Lear Corporation
LEAR CORP (Form: 10-Q, Received: 04/26/2017 10:31:44)
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 April 1, 2017 .
 
¨
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
  LEARLOGOA06.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, 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
¨
(Do not check if a smaller reporting company)
 
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 April 21, 2017 , the number of shares outstanding of the registrant’s common stock was 68,888,304 shares.
 


Table of Contents
LEAR CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED APRIL 1, 2017

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 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, 2016 .
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)

 
April 1,
2017 (1)
 
December 31,
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,209.7

 
$
1,271.6

Accounts receivable
3,308.8

 
2,746.5

Inventories
1,067.8

 
1,020.6

Other
642.6

 
610.6

Total current assets
6,228.9

 
5,649.3

LONG-TERM ASSETS:
 
 
 
Property, plant and equipment, net
2,070.7

 
2,019.3

Goodwill
1,129.4

 
1,121.3

Other
1,171.5

 
1,110.7

Total long-term assets
4,371.6

 
4,251.3

Total assets
$
10,600.5

 
$
9,900.6

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
10.2

 
$
8.6

Accounts payable and drafts
3,043.0

 
2,640.5

Accrued liabilities
1,538.7

 
1,497.6

Current portion of long-term debt
38.8

 
35.6

Total current liabilities
4,630.7

 
4,182.3

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
1,889.0

 
1,898.0

Other
617.3

 
627.4

Total long-term liabilities
2,506.3

 
2,525.4

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; 80,563,291 shares issued as of April 1, 2017 and December 31, 2016
0.8

 
0.8

Additional paid-in capital
1,324.7

 
1,385.3

Common stock held in treasury, 11,615,919 and 11,131,648 shares as of April 1, 2017 and December 31, 2016, respectively, at cost
(1,292.8
)
 
(1,200.2
)
Retained earnings
4,031.4

 
3,706.9

Accumulated other comprehensive loss
(733.1
)
 
(835.6
)
Lear Corporation stockholders’ equity
3,331.0

 
3,057.2

Noncontrolling interests
132.5

 
135.7

Equity
3,463.5

 
3,192.9

Total liabilities and equity
$
10,600.5

 
$
9,900.6

 (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
 
April 1,
2017
 
April 2,
2016
Net sales
$
4,998.5

 
$
4,662.9

 
 
 
 
Cost of sales
4,416.0

 
4,127.2

Selling, general and administrative expenses
155.7

 
149.0

Amortization of intangible assets
10.1

 
13.2

Interest expense
20.8

 
21.1

Other expense, net
3.7

 
8.5

Consolidated income before provision for income taxes and equity in net income of affiliates
392.2

 
343.9

Provision for income taxes
89.1

 
98.2

Equity in net income of affiliates
(15.4
)
 
(16.8
)
Consolidated net income
318.5

 
262.5

Less: Net income attributable to noncontrolling interests
12.7

 
14.1

Net income attributable to Lear
$
305.8

 
$
248.4

 
 
 
 
Basic net income per share attributable to Lear
$
4.39

 
$
3.33

 
 
 
 
Diluted net income per share attributable to Lear
$
4.35

 
$
3.29

 
 
 
 
Cash dividends declared per share
$
0.50

 
$
0.30

 
 
 
 
Average common shares outstanding
69,658,368

 
74,689,475

 
 
 
 
Average diluted shares outstanding
70,327,348

 
75,474,339

 
 
 
 
 
 
 
 
Consolidated comprehensive income (Note 13)
$
422.1

 
$
332.2

Less: Comprehensive income attributable to noncontrolling interests
13.8

 
14.3

Comprehensive income attributable to Lear
$
408.3

 
$
317.9

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)

 
Three Months Ended
 
April 1,
2017
 
April 2,
2016
Cash Flows from Operating Activities:
 
 
 
Consolidated net income
$
318.5

 
$
262.5

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
96.9

 
90.2

Net change in recoverable customer engineering, development and tooling
7.4

 
5.2

Net change in working capital items (see below)
(145.3
)
 
(77.5
)
Other, net
1.4

 
8.2

Net cash provided by operating activities
278.9

 
288.6

Cash Flows from Investing Activities:
 
 
 
Additions to property, plant and equipment
(120.8
)
 
(88.1
)
Other, net
(7.9
)
 
(1.8
)
Net cash used in investing activities
(128.7
)
 
(89.9
)
Cash Flows from Financing Activities:
 
 
 
Credit agreement repayments
(6.2
)
 
(3.1
)
Short-term borrowings, net
1.4

 
2.6

Repurchase of common stock
(115.6
)
 
(154.7
)
Dividends paid to Lear Corporation stockholders
(36.7
)
 
(25.3
)
Dividends paid to noncontrolling interests
(26.5
)
 

Other, net
(41.7
)
 
(51.0
)
Net cash used in financing activities
(225.3
)

(231.5
)
Effect of foreign currency translation
13.2

 
10.3

Net Change in Cash and Cash Equivalents
(61.9
)
 
(22.5
)
Cash and Cash Equivalents as of Beginning of Period
1,271.6

 
1,196.6

Cash and Cash Equivalents as of End of Period
$
1,209.7

 
$
1,174.1

 
 
 
 
Changes in Working Capital Items:
 
 
 
Accounts receivable
$
(526.6
)
 
