Lear Corporation
LEAR CORP (Form: 10-Q, Received: 10/26/2016 11:15:02)
Table of Contents

 
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 October 1, 2016 .
 
¨
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
  LEARLOGOA05.JPG
(Exact name of registrant as specified in its charter)  
_______________________________________  
 
Delaware
 
13-3386776
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
21557 Telegraph Road, Southfield, MI
 
48033
(Address of principal executive offices)
 
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
(Do not check if a smaller reporting company)
 
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 24, 2016 , the number of shares outstanding of the registrant’s common stock was 70,205,735 shares.
 


Table of Contents
LEAR CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 1, 2016

INDEX

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

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Table of Contents
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 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, 2015 .
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)

 
October 1,
2016 (1)
 
December 31,
2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,341.6

 
$
1,196.6

Accounts receivable
3,109.5

 
2,590.0

Inventories
1,063.0

 
947.6

Other
539.7

 
552.4

Total current assets
6,053.8

 
5,286.6

LONG-TERM ASSETS:
 
 
 
Property, plant and equipment, net
1,920.9

 
1,826.5

Goodwill
1,069.4

 
1,053.8

Other
1,233.3

 
1,238.9

Total long-term assets
4,223.6

 
4,119.2

Total assets
$
10,277.4

 
$
9,405.8

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
8.7

 
$

Accounts payable and drafts
2,773.2

 
2,504.4

Accrued liabilities
1,668.8

 
1,312.1

Current portion of long-term debt
32.6

 
23.1

Total current liabilities
4,483.3

 
3,839.6

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
1,907.3

 
1,931.7

Other
643.8

 
616.8

Total long-term liabilities
2,551.1

 
2,548.5

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; 80,563,291 shares issued as of October 1, 2016 and December 31, 2015
0.8

 
0.8

Additional paid-in capital
1,377.8

 
1,451.9

Common stock held in treasury, 10,340,145 and 6,099,078 shares as of October 1, 2016 and December 31, 2015, respectively, at cost
(1,099.9
)
 
(623.0
)
Retained earnings
3,503.3

 
2,827.8

Accumulated other comprehensive loss
(703.5
)
 
(730.1
)
Lear Corporation stockholders’ equity
3,078.5

 
2,927.4

Noncontrolling interests
164.5

 
90.3

Equity
3,243.0

 
3,017.7

Total liabilities and equity
$
10,277.4

 
$
9,405.8

 (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
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Net sales
$
4,526.4

 
$
4,330.3

 
$
13,914.1

 
$
13,486.8

 
 
 
 
 
 
 
 
Cost of sales
4,012.5

 
3,877.1

 
12,324.1

 
12,157.7

Selling, general and administrative expenses
153.6

 
137.6

 
456.9

 
440.8

Amortization of intangible assets
15.2

 
13.0

 
41.7

 
39.5

Interest expense
20.6

 
21.4

 
62.0

 
66.3

Other (income) expense, net
14.2

 
21.7

 
(0.8
)
 
60.4

Consolidated income before provision for income taxes and equity in net income of affiliates
310.3

 
259.5

 
1,030.2

 
722.1

Provision for income taxes
88.2

 
76.1

 
287.4

 
210.9

Equity in net income of affiliates
(12.9
)
 
(9.9
)
 
(49.2
)
 
(31.7
)
Consolidated net income
235.0

 
193.3

 
792.0

 
542.9

Less: Net income attributable to noncontrolling interests
20.6

 
12.3

 
46.8

 
32.7

Net income attributable to Lear
$
214.4

 
$
181.0

 
$
745.2

 
$
510.2

 
 
 
 
 
 
 
 
Basic net income per share attributable to Lear
$
3.01

 
$
2.37

 
$
10.19

 
$
6.60

 
 
 
 
 
 
 
 
Diluted net income per share attributable to Lear
$
2.98

 
$
2.34

 
$
10.10

 
$
6.53

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.30

 
$
0.25

 
$
0.90

 
$
0.75

 
 
 
 
 
 
 
 
Average common shares outstanding
71,259,766

 
76,259,209

 
73,102,327

 
77,315,584

 
 
 
 
 
 
 
 
Average diluted shares outstanding
72,052,270

 
77,416,102

 
73,809,220

 
78,177,431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (Note 12)
$
245.3

 
$
104.7

 
$
816.0

 
$
356.0

Less: Comprehensive income attributable to noncontrolling interests
20.6

 
9.9

 
44.2

 
30.2

Comprehensive income attributable to Lear
$
224.7

 
$
94.8

 
$
771.8

 
$
325.8

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
 
October 1,
2016
 
September 26,
2015
Cash Flows from Operating Activities:
 
 
 
Consolidated net income
$
792.0

 
$
542.9

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
283.4

 
257.4

Net change in recoverable customer engineering, development and tooling
2.1

 
(32.2
)
Net change in working capital items (see below)
3.0

 
(165.4
)
Other, net
13.4

 
83.3

Net cash provided by operating activities
1,093.9

 
686.0

Cash Flows from Investing Activities:
 
 
 
Additions to property, plant and equipment
(300.3
)
 
(327.7
)
Acquisition of Eagle Ottawa, net of cash acquired and use of $350 million restricted cash (see non-cash investing activities below) (Note 7)

 
(465.3
)
Other, net
51.8

 
(10.6
)
Net cash used in investing activities
(248.5
)
 
(803.6
)
Cash Flows from Financing Activities:
 
 
 
Credit agreement borrowings

 
500.0

Credit agreement repayments
(15.6
)
 
(3.1
)
Short-term borrowings
8.9

 

Repurchase of senior notes, net of use of $250 million restricted cash in 2015 (see non-cash financing activities below) (Note 7)

 
(5.0
)
Repurchase of common stock
(557.7
)
 
(383.0
)
Dividends paid to Lear Corporation stockholders
(68.1
)
 
(60.0
)
Dividends paid to noncontrolling interests
(14.8
)
 
