 31, 2017, respectively
(2) Unamortized portion
Senior Notes
The issuance date, maturity date and interest payable dates of the Company's senior unsecured 2024 Notes, 2025 Notes and 2027 Notes (together, the "Notes") are as shown below:
Note
Issuance Date
 
Maturity Date
 
Interest Payable Dates
2024 Notes
March 2014
 
March 15, 2024
 
March 15 and September 15
2025 Notes
November 2014
 
January 15, 2025
 
January 15 and July 15
2027 Notes
August 2017
 
September 15, 2027
 
March 15 and September 15
In August 2017, the Company issued $750.0 million in aggregate principal amount at maturity of senior unsecured notes due 2027 at a stated coupon rate of 3.8%. The 2027 Notes were priced at 99.294% of par, resulting in a yield to maturity of 3.885%. The proceeds from the offering of $744.7 million, after original issue discount, were used to redeem the $500.0 million in aggregate principal amount of the 4.75% senior notes due 2023 (the "2023 Notes") at a redemption price equal to 100% of the aggregate principal amount thereof, plus a "make-whole" premium of $17.0 million, as well as to refinance a portion of the Company's $500.0 million prior term loan facility (see "Credit Agreement" below). In connection with these transactions, the Company recognized a loss of $21.2 million on the extinguishment of debt in the three and nine months ended September 30, 2017, and paid related issuance costs of $6.0 million.
Covenants
Subject to certain exceptions, the indentures governing the Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) create or permit certain liens and (ii) consolidate, merge or sell all or substantially all of the Company’s assets. The indenture governing the 2024 Notes limits the ability of the Company to enter into sale and leaseback transactions. The indentures governing the Notes also provide for customary events of default.
As of September 29, 2018, the Company was in compliance with all covenants under the indentures governing the Notes.
Credit Agreement
The Company's unsecured credit agreement (the "Credit Agreement"), dated August 8, 2017, consists of a $1.75 billion revolving credit facility (the "Revolving Credit Facility") and a $250.0 million term loan facility (the "Term Loan Facility"), both of which mature on August 8, 2022.
In August 2017, the Company borrowed $250.0 million under the Term Loan Facility and paid related issuance costs of $5.7 million. At the same time, the Company terminated its previously existing credit agreement, which consisted of a $1.25 billion

11

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

revolving credit facility and a $500 million term loan facility, and repaid amounts outstanding under the term loan facility of $453.1 million.
As of September 29, 2018 and December 31, 2017, there were no borrowings outstanding under the Revolving Credit Facility and $243.8 million and $248.4 million, respectively, of borrowings outstanding under the Term Loan Facility. In the first nine months of 2018, the Company made required principal payments of $4.7 million under the Term Loan Facility.
Advances under the Revolving Credit Facility and the Term Loan Facility generally bear interest based on (i) the Eurocurrency Rate (as defined in the Credit Agreement) or (ii) the Base Rate (as defined in the Credit Agreement) plus a margin, determined in accordance with a pricing grid. The range and the rate as of September 29, 2018, are shown below (in percentages):
 
 
Eurocurrency Rate
 
Base Rate
 
 
Minimum
 
Maximum
 
Rate as of
September 29, 2018
 
Minimum
 
Maximum
 
Rate as of
September 29,
2018
Revolving Credit Facility
 
1.00
%
 
1.60
%
 
1.30
%
 
0.00
%
 
0.60
%
 
0.30
%
Term Loan Facility
 
1.125
%
 
1.90
%
 
1.50
%
 
0.125
%
 
0.90
%
 
0.50
%
A facility fee, which ranges from 0.125% to 0.30% of the total amount committed under the Revolving Credit Facility, is payable quarterly.
Covenants
The Credit Agreement contains various customary representations, warranties and covenants by the Company, including, without limitation, (i) covenants regarding maximum leverage, (ii) limitations on fundamental changes involving the Company or its subsidiaries and (iii) limitations on indebtedness and liens.
As of September 29, 2018, the Company was in compliance with all covenants under the Credit Agreement.
Other
As of September 29, 2018, other long-term debt consists of amounts outstanding under capital leases.
For further information related to the Company's debt, see Note 6, "Debt," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

(8) Pension and Other Postretirement Benefit Plans
The Company sponsors defined benefit pension plans and other postretirement benefit plans (primarily for the continuation of medical benefits) for eligible employees in the United States and certain other countries.
Net Periodic Pension and Other Postretirement Benefit (Credit) Cost
The components of the Company’s net periodic pension benefit (credit) cost are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$
0.1