$
(410.5
)
Inventories
(35.4
)
 
(41.8
)
Accounts payable
374.7

 
240.8

Accrued liabilities and other
42.0

 
134.0

Net change in working capital items
$
(145.3
)
 
$
(77.5
)
 
 
 
 
Supplementary Disclosure:
 
 
 
Cash paid for interest
$
42.6

 
$
40.9

Cash paid for income taxes, net of refunds received
$
65.1

 
$
41.4

 
 
 
 
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.
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 April 1, 2017 .
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 ) Acquisitions
AccuMED
On December 21, 2016, the Company completed the acquisition of 100% of the outstanding equity interests of AccuMED Holdings Corp. ("AccuMED"), a privately-held developer and manufacturer of specialty fabrics for $148.5 million , net of cash acquired. AccuMED has annual sales of approximately $80 million . The AccuMED acquisition was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheets as of April 1, 2017 and December 31, 2016 . The operating results and cash flows of AccuMED are included in the accompanying condensed consolidated financial statements from the date of acquisition and in the Company's seating segment. The purchase price and preliminary allocation are shown below (in millions):
Purchase price paid, net of cash acquired
 
$
148.5

 
 
 
Property, plant and equipment
 
$
12.7

Other assets purchased and liabilities assumed, net
 
9.9

Goodwill
 
72.9

Intangible assets
 
53.0

Preliminary purchase price allocation
 
$
148.5

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 provisional amounts recognized for the fair value of customer-based assets. Customer-based assets include AccuMED's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. It is estimated that these intangible assets have a weighted average useful life of approximately fifteen years.
The purchase price and related allocation are preliminary and will be revised as a result of additional information regarding the assets acquired and liabilities assumed, including, but not limited to, certain tax attributes, contingent liabilities and revisions of

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

provisional estimates of fair values resulting from the completion of independent appraisals and valuations of property, plant and equipment and intangible assets.
The pro-forma effects of this acquisition do not materially impact the Company's reported results for any period presented.
For further information on acquired assets measured at fair value, see Note 16 , " Financial Instruments ."
Grupo Antolin
On February 6, 2017, the Company signed a definitive agreement to acquire Grupo Antolin's automotive seating business. Grupo Antolin's seating business is headquartered in France with operations in five countries in Europe and North Africa. Grupo Antolin's seating business is comprised of just-in-time seat assembly, as well as seat structures, mechanisms and seat covers. The transaction is valued at approximately €286 million (approximately $305 million based on exchange rates as of April 1, 2017 ) on a cash and debt free basis. On April 12, 2017, European Union regulators approved the transaction, which is expected to close in the second quarter of 2017 and is subject to customary closing conditions.

( 3 ) 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 condensed 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 quarter of 2017 , the Company recorded charges of $8.5 million in connection with its restructuring actions. These charges consist of $7.7 million recorded as cost of sales and $0.8 million recorded as selling, general and administrative expenses. The restructuring charges consist of employee termination costs of $6.1 million , fixed asset impairment charges of $0.1 million , a pension benefit plan settlement loss of $0.8 million and contract termination costs of $0.3 million , as well as other related costs of $1.2 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 $0.1 million in excess of related estimated fair values.
The Company expects to incur approximately $44 million of additional restructuring costs related to activities initiated as of April 1, 2017 , 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 2017 activity, excluding the pension benefit plan settlement loss of $0.8 million , is shown below (in millions):
 
Accrual as of
 
2017
 
Utilization
 
Accrual as of
 
January 1, 2017
 
Charges
 
Cash
 
Non-cash
 
April 1, 2017
Employee termination benefits
$
69.4

 
$
6.1

 
$
(6.2
)
 
$

 
$
69.3

Asset impairment charges

 
0.1

 

 
(0.1
)
 

Contract termination costs
4.6

 
0.3

 
(0.3
)
 

 
4.6

Other related costs

 
1.2

 
(1.2
)
 

 

Total
$
74.0

 
$
7.7

 
$
(7.7
)
 
$
(0.1
)
 
$
73.9



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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 4 ) 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):
 
April 1,
2017
 
December 31, 2016
Raw materials
$
768.5

 
$
746.3

Work-in-process
118.3

 
106.4

Finished goods
181.0

 
167.9

Inventories
$
1,067.8

 
$
1,020.6


( 5 ) Pre-Production Costs Related to Long-Term Supply Agreements
The Company incurs pre-production engineering and development ("E&D") and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the Company does not have a non-cancelable right to use the tooling.
During the first quarters of 2017 and 2016 , the Company capitalized $62.9 million and $47.1 million , respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first quarters of 2017 and 2016 , the Company also capitalized $33.6 million and $24.2 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 quarters of 2017 and 2016 , the Company collected $87.6 million and $71.5 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):
 
April 1,
2017
 
December 31, 2016
Current
$
182.8

 
$
185.9

Long-term
41.6

 
43.4

Recoverable customer E&D and tooling
$
224.4

 
$
229.3


( 6 ) 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):
 
April 1,
2017
 
December 31, 2016
Land
$
102.7

 
$
101.7

Buildings and improvements
681.4

 
648.1

Machinery and equipment
2,554.0

 
2,459.6

Construction in progress
299.8

 
296.4

Total property, plant and equipment
3,637.9

 
3,505.8

Less – accumulated depreciation
(1,567.2
)
 
(1,486.5
)
Property, plant and equipment, net
$
2,070.7

 
$
2,019.3

Depreciation expense was $86.8 million and $77.0 million in the three months ended April 1, 2017 and April 2, 2016 , 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 April 1, 2017 . 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 quarter of 2017 , the Company recognized fixed asset impairment charges of $0.1 million in conjunction with its restructuring actions (Note 3 , " Restructuring ").