(16.2
)
Other, net
(52.1
)
 
(53.6
)
Net cash used in financing activities
(699.4
)

(20.9
)
Effect of foreign currency translation
(1.0
)
 
(32.8
)
Net Change in Cash and Cash Equivalents
145.0

 
(171.3
)
Cash and Cash Equivalents as of Beginning of Period
1,196.6

 
1,094.1

Cash and Cash Equivalents as of End of Period
$
1,341.6

 
$
922.8

 
 
 
 
Changes in Working Capital Items:
 
 
 
Accounts receivable
$
(440.2
)
 
$
(480.4
)
Inventories
(87.3
)
 
(76.2
)
Accounts payable (including $45.7 million of cash paid in 2015 in conjunction with the acquisition of Eagle Ottawa to settle pre-existing accounts payable)
203.6

 
103.2

Accrued liabilities and other
326.9

 
288.0

Net change in working capital items
$
3.0

 
$
(165.4
)
 
 
 
 
Supplementary Disclosure:
 
 
 
Cash paid for interest
$
85.3

 
$
82.1

Cash paid for income taxes, net of refunds received
$
151.6

 
$
141.9

 
 
 
 
Non-cash Investing Activities:
 
 
 
Cash restricted for use - acquisition of Eagle Ottawa
$

 
$
(350.0
)
 
 
 
 
Non-cash Financing Activities:
 
 
 
Cash restricted for use - repurchase of senior notes
$

 
$
(250.0
)
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 first quarter of 2015, the Company completed the acquisition of 100% of the outstanding equity interests of Everett Smith Group, Ltd., the parent company of Eagle Ottawa, LLC ("Eagle Ottawa"). 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 Eagle Ottawa, 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, 2015.
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 October 1, 2016 .
Cost of Sales and Selling, General and Administrative Expenses
Cost of sales includes material, labor and overhead costs associated with the manufacture and distribution of the Company’s products. Distribution costs include inbound freight costs, purchasing and receiving costs, inspection costs, warehousing costs and other costs of the Company’s distribution network. Selling, general and administrative expenses include selling, engineering and development and administrative costs not directly associated with the manufacture and distribution of the Company’s products.

( 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. The Company also 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 consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP"). Generally, charges are recorded as restructuring actions are approved and/or implemented.
In the first nine months of 2016 , the Company recorded charges of $51.2 million in connection with its restructuring actions. These charges consist of $44.6 million recorded as cost of sales and $6.6 million recorded as selling, general and administrative expenses. The restructuring charges consist of employee termination benefits of $45.4 million , fixed asset impairment charges of $3.5 million and net contract termination credits of $0.3 million , as well as other related costs of $2.6 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 $3.5 million in excess of related estimated fair values. The Company expects to incur approximately $50 million of additional restructuring costs related to activities initiated as of October 1, 2016 , 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.

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of 2016 activity is shown below (in millions):
 
Accrual as of
 
2016
 
Utilization
 
Accrual as of
 
January 1, 2016
 
Charges
 
Cash
 
Non-cash
 
October 1, 2016
Employee termination benefits
$
66.5

 
$
45.4

 
$
(45.1
)
 
$

 
$
66.8

Asset impairment charges

 
3.5

 

 
(3.5
)
 

Contract termination costs
5.3

 
(0.3
)
 
(0.4
)
 

 
4.6

Other related costs

 
2.6

 
(2.6
)
 

 

Total
$
71.8

 
$
51.2

 
$
(48.1
)
 
$
(3.5
)
 
$
71.4


( 3 ) Inventories
Inventories are stated at the lower of cost or market. 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):
 
October 1,
2016
 
December 31, 2015
Raw materials
$
789.9

 
$
706.8

Work-in-process
113.9

 
90.2

Finished goods
159.2

 
150.6

Inventories
$
1,063.0

 
$
947.6


( 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 2016 and 2015 , the Company capitalized $110.5 million and $115.9 million , respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first nine months of 2016 and 2015 , the Company also capitalized $61.5 million and $74.8 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 2016 and 2015 , the Company collected $168.9 million and $155.6 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):
 
October 1,
2016
 
December 31, 2015
Current
$
172.2

 
$
162.0

Long-term
49.2

 
53.7

Recoverable customer E&D and tooling
$
221.4

 
$
215.7



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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 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.
A summary of property, plant and equipment is shown below (in millions):
 
October 1,
2016
 
December 31, 2015
Land
$
104.7

 
$
97.9

Buildings and improvements
648.5

 
560.4

Machinery and equipment
2,423.1

 
2,125.8

Construction in progress
212.7

 
274.9

Total property, plant and equipment
3,389.0

 
3,059.0

Less – accumulated depreciation
(1,468.1
)
 
(1,232.5
)
Property, plant and equipment, net
$
1,920.9

 
$
1,826.5

Depreciation expense was $83.5 million and $75.0 million in the three months ended October 1, 2016 and September 26, 2015 , respectively, and $241.7 million and $217.9 million in the nine months ended October 1, 2016 and September 26, 2015 , 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 October 1, 2016 . 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 2016 and 2015 , the Company recognized fixed asset impairment charges of $3.5 million and $1.6 million , respectively, in conjunction with its restructuring actions (Note 2 , " Restructuring "). In the first nine months of 2015 , the Company also recognized additional fixed asset impairment charges of $0.5 million .
Investment in Affiliates
On June 21, 2016, the Company gained control of Beijing BAI Lear Automotive Systems Co., Ltd. (“Beijing BAI”) by amending the existing joint venture agreement to eliminate the substantive participating rights of its joint venture partner. Prior to the amendment, Beijing BAI was accounted for under the equity method. The consolidation of Beijing BAI 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 October 1, 2016 . The operating results and cash flows of Beijing BAI are reflected in the Company’s seating segment in the accompanying condensed consolidated financial statements from the date of the amended joint venture agreement.
A preliminary summary of the fair value of the assets acquired and liabilities assumed in conjunction with the consolidation is shown below (in millions):
Property, plant and equipment
$
20.7