 
$
1.7

 
$

 
$
1.8

 
$
0.1

 
$
5.2

 
$
0.1

 
$
5.3

Interest cost
5.0

 
3.6

 
5.5

 
4.0

 
14.9

 
11.1

 
16.4

 
11.2

Expected return on plan assets
(7.0
)
 
(5.7
)
 
(6.0
)
 
(5.9
)
 
(20.8
)
 
(17.4
)
 
(18.0
)
 
(17.0
)
Amortization of actuarial loss
0.6

 
1.6

 
0.6

 
1.3

 
1.6

 
4.7

 
1.9

 
3.8

Curtailment loss

 
0.5

 

 

 

 
0.5

 

 

Settlement loss

 

 

 

 
0.2

 

 
0.2

 
0.8

Net periodic benefit (credit) cost
$
(1.3
)
 
$
1.7

 
$
0.1

 
$
1.2

 
$
(4.0
)
 
$
4.1

 
$
0.6

 
$
4.1

In the three and nine months ended September 29, 2018, the Company recognized a pension curtailment loss of $0.5 million related to a plan wind-up. In the nine months ended September 30, 2017, the Company recognized a pension settlement loss of $0.8 million related to its restructuring actions.

12

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The components of the Company’s net periodic other postretirement benefit (credit) cost are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$

 
$
0.1

 
$

 
$
0.1

 
$

 
$
0.3

 
$
0.1

 
$
0.4

Interest cost
0.4

 
0.3

 
0.6

 
0.4

 
1.4

 
1.0

 
1.8

 
1.2

Amortization of actuarial (gain) loss
(0.6
)
 

 
(0.7
)
 
0.1

 
(1.7
)
 
0.1

 
(2.0
)
 
0.2

Amortization of prior service credit

 
(0.1
)
 

 
(0.1
)
 
(0.1
)
 
(0.3
)
 

 
(0.3
)
Special termination benefits

 

 

 

 

 

 

 
0.1

Net periodic benefit (credit) cost
$
(0.2
)
 
$
0.3

 
$
(0.1
)
 
$
0.5

 
$
(0.4
)
 
$
1.1

 
$
(0.1
)
 
$
1.6

Contributions
In the nine months ended September 29, 2018, employer contributions to the Company’s domestic and foreign defined benefit pension plans were $9.0 million.
The Company expects contributions to its domestic and foreign defined benefit pension plans to be approximately $10 million to $15 million in 2018. The Company may elect to make contributions in excess of minimum funding requirements in response to investment performance or changes in interest rates or when the Company believes that it is financially advantageous to do so and based on its other cash requirements.
Accounting Standards Update
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The new standard requires the classification of the non-service cost components of net periodic benefit cost in other (income) expense, net and the classification of the service cost component in the same line item as other current employee compensation costs. The provisions of the standard were applied retrospectively, and the effects of adoption were not significant.

(9) Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers," using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning on or after January 1, 2018, are presented in accordance with ASC 606. Comparative financial information for reporting periods beginning prior to January 1, 2018, has not been adjusted and continues to be reported in accordance with the Company's revenue recognition policies prior to the adoption of ASC 606. The Company did not record a cumulative adjustment related to the adoption of ASC 606, and the effects of adoption were not significant.
The Company enters into contracts with its customers to provide production parts generally at the beginning of a vehicle’s life cycle. Typically, these contracts do not provide for a specified quantity of products, but once entered into, the Company is often expected to fulfill its customers’ purchasing requirements for the production life of the vehicle. Many of these contracts may be terminated by the Company’s customers at any time. Historically, terminations of these contracts have been minimal. The Company receives purchase orders from its customers, which provide the commercial terms for a particular production part, including price (but not quantities). Contracts may also provide for annual price reductions over the production life of the vehicle, and prices may be adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors.
Revenue is recognized at a point in time when control of the product is transferred to the customer under standard commercial terms, as the Company does not have an enforceable right to payment prior to such transfer. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for those products based on the annual purchase orders, annual price reductions and ongoing price adjustments (some of which is accounted for as variable consideration). The Company does not believe that there will be significant changes to its estimates of variable consideration. The Company's customers pay for products received in accordance with payment terms that are customary within the industry. The Company's contracts with its customers do not have significant financing components.