( 7 ) Goodwill
A summary of the changes in the carrying amount of goodwill, by operating segment, in the three months ended April 1, 2017 , is shown below (in millions):
 
Seating
 
E-Systems
 
Total
Balance at January 1, 2017
$
1,091.2

 
$
30.1

 
$
1,121.3

Foreign currency translation and other
8.1

 

 
8.1

Balance at April 1, 2017
$
1,099.3

 
$
30.1

 
$
1,129.4

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 April 1, 2017 . The Company will, however, continue to assess the impact of significant events or circumstances on its recorded goodwill.


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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 8 ) 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):
 
April 1, 2017
 
December 31, 2016
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
$
462.5

 
$
(1.5
)
 
$
461.0

 
2.325%
 
$
468.7

 
$
(1.6
)
 
$
467.1

 
2.105%
4.75% Senior Notes due 2023 ("2023 Notes")
500.0

 
(4.6
)
 
495.4

 
4.75%
 
500.0

 
(4.8
)
 
495.2

 
4.75%
5.375% Senior Notes due 2024 ("2024 Notes")
325.0

 
(2.7
)
 
322.3

 
5.375%
 
325.0

 
(2.8
)
 
322.2

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

 
(6.4
)
 
643.6

 
5.25%
 
650.0

 
(6.6
)
 
643.4

 
5.25%
Other
5.5

 

 
5.5

 
N/A
 
5.7

 

 
5.7

 
N/A
 
$
1,943.0

 
$
(15.2
)
 
1,927.8

 
 
 
$
1,949.4

 
$
(15.8
)
 
1,933.6

 
 
Less — Current portion
 
 
 
 
(38.8
)
 
 
 
 
 
 
 
(35.6
)
 
 
Long-term debt
 
 
 
 
$
1,889.0

 
 
 
 
 
 
 
$
1,898.0

 
 
(1) Unamortized portion
Senior Notes
The issuance date, maturity date and interest payable dates of the Company's senior unsecured 2023 Notes, 2024 Notes and 2025 Notes (together, the "Notes") are as shown below:
Note
Issuance Date
 
Maturity Date
 
Interest Payable Dates
2023 Notes
January 2013
 
January 15, 2023
 
January 15 and July 15
2024 Notes
March 2014
 
March 15, 2024
 
March 15 and September 15
2025 Notes
November 2014
 
January 15, 2025
 
January 15 and July 15
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  18 , " 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 April 1, 2017 , the Company was in compliance with all covenants under the indentures governing the Notes.
Credit Agreement
As of April 1, 2017 , 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 April 1, 2017 and December 31, 2016 , there were no borrowings outstanding under the Revolving Credit Facility. As of April 1, 2017 and December 31, 2016 , there were $462.5 million and $468.7 million , respectively, of borrowings outstanding under the Term Loan Facility. In the first quarter of 2017 , the Company made required principal payments under the Term Loan Facility of $6.2 million .
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 April 1, 2017 ), payable on the last day of each applicable interest period but in no event less frequently than

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 April 1, 2017 ), 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 April 1, 2017 ), 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 April 1, 2017 ), payable quarterly.
The Company’s obligations under the Credit Agreement 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 18 , " 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 April 1, 2017 , the Company was in compliance with all covenants under the Credit Agreement.
Other
As of April 1, 2017 , 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, 2016 .

( 9 ) 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
The components of the Company’s net periodic pension benefit cost are shown below (in millions):
 
Three Months Ended
 
April 1, 2017
 
April 2, 2016
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$
1.3

 
$
1.7

 
$
1.4

 
$
1.5

Interest cost
5.4

 
3.8

 
7.4

 
3.9

Expected return on plan assets
(7.2
)
 
(5.6
)
 
(9.5
)
 
(5.6
)
Amortization of actuarial loss
0.6

 
1.2

 
0.7

 
0.7

Settlement loss
0.2

 
0.8

 
0.2

 

Net periodic benefit cost
$
0.3

 
$
1.9

 
$
0.2

 
$
0.5

In the three months ended April 1, 2017 , the Company recognized a pension settlement loss of $0.8 million related to its restructuring actions.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The components of the Company’s net periodic other postretirement benefit cost are shown below (in millions):
 
Three Months Ended
 
April 1, 2017
 
April 2, 2016
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$

 
$
0.1

 
$

 
$
0.1

Interest cost
0.6

 
0.4

 
0.8

 
0.4

Amortization of actuarial (gain) loss
(0.6
)
 
0.1

 
(0.3
)
 
0.1

Amortization of prior service credit

 
(0.1
)
 

 
(0.1
)
Net periodic benefit cost
$

 
$
0.5

 
$
0.5

 
$
0.5

Contributions
In the three months ended April 1, 2017 , employer contributions to the Company’s domestic and foreign defined benefit pension plans were $3.5 million .
The Company expects contributions to its domestic and foreign defined benefit pension plans to be approximately $10 million to $15 million in 2017 . 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.