Other assets and liabilities assumed, net
38.4

Goodwill
10.9

Intangible assets
34.0

Preliminary summary of fair value
$
104.0



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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 Beijing BAI’s established relationships with its customers and the expectation of these relationships generating future economic profits for the Company. It is currently estimated that these intangible assets have a weighted average useful life of approximately eight years. Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do not qualify for separate recognition.
The fair values of the assets acquired and liabilities assumed in conjunction with the consolidation contain provisional estimates that may be revised as a result of additional information obtained regarding such assets and liabilities.
As of the date of consolidation, the fair value of the Company’s previously held equity interest in Beijing BAI was $63.0 million , and the fair value of the noncontrolling interest in Beijing BAI was $41.0 million . As a result of valuing the Company’s previously held equity interest in Beijing BAI at fair value, the Company recognized a gain of $30.3 million in the nine months ended October 1, 2016.
The pro forma effects of the consolidation would not materially impact the Company’s reported results for any period presented.
For further information on acquired assets measured at fair value see Note 15 , " Financial Instruments ."

( 6 ) Goodwill
A summary of the changes in the carrying amount of goodwill, by operating segment, in the nine months ended October 1, 2016 , is shown below (in millions):
 
Seating
 
E-Systems (1)
 
Total
Balance at January 1, 2016
$
1,026.8

 
$
27.0

 
$
1,053.8

Consolidation of affiliate
10.9

 

 
10.9

Foreign currency translation and other
4.2

 
0.5

 
4.7

Balance at October 1, 2016
$
1,041.9

 
$
27.5

 
$
1,069.4

(1)  
In the third quarter of 2016, the Company changed the name of its electrical operating segment to E-Systems.
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 October 1, 2016 . The Company will, however, continue to assess the impact of significant events or circumstances on its recorded goodwill.
For further information related to the consolidation of an affiliate, 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):
 
October 1, 2016
 
December 31, 2015
Debt Instrument
Long-Term Debt
 
Debt Issuance Costs (1)
 
Long-Term
Debt, Net
 
Weighted
Average
Interest
Rate
 
Long-Term Debt
 
Debt Issuance Costs  (1)
 
Long-Term
Debt, Net
 
Weighted
Average
Interest
Rate
Credit Agreement — Term Loan Facility
$
475.0

 
$
(1.8
)
 
$
473.2

 
1.835%
 
$
490.6

 
$
(2.2
)
 
$
488.4

 
1.78%
4.75% Senior Notes due 2023
500.0

 
(5.0
)
 
495.0

 
4.75%
 
500.0

 
(5.5
)
 
494.5

 
4.75%
5.375% Senior Notes due 2024
325.0

 
(2.9
)
 
322.1

 
5.375%
 
325.0

 
(3.2
)
 
321.8

 
5.375%
5.25% Senior Notes due 2025
650.0

 
(6.8
)
 
643.2

 
5.25%
 
650.0

 
(7.5
)
 
642.5

 
5.25%
Other
6.4

 

 
6.4

 
N/A
 
7.6

 

 
7.6

 
N/A
 
$
1,956.4

 
$
(16.5
)
 
1,939.9

 
 
 
$
1,973.2

 
$
(18.4
)
 
1,954.8

 
 
Less — Current portion
 
 
 
 
(32.6
)
 
 
 
 
 
 
 
(23.1
)
 
 
Long-term debt
 
 
 
 
$
1,907.3

 
 
 
 
 
 
 
$
1,931.7

 
 
(1) Unamortized portion
Senior Notes
As of October 1, 2016 , the Company’s senior notes consist of $500 million in aggregate principal amount of senior unsecured notes due 2023 at a stated coupon rate of 4.75% (the "2023 Notes"), $325 million in aggregate principal amount of senior unsecured notes due 2024 at a stated coupon rate of 5.375% (the "2024 Notes") and $650 million in aggregate principal amount of senior unsecured notes due 2025 at a stated coupon rate of 5.25% (the "2025 Notes" and together with the 2023 Notes and 2024 Notes, the "Notes").
2023 Notes
The 2023 Notes were issued in January 2013 and mature on January 15, 2023. Interest is payable on January 15 and July 15 of each year.
2024 Notes
The 2024 Notes were issued in March 2014 and mature on March 15, 2024. Interest is payable on March 15 and September 15 of each year.
2025 Notes
The 2025 Notes were issued in November 2014 and mature on January 15, 2025. Interest is payable on January 15 and July 15 of each year. Of the $650 million of proceeds from the offering, net of related issuance costs of $8.4 million , $250 million was restricted for the redemption of the remaining outstanding aggregate principal amount of the Company's 8.125% senior unsecured notes due 2020 (the "2020 Notes") and $350 million was restricted to finance, in part, the acquisition of Eagle Ottawa (Note 1 , " Basis of Presentation ").
In January 2015, the Company used $350 million of the restricted cash proceeds from the offering, along with $500 million in borrowings under the Term Loan Facility (see "— Credit Agreement" below), to finance the acquisition of Eagle Ottawa.
In March 2015, the Company redeemed the 2020 Notes at a price equal to 104.063% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. In connection with this transaction, the Company paid $255.0 million , including $250 million of the restricted cash proceeds from the offering, and recognized a loss of $14.3 million on the extinguishment of debt in the first quarter of 2015. The use of restricted cash for the acquisition of Eagle Ottawa and the redemption of the 2020 Notes is reflected as non-cash investing and financing activities, respectively, in the accompanying condensed consolidated statement of cash flows for the nine months ended September 26, 2015 . The remaining proceeds from the offering were used for general corporate purposes, including the payment of fees and expenses associated with the acquisition of Eagle Ottawa and related financing transactions.

11

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Guarantees
The Notes are senior unsecured obligations. The Company’s obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain domestic subsidiaries, which are directly or indirectly 100% owned by Lear (Note  17 , " Supplemental Guarantor Condensed Consolidating Financial Statements ").
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 or merge or sell all or substantially all of the Company’s assets. The indentures governing the 2023 Notes and 2024 Notes limit 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 October 1, 2016 , the Company was in compliance with all covenants under the indentures governing the Notes.
Credit Agreement
As of October 1, 2016 , the Company’s credit agreement (the "Credit Agreement") consists of a $1.25 billion revolving credit facility (the “Revolving Credit Facility”), which matures on November 14, 2019, and a $500 million term loan facility (the "Term Loan Facility"), which matures on January 5, 2020. As of October 1, 2016 and December 31, 2015 , there were no borrowings outstanding under the Revolving Credit Facility. As of October 1, 2016 and December 31, 2015 , there were $475.0 million and $490.6 million , respectively, of borrowings outstanding under the Term Loan Facility. In the three and nine months ended October 1, 2016 , the Company made required principal payments under the Term Loan Facility of $6.2 million and $15.6 million , respectively.
Advances under the Revolving Credit Facility generally bear interest at a variable rate per annum equal to (i) the Eurocurrency Rate (as defined in the credit agreement) plus an adjustable margin of 1.0% to 2.25% based on the Company’s corporate rating ( 1.25% as of October 1, 2016 ), payable on the last day of each applicable interest period but in no event less frequently than quarterly, or (ii) the Adjusted Base Rate (as defined in the credit agreement) plus an adjustable margin of 0.0% to 1.25% based on the Company’s corporate rating ( 0.25% as of October 1, 2016 ), payable quarterly. A facility fee, which ranges from 0.25% to 0.50% of the total amount committed under the Revolving Credit Facility, is payable quarterly.
Loans under the Term Loan Facility generally bear interest at a variable rate per annum equal to (i) the Eurocurrency Rate (as defined in the credit agreement) plus an adjustable margin of 1.25% to 2.25% based on the Company's corporate rating ( 1.375% as of October 1, 2016 ), payable on the last day of each applicable interest period but in no event less frequently than quarterly, or (ii) the Adjusted Base Rate (as defined in the credit agreement) plus an adjustable margin of 0.25% to 1.25% based on the Company's corporate rating ( 0.375% as of October 1, 2016 ), payable quarterly.
The Company’s obligations under the Credit Agreement are guaranteed, jointly and severally, on a first priority basis, by certain domestic subsidiaries, which are directly or indirectly 100% owned by Lear (Note 17 , " Supplemental Guarantor Condensed Consolidating Financial Statements ").
The Credit Agreement contains various customary representations, warranties and covenants by the Company, including, without limitation, (i) covenants regarding maximum leverage and minimum interest coverage, (ii) limitations on fundamental changes involving the Company or its subsidiaries and (iii) limitations on indebtedness, liens, investments and restricted payments. As of October 1, 2016 , the Company was in compliance with all covenants under the Credit Agreement.
Other
As of October 1, 2016 , other long-term debt consists of amounts outstanding under capital leases.
For further information on the Notes and the Credit Agreement, 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, 2015 .


12

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 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 Cost (Credit)
The components of the Company’s net periodic pension benefit cost (credit) are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 26, 2015
 
October 1, 2016
 
September 26, 2015
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$
1.4

 
$
1.6

 
$
1.1

 
$
1.8

 
$
4.2

 
$
4.8

 
$
3.5

 
$
6.5

Interest cost
7.5

 
3.8

 
7.2

 
4.1

 
22.4

 
11.9

 
21.5

 
13.0

Expected return on plan assets
(9.5
)
 
(5.9
)
 
(9.9
)
 
(6.3
)
 
(28.6
)
 
(17.5
)
 
(29.6
)
 
(20.3
)
Amortization of actuarial loss
0.6

 
0.8

 
0.7

 
1.0

 
2.0

 
2.3

 
2.0

 
3.2

Curtailment loss

 

 

 

 

 

 

 
7.7

Settlement loss

 

 
0.1

 

 
0.2

 

 
0.2

 

Net periodic benefit cost (credit)
$

 
$
0.3

 
$
(0.8
)
 
$
0.6

 
$
0.2

 
$
1.5

 
$
(2.4
)
 
$
10.1

The components of the Company’s net periodic other postretirement benefit cost are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 26, 2015
 
October 1, 2016
 
September 26, 2015
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$

 
$
0.1

 
$

 
$
0.1

 
$
0.1

 
$
0.4

 
$
0.1

 
$
0.6

Interest cost
0.9

 
0.4

 
0.8

 
0.4

 
2.4

 
1.2

 
2.3

 
1.2

Amortization of actuarial (gain) loss
(0.3
)
 
0.1

 
(0.3
)
 
0.1

 
(0.9
)
 
0.2

 
(0.9
)
 
0.4

Amortization of prior service credit

 
(0.1
)
 

 
(0.1
)
 

 
(0.3
)
 

 
(0.2
)
Special termination benefits

 

 

 

 

 
0.3

 

 

Net periodic benefit cost
$
0.6

 
$
0.5

 
$
0.5

 
$
0.5

 
$
1.6

 
$
1.8

 
$
1.5

 
$
2.0

In the nine months ended September 26, 2015 , the Company recognized pension benefit curtailment losses of $7.7 million related to its restructuring actions.
Contributions
Employer contributions to the Company’s domestic and foreign defined benefit pension plans in the nine months ended October 1, 2016 , were $9.7 million . The Company expects contributions to its domestic and foreign defined benefit pension plans to be approximately $10 million to $15 million in 2016 . 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.
Subsequent Event
In September 2016, the Company announced a limited lump-sum payout offer to certain terminated vested plan participants of its U.S. defined benefit pension plans. This offer provides participants with the flexibility to receive their pension benefits early and reduces the Company's future administrative costs and risks related to its U.S. defined benefit pension plans. Under this offer, eligible plan participants may voluntarily elect an early payout of their pension benefits primarily in the form of a lump-sum payment equal to the present value of the participant’s pension benefits. Eligible plan participants have from October 4, 2016 through November 10, 2016, to make their election. Payments under this offer will be distributed in December 2016 from existing defined benefit pension plan assets.
In connection with this offer, the Company expects to recognize a non-cash settlement charge in the fourth quarter of 2016. Although the actual amount of the charge and the related impact on the funded status of the affected U.S. defined benefit pension plans will depend on, among other factors, the number of plan participants accepting the offer, the Company currently estimates that the offer will result in a pretax non-cash settlement charge of approximately $40 million to $55 million .

13

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)


( 9 ) 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, gains and losses on the extinguishment of debt, gains and losses on the disposal of fixed assets and other miscellaneous income and expense.
A summary of other (income) expense, net is shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Other expense
$
15.5

 
$
21.8

 
$
34.7

 
$
62.7

Other income
(1.3
)
 
(0.1
)
 
(35.5
)
 
(2.3
)
Other (income) expense, net
$
14.2

 
$
21.7

 
$
(0.8
)
 
$
60.4

In the three and nine months ended October 1, 2016 , other expense includes net foreign currency transaction losses of $3.6 million and $5.4 million , respectively. In the nine months ended October 1, 2016 , other income includes a gain of $30.3 million related to the consolidation of an affiliate (Note 5 , " Long-Term Assets ").
In the three and nine months ended September 26, 2015 , other expense includes net foreign currency transaction losses of $13.6 million and $27.9 million , respectively. In the nine months ended September 26, 2015 , other expense includes a loss of $14.3 million related to the extinguishment of debt (Note 7 , " Debt ").

( 10 ) Income Taxes
A summary of the provision for income taxes and the corresponding effective tax rate for the three and nine months ended October 1, 2016 and September 26, 2015 , is shown below (in millions, except effective tax rates):
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Provision for income taxes
$
88.2

 
$
76.1

 
$
287.4

 
$
210.9

Pretax income before equity in net income of affiliates
$
310.3

 
$
259.5

 
$
1,030.2

 
$
722.1

Effective tax rate
28.4
%
 
29.3
%
 
27.9
%
 
29.2
%
In the first nine months of 2016 and 2015 , the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of the Company’s restructuring charges and other expenses, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries.
In the first nine months of 2016 , the Company recognized net tax benefits of $14.5 million related to restructuring charges and various other items. In addition, the Company recognized a gain of $30.3 million related to the consolidation of an affiliate, for which no tax expense was provided. In the first nine months of 2015 , the Company recognized net tax benefits of $32.0 million related to restructuring charges, debt redemption costs, acquisition costs and various other items. Excluding these items, the effective tax rate in the first nine months of 2016 and 2015 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
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,

14

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 the consolidation 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, 2015 .

( 11 ) Net Income Per Share Attributable to Lear
Basic net income per share attributable to Lear is computed by dividing net income attributable to Lear 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 attributable to Lear.
Diluted net income per share attributable to Lear is computed using the treasury stock method by dividing net income attributable to Lear by the average number of common shares outstanding, including the dilutive effect of common stock equivalents using the average share price during the period.
A summary of information used to compute basic and diluted net income per share attributable to Lear is shown below (in millions, except share and per share data):
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Net income attributable to Lear
$
214.4

 
$
181.0

 
$
745.2

 
$
510.2

 
 
 
 
 
 
 
 
Average common shares outstanding
71,259,766

 
76,259,209

 
73,102,327

 
77,315,584

Dilutive effect of common stock equivalents
792,504

 
1,156,893

 
706,893

 
861,847

Average diluted shares outstanding
72,052,270

 
77,416,102

 
73,809,220

 
78,177,431

 
 
 
 
 
 
 
 
Basic net income per share attributable to Lear
$
3.01

 
$
2.37

 
$
10.19

 
$
6.60

 
 
 
 
 
 
 
 
Diluted net income per share attributable to Lear
$
2.98

 
$
2.34

 
$
10.10

 
$
6.53



15

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 12 ) 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 October 1, 2016 , is shown below (in millions):
 
Three Months Ended October 1, 2016
 
Nine Months Ended October 1, 2016
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
3,156.1

 
$
3,012.8

 
$
143.3

 
$
3,017.7

 
$
2,927.4

 
$
90.3

Stock-based compensation transactions
15.6

 
15.6

 

 
6.7

 
6.7

 

Repurchase of common stock
(152.7
)
 
(152.7
)
 

 
(557.7
)
 
(557.7
)
 

Dividends declared to Lear Corporation stockholders
(21.9
)
 
(21.9
)
 

 
(67.5
)
 
(67.5
)
 

Dividends declared to noncontrolling interest holders
(0.4
)
 

 
(0.4
)
 
(13.2
)
 

 
(13.2
)
Consolidation of affiliate
1.0

 

 
1.0

 
41.0

 

 
41.0

Non-controlling interests — other



 

 

 
(2.2
)
 
2.2

Comprehensive income:


 
 
 
 
 


 
 
 
 
Net income
235.0

 
214.4

 
20.6

 
792.0

 
745.2

 
46.8

Other comprehensive income (loss), net of tax:


 
 
 
 
 


 
 
 
 
Defined benefit plan adjustments
1.5

 
1.5

 

 
(0.2
)
 
(0.2
)
 

Derivative instruments and hedging activities
0.8

 
0.8

 

 
(10.6
)
 
(10.6
)
 

Foreign currency translation adjustments
8.0

 
8.0

 

 
34.8

 
37.4

 
(2.6
)
Other comprehensive income (loss)
10.3

 
10.3

 

 
24.0

 
26.6

 
(2.6
)
Comprehensive income
245.3

 
224.7

 
20.6

 
816.0

 
771.8

 
44.2

Ending equity balance
$
3,243.0

 
$
3,078.5

 
$
164.5

 
$
3,243.0

 
$
3,078.5

 
$
164.5


16

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of changes, net of tax, in accumulated other comprehensive loss in the three and nine months ended October 1, 2016 , is shown below (in millions):
 
Three Months Ended 
 October 1, 2016
 
Nine Months Ended 
 October 1, 2016
Defined benefit plans:
 
 
 
Balance at beginning of period
$
(196.3
)
 
$
(194.6
)
Reclassification adjustments (net of tax expense of $0.3 million and $1.0 million in the three and nine months ended October 1, 2016, respectively)
0.8

 
2.5

Other comprehensive income (loss) recognized during the period (net of tax impact of $— million in the three and nine months ended October 1, 2016)
0.7

 
(2.7
)
Balance at end of period
$
(194.8
)
 
$
(194.8
)
 
 
 
 
Derivative instruments and hedging:
 
 
 
Balance at beginning of period
$
(50.1
)
 
$
(38.7
)
Reclassification adjustments (net of tax expense of $6.0 million and $16.7 million in the three and nine months ended October 1, 2016, respectively)
17.1

 
46.2

Other comprehensive loss recognized during the period (net of tax benefit of $6.0 million and $20.5 million in the three and nine months ended October 1, 2016, respectively)
(16.3
)
 
(56.8
)
Balance at end of period
$
(49.3
)
 
$
(49.3
)
 
 
 
 
Foreign currency translation:
 
 
 
Balance at beginning of period
$
(467.4
)
 
$
(496.8
)
Other comprehensive income recognized during the period (net of tax impact of $— million in the three and nine months ended October 1, 2016)
8.0

 
37.4

Balance at end of period
$
(459.4
)
 
$
(459.4
)
In the three months ended October 1, 2016 , foreign currency translation adjustments are related primarily to the strengthening of the Euro relative to the U.S. dollar.
In the nine months ended October 1, 2016 , foreign currency translation adjustments are related primarily to the strengthening of the Euro and the Brazilian real relative to the U.S. dollar, partially offset by the weakening of the Chinese renminbi relative to the U.S. dollar. Foreign currency translation adjustments include pretax losses of $0.5 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.

17

Table of Contents
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 26, 2015 , is shown below (in millions):
 
Three Months Ended September 26, 2015
 
Nine Months Ended September 26, 2015
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
2,978.3

 
$
2,899.4

 
$
78.9

 
$
3,029.3

 
$
2,958.8

 
$
70.5

Stock-based compensation transactions
13.8

 
13.8

 

 
(1.4
)
 
(1.4
)
 

Repurchase of common stock
(148.2
)
 
(148.2
)
 

 
(383.0
)
 
(383.0
)
 

Dividends declared to Lear Corporation stockholders
(19.5
)
 
(19.5
)
 

 
(59.9
)
 
(59.9
)
 

Dividends declared to noncontrolling interest holders
(4.3
)
 

 
(4.3
)
 
(16.2
)
 

 
(16.2
)
Comprehensive income:

 
 
 
 
 

 
 
 
 
Net income
193.3

 
181.0

 
12.3

 
542.9

 
510.2

 
32.7

Other comprehensive loss, net of tax:

 
 
 
 
 

 
 
 
 
Defined benefit plan adjustments
4.7

 
4.7

 

 
14.7

 
14.7

 

Derivative instruments and hedging activities
(16.1
)
 
(16.1
)
 

 
(14.3
)
 
(14.3
)
 

Foreign currency translation adjustments
(77.2
)
 
(74.8
)
 
(2.4
)
 
(187.3
)
 
(184.8
)
 
(2.5
)
Other comprehensive loss
(88.6
)
 
(86.2
)
 
(2.4
)
 
(186.9
)
 
(184.4
)
 
(2.5
)
Comprehensive income
104.7

 
94.8

 
9.9

 
356.0

 
325.8

 
30.2

Ending equity balance
$
2,924.8

 
$
2,840.3

 
$
84.5

 
$
2,924.8

 
$
2,840.3

 
$
84.5


18

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of changes, net of tax, in accumulated other comprehensive loss in the three and nine months ended September 26, 2015 , is shown below (in millions):
 
Three Months Ended September 26, 2015
 
Nine Months Ended 
 September 26, 2015
Defined benefit plans:
 
 
 
Balance at beginning of period
$
(209.2
)
 
$
(219.2
)
Reclassification adjustments (net of tax expense of $0.3 million and $1.2 million in the three and nine month ended September 26, 2015, respectively)
1.2

 
3.5

Other comprehensive income recognized during the period (net of tax expense of $— million and $1.1 million in the three and nine months ended September 26, 2015, respectively)
3.5

 
11.2

Balance at end of period
$
(204.5
)
 
$
(204.5
)
 
 
 
 
Derivative instruments and hedging:
 
 
 
Balance at beginning of period
$
(31.4
)
 
$
(33.2
)
Reclassification adjustments (net of tax expense of $4.4 million and $7.6 million in the three and nine months ended September 26, 2015, respectively)
8.1

 
16.8

Other comprehensive loss recognized during the period (net of tax benefit of $10.1 million and $12.6 million in the three and nine months ended September 26, 2015, respectively)
(24.2
)
 
(31.1
)
Balance at end of period
$
(47.5
)
 
$
(47.5
)
 
 
 
 
Foreign currency translation:
 
 
 
Balance at beginning of period
$
(359.6
)
 
$
(249.6
)
Other comprehensive loss recognized during the period (net of tax benefit of $— million and $4.0 million in the three and nine months ended September 26, 2015, respectively)
(74.8
)
 
(184.8
)
Balance at end of period
$
(434.4
)
 
$
(434.4
)
In the three months ended September 26, 2015 , foreign currency translation adjustments are related primarily to the weakening of the Brazilian real and the Chinese renminbi relative to the U.S. dollar and include pretax gains of $0.4 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
In the nine months ended September 26, 2015 , foreign currency translation adjustments are related primarily to the weakening of the Euro, the Brazilian real and the Chinese renminbi relative to the U.S. dollar and include pretax losses of $11.1 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
See Note 8 , " Pension and Other Postretirement Benefit Plans ," for further information regarding reclassification adjustments related to the Company's defined benefit plans.
See Note 15 , " Financial Instruments ," for further information regarding reclassification adjustments related to the Company's derivative and hedging activities.
Lear Corporation Stockholders’ Equity
Common Stock Share Repurchase Program
In February 2016, the Company's Board of Directors authorized a $487.4 million increase to the existing common stock share repurchase program to provide for a remaining aggregate repurchase authorization of $1.0 billion , while maintaining the program expiration date of December 31, 2017. In the first nine months of 2016 , the Company repurchased, in aggregate, $557.7 million of its outstanding common stock ( 5,015,556 shares at an average purchase price of $111.20 per share, excluding commissions). As of the end of the third quarter of 2016, the Company has a remaining repurchase authorization of $442.3 million under its ongoing common stock share repurchase program. 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

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

other factors. In addition, the Company’s Credit Agreement places certain limitations on the Company’s ability to repurchase its common stock.
Since the first quarter of 2011, the Company's Board of Directors has authorized $3.4 billion in share repurchases under its common stock share repurchase program. As of the end of the third quarter of 2016, the Company has repurchased, in aggregate, $3.0 billion of its outstanding common stock, at an average price of $73.48 per share, excluding commissions and related fees, since the first quarter of 2011.
In addition to shares repurchased under the Company’s common stock share repurchase program described in the preceding paragraphs, the Company classified shares withheld from the settlement of the Company’s restricted stock unit and performance share awards to cover minimum tax withholding requirements as common stock held in treasury in the accompanying condensed consolidated balance sheets as of October 1, 2016 and December 31, 2015 .
Quarterly Dividend
In the first nine months of 2016 and 2015 , the Company’s Board of Directors declared quarterly cash dividends of $0.30 and $0.25 per share of common stock, respectively. In the first nine months of 2016 , declared dividends totaled $67.5 million , and dividends paid totaled $68.1 million . In the first nine months of 2015 , declared dividends totaled $59.9 million , and dividends paid totaled $60.0 million . 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 2016 , the Company gained control of and consolidated an affiliate. For further information related to the consolidation, see Note 5 , " Long-Term Assets ."
In October 2016, the Company entered into a transaction to acquire the outstanding noncontrolling interests in a consolidated subsidiary, Shenyang Lear Automotive Seating and Interior Systems Co., Ltd., for $33.0 million . Upon completion of the transaction, the Company will own 100% of the subsidiary. There will be no gain or loss recognized in the condensed consolidated statement of comprehensive income as a result of this transaction in the year ended December 31, 2016.

( 13 ) Legal and Other Contingencies
As of October 1, 2016 and December 31, 2015 , the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $15.1 million and $9.2 million , respectively. Such reserves reflect amounts recognized in accordance with GAAP and typically 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.
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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 in the nine months ended October 1, 2016 , is shown below (in millions):
Balance at January 1, 2016
$
33.0

Expense, net (including changes in estimates)
18.9

Settlements
(3.8
)
Foreign currency translation and other
0.2

Balance at October 1, 2016
$
48.3

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.
The Company has been named as a potentially responsible party at several third-party landfill sites and is engaged in the cleanup of hazardous waste at certain sites owned, leased or operated by the Company, including several properties acquired in its 1999 acquisition of UT Automotive, Inc. ("UT Automotive"). Certain present and former properties of UT Automotive are subject to environmental liabilities which may be significant. The Company obtained agreements and indemnities with respect to certain environmental liabilities from United Technologies Corporation ("UTC") in connection with the Company’s acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with the Company.
As of October 1, 2016 and December 31, 2015 , the Company had recorded environmental reserves of $9.1 million . 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.


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 14 ) 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 (formerly electrical), which includes complete electrical distribution systems, electronic control modules and wireless communication modules. Key components in the electrical distribution system include wiring harnesses, terminals and connectors, junction boxes and high power components for hybrid and electric vehicles. 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, ("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 October 1, 2016
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,513.3

 
$
1,013.1

 
$

 
$
4,526.4

Segment earnings (1)
269.5

 
140.3

 
(64.7
)
 
345.1

Depreciation and amortization
67.9

 
27.5

 
3.3

 
98.7

Capital expenditures
80.3

 
34.9

 
3.4

 
118.6

Total assets
6,348.8

 
1,746.6

 
2,182.0

 
10,277.4

 
Three Months Ended September 26, 2015
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,357.1

 
$
973.2

 
$

 
$
4,330.3

Segment earnings (1)
234.2

 
132.6

 
(64.2
)
 
302.6

Depreciation and amortization
60.2

 
25.4

 
2.4

 
88.0

Capital expenditures
75.6

 
26.7

 
12.5

 
114.8

Total assets
6,132.9

 
1,674.6

 
1,831.2

 
9,638.7

 
Nine Months Ended October 1, 2016
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
10,755.7

 
$
3,158.4

 
$

 
$
13,914.1

Segment earnings (1)
848.8

 
441.5

 
(198.9
)
 
1,091.4

Depreciation and amortization
193.8

 
80.5

 
9.1

 
283.4

Capital expenditures
204.6

 
79.5

 
16.2

 
300.3

Total assets
6,348.8

 
1,746.6

 
2,182.0

 
10,277.4

 
Nine Months Ended September 26, 2015
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
10,419.8

 
$
3,067.0

 
$

 
$
13,486.8

Segment earnings (1)
644.8

 
411.5

 
(207.5
)
 
848.8

Depreciation and amortization
177.1

 
73.6

 
6.7

 
257.4

Capital expenditures
232.5

 
75.5

 
19.7

 
327.7

Total assets
6,132.9

 
1,674.6

 
1,831.2

 
9,638.7

(1)  
See definition above.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In the three months ended October 1, 2016 , segment earnings include restructuring charges of $7.8 million , $6.9 million and $0.2 million in the seating and E-Systems segments and in the other category, respectively. In the nine months ended October 1, 2016 , segment earnings include restructuring charges of $30.8 million , $17.5 million and $2.9 million in the seating and E-Systems segments and in the other category, respectively (Note 2 , " Restructuring ").
In the three months ended September 26, 2015 , segment earnings include restructuring charges of $4.3 million , $3.7 million and $6.9 million in the seating and E-Systems segments and in the other category, respectively. In the nine months ended September 26, 2015 , segment earnings include restructuring charges of $47.3 million , $9.7 million and $14.7 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
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Segment earnings
$
345.1

 
$
302.6

 
$
1,091.4

 
$
848.8

Interest expense
20.6

 
21.4

 
62.0

 
66.3

Other (income) expense, net
14.2

 
21.7

 
(0.8
)
 
60.4

Consolidated income before provision for income taxes and equity in net income of affiliates
$
310.3

 
$
259.5

 
$
1,030.2

 
$
722.1


( 15 ) Financial Instruments
Debt Instruments
The carrying values of the Company’s debt instruments vary from their fair values. The fair values were determined by reference to the quoted market prices of these securities (Level 2 input based on the GAAP fair value hierarchy). The estimated fair value, as well as the carrying value, of the Company's debt instruments are shown below (in millions):
 
October 1,
2016
 
December 31, 2015
Estimated aggregate fair value
$
2,042.0

 
$
1,992.3

Aggregate carrying value (1)
1,950.0

 
1,965.6

(1) Credit agreement and senior notes, excluding the impact of unamortized debt issuance costs.
Accounts Receivable Factoring
One of the Company's European subsidiaries has an uncommitted factoring agreement, which provides for aggregate purchases of specified customer accounts of up to €200 million . As of October 1, 2016 , there were no factored receivables outstanding. The Company cannot provide any assurances that this factoring facility will be available or utilized in the future.
Marketable Equity Securities
Included in other current assets in the accompanying condensed consolidated balance sheets as of October 1, 2016 and December 31, 2015 , are $28.8 million and $23.0 million , respectively, of marketable equity securities, which the Company accounts for under the fair value option. Accordingly, unrealized gains and losses arising from changes in the fair value of the marketable equity securities are recognized in the accompanying condensed consolidated statement of income as a component of other expense, net. The fair value of the marketable equity securities is determined by reference to quoted market prices in active markets (Level 1 input based on the GAAP fair value hierarchy).
Derivative Instruments and Hedging Activities
The Company has used derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates and interest rates and the resulting variability of the Company’s operating results. The Company is not a party to leveraged derivatives. The Company’s derivative financial instruments are subject to master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. On the date that a derivative contract for a hedging instrument is entered into, the Company

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge) or (3) a hedge of a net investment in a foreign operation (a net investment hedge).
For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the condensed consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the condensed consolidated balance sheet. When the underlying hedged transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the condensed consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the effective portion of the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the condensed consolidated balance sheet. In addition, for both cash flow and net investment hedges, changes in the fair value of the derivative that are excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of the derivative are recorded in earnings and reflected in the condensed consolidated statement of income as other expense, net.
Foreign Exchange
The Company uses forwards, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates on known foreign currency exposures. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce exposure to fluctuations in foreign exchange rates. The principal currencies hedged by the Company include the Mexican peso, various European currencies, the Thai baht, the Japanese yen, the Philippine peso and the Canadian dollar.
The notional amount and estimated fair value of the Company's foreign currency derivative contracts are shown below (in millions, except for maturities):
 
October 1,
2016
 
December 31, 2015
Contracts designated as cash flow hedges:
 
 
 
Notional amount
$
1,134.9

 
$
1,394.6

Fair value
$
(60.7
)
 
$
(46.4
)
Outstanding maturities in months, not to exceed
24

 
24

 
 
 
 
Contracts not designated as hedging instruments:
 
 
 
Notional amount
$
876.8

 
$
423.4

Fair value
$
(3.8
)
 
$
(4.5
)
Outstanding maturities in months, not to exceed
12

 
12

 
 
 
 
Total outstanding notional amount
$
2,011.7

 
$
1,818.0

Foreign currency derivative contracts not designated as hedging instruments consist principally of hedges of cash transactions, intercompany loans and certain other balance sheet exposures.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The fair value of outstanding foreign currency derivative contracts and the related classification in the accompanying condensed consolidated balance sheets as of October 1, 2016 and December 31, 2015 , are shown below (in millions):
 
October 1,
2016
 
December 31,
2015
Contracts designated as cash flow hedges:
 
 
 
Other current assets
$
4.0

 
$
8.2

Other long-term assets
0.9

 
0.3

Other current liabilities
(55.4
)
 
(51.5
)
Other long-term liabilities
(10.2
)
 
(3.4
)
 
(60.7
)
 
(46.4
)
Contracts not designated as hedging instruments:
 
 
 
Other current assets
3.1

 
3.6

Other current liabilities
(6.9
)
 
(8.1
)
 
(3.8
)
 
(4.5
)
 
$
(64.5
)
 
$
(50.9
)
Pretax amounts related to foreign currency derivative contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Losses recognized in accumulated other comprehensive loss
$
(22.3
)
 
$
(34.2
)
 
$
(77.2
)
 
$
(43.4
)
Losses reclassified from accumulated other comprehensive loss
23.1

 
12.5

 
62.9

 
24.4

Comprehensive income (loss)
$
0.8

 
$
(21.7
)
 
$
(14.3
)
 
$
(19.0
)
Pretax gains (losses) reclassified from accumulated other comprehensive loss to net sales and cost of sales are shown below (in millions):
 
Three Months Ended