13

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company records a contract liability for advances received from its customers. As of September 29, 2018, there were no significant contract liabilities recorded. Further, there were no significant contract liabilities recognized in revenue during the first nine months of 2018.
Amounts billed to customers related to shipping and handling costs are included in net sales in the condensed consolidated statements of comprehensive income. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales in the condensed consolidated statements of comprehensive income.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue.
A summary of the Company’s revenue by reportable operating segment and geography is shown below (in millions):
 
Three Months Ended
 
September 29, 2018
 
September 30, 2017
 
Seating
 
E-Systems
 
Total
 
Seating
 
E-Systems
 
Total
North America
$
1,524.0

 
$
256.3

 
$
1,780.3

 
$
1,559.8

 
$
261.5

 
$
1,821.3

Europe and Africa
1,392.5

 
552.3

 
1,944.8

 
1,472.7

 
551.7

 
2,024.4

Asia
638.6

 
350.8

 
989.4

 
686.8

 
252.2

 
939.0

South America
127.9

 
49.2

 
177.1

 
149.6

 
47.2

 
196.8

 
$
3,683.0

 
$
1,208.6

 
$
4,891.6

 
$
3,868.9

 
$
1,112.6

 
$
4,981.5

 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
Seating
 
E-Systems
 
Total
 
Seating
 
E-Systems
 
Total
North America
$
4,975.2

 
$
844.0

 
$
5,819.2

 
$
5,006.0

 
$
827.2

 
$
5,833.2

Europe and Africa
4,882.8

 
1,883.7

 
6,766.5

 
4,286.4

 
1,687.0

 
5,973.4

Asia
1,993.1

 
1,059.9

 
3,053.0

 
2,045.1

 
693.1

 
2,738.2

South America
436.5

 
130.9

 
567.4

 
424.5

 
133.9

 
558.4

 
$
12,287.6

 
$
3,918.5

 
$
16,206.1

 
$
11,762.0

 
$
3,341.2

 
$
15,103.2



14

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(10) Other (Income) Expense, Net
Other (income) expense, net includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, losses on the extinguishment of debt, 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.
A summary of other (income) expense, net is shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Other expense
$
16.6

 
$
34.4

 
$
24.2

 
$
47.2

Other income
(3.4
)
 
(56.2
)
 
(12.9
)
 
(59.5
)
Other (income) expense, net
$
13.2

 
$
(21.8
)
 
$
11.3

 
$
(12.3
)
In the three and nine months ended September 29, 2018, other expense includes net foreign currency transaction losses of $10.2 million and $12.6 million, respectively. In the nine months ended September 29, 2018, other income includes a gain of $10.0 million related to gaining control of an affiliate (Note 5, "Long-Term Assets").
In the three and nine months ended September 30, 2017, other expense includes a loss of $21.2 million on the extinguishment of debt (Note 7, "Debt") and net foreign currency transaction losses of $5.3 million and $3.9 million, respectively. In the three and nine months ended September 30, 2017, other income includes a gain of $54.2 million related to obtaining control of an affiliate. For further information related to obtaining control of an affiliate in 2017, see Note 5, "Investments in Affiliates and Other Related Party Transactions," to the consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2017.

(11) Income Taxes
A summary of the provision for income taxes and the corresponding effective tax rate for the three and nine months ended September 29, 2018 and September 30, 2017, is shown below (in millions, except effective tax rates):
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Provision for income taxes
$
57.6

 
$
77.8

 
$
233.0

 
$
240.2

Pretax income before equity in net income of affiliates
$
328.9

 
$
385.3

 
$
1,220.3

 
$
1,159.4

Effective tax rate
17.5
%
 
20.2
%
 
19.1
%
 
20.7
%
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company had not completed its accounting for the tax effects of the Act. In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05, "Income Taxes - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The guidance provides for a provisional one year measurement period for entities to finalize their accounting for certain tax effects related to the Act. In the first nine months of 2018, the Company recognized a $9.3 million tax benefit adjustment to the provisional income tax expense related to the remeasurement of the December 31, 2017 deferred tax balances. The Company expects to finalize its provisional amounts by the fourth quarter of 2018.
On January 1, 2018, the Company adopted ASU 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other than Inventory." The new standard requires the recognition of the income tax effects of intercompany sales and transfers of assets other than inventory, in the period in which the transfer occurs. The standard also required modified retrospective adoption. Accordingly, the Company recognized a deferred tax asset of $2.3 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-16 were not significant.
In the first nine months of 2018 and 2017, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision for income taxes in 2018 was also impacted by the reduction in the U.S. federal corporate income tax rate.