( 10 ) Other Expense, Net
Other 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 disposal of fixed assets and other miscellaneous income and expense.
A summary of other expense, net is shown below (in millions):
 
Three Months Ended
 
April 1,
2017
 
April 2,
2016
Other expense
$
8.0

 
$
9.3

Other income
(4.3
)
 
(0.8
)
Other expense, net
$
3.7

 
$
8.5

In the three months ended April 1, 2017 and April 2, 2016 , other expense includes net foreign currency transaction gains of $5.6 million and $0.4 million , respectively.

( 11 ) Income Taxes
A summary of the provision for income taxes and the corresponding effective tax rate for the three months ended April 1, 2017 and April 2, 2016 , is shown below (in millions, except effective tax rates):
 
Three Months Ended
 
April 1,
2017
 
April 2,
2016
Provision for income taxes
$
89.1

 
$
98.2

Pretax income before equity in net income of affiliates
$
392.2

 
$
343.9

Effective tax rate
22.7
%
 
28.6
%
On January 1, 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, "Improvements to Employee Share-Based Payment Accounting." The new standard requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the Company’s condensed consolidated statement of comprehensive income in the reporting period in which such awards vest. The standard also required a modified retrospective adoption for previously unrecognized excess tax benefits. Accordingly, the Company recognized a deferred tax asset of $54.5 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-09 were not significant.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In the first quarters of 2017 and 2016 , the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In the first quarter of 2017 , the Company recognized net tax benefits of $19.1 million , of which $15.5 million related to the change in the accounting for share-based compensation discussed above and $3.6 million related to restructuring charges and various other items. In the first quarter of 2016 , the Company recognized net tax benefits of $5.0 million related to restructuring charges and various other items. Excluding these items, the effective tax rate in the first quarters 2017 and 2016 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, 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 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, 2016 .

( 12 ) 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
 
April 1,
2017
 
April 2,
2016
Net income attributable to Lear
$
305.8

 
$
248.4

 
 
 
 
Average common shares outstanding
69,658,368

 
74,689,475

Dilutive effect of common stock equivalents
668,980

 
784,864

Average diluted shares outstanding
70,327,348

 
75,474,339

 
 
 
 
Basic net income per share attributable to Lear
$
4.39

 
$
3.33

 
 
 
 
Diluted net income per share attributable to Lear
$
4.35

 
$
3.29



14

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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 months ended April 1, 2017 , is shown below (in millions):
 
Three Months Ended April 1, 2017
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
3,192.9

 
$
3,057.2

 
$
135.7

Stock-based compensation transactions
(25.8
)
 
(25.8
)
 

Repurchase of common stock
(127.5
)
 
(127.5
)
 

Dividends declared to Lear Corporation stockholders
(35.7
)
 
(35.7
)
 

Dividends declared to noncontrolling interest holders
(17.0
)
 

 
(17.0
)
Adoption of ASU 2016-09 (Note 11, "Taxes")
54.5

 
54.5

 

Comprehensive income:


 
 
 
 
Net income
318.5

 
305.8

 
12.7

Other comprehensive income, net of tax:


 
 
 
 
Defined benefit plan adjustments
0.7

 
0.7

 

Derivative instruments and hedging activities
52.1

 
52.1

 

Foreign currency translation adjustments
50.8

 
49.7

 
1.1

Other comprehensive income
103.6

 
102.5

 
1.1

Comprehensive income
422.1

 
408.3

 
13.8

Ending equity balance
$
3,463.5

 
$
3,331.0

 
$
132.5


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of changes, net of tax, in accumulated other comprehensive loss for the three months ended April 1, 2017 , is shown below (in millions):
 
Three Months Ended 
 April 1, 2017
Defined benefit plans:
 
Balance at beginning of period
$
(192.8
)
Reclassification adjustments (net of tax expense of $0.5 million)
1.7

Other comprehensive loss recognized during the period (net of tax impact of $— million)
(1.0
)
Balance at end of period
$
(192.1
)
 
 
Derivative instruments and hedging:
 
Balance at beginning of period
$
(45.1
)
Reclassification adjustments (net of tax expense of $3.0 million)
8.8

Other comprehensive income recognized during the period (net of tax expense of $14.7 million)
43.3

Balance at end of period
$
7.0

 
 
Foreign currency translation:
 
Balance at beginning of period
$
(597.7
)
Other comprehensive income recognized during the period (net of tax impact of $— million)
49.7

Balance at end of period
$
(548.0
)
For the three months ended April 1, 2017 , foreign currency translation adjustments are related primarily to the strengthening of the Euro, Chinese renminbi and Brazilian real relative to the U.S. dollar. Foreign currency translation adjustments include pretax losses of $0.6 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
A summary of comprehensive income and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three months ended April 2, 2016 , is shown below (in millions):
 
Three Months Ended April 2, 2016
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
3,017.7

 
$
2,927.4

 
$
90.3

Stock-based compensation transactions
(27.7
)
 
(27.7
)
 

Repurchase of common stock
(154.7
)
 
(154.7
)
 

Dividends declared to Lear Corporation stockholders
(23.1
)
 
(23.1
)
 

Non-controlling interests — other

 
(2.2
)
 
2.2

Comprehensive income:

 
 
 
 
Net income
262.5

 
248.4

 
14.1

Other comprehensive income (loss), net of tax:

 
 
 
 
Defined benefit plan adjustments
(2.8
)
 
(2.8
)
 

Derivative instruments and hedging activities
2.0

 
2.0

 

Foreign currency translation adjustments
70.5

 
70.3

 
0.2

Other comprehensive income
69.7

 
69.5

 
0.2

Comprehensive income
332.2

 
317.9

 
14.3

Ending equity balance
$
3,144.4

 
$
3,037.6

 
$
106.8


16

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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 months ended April 2, 2016 , is shown below (in millions):
 
Three Months Ended 
 April 2, 2016
Defined benefit plans:
 
Balance at beginning of period
$
(194.6
)
Reclassification adjustments (net of tax expense of $0.2 million)
1.1

Other comprehensive loss recognized during the period (net of tax impact of $— million)
(3.9
)
Balance at end of period
$
(197.4
)
 
 
Derivative instruments and hedging:
 
Balance at beginning of period
$
(38.7
)
Reclassification adjustments (net of tax expense of $4.9 million)
13.6

Other comprehensive loss recognized during the period (net of tax benefit of $4.2 million)
(11.6
)
Balance at end of period
$
(36.7
)
 
 
Foreign currency translation:
 
Balance at beginning of period
$
(496.8
)
Other comprehensive income recognized during the period (net of tax impact of $— million)
70.3

Balance at end of period
$
(426.5
)
For the three months ended April 2, 2016 , foreign currency translation adjustments are related primarily to the strengthening of the Euro and, to a lesser extent, the Brazilian real relative to the U.S. dollar and include pretax losses of $0.6 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
See Note 9 , " Pension and Other Postretirement Benefit Plans ," for further information regarding reclassification adjustments related to the Company's defined benefit plans.
See Note 16 , " 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 2017, the Company's Board of Directors authorized a $658.8 million increase to the existing common stock share repurchase program to provide for a remaining aggregate repurchase authorization of $1.0 billion and extended the term of the program to December 31, 2019. In the first quarter of 2017 , the Company repurchased, in aggregate, $127.5 million of its outstanding common stock ( 896,965 shares at an average purchase price of $142.10 per share, excluding commissions), of which $115.6 million was paid in cash with the remaining amount to be paid in the second quarter of 2017. As of the end of the first quarter of 2017 , the Company has a remaining repurchase authorization of $872.5 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 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 $4.1 billion in share repurchases under its common stock share repurchase program. As of the end of the first quarter of 2017 , the Company has repurchased, in aggregate, $3.2 billion of its outstanding common stock, at an average price of $75.96 per share, excluding commissions and related fees.
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

17

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

share awards to cover minimum tax withholding requirements as common stock held in treasury in the accompanying condensed consolidated balance sheets as of April 1, 2017 and December 31, 2016 .
Quarterly Dividend
In the first quarters of 2017 and 2016 , the Company’s Board of Directors declared quarterly cash dividends of $0.50 and $0.30 per share of common stock, respectively. In the first quarter of 2017 , declared dividends totaled $35.7 million , and dividends paid totaled $36.7 million . In the first quarter of 2016 , declared dividends totaled $23.1 million , and dividends paid totaled $25.3 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.

( 14 ) Legal and Other Contingencies
As of April 1, 2017 and December 31, 2016 , the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $8.7 million and $11.0 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.
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 three months ended April 1, 2017 is shown below (in millions):
Balance at January 1, 2017
$
49.1

Expense, net (including changes in estimates)
7.8

Settlements
(2.9
)
Foreign currency translation and other
0.7

Balance at April 1, 2017
$
54.7


18

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 April 1, 2017 and December 31, 2016 , the Company had recorded environmental reserves of $9.0 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.

( 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 wiring harnesses, terminals and connectors and junction boxes, including components for high power and hybrid electric 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 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 April 1, 2017
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,868.0

 
$
1,130.5

 
$

 
$
4,998.5

Segment earnings (1)
320.3

 
164.9

 
(68.5
)
 
416.7

Depreciation and amortization
65.0

 
28.3

 
3.6

 
96.9

Capital expenditures
82.7

 
29.5

 
8.6

 
120.8

Total assets
6,824.5

 
1,835.7

 
1,940.3

 
10,600.5


19

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

 
Three Months Ended April 2, 2016
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,602.0

 
$
1,060.9

 
$

 
$
4,662.9

Segment earnings (1)
291.6

 
149.8

 
(67.9
)
 
373.5

Depreciation and amortization
61.3

 
26.1

 
2.8

 
90.2

Capital expenditures
62.4

 
20.2

 
5.5

 
88.1

Total assets
6,241.5

 
1,745.9

 
1,972.1

 
9,959.5

(1)  
See definition above.
For the three months ended April 1, 2017 , segment earnings include restructuring charges of $6.7 million , $1.7 million and $0.1 million in the seating and E-Systems segments and in the other category, respectively. For the three months ended April 2, 2016 , segment earnings include restructuring charges of $5.7 million , $2.9 million and $1.6 million in the seating and E-Systems segments and in the other category, respectively (Note 3 , " 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
 
April 1,
2017
 
April 2,
2016
Segment earnings
$
416.7

 
$
373.5

Interest expense
20.8

 
21.1

Other expense, net
3.7

 
8.5

Consolidated income before provision for income taxes and equity in net income of affiliates
$
392.2

 
$
343.9


( 16 ) 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):
 
April 1,
2017
 
December 31, 2016
Estimated aggregate fair value
$
2,007.0

 
$
2,004.8

Aggregate carrying value (1)
1,937.5

 
1,943.7

(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 April 1, 2017 , 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 April 1, 2017 and December 31, 2016 , are $35.6 million and $30.2 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).