15

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In the first nine months of 2018 and 2017, the Company recognized tax benefits (expense) related to the significant, discrete items shown below (in millions):
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
Reversal of valuation allowances on deferred tax assets of certain foreign subsidiaries
$
36.4

 
$
28.7

Share-based compensation
10.8

 
16.3

Restructuring charges and various other items
9.9

 
13.9

Redemption of 2023 Notes

 
7.5

Foreign withholding tax on certain undistributed foreign earnings
(22.0
)
 

Tax rate change in a foreign subsidiary
7.2

 
2.0

Adjustment to 2017 provisional U.S. income tax expense
9.3

 

 
$
51.6

 
$
68.4

In addition, in the first nine months of 2018 and 2017, the Company recognized gains of $10.0 million and $54.2 million, respectively, related to obtaining control of affiliates and for which no tax expense was provided. Excluding the items above, the effective tax rate for the first nine months of 2018 and 2017 approximated the U.S. federal statutory income tax rate of 21% and 35%, respectively, adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
As of September 29, 2018, the Company made its best estimate of the annual effective tax rate ("EAETR") for the full year of 2018. The Company continues to examine the potential impact of certain provisions of the Act that could affect its 2018 EAETR, including the provisions related to global intangible low-taxed income ("GILTI"), foreign derived intangible income ("FDII") and the base erosion and anti-abuse tax ("BEAT"). The Company has not yet elected an accounting policy with respect to GILTI. As such, the Company is currently treating the impact of GILTI as a period cost.
The Company’s current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. The Company’s future provision for income taxes will include no tax benefit with respect to losses incurred and, except for certain jurisdictions, no tax expense with respect to income generated in these countries until the respective valuation allowances are eliminated. Accordingly, income taxes are impacted by changes in valuation allowances and the mix of earnings among jurisdictions. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. In completing this evaluation, the Company considers all available evidence in order to determine whether, based on the weight of the evidence, a valuation allowance for its deferred tax assets is necessary. Such evidence includes historical results, future reversals of existing taxable temporary differences and expectations for future taxable income (exclusive of the reversal of temporary differences and carryforwards), as well as the implementation of feasible and prudent tax planning strategies. If, based on the weight of the evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a valuation allowance is recorded. If operating results improve or decline on a continual basis in a particular jurisdiction, the Company’s decision regarding the need for a valuation allowance could change, resulting in either the initial recognition or reversal of a valuation allowance in that jurisdiction, which could have a significant impact on income tax expense in the period recognized and subsequent periods.
For further information related to obtaining control of an affiliate, see Note 5, "Long-Term Assets." For further information related to the Company's income taxes, see Note 7, "Income Taxes," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


16

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(12) Net Income Per Share Attributable to Lear
Basic net income per share available to Lear common stockholders is computed using the two-class method by dividing net income attributable to Lear, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding during the period. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement are considered common shares outstanding and are included in the computation of basic net income per share available to Lear common stockholders.
Diluted net income per share available to Lear common stockholders is computed using the two-class method by dividing net income attributable to Lear, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding, including the dilutive effect of common stock equivalents computed using the treasury stock method and the average share price during the period.
A summary of information used to compute basic and diluted net income per share available to Lear common stockholders is shown below (in millions, except share and per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income attributable to Lear
$
252.5

 
$
295.2

 
$
937.6

 
$
912.9

Less: Redeemable noncontrolling interest adjustment
(2.3
)
 
(22.7
)
 
(16.9
)
 
(22.7
)
Net income available to Lear common stockholders
$
250.2

 
$
272.5

 
$
920.7

 
$
890.2

 
 
 
 
 
 
 
 
Average common shares outstanding
65,372,829

 
68,061,718

 
66,256,800

 
68,874,682

Dilutive effect of common stock equivalents
495,831

 
772,561

 
453,128

 
662,126

Average diluted shares outstanding
65,868,660

 
68,834,279

 
66,709,928

 
69,536,808

 
 
 
 
 
 
 
 
Basic net income per share available to Lear common stockholders
$
3.83

 
$
4.00

 
$
13.90

 
$
12.92

 
 
 
 
 
 
 
 
Diluted net income per share available to Lear common stockholders
$
3.80

 
$
3.96

 
$
13.80

 
$
12.80

For further information related to the redeemable noncontrolling interest adjustment, see Note 13, "Comprehensive Income and Equity."