20

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 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), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or (4) a contract not designated as a hedging instrument.
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, changes in the fair value of contracts not designated as hedging instruments and the ineffective portion of both cash flow and net investment hedges 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 Chinese renminbi, the Japanese yen and the Canadian dollar.

21

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The notional amount, estimated fair value and related balance sheet classification of the Company's foreign currency derivative contracts are shown below (in millions, except for maturities):
 
April 1,
2017
 
December 31,
2016
Fair value of contracts designated as cash flow hedges:
 
 
 
Other current assets
$
20.0

 
$
11.2

Other long-term assets
9.2

 
0.5

Other current liabilities
(15.2
)
 
(58.3
)
Other long-term liabilities
(0.6
)
 
(9.9
)
 
13.4

 
(56.5
)
 
 
 
 
Notional amount
$
1,152.4

 
$
1,275.0

Outstanding maturities in months, not to exceed
24

 
24

Fair value of contracts not designated as hedging instruments:
 
 
 
Other current assets
13.0

 
5.9

Other current liabilities
(7.6
)
 
(3.8
)
 
5.4

 
2.1

 
 
 
 
Notional amount
$
1,452.4

 
$
681.2

Outstanding maturities in months, not to exceed
9

 
12

 
 
 
 
Total fair value
$
18.8

 
$
(54.4
)
Total notional amount
$
2,604.8

 
$
1,956.2

Foreign currency derivative contracts not designated as hedging instruments consist principally of hedges of cash transactions, intercompany loans and certain other balance sheet exposures.
Pretax amounts related to foreign currency derivative contracts designated as cash flow hedges that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):
 
Three Months Ended
 
April 1,
2017
 
April 2,
2016
Gains (losses) recognized in accumulated other comprehensive loss
$
58.1

 
$
(15.7
)
 
 
 
 
Losses reclassified from accumulated other comprehensive loss to:
 
 
 
Net sales
0.1

 
0.3

Cost of sales
11.7

 
18.2


11.8

 
18.5

Comprehensive income
$
69.9

 
$
2.8

Accumulated Other Comprehensive Loss - Derivative Instruments and Hedging
As of April 1, 2017 and December 31, 2016 , pretax net gains (losses) of approximately $13.4 million and ($56.5) million , respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the next twelve month period, the Company expects to reclassify into earnings net gains of approximately $4.7 million recorded in accumulated other comprehensive loss as of April 1, 2017 . Such gains will be reclassified at the time that the underlying hedged transactions are realized.
During the three months ended April 1, 2017 and April 2, 2016 , amounts recognized in the accompanying condensed consolidated statements of comprehensive income related to changes in the fair value of cash flow and fair value hedges excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of cash flow and fair value hedges were not material.

22

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Fair Value Measurements
GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:
Market:
 
This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
 
 
Income :
 
This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
 
 
 
Cost:
 
This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:
Level 1:
 
Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
 
 
 
Level 2:
 
Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.
 
 
 
Level 3:
 
Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.
The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.
Items Measured at Fair Value on a Recurring Basis
Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of April 1, 2017 and December 31, 2016 , are shown below (in millions):
 
April 1, 2017
 
Frequency
 
Asset
(Liability)
 
Valuation
Technique
 
Level 1
 
Level 2
 
Level 3

Foreign currency derivative contracts, net
Recurring
 
$
18.8

 
Market/ Income
 
$

 
$
18.8

 
$

Marketable equity securities
Recurring
 
$
35.6

 
Market
 
$
35.6

 
$

 
$

 
December 31, 2016
 
Frequency
 
Asset
(Liability)
 
Valuation
Technique
 
Level 1
 
Level 2
 
Level 3

Foreign currency derivative contracts, net
Recurring
 
$
(54.4
)
 
Market/ Income
 
$

 
$
(54.4
)
 
$

Marketable equity securities
Recurring
 
$
30.2

 
Market
 
$
30.2

 
$

 
$

The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, the Company adjusts these discount rates, if required, by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. If an estimate of the credit spread is required, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy. As of April 1, 2017 and December 31, 2016 , there were no derivative contracts that were classified within Level 3 of the fair value hierarchy. In addition, there were no transfers in or out of Level 3 of the fair value hierarchy in 2017 .

23

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Items Measured at Fair Value on a Non-Recurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy.
As a result of the 2016 acquisition of AccuMED, Level 3 fair value estimates of $12.7 million and $13.9 million related to property, plant and equipment are recorded in the accompanying condensed consolidated balance sheets as of April 1, 2017 and December 31, 2016 , respectively. Level 3 fair value estimates of $53.0 million related to intangible assets are recorded in the accompanying condensed consolidated balance sheets as of April 1, 2017 and December 31, 2016 .
Fair value estimates of property, plant and equipment were based on independent appraisals, giving consideration to the highest and best use of the assets. Key assumptions used in the appraisals were based on a combination of market and cost approaches, as appropriate. Fair value estimates of customer-based intangible assets were based on the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets.
For further information on assets and liabilities measured at fair value on a non-recurring basis, see Note 2 , “ Acquisitions .”
As of April 1, 2017 , there were no additional significant assets or liabilities measured at fair value on a non-recurring basis.