17

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(13) Comprehensive Income and Equity
Comprehensive Income
Comprehensive income is defined as all changes in the Company’s net assets except changes resulting from transactions with stockholders. It differs from net income in that certain items recorded in equity are included in comprehensive income.
A summary of comprehensive income and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three and nine months ended September 29, 2018, is shown below (in millions):
 
Three Months Ended September 29, 2018
Nine Months Ended September 29, 2018
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
4,427.4

 
$
4,299.9

 
$
127.5

 
$
4,292.6

 
$
4,150.5

 
$
142.1

Stock-based compensation transactions
12.4

 
12.4

 

 
(6.3
)
 
(6.3
)
 

Repurchase of common stock
(195.0
)
 
(195.0
)
 

 
(490.7
)
 
(490.7
)
 

Dividends declared to Lear Corporation stockholders
(46.4
)
 
(46.4
)
 

 
(141.1
)
 
(141.1
)
 

Dividends declared to noncontrolling interest holders
(0.1
)
 

 
(0.1
)
 
(59.7
)
 

 
(59.7
)
Adoption of ASU 2016-16
(Note 11, "Taxes")

 

 

 
2.3

 
2.3

 

Affiliate transaction
(Note 5, "Long-Term Assets")

 

 

 
14.0

 

 
14.0

Redeemable non-controlling interest adjustment
(2.3
)
 
(2.3
)
 

 
(16.9
)
 
(16.9
)
 

Acquisition of outstanding non-controlling interest

 

 

 
(3.4
)
 

 
(3.4
)
Comprehensive income:


 
 
 
 
 


 
 
 
 
Net income
272.2

 
252.5

 
19.7

 
994.1

 
937.6

 
56.5

Other comprehensive income (loss), net of tax:


 
 
 
 
 


 
 
 
 
Defined benefit plan adjustments
0.2

 
0.2

 

 
5.8

 
5.8

 

Derivative instruments and hedging activities
42.4

 
42.4

 

 
46.6

 
46.6

 

Foreign currency translation adjustments
(75.1
)
 
(70.8
)
 
(4.3
)
 
(201.6
)
 
(194.9
)
 
(6.7
)
Other comprehensive loss
(32.5
)
 
(28.2
)
 
(4.3
)
 
(149.2
)
 
(142.5
)
 
(6.7
)
Comprehensive income
239.7

 
224.3

 
15.4

 
844.9

 
795.1

 
49.8

Ending equity balance
$
4,435.7

 
$
4,292.9

 
$
142.8

 
$
4,435.7

 
$
4,292.9

 
$
142.8


18

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of comprehensive income and a reconciliation of Lear's redeemable non-controlling interests for the three and nine months ended September 29, 2018, is shown below (in millions):
 
Three Months Ended 
 September 29, 2018
 
Nine Months Ended 
 September 29, 2018
Beginning redeemable noncontrolling interest balance
$
167.5

 
$
153.4

Dividends declared to noncontrolling interest holders
(4.6
)
 
(9.3
)
Redeemable noncontrolling interest adjustment
2.3

 
16.9

Comprehensive income (loss):
 
 
 
Net income
2.5

 
9.8

Foreign currency translation adjustments
(6.1
)
 
(9.2
)
Comprehensive income (loss)
(3.6
)
 
0.6

Ending redeemable noncontrolling interest balance
$
161.6

 
$
161.6

In accordance with GAAP, the Company records redeemable noncontrolling interests at the greater of (1) the initial carrying amount adjusted for the noncontrolling interest holder’s share of total comprehensive income or loss and dividends ("noncontrolling interest carrying value") or (2) the redemption value as of and based on conditions existing as of the reporting date. Required redeemable noncontrolling interest adjustments are recorded as an increase to redeemable noncontrolling interests, with an offsetting adjustment to retained earnings. The redeemable noncontrolling interest is classified in mezzanine equity in the accompanying condensed consolidated balance sheets as of September 29, 2018 and December 31, 2017.
For further information related to the redeemable noncontrolling interest adjustment, see Note 12, "Net Income Per Share Attributable to Lear," as well as Note 5, "Investments in Affiliates and Other Related Party Transactions," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

19

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of changes, net of tax, in accumulated other comprehensive loss for the three and nine months ended September 29, 2018, is shown below (in millions):
 
Three Months Ended 
 September 29, 2018
 
Nine Months Ended 
 September 29, 2018
Defined benefit plans:
 
 
 
Balance at beginning of period
$
(178.4
)
 
$
(184.0
)
Reclassification adjustments (net of tax expense of $0.3 million and $0.9 million in the three and nine months ended September 29, 2018, respectively)
1.2

 
3.6

Other comprehensive income (loss) recognized during the period (net of tax impact of $— million)
(1.0
)
 
2.2

Balance at end of period
$
(178.2
)
 
$
(178.2
)
 
 
 
 
Derivative instruments and hedging:
 
 
 
Balance at beginning of period
$
(18.7
)
 
$
(22.9
)
Reclassification adjustments (net of tax benefit of $1.8 million and $2.7 million in the three and nine months ended September 29, 2018, respectively)
(6.4
)
 
(9.9
)
Other comprehensive income recognized during the period (net of tax expense of $13.4 million and $15.5 million in the three and nine months ended September 29, 2018, respectively)
48.8

 
56.5

Balance at end of period
$
23.7

 
$
23.7

 
 
 
 
Foreign currency translation:
 
 
 
Balance at beginning of period
$
(430.6
)
 
$
(306.5
)
Other comprehensive loss recognized during the period (net of tax benefit of $2.4 million in the three and nine months ended September 29, 2018)
(70.8
)
 
(194.9
)
Balance at end of period
$
(501.4
)
 
$
(501.4
)
In the three and nine months ended September 29, 2018, foreign currency translation adjustments are primarily related to the weakening of the Euro, the Chinese renminbi and the Brazilian real relative to the U.S. dollar and include pretax losses of $0.8 million and $1.7 million, respectively, related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.

20

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of comprehensive income and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three and nine months ended September 30, 2017, is shown below (in millions):
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
3,756.2

 
$
3,621.9

 
$
134.3

 
$
3,192.9

 
$
3,057.2

 
$
135.7

Stock-based compensation transactions
14.9

 
14.9

 

 
8.4

 
8.4

 

Repurchase of common stock
(77.9
)
 
(77.9
)
 

 
(332.2
)
 
(332.2
)
 

Dividends declared to Lear Corporation stockholders
(34.8
)
 
(34.8
)
 

 
(105.8
)
 
(105.8
)
 

Dividends declared to noncontrolling interest holders
(0.7
)
 

 
(0.7
)
 
(33.2
)
 

 
(33.2
)
Adoption of ASU 2016-09

 

 

 
54.5

 
54.5

 

Redeemable non-controlling interest adjustment
(22.7
)
 
(22.7
)
 

 
(22.7
)
 
(22.7
)
 

Comprehensive income:

 
 
 
 
 

 
 
 
 
Net income
315.0

 
295.2

 
19.8

 
960.5

 
912.9

 
47.6

Other comprehensive income (loss), net of tax:

 
 
 
 
 

 
 
 
 
Defined benefit plan adjustments
(1.8
)
 
(1.8
)
 

 
(3.0
)
 
(3.0
)
 

Derivative instruments and hedging activities
(10.8
)
 
(10.8
)
 

 
57.2

 
57.2

 

Foreign currency translation adjustments
89.9

 
87.1

 
2.8

 
250.7

 
244.6

 
6.1

Other comprehensive income
77.3

 
74.5

 
2.8

 
304.9

 
298.8

 
6.1

Comprehensive income
392.3

 
369.7

 
22.6

 
1,265.4

 
1,211.7

 
53.7

Ending equity balance
$
4,027.3

 
$
3,871.1

 
$
156.2

 
$
4,027.3

 
$
3,871.1

 
$
156.2


21

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of changes, net of tax, in accumulated other comprehensive loss for the three and nine months ended September 30, 2017, is shown below (in millions):
 
Three Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2017
Defined benefit plans:
 
 
 
Balance at beginning of period
$
(194.0
)
 
$
(192.8
)
Reclassification adjustments (net of tax expense of $0.3 million and $1.2 million in the three and nine months ended September 30, 2017, respectively)
0.9

 
3.4

Other comprehensive loss recognized during the period (net of tax impact of $— million)
(2.7
)
 
(6.4
)
Balance at end of period
$
(195.8
)
 
$
(195.8
)
 
 
 
 
Derivative instruments and hedging:
 
 
 
Balance at beginning of period
$
22.9

 
$
(45.1
)
Reclassification adjustments (net of tax benefit of $1.0 million and tax expense of $1.9 million in the three and nine months ended September 30, 2017, respectively)
(3.1
)
 
5.7

Other comprehensive income (loss) recognized during the period (net of tax benefit of $3.2 million and tax expense of $16.6 million in the three and nine months ended September 30, 2017, respectively)
(7.7
)
 
51.5

Balance at end of period
$
12.1

 
$
12.1

 
 
 
 
Foreign currency translation:
 
 
 
Balance at beginning of period
$
(440.2
)
 
$
(597.7
)
Other comprehensive income recognized during the period (net of tax impact of $— million)
87.1

 
244.6

Balance at end of period
$
(353.1
)
 
$
(353.1
)
In the three and nine months ended September 30, 2017, foreign currency translation adjustments are primarily related to the strengthening of the Euro and, to a lesser extent, the Chinese renminbi relative to the U.S. dollar and include pretax losses of $0.2 million and pretax gains of $0.6 million, respectively, related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
For further information regarding reclassification adjustments related to the Company's defined benefit plans, see Note 8, "Pension and Other Postretirement Benefit Plans." For further information regarding reclassification adjustments related to the Company's derivative and hedging activities, see Note 16, "Financial Instruments."
Lear Corporation Stockholders’ Equity
Common Stock Share Repurchase Program
On February 13, 2018, the Company's Board of Directors authorized an increase to the existing common stock share repurchase program to provide for a remaining aggregate repurchase authorization of $1.5 billion and extended the term of the program to December 31, 2020.

22

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Share repurchases in the first nine months of 2018 are shown below (in millions except for shares and per share amounts):
Nine Months Ended
 
As of
September 29, 2018
 
September 29, 2018
Aggregate Repurchases (1)
 
Cash paid for Repurchases
 
Number of Shares
 
Average Price per Share (2)
 
Remaining Purchase Authorization
$
490.7

 
$
488.1

 
2,697,188
 
$
181.93

 
$
1,014.4

(1) Includes $5.1 million of purchases prior to the increased authorization
(2) Excludes commissions
Since the first quarter of 2011, the Company's Board of Directors has authorized $5.0 billion in share repurchases under the common stock share repurchase program. As of the end of the third quarter of 2018, the Company has repurchased, in aggregate, $4.0 billion of its outstanding common stock, at an average price of $85.62 per share, excluding commissions and related fees.
The Company may implement these 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 the Company will repurchase its outstanding common stock and the timing of such repurchases will depend upon its financial condition, prevailing market conditions, alternative uses of capital and other factors.
In addition to shares repurchased under the Company’s common stock share repurchase program described above, the Company classified shares withheld from the settlement of the Company’s restricted stock unit and performance share awards to cover tax withholding requirements as common stock held in treasury in the accompanying condensed consolidated balance sheets as of September 29, 2018 and December 31, 2017.
Quarterly Dividend
In the first nine months of 2018 and 2017, the Company’s Board of Directors declared quarterly cash dividends of $0.70 and $0.50 per share of common stock, respectively. Dividends declared and paid are shown below (in millions):
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
Dividends declared
$
141.1

 
$
105.8

Dividends paid
142.1

 
104.4

Dividends payable on common shares to be distributed under the Company’s stock-based compensation program and common shares contemplated as part of the Company’s emergence from Chapter 11 bankruptcy proceedings will be paid when such common shares are distributed.
Noncontrolling Interests
In the first nine months of 2018, the Company gained control of an affiliate and acquired the outstanding non-controlling interest of another affiliate. For further information related to the affiliate transaction, see Note 5, "Long-Term Assets."

(14) Legal and Other Contingencies
As of September 29, 2018 and December 31, 2017, the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $10.6 million and $25.8 million, respectively. Such reserves reflect amounts recognized in accordance with GAAP and exclude the cost of legal representation. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
Commercial Disputes
The Company is involved from time to time in legal proceedings and claims, including, without limitation, commercial or contractual disputes with its customers, suppliers and competitors. These disputes vary in nature and are usually resolved by negotiations between the parties.

23

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Product Liability and Warranty Matters
In the event that use of the Company’s products results in, or is alleged to result in, bodily injury and/or property damage or other losses, the Company may be subject to product liability lawsuits and other claims. Such lawsuits generally seek compensatory damages, punitive damages and attorneys’ fees and costs. In addition, if any of the Company’s products are, or are alleged to be, defective, the Company may be required or requested by its customers to participate in a recall or other corrective action involving such products. Certain of the Company’s customers have asserted claims against the Company for costs related to recalls or other corrective actions involving its products. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend such claims.
To a lesser extent, the Company is a party to agreements with certain of its customers, whereby these customers may pursue claims against the Company for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims.
In certain instances, allegedly defective products may be supplied by Tier 2 suppliers. The Company may seek recovery from its suppliers of materials or services included within the Company’s products that are associated with product liability and warranty claims. The Company carries insurance for certain legal matters, including product liability claims, but such coverage may be limited. The Company does not maintain insurance for product warranty or recall matters. Future dispositions with respect to the Company’s product liability claims that were subject to compromise under the Chapter 11 bankruptcy proceedings will be satisfied out of a common stock and warrant reserve established for that purpose.
The Company records product warranty reserves when liability is probable and related amounts are reasonably estimable.
A summary of the changes in reserves for product liability and warranty claims for the nine months ended September 29, 2018, is shown below (in millions):
Balance at January 1, 2018
$
46.5

Expense, net (including changes in estimates)
7.8

Settlements
(20.3
)
Foreign currency translation and other
(0.8
)
Balance at September 29, 2018
$
33.2

Environmental Matters
The Company is subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. The Company’s policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance with this standard. However, the Company currently is, has been and in the future may become the subject of formal or informal enforcement actions or procedures.
As of September 29, 2018 and December 31, 2017, the Company had recorded environmental reserves of $8.9 million and $9.0 million, respectively. The Company does not believe that the environmental liabilities associated with its current and former properties will have a material adverse impact on its business, financial condition, results of operations or cash flows; however, no assurances can be given in this regard.
Other Matters
The Company is involved from time to time in various other legal proceedings and claims, including, without limitation, intellectual property matters, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, the Company does not believe that any of the other legal proceedings or claims in which the Company is currently involved, either individually or in the aggregate, will have a material adverse impact on its business, financial condition, results of operations or cash flows. However, no assurances can be given in this regard.
Although the Company records reserves for legal disputes, product liability and warranty claims and environmental and other matters in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain. Actual results may differ significantly from current estimates.


24

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(15) Segment Reporting
The Company has two reportable operating segments: Seating, which includes complete seat systems and all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests, and E-Systems, which includes complete electrical distribution systems, electronic control modules and associated software and wireless communication modules. Key components in the electrical distribution system include wire harnesses, terminals and connectors and junction boxes, including components and systems for high power battery electric vehicle and hybrid electric vehicle power management and distribution systems. 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.
The Company evaluates the performance of its operating segments based primarily on (i) revenues from external customers, (ii) pretax income before equity in net income of affiliates, interest expense and other (income) expense, net, ("segment earnings") and (iii) cash flows, being defined as segment earnings less capital expenditures plus depreciation and amortization.
A summary of revenues from external customers and other financial information by reportable operating segment is shown below (in millions):
 
Three Months Ended September 29, 2018
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,683.0

 
$
1,208.6

 
$

 
$
4,891.6

Segment earnings (1)
294.0

 
138.4

 
(69.1
)
 
363.3

Depreciation and amortization
80.1

 
36.1

 
3.6

 
119.8

Capital expenditures
109.2

 
49.8

 
1.5

 
160.5

Total assets
7,311.2

 
2,578.8

 
2,119.4

 
12,009.4

 
Three Months Ended September 30, 2017
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,868.9

 
$
1,112.6

 
$

 
$
4,981.5

Segment earnings (1)
298.8

 
155.5

 
(69.1
)
 
385.2

Depreciation and amortization
76.7

 
31.3

 
3.7

 
111.7

Capital expenditures
109.7

 
42.7

 
3.8

 
156.2

Total assets
7,413.5

 
2,262.7

 
2,035.8

 
11,712.0

 
Nine Months Ended September 29, 2018
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
12,287.6

 
$
3,918.5

 
$

 
$
16,206.1

Segment earnings (1)
981.8

 
504.3

 
(191.7
)
 
1,294.4

Depreciation and amortization
241.5

 
109.6

 
10.7

 
361.8

Capital expenditures
335.2

 
150.4

 
7.1

 
492.7

 
Nine Months Ended September 30, 2017
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
11,762.0

 
$
3,341.2

 
$

 
$
15,103.2

Segment earnings (1)
941.8

 
476.7

 
(207.5
)
 
1,211.0

Depreciation and amortization
213.2

 
89.0

 
11.0

 
313.2

Capital expenditures
287.1

 
126.2

 
16.9

 
430.2

(1) See definition above
For the three months ended September 29, 2018, segment earnings include restructuring charges of $17.3 million, $2.4 million and $0.1 million in the Seating and E-Systems segments and in the other category, respectively. For the nine months ended

25

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

September 29, 2018, segment earnings include restructuring charges of $37.6 million, $7.9 million and $2.7 million in the Seating and E-Systems segments and in the other category, respectively (Note 2, "Restructuring").
For the three months ended September 30, 2017, segment earnings include restructuring charges of $13.3 million, $2.7 million and $1.0 million in the Seating and E-Systems segments and in the other category, respectively. For the nine months ended September 30, 2017, segment earnings include restructuring charges of $29.6 million, $6.3 million and $12.7 million in the Seating and E-Systems segments and in the other category, respectively (Note 2, "Restructuring").
A reconciliation of segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates is shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Segment earnings
$
363.3

 
$
385.2

 
$
1,294.4

 
$
1,211.0

Interest expense
21.2

 
21.7

 
62.8

 
63.9

Other (income) expense, net
13.2