24

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

( 17 ) Accounting Pronouncements
The Company has considered the ASUs issued by the Financial Accounting Standards Board ("FASB") summarized below, which could significantly impact its financial statements:
Standards Pending Adoption
 
Description
 
Effective Date
 
Anticipated Impact
ASU 2014-09, Revenue from Contracts with Customers (1)
 
The standard replaces existing revenue recognition guidance and requires additional financial statement disclosures. The provisions of these updates may be applied through either a full retrospective or a modified retrospective approach.
 
January 1, 2018
 
The Company is continuing to assess the potential effects of the standard. The Company’s current analysis indicates that the new standard may impact the Company's accounting for contractually guaranteed reimbursement of pre-production engineering and development and tooling costs related to products produced for its customers under long-term supply agreements. Under current guidance, such reimbursement is recorded as a cost offset. Under the new standard, the Company may recognize such reimbursements as revenues. While the Company continues to assess the potential effects of the standard, the Company does not currently expect the adoption of the new standard to have a material impact on consolidated net income or the consolidated balance sheet. The Company has not yet selected a transition method and plans to adopt the new standard effective January 1, 2018.
ASU 2016-02, Leases
 
The standard requires that a lessee recognize on its balance sheet right-of-use assets and corresponding liabilities resulting from leasing transactions, as well as additional financial statement disclosures. Currently, GAAP only requires balance sheet recognition for leases classified as capital leases. The provisions of this update apply to substantially all leased assets, with certain permitted exceptions, and must be adopted using a modified retrospective approach.
 
January 1, 2019
 
The Company is currently evaluating the impact of this update. For additional information on the Company’s operating lease commitments, see Note 11, "Commitments and Contingencies," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
 
The standard was issued to address the net presentation of the components of net benefit cost. It requires the classification of service cost in the same line item as other current employee compensation costs. It also requires the presentation of the remaining components of net benefit cost in a separate line item outside any subtotal for income from operations.
 
January 1, 2018
 
The update will result in the retrospective reclassification of the non-service cost components of net benefit cost from cost of sales and selling, general and administrative expenses to other expense, net. There will be no impact on consolidated net income.
(1) Along with four subsequent ASUs amending and clarifying ASU 2014-09:
ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date"
ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)"
ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients"

In addition to the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," discussed in Note 11 , " Income Taxes ," the Company adopted the ASUs summarized below in 2017. The effects of adopting the ASUs listed below did not significantly impact the Company's financial statements:
Standard
 
Description
 
Effective Date
ASU 2015-11, Simplifying the Measurement of Inventory
 
The standard requires the measurement of inventory at the lower of cost or net realizable value rather than at the lower of cost or market.
 
January 1, 2017
ASU 2016-05, Effects of Derivative Contract Novations on Existing Hedge Accounting Relationships and ASU 2016-06, Contingent Put and Call Options in Debt Instruments.
 
The standards provide clarification when there is a change in a counterparty to a derivative hedging instrument and the steps required when assessing the economic characteristics of embedded put or call options.
 
January 1, 2017
ASU 2016-07, Simplifying the Transition to Equity Method of Accounting
 
The standard eliminates the requirement to retroactively apply the equity method of accounting as a result of an increase in the level of ownership or degree of influence.
 
January 1, 2017
ASU 2016-17, Interests Held through Related Parties that Are under Common Control
 
The standard changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity in certain instances involving entities under common control.
 
January 1, 2017

25

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company has considered the recent ASUs summarized below, none of which are expected to significantly impact its financial statements:
Standard
 
Description
 
Effective Date
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities
 
The standard requires equity investments and other ownership interests in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value through earnings. A practicability exception exists for equity investments without readily determinable fair values.
 
January 1, 2018
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
 
The standard addresses the classification of cash flows related to various transactions, including debt prepayment and extinguishment costs, contingent consideration and proceeds from insurance claims.
 
January 1, 2018
ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other than Inventory
 
The standard requires the recognition of the income tax effects of intercompany sales and transfers (other than inventory) when the sales and transfers occur.
 
January 1, 2018
ASU 2016-18, Restricted Cash
 
The standard provides guidance on the presentation of restricted cash on the statement of cash flows.
 
January 1, 2018
ASU 2017-01, Clarifying the Definition of a Business
 
The standard provides a new framework to use when determining if a set of assets and activities is a business.
 
January 1, 2018
ASU 2017-05, Gains and Losses from the Derecognition of Nonfinancial Assets
 
The standard provides guidance for recognizing gains and losses on nonfinancial assets (including land, buildings and intangible assets) to noncustomers. Adoption must coincide with ASU 2014-09.
 
January 1, 2018
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
 
The standard changes the impairment model for most financial instruments to an "expected loss" model. The new model will generally result in earlier recognition of credit losses.
 
January 1, 2020
ASU 2017-04, Simplifying the Test for Goodwill Impairment
 
The standard simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based on the amount of a reporting unit's carrying value in excess of its fair value. This eliminates the requirement to calculate the implied fair value of goodwill or what is known as "Step 2" under the current guidance.
 
January 1, 2020


26

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(18) Supplemental Guarantor Condensed Consolidating Financial Statements


 
April 1, 2017
 
Lear
 
Guarantors
 
Non-
guarantors
 
Eliminations
 
Consolidated
 
(Unaudited; in millions)
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
250.4

 
$
0.3

 
$
959.0

 
$

 
$
1,209.7

Accounts receivable
423.2

 
292.2

 
2,593.4

 

 
3,308.8

Inventories
66.3

 
385.4

 
616.1

 

 
1,067.8

Intercompany accounts
76.5

 
156.5

 

 
(233.0
)
 

Other
134.1

 
12.7

 
495.8

 

 
642.6

Total current assets
950.5

 
847.1

 
4,664.3

 
(233.0
)
 
6,228.9

LONG-TERM ASSETS:
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
313.0

 
329.4

 
1,428.3

 

 
2,070.7

Goodwill
172.1

 
519.9

 
437.4

 

 
1,129.4

Investments in subsidiaries
4,269.9

 
1,546.3

 

 
(5,816.2
)
 

Intercompany loans receivable
1,068.3

 
1,167.7

 
118.2

 
(2,354.2
)
 

Other
513.4

 
134.7

 
542.8

 
(19.4
)
 
1,171.5

Total long-term assets
6,336.7

 
3,698.0

 
2,526.7

 
(8,189.8
)
 
4,371.6

Total assets
$
7,287.2

 
$
4,545.1

 
$
7,191.0

 
$
(8,422.8
)
 
$
10,600.5

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$

 
$
10.2

 
$

 
$
10.2

Accounts payable and drafts
392.6

 
559.6

 
2,090.8

 

 
3,043.0

Accrued liabilities
251.3

 
157.2

 
1,130.2

 

 
1,538.7

Intercompany accounts

 

 
233.0

 
(233.0
)
 

Current portion of long-term debt
37.5

 

 
1.3

 

 
38.8

Total current liabilities
681.4

 
716.8

 
3,465.5

 
(233.0
)
 
4,630.7

LONG-TERM LIABILITIES:
 
 
 
 
 
 
 
 
 
Long-term debt
1,884.8

 

 
4.2

 

 
1,889.0

Intercompany loans payable
1,124.9

 
54.5

 
1,174.8

 
(2,354.2
)
 

Other
265.1

 
5.8

 
365.8

 
(19.4
)
 
617.3

Total long-term liabilities
3,274.8

 
60.3

 
1,544.8

 
(2,373.6
)
 
2,506.3

EQUITY:
 
 
 
 
 
 
 
 
 
Lear Corporation stockholders’ equity
3,331.0

 
3,768.0

 
2,048.2

 
(5,816.2
)
 
3,331.0

Noncontrolling interests

 

 
132.5

 

 
132.5

Equity
3,331.0

 
3,768.0

 
2,180.7

 
(5,816.2
)
 
3,463.5

Total liabilities and equity
$
7,287.2

 
$
4,545.1

 
$
7,191.0

 
$
(8,422.8
)
 
$
10,600.5



27

Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(18) Supplemental Guarantor Condensed Consolidating Financial Statements (continued)

 
December 31, 2016
 
Lear
 
Guarantors
 
Non-
guarantors
 
Eliminations
 
Consolidated
 
(In millions)
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
480.4

 
$
0.3

 
$
790.9

 
$

 
$
1,271.6

Accounts receivable
314.0

 
238.7

 
2,193.8

 

 
2,746.5

Inventories
67.9

 
364.7

 
588.0

 

 
1,020.6

Intercompany accounts
87.0

 
94.3

 

 
(181.3
)
 

Other
119.4

 
15.3

 
475.9

 

 
610.6

Total current assets
1,068.7

 
713.3

 
4,048.6

 
(181.3
)
 
5,649.3

LONG-TERM ASSETS:
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
309.4

 
313.4

 
1,396.5

 

 
2,019.3

Goodwill
172.1

 
519.9

 
429.3

 

 
1,121.3

Investments in subsidiaries
4,002.3

 
917.5

 

 
(4,919.8
)
 

Intercompany loans receivable
308.9

 
1,206.9

 
91.1

 
(1,606.9
)
 

Other
456.6

 
146.8

 
525.1

 
(17.8
)
 
1,110.7

Total long-term assets
5,249.3

 
3,104.5

 
2,442.0

 
(6,544.5
)
 
4,251.3

Total assets
$
6,318.0

 
$
3,817.8

 
$
6,490.6

 
$
(6,725.8
)
 
$
9,900.6

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$

 
$
8.6

 
$

 
$
8.6

Accounts payable and drafts
328.8

 
460.1

 
1,851.6

 

 
2,640.5

Accrued liabilities
228.6

 
197.5

 
1,071.5

 

 
1,497.6

Intercompany accounts

 

 
181.3

 
(181.3
)
 

Current portion of long-term debt
34.4

 

 
1.2

 

 
35.6

Total current liabilities
591.8

 
657.6

 
3,114.2

 
(181.3
)
 
4,182.3

LONG-TERM LIABILITIES: