Lear Corporation
LEAR CORP (Form: 10-K, Received: 02/07/2017 08:41:34)
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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: 1-11311
LEARCORPORATIONA04.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)
Registrant’s telephone number, including area code: (248) 447-1500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
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 the 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
o
Smaller reporting company
o
 
 
(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 Act).    Yes   ¨     No   x
As of July 2, 2016 , the aggregate market value of the registrant’s common stock, par value $0.01 per share, held by non-affiliates of the registrant was $7,333,554,195 . The closing price of the common stock on July 2, 2016, as reported on the New York Stock Exchange, was $102.81 per share.
As of February 3, 2017 , the number of shares outstanding of the registrant’s common stock was 69,431,643  shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders to be held in May 2017 , as described in the Cross Reference Sheet and Table of Contents included herewith, are incorporated by reference into Part III of this Report.



Table of Contents


LEAR CORPORATION AND SUBSIDIARIES
CROSS REFERENCE SHEET AND TABLE OF CONTENTS
 
 
 
Page Number
or Reference
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
SUPPLEMENTARY ITEM.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
Quantitative and qualitative disclosures about market risk (included in Item 7)
 
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
________________________
(1)
Certain information is incorporated by reference, as indicated below, to the registrant’s Notice of Annual Meeting of Stockholders and Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders to be held in May 2017 (the "Proxy Statement").
(2)
A portion of the information required is incorporated by reference to the Proxy Statement sections entitled "Election of Directors" and "Directors and Corporate Governance."
(3)
Incorporated by reference to the Proxy Statement sections entitled "Directors and Corporate Governance — Director Compensation," "Compensation Discussion and Analysis," "Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report."
(4)
A portion of the information required is incorporated by reference to the Proxy Statement section entitled "Directors and Corporate Governance — Security Ownership of Certain Beneficial Owners, Directors and Management."
(5)
Incorporated by reference to the Proxy Statement sections entitled "Certain Relationships and Related Party Transactions" and "Directors and Corporate Governance — Independence of Directors."
(6)
Incorporated by reference to the Proxy Statement section entitled "Fees of Independent Accountants."



Table of Contents


PART I
ITEM 1 – BUSINESS
In this Report, when we use the terms the "Company," "Lear," "we," "us" and "our," unless otherwise indicated or the context otherwise requires, we are referring to Lear Corporation and its consolidated subsidiaries. A substantial portion of the Company’s operations are conducted through subsidiaries controlled by Lear Corporation. The Company is also a party to various joint venture arrangements. Certain disclosures included in this Report constitute forward-looking statements that are subject to risks and uncertainties. See Item 1A, "Risk Factors," and Part II Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements."
BUSINESS OF THE COMPANY
General
Lear Corporation is a leading Tier 1 supplier to the global automotive industry. We supply seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to virtually every major automotive manufacturer in the world. We have 243 manufacturing, engineering and administrative locations in 37 countries and are continuing to grow our business in all automotive producing regions of the world, both organically and through complementary acquisitions. Our manufacturing footprint reflects more than 143 facilities in 22 low cost countries.
We use our product, design and technological expertise, global reach and competitive manufacturing footprint to achieve the following financial goals and objectives with the aim to maximize shareholder value:
Continue to deliver profitable growth, balancing risks and returns;
Maintain a strong balance sheet with investment grade credit metrics; and
Consistently return excess cash to our shareholders.
Our business is organized under two reporting segments: Seating and E-Systems (formerly Electrical). Each of these segments has a varied product range across a number of component categories:
Seating — Our seating segment consists of the design, development, engineering, just-in-time assembly and delivery of complete seat systems, as well as the design, development, engineering and manufacture of all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests. Further, we have capabilities in active sensing and comfort for seats, utilizing electronically controlled sensor and adjustment systems and internally developed algorithms. Through a strategic investment, we also offer thermoelectric seat heating and cooling capabilities.
E-Systems — Our E-Systems segment consists of the design, development, engineering and manufacture of complete electrical distribution systems that route electrical signals and manage electrical power within the vehicle for traditional vehicle architectures, as well as high power and hybrid electric systems. 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. We also design, develop, engineer and manufacture sophisticated electronic control modules that facilitate signal, data and power management within the vehicle, as well as associated software. We have added capabilities in wireless communication modules and cybersecurity that securely process various signals to, from and within the vehicle, as well as road infrastructure.
We serve the worldwide automotive and light truck market in both our seating and E-Systems segments. We have automotive content on over 400 vehicle nameplates worldwide and serve all of the world’s major automotive manufacturers across our businesses and various component categories in both our seating and E-Systems segments. It is common to have both seating and electrical content on the same and multiple vehicle platforms with a single customer. In addition, our electrical components are often integrated into our complete seat systems. Our businesses benefit globally from leveraging common operating standards and disciplines, including world-class development and manufacturing processes, as well as common customer support and regional infrastructures. Our core capabilities are shared across component categories and include high-precision manufacturing and assembly with short lead times, management of complex supply chains, global engineering and program management skills, the agility to establish and/or move facilities quickly and a unique customer-focused culture. Our businesses utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating support functions, such as logistics, supply chain management, quality and health and safety, as well as all major administrative functions.

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Available Information on our Website
Our website address is http://www.lear.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission ("SEC"), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also make available on our website or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics (which includes specific provisions for our executive officers), charters for the standing committees of our Board of Directors and other information related to the Company. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information related to issuers that file electronically with the SEC.
History
Lear was founded in Detroit in 1917 as American Metal Products, a manufacturer of seating assemblies and other components for the automotive and aircraft industries, and was incorporated in Delaware in 1987. Through a management-led buyout in 1988, Lear Corporation established itself as a privately-held seat assembly operation for the North American automobile market with annual sales of approximately $900 million. We completed an initial public offering in 1994 and developed into a global supplier through organic growth and a series of acquisitions.
In May 1999, we acquired UT Automotive, Inc. ("UT Automotive") for a purchase price of approximately $2.3 billion from United Technologies Corporation. UT Automotive was a leading supplier of automotive electrical distribution systems. The acquisition of UT Automotive represented our entry into automotive electrical and electronic systems and was the basis for our current E-Systems segment. In addition to electrical distribution systems, UT Automotive produced a broad portfolio of automotive interior products, which were subsequently included in the transfer of substantially all of the assets of our interior business to International Automotive Components Group in October 2006 (European assets) and March 2007 (North American assets).
We have subsequently augmented our internal growth plans with selective acquisitions to expand our component capabilities and global footprint, as well as expand our technology portfolio. In May 2012, we acquired Guilford Mills, a leading supplier of automotive seat and interior fabric, from Cerberus Capital Management, L.P., for approximately $243 million. In January 2015, we acquired Everett Smith Group, Ltd., the parent company of Eagle Ottawa, LLC ("Eagle Ottawa"), the world's leading provider of leather for the automotive industry, for approximately $844 million. In August 2015, we acquired intellectual property and technology from Autonet Mobile, a developer of wireless communication software and devices for automotive applications. In November 2015, we completed the acquisition of Arada Systems Inc., an automotive technology company that specializes in vehicle-to-vehicle ("V2V") and vehicle-to-infrastructure ("V2I" and together with V2V, "V2X") communications. In December 2016, we acquired AccuMED Holdings Corp. ("AccuMED"), a privately-held developer and manufacturer of specialty fabrics. AccuMED was founded in 1974 and has an experienced management team, modern facilities with a low-cost footprint and a reputation for superior quality and innovation. Strategically, AccuMED provides innovative fabric processing technology that will benefit our automotive fabric operations, and it adds critical mass to our existing non-automotive fabric products.
Industry and Strategy
We supply all vehicle segments of the automotive light vehicle original equipment market in every major automotive producing region in the world. Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. Global automotive industry production volumes improved 2% in 2015 from the prior year and another 5% in 2016 to a record 91.2 million units.

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Details on light vehicle production in certain key regions for 2016 and 2015 are provided below. Our actual results are impacted by the specific mix of products within each market, as well as other factors described in Item 1A, "Risk Factors."
(In thousands of units)
2016  (1)
 
2015 (1, 2)
 
% Change
North America
17,849.3

 
17,495.4

 
2%
Europe and Africa
22,287.8

 
21,528.1

 
4%
Asia
46,987.2

 
43,942.4

 
7%
South America
2,598.8

 
2,871.2

 
(9)%
Other
1,503.8

 
1,258.7

 
19%
Total
91,226.9

 
87,095.8

 
5%
(1)
Production data based on IHS Automotive for vehicle weights up to 3.5 tons.
(2)
Production data for 2015 has been updated to reflect actual production levels.
Details on light vehicle production in certain emerging markets for 2016 and 2015 are provided below.
(In thousands of units)
2016  (1)
 
2015 (1, 2)
 
% Change
China
25,649.2

 
22,497.6

 
14%
India
4,135.8

 
3,775.4

 
10%
Brazil
2,121.8

 
2,330.0

 
(9)%
Russia
1,191.7

 
1,287.9

 
(7)%
(1)
Production data based on IHS Automotive for vehicle weights up to 3.5 tons.
(2)
Production data for 2015 has been updated to reflect actual production levels.
Details on our sales in certain key regions for 2016 and 2015 are provided below.
(In millions)
2016
 
2015
 
% Change
North America
$
7,523.6

 
$
7,755.7

 
(3)%
Europe and Africa
7,051.8

 
6,756.1

 
4%
Asia
3,444.6

 
3,235.5

 
6%
South America
537.6

 
464.1

 
16%
Total
$
18,557.6

 
$
18,211.4

 
2%
 
 
 
 
 
 
China (consolidated)
$
2,277.6

 
$
2,141.9

 
6%
China (non-consolidated)
1,598.6

 
1,508.0

 
6%
A growing trend toward crossover and sport utility vehicles has benefited our business, as our content on such vehicles can be significantly higher than average, particularly in our seating segment. Crossover and sport utility vehicle production has grown to approximately 30% of total vehicle production in 2016, up from 17% of total vehicle production five years ago. China has been a major driver of this trend, where crossover and sport utility vehicle production now comprises approximately 35% of total vehicle production, up from 11% of total vehicle production five years ago.
Key trends that specifically affect our business include automotive manufacturers’ utilization of global vehicle platforms, increasing demand for luxury and performance features, including increasing levels of electrical and electronic content, and China’s emergence as the single largest major automotive market in the world with above average long-term growth expectations.
Our strategy is built on addressing these trends and the major imperatives for success as an automotive supplier: quality, cost and efficiency and innovation and technology. We have expanded key component and software capabilities through organic investment and acquisitions to ensure a full complement of the highest quality solutions for our customers. We have restructured, and continue to align, our manufacturing and engineering footprint to attain a leading competitive position globally. We have established or expanded activities in new and growing markets, especially China, in support of our customers’ growth and global platform initiatives. These initiatives have helped us achieve our financial goals overall, as well as a more balanced regional, customer and vehicle segment diversification in our business.
In addition, we believe that the following mega-trends are likely to be at the forefront of our industry for the foreseeable future with each of these trends advancing and converging toward autonomous vehicles:

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Connectivity — Customer and consumer demand to have constant communication and information exchange. This trend began with consumer demand to extend and integrate their mobile connectivity into the vehicle by connecting mobile devices with vehicle infotainment systems. Connectivity requirements will continue to grow as we believe that vehicles will increasingly have direct communication with cellular networks, infrastructure, satellites and other vehicles in the grid to enable more advanced safety and fuel efficiency functionality. Vehicles are effectively becoming smart devices on wheels as the automobile is increasingly becoming a platform connected to various types of communication networks. We expect these trends to continue, making the vehicle a constantly connected device, receiving and transmitting data through a variety of signals, which communicate directly with the on-board vehicle network.
Safety — Customer and consumer demand for safety features and systems that protect vehicle occupants when a crash occurs, and also, with an increasing prevalence, for advanced driver assistance systems that proactively respond to driving situations to reduce the likelihood or severity of a crash.
Efficiency — Customer and consumer demand for more energy efficient vehicles that meet increasingly strict fuel economy and emission standards and reduce the environmental impact of automobiles. This requires further use of electronically controlled powertrains and related components to improve fuel efficiency, adoption of alternative energy powertrains, such as hybrid, electric and other powertrain technologies that facilitate high power electrification of the vehicle, and use of lighter weight materials throughout the car.
These mega-trends have become widely accepted and also are attracting new, non-traditional entrants to the automotive industry that are leveraging technology, vehicle electrification and consumer relationships to exploit growth opportunities in the industry. Regulation is also a major influence with these mega-trends, as government mandates (e.g., for vehicles to meet minimum fuel economy and emissions standards or be equipped with certain safety-related components) are driving vehicle design and technology plans. For example, in December 2016, the U.S. Department of Transportation issued a proposed rule that would advance the deployment of connected vehicle technologies throughout the U.S. light vehicle fleet. The proposed rule would require V2V communication technology on all new light-duty vehicles, enabling a multitude of new crash-avoidance applications that, once fully deployed, could prevent hundreds of thousands of crashes every year by helping vehicles “talk” to each other.
We are well positioned for growth by capitalizing on these mega-trends as we supply high value systems and components that drive critical functionality and core elements of the vehicle’s electrical architecture and design. The systems and components that we design, develop and manufacture facilitate connectivity of various vehicle systems, impact a vehicle’s safety and crashworthiness and support more fuel efficient alternative powertrains. Many of our systems and components also directly impact the consumer, providing us with the opportunity to offer our automotive customers technology, solutions and designs that will differentiate their vehicles in the consumer marketplace.
We are well positioned to directly participate in the connectivity mega-trend as we design, develop and supply systems, components and software that connect the various electrical and electronic systems within the vehicle into integrated on-board power and data communication networks. We further have the technology and expertise to wirelessly and securely connect these on-board vehicle networks and systems with external networks over various standards and protocols. This expertise allows us to offer our automotive customers electronic modules, such as connected gateway modules, that offer functionality such as over-the-air software updates or cellular communication of vehicle performance data to the automotive manufacturers, their dealers or the vehicle owners. Our expertise in dedicated short-range communications ("DSRC") technology allows us to provide in-vehicle and roadside modules and software that facilitate direct, high speed communication between vehicles and road infrastructure. Importantly, we have expertise in cybersecurity, including architectures, designs and techniques that promote highly secure transmission of data to, from and within the vehicle, as well as road infrastructure.
Furthermore, a seat is an active part of the vehicle safety system. As a result of our innovative product design and technology capabilities, we are able to provide seats with enhanced safety features, such as the active head restraint and seat structures that withstand collision impact well in excess of what is demanded by regulatory agencies. We have developed products and materials to reduce cost and enhance seat design and packaging flexibility, including our mini recliners and micro adjust tracks. Another way in which we are well-positioned to benefit from this mega-trend related growth is our belief that the seat system will become increasingly more sophisticated, dynamic and connected to both the occupants and the vehicle. The seat is the logical focal point for monitoring the driver and passenger and for facilitating feedback between the vehicle and the occupants. Our capabilities in DSRC and other V2X communications protocols and applications position us to provide high speed communication between vehicles, even in extreme weather conditions, potentially reducing crashes through real-time advisories alerting drivers to imminent hazards in the roadway ahead, including other vehicles on a potential path for collision.
Continued growth in more fuel efficient, complex and electronically controlled powertrains is helping to drive content growth in the vehicle's electrical distribution system. The emergence and continued development of alternative energy powertrains, including electric, hybrid electric, 48-volt and other technologies, is driving growth in high power electric systems and

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components. Hybrid and electric vehicles incorporate both high power and low power components. As a result, they offer a significant incremental content opportunity for us. These trends all support continued growth in electrical and electronic content on the vehicle, as well as associated software. This content growth will require far more complex vehicle electrical architectures. Our significant experience designing and manufacturing highly integrated and standardized architectures that optimize size, performance and quality leaves us well positioned to take advantage of the growth in electrical content and the increasingly complex architectures.
We believe that the convergence of these mega-trends and eventual wide-spread adoption of autonomous vehicles will benefit both our seating and E-Systems segments. We believe that autonomous vehicles will have seat designs and requirements that are far more flexible and demanding in both autonomous and piloted driving states. Further, more active monitoring of the driver and the driver’s position and physical state will be required to manage the transitions between automonous and piloted driving conditions. We also believe that autonomous vehicles will not only need to be fully connected and networked to maximize their safety and efficiency, they will have much higher levels of power consumption to support the array of sensors and processing power required to operate such vehicles.
Seating Segment
Lear is a recognized global leader in complete automotive seat systems and key individual seat components. The seating segment consists of the design, development, engineering, just-in-time assembly and delivery of complete seat systems, as well as the design, development, engineering and manufacture of all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests, as well as seating-related electrical and electronics (including software products). We have the most complete set of component offerings of any automotive seating supplier and are a market leader in every automotive producing market in the world. Further, we have expertise and are building capabilities in seat comfort technologies, including heating and cooling. Overall, our global manufacturing and engineering expertise, low-cost footprint, complete component capabilities, quality leadership and strong customer relationships provide us with a solid platform for future growth in this segment.
We produce seat systems that are fully assembled and ready for installation in automobiles and light trucks. Seat systems are generally designed and engineered for specific vehicle models or platforms. We develop seat systems and components for all vehicle segments from compact cars to full-size sport utility vehicles. We are the world leader in luxury and performance automotive seating, providing craftsmanship, elegance in design, use of innovative materials and industry-leading technology required by premium brands, including Alfa Romeo, Audi, BMW, Cadillac, Ferrari, Jaguar Land Rover, Lamborghini, Lincoln, Maserati, Mercedes-Benz and Porsche.
We have been executing a strategy for vertical integration of key seat components to enhance growth, improve quality, increase profitability and support our current market position in just-in-time seat assembly. In this regard, our capabilities in seat structures and mechanisms include complete development and manufacturing capabilities in every major automotive producing region in the world. In addition, we have developed standardized seat structures and mechanisms that can be adapted to multiple segments to minimize investment costs. We believe that our low-cost manufacturing footprint in seat structures and mechanisms and our precision engineered seat mechanism expertise are competitive advantages.
We have also expanded our seat cover operations, including precision cutting, assembly, sewing and lamination of seat fabric, in low-cost markets, entered the fabric business (largely through our acquisition of Guilford Performance Textiles) and added industry-leading leather design, development and manufacturing capabilities (through our acquisition of Eagle Ottawa). We can provide globally a full range of seat cover capabilities and design solutions, including the use of unique leather and fabric applications. We believe that the combination of these capabilities in seating surface materials leads the industry.
Craftsmanship and Design
We believe that our broad portfolio of capabilities, including advanced design and material integration skills, is a differentiating competitive advantage for us. The breadth of our portfolio and depth of our design expertise allow us to have early involvement in the automotive manufacturer’s design process and the opportunity to better integrate all seating components to provide differentiated comfort, quality and overall value for the end consumer. We are leveraging our unique position to be an industry leader in differentiated design through the creation of a Center for Craftsmanship. This is a dedicated studio for customer interface where designers and engineers work collaboratively to create innovative solutions early in the design process. We have also developed a proprietary craftsmanship process called Harmonic Precision that synthesizes all of our component expertise and technologies with our customers’ design visions. We believe that our unmatched component capabilities and design know-how, combined with our global manufacturing presence, enable us to be uniquely positioned to bring innovative designs into production with the highest level of craftsmanship.

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Intelligent Seating (INTU TM Seating)
The seat is emerging as an integral device facilitating the direct connection between drivers and passengers and the vehicle. This direct connection will increasingly support the functionality of connected and autonomous vehicles. We are the only seating supplier with both global capabilities in all major seat components and global electronics development (including software), manufacturing and integration. We believe that the seat will increasingly integrate electronics, not only for motorized control, but for dynamic sensing and response. We have developed active sensing and comfort seat capabilities, utilizing electronically controlled sensor and adjustment systems and internally developed algorithms. These seat designs automatically and constantly adjust the seat's cushioning and support based on the occupant’s position and ideal alignment for health and wellness. We also have developed technologies that will monitor certain bio-metric readings through seat sensors with a high level of accuracy and reliability. We believe that intelligent and dynamic seating solutions, which we call INTU TM Seating, will provide future benefits as consumers and automotive manufacturers demand seats that can sense key attributes of a driver and passenger and communicate these attributes within the vehicle network, as well as to external networks. Our seats will intuitively anticipate and dynamically adjust to the occupant's needs and preferences related to posture, health and wellness, comfort and safety. We believe that the seat will increasingly become a more dynamic and integrated system that will actively react to both the driver and driving conditions, particularly with the advent of autonomous vehicles. Such trends will promote increased levels of electrical and electronic integration into the seat.
Manufacturing
Our seat assembly facilities use lean manufacturing techniques, and our finished products are delivered to the automotive manufacturers on a just-in-time basis, matching our customers’ exact build specifications for a particular day, shift and sequence thereby reducing inventory levels. These facilities are typically located adjacent to or near our customers’ manufacturing and assembly sites. Increasingly, we are utilizing component and sub-assembly designs that allow us to drive higher efficiencies in our seat assembly facilities and further integrate certain assembly activities with our core component manufacturing operations. Our seat components, including recliner mechanisms, seat tracks and seat trim covers, leather and fabric are manufactured in batches, typically utilizing facilities in low-cost regions.
Financial Summary
A summary of revenues from external customers and other financial information for our seating segment is shown below. For additional information regarding the operating results of our seating segment, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." For additional information regarding Lear’s total sales and long-lived assets by geographic area, as well as customer concentrations, see Note 12 , " Segment Reporting ," to the consolidated financial statements included in this Report. The top five customers of this segment are: General Motors, Ford, BMW, Fiat Chrysler and Daimler.
(In millions)
2016
 
2015
 
2014
Revenues from external customers
$
14,356.7

 
$
14,098.5

 
$
13,310.6

Segment earnings (1)
1,136.0

 
907.0

 
655.2

Depreciation and amortization
258.1

 
239.3

 
199.8

Capital expenditures
341.6

 
317.2

 
268.9

Total assets
6,199.2

 
5,780.7

 
4,855.6

(1)
As discussed in Note 2 , " Summary of Significant Accounting Policies — Segment Reporting," segment earnings represents pretax income before equity in net income of affiliates, interest expense and other expense.
Competition
Based on independent market studies and management estimates, we believe that we hold the #2 position in seat systems assembly globally on the basis of revenue with strong positions in all major markets. We estimate the global seat systems market at more than $64 billion in 2016 . We believe that we are also among the leading suppliers of various components produced for complete seat systems.
Our primary competitor in this segment globally is Adient, plc. Other competitors in this segment include Faurecia S.A., Toyota Boshoku Corporation, TS Tech Co., Ltd. and Magna International Inc., which have varying market presence depending on the region, country or automotive manufacturer. Peugeot S.A., Toyota Motor Corporation and Honda Motor Co. Ltd. hold equity ownership positions in Faurecia S.A., Toyota Boshoku Corporation and TS Tech Co., Ltd., respectively. Other automotive manufacturers maintain a presence in the seat systems market through wholly owned subsidiaries or in-house operations. In seat components, we compete with the seat systems suppliers identified above, as well as certain suppliers that specialize in particular components.

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Technology
We maintain state-of-the-art testing, instrumentation and data analysis capabilities. We own industry-leading seat validation test centers featuring crashworthiness, durability and full acoustic and sound quality testing capabilities. Together with computer-controlled data acquisition and analysis capabilities, these centers provide precisely controlled laboratory conditions for sophisticated testing of parts, materials and systems. In addition, we incorporate many convenience, comfort and safety features into our designs, including advanced whiplash prevention concepts, integrated restraint seat systems and side impact airbags. We also invest in our computer-aided engineering design and computer-aided manufacturing systems.
We also are investing in seat heating and cooling capabilities and technologies. We are building expertise in this area and entered into a strategic partnership for thermoelectric seat heating and cooling technology that will provide us with the potential to heat and cool seats faster utilizing less energy than other systems available today. The addition of seat heating and cooling to our existing capabilities and technologies in seat fabric, premium leather and seat cover sewing, as well as seat foam and seat structures, allows us to offer unique seat designs and the most complete range of seat features.
We have developed products and materials to improve comfort and ease of adjustment, promote customization and styling flexibility, increase durability and reliability, enhance safety, expand the usage of environmentally friendly materials and reduce cost and weight. ProActive™ Posture seating uses proprietary MySeat by Lear™ technology powered by our TheraMetric™ analytical process. This process is derived from our research to provide a driver with a seating position that promotes better posture and cumulative wellness benefits. ProActive™ Posture Seating has been endorsed by the American Chiropractic Association, International Chiropractors Association, World Federation of Chiropractic and Loomis Institute of Enzyme Nutrition. Our Lear Crafted Comfort Connect™ and Advanced Comfort Systems™ are adjustable cushions, seat backs and side bolsters which support correct posture and provide improved comfort and appearance. Our Guilford TeXstyle™ fabrics provide customizable fabric engineered to improve the vehicle experience and durability, and our TeXstyle™ Enhance offerings provide a range of secondary embellishment technologies to enhance standard fabrics, enabling unique design within an array of fabric choices. Our proprietary, anti-soiling performance leather finishing technology, Ansolé™, improves durability and protects against fading. Our head restraints provide improved comfort and safety with adjustability. Our high speed smart fold technology is a regulated high speed folding adjustment mechanism that delivers premium convenience while maintaining leading safety and comfort benefits. Our mini recliners and micro adjust tracks are seat mechanisms, which provide precision movement and facilitate interior packaging space flexibility. Our Dynamic Environmental Comfort Systems™ utilize environmentally friendly materials and offer weight reductions of 30% - 40%, as compared to current foam seat designs. Our SoyFoam™ seats, which are used by multiple global customers, are up to 24% renewable, as compared to non-renewable, petroleum-based foam seats.
For additional factors that may impact our seating segment’s business, financial condition, operating results and/or cash flows, see Item 1A, "Risk Factors."
E-Systems Segment
The E-Systems segment consists of the design, development, engineering, manufacture, assembly and supply of electrical distribution systems, electronic modules and related components and software for light vehicles globally. We are a leader in power management and signal distribution within the vehicle for traditional vehicle architectures, as well as high power and hybrid electric systems. We have connectivity hardware and software capabilities, including cybersecurity expertise, that facilitate secure, wireless communication between the vehicle’s electrical and electronic architecture and external networks, as well as other vehicles.
Electrical Distribution Systems
Electrical distribution systems route electrical signals and manage electrical power within the vehicle for traditional vehicle architectures, as well as high power and hybrid electric systems. 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.
Wire harness assemblies are a collection of wiring and terminals and connectors that link all of the various electrical and electronic devices within the vehicle to each other and/or to a power source. Wire harness assemblies are a collection of individual circuits fabricated from raw and insulated wire, which is automatically cut to length and terminated during the manufacturing process. Individual circuits are assembled together on a jig or table, inserted into connectors and wrapped or taped to form wire harness assemblies. The assembly process is labor intensive, and as a result, production is generally performed in low-cost labor sites in Mexico, Honduras, Eastern Europe, Africa, China, the Philippines, Brazil and Thailand.
Terminals and connectors include conductive metal components and connector housings that join wire harness assemblies together at their respective end points or connect devices to wire harness assemblies. Terminals and connectors can vary significantly in size and complexity depending on the amount of power or data being transferred and the number of connections

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being made at any particular point in the electrical distribution system. Terminals and connectors are currently manufactured in Germany, China, Eastern Europe and the United States.
Junction boxes are centrally located modules within the vehicle that contain fuses and/or relays for circuit and device protection and serve as a connection point for multiple wire harnesses. Junction boxes are manufactured in Mexico, Northern Africa, Europe, China and the Philippines with a proprietary, capital-intensive assembly process using printed circuit boards, a portion of which are purchased from third-party suppliers. Certain materials, particularly certain specialized electronic components, are available from a limited number of suppliers. Proprietary features have been developed to improve the function of these junction boxes in harsh environments, including extreme temperatures and humidity.
Our advanced efficiency systems group is dedicated to the development of high power and hybrid electric systems and components, including wiring, terminals and connectors and power electronics. We have products and technologies that enable the varying degrees of powertrain electrification being employed by automotive manufacturers today from mild hybrid vehicles to full electric vehicles, including 48-volt architectures. Our products include on-board charging systems, charge cord sets, high voltage electrical distribution systems and battery monitoring technology. Our global center for Advanced Efficiency Systems and high power applications is in Southfield, Michigan with full development capabilities also located in Valls, Spain. We are supplying, or will supply, high voltage components and systems for hybrid and electric vehicles produced by BMW, Daimler, Fiat Chrysler, General Motors, Jaguar Land Rover and Renault-Nissan. We believe that our expertise in high power electrical distribution systems will provide additional growth opportunities going forward and will be beneficial with the entrance of technology and emergent companies focusing on electric or other alternative powertrain designs.
Electronics
In our E-Systems segment, we also design, develop, engineer and manufacture electronics, which control various functions within the vehicle, as well as develop and integrate the associated software for these electronic modules. Our electronic modules include body control modules, smart junction boxes, gateway modules, wireless control modules, lighting control modules and audio amplifiers. Our engineering and development activities for electronics are in Southfield, Michigan, Santa Rosa, California, Spain, Germany, Belgium, China and India. We assemble these modules using high-speed surface mount placement equipment in Mexico, China, the Philippines, Morocco, Spain and Germany.
Body control modules primarily control vehicle interior functions outside of the vehicle’s head unit or infotainment system. Depending on the vehicle’s electrical and electronic architecture, these modules can be either highly integrated, consolidating multiple functional controls into a single module, or focus on a specific function, such as seat position and comfort controls or the door zone control module which controls features such as window lift, door lock and power mirrors. As electronic control modules become increasingly centralized and integrated, we developed "smart junction boxes," which are junction boxes augmented with integrated electronic functionality that otherwise would be contained in other body control modules. The integration of functionality in our smart junction boxes eliminates interconnections, increases overall system reliability and can consolidate the number of electronic modules within the vehicle. This can lead to reduced cost and complexity. We believe that our expertise in consolidating functional controls into integrated modules and integrating these modules into the vehicle’s electrical and electronic architecture is a competitive strength.
We develop and produce gateway modules, which facilitate secure access to, and communication with, all of the vehicle systems at a central point and translate various signals to facilitate data exchange across vehicle domains. This gateway becomes increasingly important as formerly distinct vehicle systems increasingly must work in concert with one another. We also offer wireless functionality in both integrated and stand-alone modules, which send and receive signals using radio frequency technology. Our wireless systems include passive entry systems, remote keyless entry and dual range/dual function remote keyless entry systems. We are building on both our core gateway and wireless capabilities as we add and develop higher levels of data and signal connectivity in and out of the vehicle.
Our electronics product offerings also include lighting control modules, which provide the electronic control logic and diagnostics for increasingly advanced and complex vehicle lighting systems. We supply LED lighting control systems for vehicle interiors and exteriors. In addition, we offer audio electronics, including premium audio amplifiers and complete vehicle sound system development capabilities with advanced domain control and audio tuning.
The higher level of complexity and processing power in these electronic control modules is driving rapid increases in software requirements associated with these modules. Accordingly, we continue to build on our knowledge and capabilities in software in order to design and develop more complex and integrated electronic control modules capable of more efficiently managing the distribution of power and data signals through the vehicle.
Connectivity
We are building connectivity capabilities that facilitate secure, wireless communication between the vehicle’s systems and external networks, as well as other vehicles. Our connectivity strategy is based on leveraging our expertise in vehicle electrical

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and electronic architecture design and development, electronic module functional integration, gateway module data exchange and core wireless signals. We are building capabilities organically through internal investment and through acquisition and partnership. Recent transactions added technology that directly connects on-board vehicle systems with cloud-based applications using proprietary, secure data exchange capabilities via cellular networks and V2X hardware and software solutions utilizing expertise in 5.9 GHz DSRC and other wireless communications protocols, notably GPS satellite communications.
These capabilities, combined with our vehicle electrical and electronic architecture expertise and products, allow us to offer our customers embedded modules and software that facilitate direct and secure connectivity between the vehicle and external networks. Products that we can offer will include connected gateway modules with an array of features including over-the-air software update capabilities, embedded cellular communication modules, e-Call modules that automatically contact emergency services in the event of a crash and both on-board and roadside DSRC units that facilitate V2X communications. We combine these offerings with cybersecurity expertise and software solutions to permit highly secure communications and defend against cybersecurity attacks.
Financial Summary
A summary of revenues from external customers and other financial information for our E-Systems segment is shown below. For additional information regarding the operating results of our E-Systems segment, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations." For additional information regarding Lear’s total sales and long-lived assets by geographic area, as well as customer concentrations, see Note 12 , " Segment Reporting ," to the consolidated financial statements included in this Report. The top five customers of this segment are: Ford, General Motors, Renault-Nissan, Jaguar Land Rover and BMW.
(In millions)
2016
 
2015
 
2014
Revenues from external customers
$
4,200.9

 
$
4,112.9

 
$
4,416.7

Segment earnings (1)
591.3

 
554.4

 
556.6

Depreciation and amortization
107.6

 
99.3

 
103.3

Capital expenditures
162.4

 
134.4

 
138.4

Total assets
1,675.9

 
1,572.9

 
1,609.9

(1)
As discussed in Note 2 , " Summary of Significant Accounting Policies — Segment Reporting," segment earnings represents pretax income before equity in net income of affiliates, interest expense and other expense.
Competition
We estimate the global target market for our E-Systems business to be over $70 billion. Our major competitors in electrical distribution systems include Delphi Automotive PLC, Leoni AG, Molex Incorporated (a subsidiary of Koch Industries Inc.), Sumitomo Corporation, TE Connectivity and Yazaki Corporation. Our major competitors in electronic modules, including connectivity solutions, include Continental AG, Delphi Automotive PLC, Denso Corporation, Harman International Industries, Incorporated (acquired by Samsung Electronics Co. Ltd.), Hella AG, Robert Bosch GmbH, Valeo S.A. and Visteon Corporation.
Technology
The E-Systems segment is technology driven and typically requires higher investment as a percentage of sales than our seating segment. Our complete electrical distribution system design capabilities, coupled with certain market-leading component technologies, allow access to our customers’ development teams, which provides an early indication of our customers’ product needs and enables us to develop system design efficiencies. Our ability to design and integrate electronic modules creates a competitive advantage as we support customers with complete electrical architecture development. Our expertise is developed and delivered by over 2,200 engineers across fourteen countries and is led by five global technology centers of excellence in Belgium, China, Germany, Spain and the United States for each of our major product lines in this segment, which are described below.
In electrical distribution systems, our technology includes expertise in the design and use of alternative conductor materials, such as aluminum, copper-clad steel and other hybrid alloys. Alternative conductor materials can enable the use of ultra small gauge conductors, which reduce the weight and packaging size of electrical distribution systems. We were the first to implement copper-clad steel cabling in series production. We also have developed proprietary manufacturing process technologies, such as our vertical manufacturing system that features three dimensional wire harness assembly boards. Our expertise in terminals and connectors technology facilitates our ability to implement these small gauge and alternative alloy conductors. We have developed advanced capabilities in aluminum terminals and aluminum wire termination, ultra small gauge

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termination, and high voltage terminals and connectors. We have developed high packaging density in-line connectors and new small gauge terminals that will enable wire gauge reduction and provide our customers with smaller and lower cost solutions. Our high voltage terminals and connectors are a part of our advanced efficiency systems capabilities, and we have established a leading capability in power density (power per packaging size) that is being adopted by multiple automakers. Our advanced efficiency systems and components for high voltage vehicle applications have achieved industry leading efficiency, packaging and reliability. We continue to build on our strong technology position for high voltage applications and have developed an 11kW wireless charging system that enables electric vehicles to safely recharge at the highest power level available without plugging in the vehicle. We have 619 patents issued or applied for in the advanced efficiency systems product technology area.
In electronics, we are a market leader in smart junction box technology and began production of our Automotive News PACE Award winning Solid State Smart Junction Box™ in 2016. We continue to refine our smart junction box technology, including the development of aluminum printed circuit boards. We have developed body control modules with dual core microprocessors that allow body control and gateway functionality in a single module. We are a leader in gateway module technology and have capabilities to enable our gateway and other electronic control modules to efficiently and securely manage the increasing amount of both wired and wireless signals running throughout, as well as within and outside of, the vehicle. We also have developed wireless products, such as lower-cost passive entry systems with improved security using ultra wide band technology and that feature our 2-way remote keyless entry systems that enable the vehicle to provide feedback to the consumer, such as verification that the doors have locked or that the engine has started. In lighting, we have developed advanced technology electronic controls, including a Matrix LED Control System capable of individually dimming and switching on/off up to 100 LEDs. This system enables steerable light beams and other advanced lighting features and can be paired with driver assistance system sensors for functionality, such as automatic high beam management and obstacle highlighting. In audio, we have developed an ethernet audio video bridging amplifier that facilitates faster processing of digital data at a lower cost.
Software remains a critical element of our E-Systems business. Software capabilities are becoming more important in the management of complex and highly sophisticated electrical architectures. Software within the vehicle is rapidly growing as a key element of technological innovation and a cost effective way to provide new features and functions. We currently employ approximately 600 software engineers globally and are pursuing expansion of specialized capabilities in vehicle networking, encryption, cybersecurity and connectivity protocols. We have expanded our software development capabilities through acquisition, internal investment and strategic hires, building on our architecture and power management capabilities with expertise in wireless communication software and cybersecurity. As part of our strategy to provide vehicle cybersecurity solutions to our customers, we have developed a firewall module, including proprietary software, which protects the vehicle from cybersecurity intrusion through one of its most vulnerable points, the on-board diagnostic port. We also have enhanced our V2X product line by adding secure, over-the-air software update capabilities to our V2X modules, allowing these units to receive regular software upgrades, which provide additional applications and functionality.
For additional factors that may impact our E-Systems segment’s business, financial condition, operating results and/or cash flows, see Item 1A, "Risk Factors."
Customers
In 2016 , Ford and General Motors, two of the largest automotive and light truck manufacturers in the world, each accounted for 21% of our net sales. In addition, BMW accounted for approximately 10% of our net sales. We supply and have expertise in all vehicle segments of the automotive market. Our sales content tends to be higher on those vehicle platforms and segments which offer more features and functionality. The popularity of particular vehicle platforms and segments varies over time and by regional market. We expect to continue to win new business and grow sales at a greater rate than overall automotive industry production. For further information related to our customers and domestic and foreign sales and operations, see Note  12 , " Segment Reporting ," to the consolidated financial statements included in this Report.
Our customers award business to their suppliers in a number of ways, including the award of complete systems, which allows suppliers either to manufacture components internally or to purchase components from other suppliers at their discretion. Certain of our customers also elect to award certain components directly to component suppliers and independent of the award of the complete system. We have been selectively expanding our component capabilities and investing in manufacturing capacity in low-cost regions in order to maximize our participation in such component sourcing.
Our customers typically award contracts several years before actual production is scheduled to begin. Each year, the automotive manufacturers introduce new models, update existing models and discontinue certain models and, recently, even complete brands. In this process, we may be selected as the supplier on a new model, we may continue as the supplier on an updated model or we may lose a new or updated model to a competitor. Our sales backlog reflects estimated net sales over the next three years from formally awarded new programs, less lost and discontinued programs. This measure excludes the sales backlog at our non-consolidated joint ventures. As of January 2017, our 2017 to 2019 sales backlog is $2.8 billion, an increase of 40% as compared to our sales backlog as of January 2016. Our current sales backlog reflects $1.25 billion related to 2017

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and 73% and 27% related to our seating and E-Systems segments, respectively. In addition, our 2017 to 2019 sales backlog at our non-consolidated joint ventures is $800 million. Our current sales backlog assumes volumes based on the independent industry projections of IHS Automotive as of December 2016 and a Euro exchange rate of $1.05 / Euro. This sales backlog is generally subject to a number of risks and uncertainties, including vehicle production volumes on new and replacement programs and foreign exchange rates, as well as the timing of production launches and changes in customer development plans. For additional information regarding risks that may affect our sales backlog, see Item 1A, "Risk Factors," and Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements."
We receive purchase orders from our customers that generally provide for the supply of a customer’s annual requirements for a particular vehicle model and assembly plant, or in some cases, for the supply of a customer’s requirements for the life of a particular vehicle model, rather than for the purchase of a specified quantity of products. Although most purchase orders may be terminated by our customers at any time, such terminations have been minimal and have not had a material impact on our operating results. We are subject to risks that an automotive manufacturer will produce fewer units of a vehicle model than anticipated or that an automotive manufacturer will not award us a replacement program following the life of a vehicle model. To reduce our reliance on any one vehicle model, we produce automotive systems and components for a broad cross-section of both new and established models. However, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating performance. Our net sales for the year ended December 31, 2016 , consisted of 13% compact, 46% mid-size, 23% full-size/luxury and 18% full frame and were comprised of 47% cars and 53% light trucks.
Our agreements with our major customers generally provide for an annual productivity price reduction. Historically, cost reductions through product design changes, increased manufacturing productivity and similar programs with our suppliers have generally offset these customer-imposed price reduction requirements. However, raw material, energy and commodity costs can be volatile. Although we have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. Certain of these strategies also may limit our opportunities in a declining commodity environment. In addition, we are exposed to increasing market risk associated with fluctuations in foreign exchange as a result of our low-cost footprint and vertical integration strategies. We use derivative financial instruments to reduce our exposure to fluctuations in foreign exchange rates. For additional information regarding our foreign exchange and commodity price risk, see Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Financial Condition — Foreign Exchange" and "— Commodity Prices."
Seasonality
Our principal operations are directly related to the automotive industry. Consequently, we may experience seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants close for model year changeovers, in December when many customer plants close for the holidays and during periods of high vehicle inventory. See Note 14 , " Quarterly Financial Data ," to the consolidated financial statements included in this Report.
Raw Materials
The principal raw materials used in our seat systems, electrical distribution systems and electronics are generally available and obtained from multiple suppliers under various types of supply agreements. Components, such as fabric, foam, leather, seat structures and mechanisms, terminals and connectors and certain other components are either manufactured by us internally or purchased from multiple suppliers under various types of supply agreements. The majority of the steel used in our products is comprised of fabricated components that are integrated into a seat system, such as seat frames, recliner mechanisms, seat tracks and other mechanical components. Therefore, our exposure to changes in steel prices is primarily indirect, through these purchased components. With the exception of certain terminals and connectors, the materials that we use to manufacture wire harness assemblies are substantially purchased from suppliers, including extruded and insulated wire and cable. The majority of our copper purchases are comprised of extruded wire and cable that we integrate into electrical wire harnesses. In general, our copper purchases, as well as a significant portion of our leather purchases, are subject to price index agreements with our customers. We utilize a combination of short-term and long-term supply contracts to purchase key components. We generally retain the right to terminate these agreements if our supplier does not remain competitive in terms of cost, quality, delivery, technology or customer support.


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Employees
As of December 31, 2016 and 2015 , our employment levels worldwide were approximately as follows:
Region
2016
 
2015
United States and Canada
9,900

 
10,200

Mexico
48,700

 
46,600

Central and South America
11,100

 
10,400

Europe and Africa
52,600

 
47,200

Asia
26,100

 
21,800

Total
148,400

 
136,200

A substantial number of our employees are members of unions or national trade organizations. We have collective bargaining agreements with several North American unions, including the United Auto Workers, Unifor, International Brotherhood of Electrical Workers and Workers United. Each of our unionized facilities in the United States and Canada has a separate collective bargaining agreement with the union that represents the workers at such facility, with each such agreement having an expiration date that is independent of the other agreements. The majority of our employees in Mexico and Europe are members of industrial trade union organizations or confederations within their respective countries. Many of these organizations and confederations operate under national contracts, which are not specific to any one employer. We have occasionally experienced labor disputes at our plants. We have been able to resolve all such labor disputes and believe our relations with our employees are generally good.
See Item 1A, "Risk Factors — A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could adversely affect our financial performance," and Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements."
Intellectual Property
Worldwide, we have approximately 2,100 patents and patent applications pending. While we believe that our patent portfolio is a valuable asset, no individual patent or group of patents is critical to the success of our business. We also license selected technologies to automotive manufacturers and to other automotive suppliers. We continually strive to identify and implement new technologies for use in the design and development of our products.
Advanced technology development is conducted worldwide at our six advanced technology centers and at our product engineering centers. At these centers, we engineer our products to comply with applicable safety standards, meet quality and durability standards, respond to environmental conditions and conform to customer and consumer requirements. Our global innovation and technology center located in Southfield, Michigan, develops and integrates new concepts and is our central location for consumer research, benchmarking, craftsmanship and industrial design activity.
We have numerous registered trademarks in the United States and in many foreign countries. The most important of these marks include LEAR CORPORATION ® (including our stylized version thereof) and LEAR ® , which are widely used in connection with our products and services. Our other principal brands include GUILFORD TM and EAGLE OTTAWA ® , AVENTINO ® leather, INTU TM Seating, LEAR CONNEXUS TM signal and data communications, PROACTIVE POSTURE TM seating, ProTec ® active head restraints, SMART JUNCTION BOX TM technology, STRUCSURE TM systems and TeXstyle TM fabrics are some of the other trademarks used in connection with certain of our product lines.
We will continue to dedicate resources to engineering and development. Engineering and development costs incurred in connection with product launch, to the extent not recoverable from our customers, are charged to cost of sales as incurred. All other engineering and development costs are charged to selling, general and administrative expenses when incurred. Engineering and development costs charged to selling, general and administrative expenses totaled approximately $144 million , $127 million and $102 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. Engineering and development costs for which reimbursement is contractually guaranteed by our customers are capitalized. Engineering and development costs capitalized totaled approximately $179 million , $194 million and $232 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.
Environmental Matters
We are 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. For a description of our outstanding environmental matters

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and other legal proceedings, see Note 11 , " Commitments and Contingencies ," to the consolidated financial statements included in this Report.
In addition, our customers are subject to significant environmentally focused state, federal and foreign laws and regulations that regulate vehicle emissions, fuel economy and other matters related to the environmental impact of vehicles. To the extent that such laws and regulations ultimately increase or decrease automotive vehicle production, such laws and regulations would likely impact our business. See Item 1A, "Risk Factors."
Furthermore, we currently offer products with environmentally friendly features, and our expertise and capabilities are allowing us to expand our product offerings in this area. We will continue to monitor emerging developments in this area.
Joint Ventures and Noncontrolling Interests
We form joint ventures in order to gain entry into new markets, expand our product offerings and broaden our customer base. In particular, we believe that certain joint ventures have provided us, and will continue to provide us, with the opportunity to expand our business relationships with Asian automotive manufacturers, particularly in emerging markets. We also partner with companies having significant local experience in commerce and customs, as well as capacity, to reduce our financial risk and enhance our potential for achieving expected financial returns. In some cases, these joint ventures may be located in North America or Europe and used to expand our customer relationships.
As of December 31, 2016 , we had 22 operating joint ventures located in six countries. Of these joint ventures, eight are consolidated and fourteen are accounted for using the equity method of accounting. Fifteen of the joint ventures operate in Asia and seven operate in North America (including one that is dedicated to serving Asian automotive manufacturers). Net sales of our consolidated joint ventures accounted for approximately 12% of our net sales in 2016 . As of December 31, 2016 , our investments in non-consolidated joint ventures totaled $154 million .
A summary of our non-consolidated operating joint ventures, including ownership percentages, is shown below. For further information related to our joint ventures, see Note  5 , " Investments in Affiliates and Other Related Party Transactions ," to the consolidated financial statements included in this Report.
Country
Name
Ownership
Percentage
China
Shanghai Lear STEC Automotive Parts Co., Ltd.
55%
China
Beijing BHAP Lear Automotive Systems Co., Ltd.
50
China
Jiangxi Jiangling Lear Interior Systems Co., Ltd.
50
China
Lear Dongfeng Automotive Seating Co., Ltd.
50
China
Changchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd.
49
China
Changchun Lear FAWSN Automotive Seat Systems Co., Ltd.
49
China
Beijing Lear Dymos Automotive Systems Co., Ltd.
40
Honduras
Honduras Electrical Distribution Systems S. de R.L. de C.V.
49
India
Dymos Lear Automotive India Private Limited
35
Korea
Dong Kwang Lear Yuhan Hoesa
50
United States
Kyungshin-Lear Sales and Engineering LLC
49
United States
eLumigen, LLC
46
United States
RevoLaze, LLC
20
United States
Tempronics, Inc.
12
ITEM 1A – RISK FACTORS
Our business, financial condition, operating results and cash flows may be impacted by a number of factors. In addition to the factors affecting our business identified elsewhere in this Report, the most significant factors affecting our operations include the following:
Our industry is cyclical and a decline in the production levels of our major customers, particularly with respect to models for which we are a significant supplier, could adversely affect our financial performance.
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. The automotive industry is cyclical and

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sensitive to general economic conditions, including the global credit markets, interest rates, consumer credit and consumer spending and preferences. Automotive sales and production can also be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles, restructuring actions of our customers and suppliers, facility closures, increased competition, changing consumer attitudes toward vehicle ownership and usage and other factors, including consumer preferences regarding vehicle size, configuration and features.
Our ability to reduce the risks inherent in certain concentrations of business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall. While we are pursuing a strategy of aggressively expanding our sales and operations in Asia, no assurances can be given as to how successful we will be in doing so. As a result, an economic downturn or other adverse industry conditions that result in a decline in the production levels of our major customers, particularly with respect to models for which we are a significant supplier, could reduce our sales and thereby adversely affect our financial condition, operating results and cash flows.  
The loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier could adversely affect our financial performance.
Although we receive purchase orders from our customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular vehicle model and assembly plant, or in some cases, for the supply of a customer’s requirements for the life of a particular vehicle model, rather than for the purchase of a specific quantity of products. In addition, it is possible that our customers could elect to manufacture our products internally or increase the extent to which they require us to utilize specific suppliers or materials in the manufacture of our products. The loss of business with respect to, the lack of commercial success of or an increase in directed component sourcing for a vehicle model for which we are a significant supplier could reduce our sales or margins and thereby adversely affect our financial condition, operating results and cash flows.
Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial performance.
Downward pricing pressure by automotive manufacturers is a characteristic of the automotive industry. We regularly negotiate contracts and sales prices with our customers. These contracts require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through product design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to align our business with the changing needs of our customers and improve our business structure by investing in vertical integration opportunities. Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial condition, operating results and cash flows.
Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance.
Raw material, energy and commodity costs can be volatile. Although we have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. Certain of these strategies also may limit our opportunities in a declining commodity environment. In addition, the availability of raw materials, commodities and product components fluctuates from time to time due to factors outside of our control. If the costs of raw materials, energy, commodities and product components increase or the availability thereof is restricted, it could adversely affect our financial condition, operating results and cash flows.
Adverse developments affecting or the financial distress of one or more of our suppliers could adversely affect our financial performance.
We obtain components and other products and services from numerous Tier 2 automotive suppliers and other vendors throughout the world. We are responsible for managing our supply chain, including suppliers that may be the sole sources of products that we require, that our customers direct us to use or that have unique capabilities that would make it difficult and/or expensive to re-source. In certain instances, entire industries may experience short-term capacity constraints. Additionally, our production capacity, and that of our customers and suppliers, may be adversely affected by natural

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disasters. Any such significant disruption could adversely affect our financial performance. Furthermore, unfavorable economic or industry conditions could result in financial distress within our supply base, thereby increasing the risk of supply disruption. Although market conditions generally have improved in recent years, uncertainty remains and another economic downturn or other unfavorable industry conditions in one or more of the regions in which we operate could cause a supply disruption and thereby adversely affect our financial condition, operating results and cash flows.
Our substantial international operations make us vulnerable to risks associated with doing business in foreign countries.
As a result of our global presence, a significant portion of our revenues and expenses are denominated in currencies other than the U.S. dollar. We have substantial manufacturing and distribution facilities in many foreign countries, including Mexico and countries in Africa, Asia, Central and South America and Europe. International operations are subject to certain risks inherent in doing business abroad, including:
exposure to local economic conditions;
political, economic and civil instability and uncertainty (including acts of terrorism, civil unrest, drug-cartel related and other forms of violence and outbreaks of war);
labor unrest;
expropriation and nationalization;
currency exchange rate fluctuations, currency controls and the ability to economically hedge currencies;
withholding and other taxes on remittances and other payments by subsidiaries;
investment restrictions or requirements;
repatriation restrictions or requirements;
export and import restrictions and increases in duties and tariffs;
increases in working capital requirements related to long supply chains; and
global sovereign fiscal matters and creditworthiness, including potential defaults and the related impacts on economic activity, including the possible effects on credit markets, currency values, monetary unions, international treaties and fiscal policies.
Expanding our sales and operations in Asia and our manufacturing operations in lower-cost regions are important elements of our strategy. As a result, our exposure to the risks described above is substantial. The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. However, any such occurrences could adversely affect our financial condition, operating results and cash flows.
Certain of our operations are conducted through joint ventures which have unique risks.
Certain of our operations, particularly in emerging markets, are conducted through joint ventures. With respect to our joint ventures, we may share ownership and management responsibilities with one or more partners that may not share our goals and objectives. Operating a joint venture requires us to operate the business pursuant to the terms of the agreement that we entered into with our partners, including additional organizational formalities, as well as to share information and decision making. Additional risks associated with joint ventures include one or more partners failing to satisfy contractual obligations, conflicts arising between us and any of our partners, a change in the ownership of any of our partners and less of an ability to control compliance with applicable rules and regulations, including the Foreign Corrupt Practices Act and related rules and regulations. Additionally, our ability to sell our interest in a joint venture may be subject to contractual and other limitations. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.
We operate in a highly competitive industry and efforts by our competitors, as well as new non-traditional entrants to the industry, to gain market share could adversely affect our financial performance.
We operate in a highly competitive industry. We and most of our competitors are seeking to expand market share with new and existing customers, including in Asia and other potential high growth regions. Our customers award business based on, among other things, price, quality, service and technology. Our competitors’ efforts, as well as the efforts of new non-traditional entrants to the industry, to grow market share could exert downward pressure on our product pricing and margins. In addition, the success of portions of our business requires us to develop and/or incorporate leading technologies. Such technologies are subject to rapid obsolescence. Our inability to maintain access to these technologies

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(either through development or licensing) may adversely affect our ability to compete. If we are unable to differentiate our products or maintain a low-cost footprint, we may lose market share or be forced to reduce prices, thereby lowering our margins. Any such occurrences could adversely affect our financial condition, operating results and cash flows.
Our inability to effectively manage the timing, quality and costs of new program launches could adversely affect our financial performance.
In connection with the award of new business, we obligate ourselves to deliver new products and services that are subject to our customers’ timing, performance and quality standards. Additionally, as a Tier 1 supplier, we must effectively coordinate the activities of numerous suppliers in order for the program launches of our products to be successful. Given the complexity of new program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp up of costs; however, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could adversely affect our financial condition, operating results and cash flows.
A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could adversely affect our financial performance.
A substantial number of our employees and the employees of our largest customers and suppliers are members of industrial trade unions and are employed under the terms of various labor agreements. We have labor agreements covering approximately 77,000 employees globally. In the United States and Canada, each of our unionized facilities has a separate collective bargaining agreement with the union that represents the workers at such facility, with each such agreement having an expiration date that is independent of the other agreements. Labor agreements covering approximately 78% of our unionized work force, including approximately 2% of our unionized workforce in the United States and Canada, are scheduled to expire during 2017 . There can be no assurances that future negotiations with the unions will be resolved favorably or that we will not experience a work stoppage or disruption that could adversely affect our financial condition, operating results and cash flows. A labor dispute involving us, any of our customers or suppliers or any other suppliers to our customers or that otherwise affects our operations, or the inability by us, any of our customers or suppliers or any other suppliers to our customers to negotiate, upon the expiration of a labor agreement, an extension of such agreement or a new agreement on satisfactory terms could adversely affect our financial condition, operating results and cash flows. In addition, if any of our significant customers experience a material work stoppage, the customer may halt or limit the purchase of our products. This could require us to shut down or significantly reduce production at facilities relating to such products, which could adversely affect our business and harm our profitability.
Our existing indebtedness and the inability to access capital markets could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance.
As of December 31, 2016 , we had approximately $1.9 billion of outstanding indebtedness, as well as $1.25 billion available for borrowing under our revolving credit facility. The debt instruments governing our indebtedness contain covenants that may restrict our business activities or our ability to execute our strategic objectives, and our failure to comply with these covenants could result in a default under our indebtedness. We also lease certain buildings and equipment under non-cancelable lease agreements with terms exceeding one year, which are accounted for as operating leases. Additionally, any downgrade in the ratings that rating agencies assign to us and our debt may ultimately impact our access to capital markets. Our inability to generate sufficient cash flow to satisfy our debt and lease obligations, to refinance our debt obligations or to access capital markets on commercially reasonable terms could adversely affect our financial condition, operating results and cash flows.
Significant changes in discount rates, the actual return on pension assets and other factors could adversely affect our financial performance.
Our earnings may be positively or negatively impacted by the amount of income or expense recorded related to our defined benefit plans. Accounting principles generally accepted in the United States require that income or expense related to the defined benefit plans be calculated at the annual measurement date using actuarial calculations, which reflect certain assumptions. The most significant of these assumptions relate to interest rates, the capital markets and other economic conditions. These assumptions, as well as the actual value of pension assets at the measurement date, will impact the calculation of pension and other postretirement benefit expense for the year. Although pension expense and pension contributions are not directly related, the key economic indicators that affect pension expense also affect the amount of cash that we will contribute to our pension plans. Because interest rates and the values of these pension assets have fluctuated and will continue to fluctuate in response to changing market conditions, pension and other postretirement

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benefit expense in subsequent periods, the funded status of our pension plans and the future minimum required pension contributions, if any, could adversely affect our financial condition, operating results and cash flows.
Impairment charges relating to our goodwill and long-lived assets could adversely affect our financial performance.
We regularly monitor our goodwill and long-lived assets for impairment indicators. In conducting our goodwill impairment testing, we 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 we elect not to perform a qualitative assessment of a reporting unit, we then compare 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. In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings that could adversely affect our financial condition and operating results.
Our failure to execute our strategic objectives could adversely affect our financial performance.
Our financial performance depends, in part, on our ability to successfully execute our strategic objectives. Our objectives are to deliver superior long-term shareholder value by investing in our business to grow and improve our competitive position, while maintaining a strong and flexible balance sheet and returning cash to our shareholders. Various factors, including the industry environment and the other matters described herein and in Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," including "— Forward-Looking Statements," could adversely affect our ability to execute our strategic objectives. These risk factors include our failure to identify suitable opportunities for organic investment and/or acquisitions, our inability to successfully develop such opportunities or complete such acquisitions or our inability to successfully utilize or integrate the investments in our operations. Our failure to execute our strategic objectives could adversely affect our financial condition, operating results and cash flows. Moreover, there can be no assurances that, even if implemented, our strategic objectives will be successful.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.
A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers could adversely affect our financial performance.
In the event that our products fail to perform as expected, whether allegedly due to our fault or that of one of our sub-suppliers, and such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims or we may be required or requested by our customers to participate in a recall or other corrective action involving such products. We also are a party to agreements with certain of our customers, whereby these customers may pursue claims against us for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims. We carry insurance for certain product liability claims, but such coverage may be limited. We do not maintain insurance for product warranty or recall matters. In addition, we may not be successful in recovering amounts from third parties, including sub-suppliers, in connection with these claims. These types of claims could adversely affect our financial condition, operating results and cash flows.
We are involved from time to time in various legal and regulatory proceedings and claims, which could adversely affect our financial performance.
We are involved in various legal and regulatory proceedings and claims that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our customers, suppliers or competitors, intellectual property matters, personal injury

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claims, environmental matters, tax matters, employment matters and antitrust matters. No assurances can be given that such proceedings and claims will not adversely affect our financial condition, operating results and cash flows.
New laws or regulations or changes in existing laws or regulations could adversely affect our financial performance.
We and the automotive industry are subject to a variety of federal, state, local and foreign laws and regulations, including those related to health, safety and environmental matters. Governmental regulations also affect taxes and levies, capital markets, healthcare costs, energy usage, international trade and immigration and other labor issues, all of which may have a direct or indirect effect on our business and the businesses of our customers and suppliers. We cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof. The introduction of new laws or regulations or changes in existing laws or regulations, or the interpretation thereof, could increase the costs of doing business for us or our customers or suppliers or restrict our actions and adversely affect our financial condition, operating results and cash flows.
We are subject to regulation of our international operations that could adversely affect our financial performance.
We are subject to many laws governing our international operations, including those that prohibit improper payments to government officials and restrict where we can do business and what information or products we can supply to certain countries, including but not limited to the Foreign Corrupt Practices Act and the U.S. Export Administration Act. Violations of these laws, which are complex and often difficult to interpret and apply, could result in significant criminal penalties or sanctions that could adversely affect our business, financial condition, operating results and cash flows.
We are required to comply with environmental laws and regulations that could cause us to incur significant costs.
Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future.
Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. If we fail to comply with present and future environmental laws and regulations, we could be subject to future liabilities, which could adversely affect our financial condition, operating results and cash flows.
Developments or assertions by or against us relating to intellectual property rights could adversely affect our financial performance.
We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and we are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Developments or assertions by or against us relating to intellectual property rights could adversely affect our financial condition, operating results and cash flows.
Our U.S. net operating loss, capital loss and tax credit carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
We have significant U.S. net operating loss, capital loss and tax credit carryforwards (collectively, the "Tax Attributes"). Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of 1986, as amended (the "IRC"). Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership, as defined under the IRC. We may experience a change in ownership in the future as a result of changes in our stock ownership that are beyond our control, and any such subsequent changes in ownership for purposes of the IRC could further limit our ability to use our Tax Attributes. Accordingly, any such occurrences could adversely impact our ability to offset future tax liabilities and, therefore, adversely affect our financial condition, net income and cash flow.
The impact of potential changes in tax and trade policies in the United States and the potential corresponding actions by other countries in which we do business could adversely affect our financial performance.
The U.S. government has recently proposed comprehensive tax and trade reform. These proposals are designed to encourage increased production in the United States and include a border tax on imports, an increase in customs duties and the renegotiation of U.S. trade agreements. Reflective of the automotive industry, our vehicle parts manufacturing facilities in the United States, Mexico and Canada are highly dependent on trade within the North American Free Trade Agreement (“NAFTA”) region. A significant number of these facilities are in Mexico and represent a critical component

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of our supply chain and that of our customers. We have significant imports into the United States, and the imposition of a border tax or an increase in customs duties with respect to these imports could negatively impact our financial performance. If such taxes or customs duties are implemented, it also may cause our trading partners to take actions with respect to U.S. imports or U.S. investment activities in their respective countries. Any potential changes in tax and trade policies in the United States and the potential corresponding actions by other countries in which we do business could adversely affect our financial performance.
Changes in the United Kingdom's economic and other relationships with the European Union could adversely affect us.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum (also referred to as "Brexit"). The referendum was advisory, and by the terms of the Treaty on European Union, any withdrawal is subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates the withdrawal process. The ultimate effects of Brexit on us are difficult to predict, but because we currently conduct business in the United Kingdom and in Europe, the results of the referendum and any eventual withdrawal could cause disruptions and create uncertainty to our businesses, including affecting the business of and/or our relationships with our customers and suppliers, as well as altering the relationship among tariffs and currencies, including the value of the British pound and the Euro relative to the U.S. dollar. Such disruptions and uncertainties could adversely affect our financial condition, operating results and cash flows. In addition, Brexit could result in legal uncertainty and potentially divergent national laws and regulations as new legal relationships between the United Kingdom and the European Union are established. The ultimate effects of Brexit on us will also depend on the terms of any agreements the United Kingdom and the European Union make to retain access to each other's respective markets either during a transitional period or more permanently.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.

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ITEM 2 – PROPERTIES
As of December 31, 2016 , our operations were conducted through 243 facilities, some of which are used for multiple purposes, including 82 just-in-time manufacturing facilities, 114 dedicated component manufacturing facilities, 7 sequencing and distribution sites, 32 administrative/technical support facilities and 8 advanced technology centers, in 37 countries. Our corporate headquarters is located in Southfield, Michigan.
Of our 243 total facilities, which include facilities owned or leased by our consolidated subsidiaries, 104 are owned and 139 are leased with expiration dates ranging from 2017 through 2053 . We believe that substantially all of our property and equipment is in good condition and that we have sufficient capacity to meet our current and expected manufacturing and distribution needs. See Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Financial Condition."
Seating
Argentina
Czech Republic
Indonesia
Mexico (continued)
Russia
United States
Escobar, BA
Kolin
Cikarang
Nuevo Casas
Kaluga
Arlington, TX
Ferreyra, CBA
Stribro
Italy
Grandes, CH
Nizhny Novgorod
Auburn Hills, MI
Brazil
Dominican Republic
Caivano, NA
Panzacola, TL
St. Petersburg
Columbia City, IN
Betim
Santo Domingo
Cassino, FR
Piedras Negras, CO
Slovak Republic
Detroit, MI
Caçapava
France
Grugliasco, TO
Ramos Arizpe, CO
Presov
Duncan, SC
Camaçari
Cergy
Melfi, PZ
Saltillo, CO
Voderady
Farwell, MI
Joinville
Feignies
Pozzo d’Adda, MI
San Felipe, GU
South Africa
Hammond, IN
Pernambuco
Germany
Macedonia
San Luis Potosi, SL
East London
Hebron, OH
Canada
Besigheim
Tetovo
Silao, GO
Port Elizabeth
Highland Park, MI
Ajax, ON
Bremen
Malaysia
Toluca, MX
Rosslyn
Kenansville, NC
Whitby, ON
Eisenach
Behrang Stesen
Villa Ahumada, CH
South Korea
Louisville, KY
China
Ginsheim-
Klang
Moldova
Gyeongju
Montgomery, AL
Beijing
Gustavsburg
Mexico
Ungheni
Spain
Morristown, TN
Changshu
Rietberg
Aguascalientes, AG
Morocco
Barcelona
Pine Grove, PA
Chongqing
Wackersdorf
Arteaga, CA
Tangier
Epila
Portage, IN
Guangzhou
Hungary
Ascension, CH
Poland
Valencia
Rochester Hills, MI
Hangzhou
Györ
Cuautlancingo, PU
Bierun
Thailand
Roscommon, MI
Liuzhou
Mor
Fresnillo, ZA
Jaroslaw
Mueang Nakhon
Selma, AL
Nanjing
Szolnok
Hermosillo, SO
Legnica
Ratchasima
Tuscaloosa, AL
Rui’an
India
Huamantla, TL
Tychy
Rayong
Wentzville, MO
Shanghai
Chennai
Juarez, CH
Romania
United Kingdom
Vietnam
Shenyang
Halol
Leon, GT
Iasi
Alfreton
Hai Phong City
Wuhan
Haridwar
Mexico City, DF
 
Coventry
 
Wuhu
Nasik
Monclova, CO
 
Redditch
 
 
Pune
 
 
Sunderland
 
 
 
 
 
 
 
E-Systems
Argentina
Czech Republic
Honduras
Morocco
Russia
Thailand
Pacheco, BA
Vyskov
Naco
Kenitra
Volokolamsk
Kabin Buri
Brazil
France
Hungary
Salé Al-Jadida
Serbia
United States
Navegantes
Hordain
Gödöllö
Tangier
Novi Sad
Plymouth, IN
China
Sandouville
Gyöngyös
Philippines
South Africa
Taylor, MI
Chongqing
Germany
India
LapuLapu City
Port Elizabeth
Traverse City, MI
Shanghai
Bersenbrueck
Pune
Poland
Spain
 
Wuhan
Kronach
Mexico
Mielec
Almussafes
 
Yangzhou
Saarlouis
Apodaca, NL
Romania
Valls
 
 
Wismar
Chihuahua, CH
Campulung
 
 
 
 
Juarez, CH
Pitesti
 
 
 
 
Torreon, CA
 
 
 
 
ADMINISTRATIVE/TECHNICAL
Australia
France
India
Mexico
South Korea
United States
Essendon Fields
Vélizy-
Bengaluru
Juarez, CH
Seoul
Detroit, MI
Belgium
Villacoublay
Pune
Mexico City, DF
Spain
El Paso, TX
Leuven
Germany
Italy
Netherlands
Valls
Rochester Hills, MI
Brazil
Cologne
Grugliasco, TO
Hilversum
Sweden
Santa Rosa, CA
São Paulo
Korntal-
Japan
Philippines
Gothenburg
Southfield, MI
China
Münchingen
Hiroshima
LapuLapu City
United Kingdom
Wilmington, NC
Shanghai
Remscheid
Kariya
Singapore
Coventry
 
Czech Republic
Schwaig-Oberding
Nagoya
 
 
 
Brno
Sindelfingen
Tokyo
 
 
 
Pilsen
Wolfsburg
Yokohama
 
 
 
 
 
 
 
 
 

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ITEM 3 – LEGAL PROCEEDINGS
Legal and Environmental Matters
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial or contractual disputes, product liability claims and environmental and other matters. For a description of risks related to various legal proceedings and claims, see Item 1A, "Risk Factors." For a description of our outstanding material legal proceedings, see Note 11 , " Commitments and Contingencies ," to the consolidated financial statements included in this Report.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
SUPPLEMENTARY ITEM – EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions of our executive officers. Executive officers are appointed annually by our Board of Directors and serve at the pleasure of our Board.
Name
Age
Position
Shari L. Burgess
58
Vice President, Treasurer and Chief Diversity Officer
Thomas A. DiDonato
58
Senior Vice President, Human Resources
Jay K. Kunkel
57
Senior Vice President and President, Asia-Pacific Operations
Terrence B. Larkin
62
Executive Vice President, Business Development, General Counsel and Corporate Secretary
James L. Murawski
65
Vice President, Corporate Controller and Chief Accounting Officer
Frank C. Orsini
44
Senior Vice President and President, E-Systems
Raymond E. Scott
51
Executive Vice President and President, Seating
Matthew J. Simoncini
56
President and Chief Executive Officer
Melvin L. Stephens
61
Senior Vice President, Communications and Corporate & Investor Relations
Jeffrey H. Vanneste
57
Senior Vice President and Chief Financial Officer
Set forth below is a description of the business experience of each of our executive officers.
Shari L. Burgess
Ms. Burgess is the Company’s Vice President, Treasurer and Chief Diversity Officer, a position she has held since January 2014. Previously, Ms. Burgess served as the Company’s Vice President and Treasurer since August 2002 and in various financial roles since joining the Company in 1992. Prior to joining the Company, Ms. Burgess served as the corporate controller for Victor International Corporation and as an audit manager for Ernst & Young LLP.
 
 
Thomas A. DiDonato
Mr. DiDonato is the Company’s Senior Vice President, Human Resources, a position he has held since April 2012. Prior to joining the Company, Mr. DiDonato served as Executive Vice President, Human Resources for American Eagle Outfitters, Inc. since 2005, Chief People Officer for H.J. Heinz since 2004 and Senior Vice President, Human Resources for Heinz North America since 2001. Earlier experiences include directing human resources for a $14 billion division of Merck & Co. and heading worldwide staffing for Pepsico. Mr. DiDonato began his career at General Foods Corporation and moved up to manage the personnel at its largest manufacturing facility.
 
 
Jay K. Kunkel
Mr. Kunkel is the Company’s Senior Vice President and President, Asia-Pacific Operations, a position he has held since June 2013. Prior to joining the Company, Mr. Kunkel served as President Asia and as a Member of the Automotive Management Board for Continental A.G. since December 2007 and initially joined Continental A.G. in February 2005. Prior to joining Continental A.G., Mr. Kunkel served as a Director for SRP International Group Ltd. and held various positions of increasing responsibility at PricewaterhouseCoopers, Visteon, Mitsubishi and Chrysler.
 
 

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Terrence B. Larkin
Mr. Larkin is the Company’s Executive Vice President, Business Development, General Counsel and Corporate Secretary, a position he has held since November 2011. Mr. Larkin previously served as the Company’s Senior Vice President, General Counsel and Corporate Secretary since January 2008. Prior to joining the Company, Mr. Larkin was a partner since 1986 of Bodman PLC, a Detroit-based law firm. Mr. Larkin served on the executive committee of Bodman PLC and was the chairman of its business law practice group. Mr. Larkin’s practice was focused on general corporate, commercial transactions and mergers and acquisitions.
 
 
James L. Murawski
Mr. Murawski is the Company’s Vice President, Corporate Controller and Chief Accounting Officer, a position he has held since September 2015. Mr. Murawski most recently served as the Company’s Vice President and Chief Information Officer since 2009. Previously, he served as the Company’s Vice President, Operational Finance since 2007, Corporate Controller since 2005 and in various other management positions for the Company since 2003. Prior to joining the Company, Mr. Murawski was employed in public accounting at Deloitte & Touche for fourteen years and in financial positions at various other companies.
 
 
Frank C. Orsini
Mr. Orsini is the Company’s Senior Vice President and President, E-Systems, a position he has held since September 2012. Mr. Orsini most recently served as the Company’s Vice President and Interim President, E-Systems since October 2011. Previously, he served as the Company’s Vice President, Operations, E-Systems since 2009, Vice President, Sales, Program Management & Manufacturing, E-Systems since 2008, Vice President, North America Seating Operations since 2005 and in various other management positions for the Company since 1994. Mr. Orsini currently sits on the board of directors of Focus: HOPE, a non-profit organization.
 
 
Raymond E. Scott
Mr. Scott is the Company’s Executive Vice President and President, Seating, a position he has held since November 2011. Mr. Scott most recently served as the Company’s Senior Vice President and President, E-Systems since February 2008. Previously, he served as the Company’s Senior Vice President and President, North American Seat Systems Group since August 2006, Senior Vice President and President, North American Customer Group since June 2005, President, European Customer Focused Division since June 2004 and President, General Motors Division since November 2000.
 
 
Matthew J. Simoncini
Mr. Simoncini is the Company’s President and Chief Executive Officer, a position he has held since September 2011. Mr. Simoncini most recently served as the Company’s Senior Vice President and Chief Financial Officer since 2007. Previously, he served as the Company’s Senior Vice President, Finance and Chief Accounting Officer since August 2006, Vice President, Global Finance since February 2006, Vice President of Operational Finance since June 2004, Vice President of Finance — Europe since 2001 and prior to 2001, in various senior financial management positions for the Company and UT Automotive, Inc.
 
 
Melvin L. Stephens
Mr. Stephens is the Company’s Senior Vice President, Communications and Corporate & Investor Relations, a position he has held since April 2012. Mr. Stephens most recently served as the Company’s Senior Vice President, Communications, Human Resources and Investor Relations since September 2009. Previously, he served as the Company’s Vice President of Corporate Communications and Investor Relations since January 2002. Prior to joining the Company, Mr. Stephens worked for Ford Motor Company for 23 years and held various leadership positions in finance, business planning, corporate strategy, communications, sales and marketing and investor relations.
 
 
Jeffrey H. Vanneste
Mr. Vanneste is the Company’s Senior Vice President and Chief Financial Officer, a position he has held since March 2012. Prior to joining the Company, Mr. Vanneste served as Executive Vice President and Chief Financial Officer for International Automotive Components Group ("IAC") since January 2011 and as Chief Financial Officer for IAC North America since March 2007. Prior to joining IAC, Mr. Vanneste worked with the Company in positions of increasing responsibility over 15 plus years including: Vice President of Finance, European Operations, Vice President of Corporate Business Planning and Analysis, Vice President of Finance, Seating and Vice President of Finance for the Ford and GM Divisions. Prior to joining the Company in October 1991, he served as the assistant controller for Champagne-Webber, Inc. and as an audit senior for Coopers & Lybrand.

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PART II
ITEM 5 – MARKET FOR THE COMPANY’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the New York Stock Exchange under the symbol "LEA."
The high and low sales prices per share of our common stock, as reported on the New York Stock Exchange, and the amount of our dividend declarations for 2016 and 2015 are shown below:
2016
Price Range of
Common Stock
 
Cash
Dividend Per Share
 
High
 
Low
 
4 th  Quarter
$
138.80

 
$
110.77

 
$
0.30

3 rd  Quarter
121.78

 
98.00

 
0.30

2 nd  Quarter
120.00

 
97.35

 
0.30

1 st  Quarter
124.56

 
93.54

 
0.30

2015
Price Range of
Common Stock
 
Cash
Dividend Per Share
 
High
 
Low
 
4 th  Quarter
$
127.00

 
$
103.20

 
$
0.25

3 rd  Quarter
115.81

 
89.71

 
0.25

2 nd  Quarter
118.50

 
107.80

 
0.25

1 st  Quarter
112.67

 
92.45

 
0.25

Dividends
Our Board of Directors declared quarterly cash dividends of $0.30 and $0.25 per share of common stock in 2016 and 2015 , respectively.
We currently expect to pay quarterly cash dividends in the future, although such payments are at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors that our Board of Directors may consider at its discretion. In addition, our amended and restated credit agreement places certain limitations on the payment of cash dividends. See Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements," and Note 6 , " Debt ," to the consolidated financial statements included in this Report.
Holders of Common Stock
The Transfer Agent and Registrar for our common stock is Computershare Trust Company, N.A., located in Canton, Massachusetts. On February 3, 2017, there were 68 registered holders of record of our common stock.
For certain information regarding our equity compensation plans, see Part III — Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plan Information."
Common Stock Share Repurchase Program
Since the first quarter of 2011, our Board of Directors has authorized $3.4 billion in share repurchases under our common stock share repurchase program. As of December 31, 2016 , we have a remaining repurchase authorization of $341.2 million , which will expire on December 31, 2017.
We may implement our share repurchases through a variety of methods, including open market purchases, accelerated stock repurchase programs and structured repurchase transactions. The extent to which we will repurchase our outstanding common stock and the timing of such repurchases will depend upon our financial condition, prevailing market conditions, alternative uses of capital and other factors. In addition, our amended and restated credit agreement places certain limitations on the repurchase of common shares. See Part II — Item 7, "Management’s Discussion and Analysis of Financial Condition and

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Results of Operations — Forward-Looking Statements," Note 6 , " Debt ," and Note 9 , " Capital Stock, Equity and Accumulated Other Comprehensive Loss ," to the consolidated financial statements included in this Report.
As of December 31, 2016 , we have paid $3.1 billion in aggregate for repurchases of our outstanding common stock, at an average price of $74.51 per share, excluding commissions and related fees, since the first quarter of 2011. A summary of the shares of our common stock repurchased during the fiscal quarter ended December 31, 2016 , is shown below:
Period
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced 
Plans or Programs
 
Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Program
(in millions)
 
October 2, 2016 through October 29, 2016
26,280

 
$
113.70

 
26,280

 
$
439.3

 
October 30, 2016 through November 26, 2016
485,200

 
122.98

 
485,200

 
379.6

 
November 27, 2016 through December 31, 2016
289,327

 
132.78

 
289,327

 
341.2

 
Total
800,807

 
$
126.21

 
800,807

 
$
341.2

(1)  
(1)
Remaining authorization as of December 31, 2016 .
Performance Graph
The following graph compares the cumulative total stockholder return from December 31, 2011, through December 31, 2016 , for our common stock, the S&P 500 Index and a peer group (1) of companies that we have selected for purposes of this comparison. We have assumed that dividends have been reinvested, and the returns of each company in the S&P 500 Index and the peer group have been weighted to reflect relative stock market capitalization. The graph below assumes that $100 was invested on December 31, 2011, in each of our common stock, the stocks comprising the S&P 500 Index and the stocks comprising the peer group.
A2016PROXYSTOCKPERFORMANCEGR.JPG
 
 
December 31,
2011
 
December 31,
2012
 
December 31,
2013
 
December 31,
2014
 
December 31,
2015
 
December 31,
2016
Lear Corporation
 
$
100.00

 
$
119.31

 
$
208.43

 
$
254.68

 
$
321.78

 
$
350.36

S&P 500
 
$
100.00

 
$
115.99

 
$
153.54

 
$
174.54

 
$
176.94

 
$
198.09

Peer Group (1)
 
$
100.00

 
$
127.87

 
$
206.33

 
$
242.30

 
$
218.72

 
$
221.30

(1)
We do not believe that there is a single published industry or line of business index that is appropriate for comparing stockholder returns. As a result, we have selected a peer group comprised of representative independent automotive suppliers whose common stock is publicly traded. Our peer group, referenced in the graph above, consists of American

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Axle & Manufacturing Holdings Inc., BorgWarner Inc., Dana Holding Corporation, Delphi Automotive PLC, Federal-Mogul Holdings Corporation, Gentex Corp., Magna International, Inc., Superior Industries International, Inc., Tenneco Inc. and Visteon Corporation. Delphi Automotive PLC completed an initial public offering in 2011 and has been included in the peer group calculation beginning January 1, 2012. In 2016, Johnson Controls, Inc. completed both a spinoff of its automotive business and a merger with Tyco International plc and, accordingly, is not included in the peer group for any period presented.
ITEM 6 – SELECTED FINANCIAL DATA
The following statement of operations, statement of cash flows and balance sheet data were derived from our consolidated financial statements. Our consolidated financial statements for the years ended December 31, 2016 , 2015 , 2014 , 2013 and 2012 , have been audited by Ernst & Young LLP. The selected financial data below should be read in conjunction with Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the notes thereto included in this Report.
For the year ended December 31,
2016 (1)
 
2015 (2)
 
2014 (3)
 
2013 (4)
 
2012 (5)
Statement of Operations:  (in millions)
 
 
 
 
 
 
 
 
 
Net sales
$
18,557.6

 
$
18,211.4

 
$
17,727.3

 
$
16,234.0

 
$
14,567.0

Gross profit
2,102.1

 
1,819.8

 
1,492.8

 
1,299.7

 
1,217.5

Selling, general and administrative expenses
621.9

 
580.5

 
529.9

 
528.7

 
479.3

Amortization of intangible assets
53.0

 
52.5

 
33.7

 
34.4

 
33.0

Interest expense
82.5

 
86.7

 
67.5

 
68.4

 
49.9

Other expense, net (6)
6.4

 
68.6

 
74.3

 
58.1

 
6.4

Consolidated income before provision (benefit) for income taxes and equity in net income of affiliates
1,338.3


1,031.5


787.4


610.1


648.9

Provision (benefit) for income taxes
370.2

 
285.5

 
121.4

 
192.7

 
(638.0
)
Equity in net income of affiliates
(72.4
)
 
(49.8
)
 
(36.3
)
 
(38.4
)
 
(30.3
)
Consolidated net income
1,040.5

 
795.8

 
702.3

 
455.8

 
1,317.2

Net income attributable to noncontrolling interests
65.4

 
50.3

 
29.9

 
24.4

 
34.4

Net income attributable to Lear
$
975.1

 
$
745.5

 
$
672.4

 
$
431.4

 
$
1,282.8

For the year ended December 31,
2016 (1)
 
2015 (2)
 
2014 (3)
 
2013 (4)
 
2012 (5)
Statement of Operations Data:
 
 
 
 
 
 
 
Basic net income per share attributable to Lear
$
13.48

 
$
9.71

 
$
8.39

 
$
5.07

 
$
13.04

Diluted net income per share attributable to Lear
$
13.33

 
$
9.59

 
$
8.23

 
$
4.99

 
$
12.85

Weighted average shares outstanding – basic
72,345,436

 
76,754,270

 
80,187,516

 
85,094,889

 
98,388,228

Weighted average shares outstanding – diluted
73,124,949

 
77,767,017

 
81,728,479

 
86,415,786

 
99,825,686

Dividends per share
$
1.20

 
$
1.00

 
$
0.80

 
$
0.68

 
$
0.56

Statement of Cash Flows Data:  (in millions)
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
1,619.3

 
$
1,271.1

 
$
927.8

 
$
820.1

 
$
729.8

Cash flows from investing activities
(637.1
)
 
(965.3
)
 
(780.6
)
 
(403.9
)
 
(687.9
)
Cash flows from financing activities
(872.9
)
 
(156.3
)
 
(160.8
)
 
(698.5
)
 
(396.1
)
Capital expenditures
528.3

 
485.8

 
424.7

 
460.6

 
458.3

Other Data  (unaudited):
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges   (7)
12.0x

 
9.4x

 
8.4x

 
6.8x

 
8.7x


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As of or for the year ended December 31,
2016
 
2015
 
2014
 
2013
 
2012
Balance Sheet Data:  (in millions) (8)
 
 
 
 
 
 
 
 
 
Current assets
$
5,649.3

 
$
5,286.6

 
$
5,165.6

 
$
4,735.1

 
$
4,707.5

Total assets
9,900.6

 
9,405.8

 
9,113.1

 
8,303.0

 
8,164.0

Current liabilities
4,182.3

 
3,839.6

 
3,945.1

 
3,556.0

 
3,197.8

Long-term debt
1,898.0

 
1,931.7

 
1,454.0

 
1,042.3

 
616.1

Equity
3,192.9

 
3,017.7

 
3,029.3

 
3,149.5

 
3,612.2

Other Data  (unaudited):
 
 
 
 
 
 
 
 
 
Employees at year end
148,400

 
136,200

 
125,200

 
122,300

 
113,400

North American content per vehicle  (9)
$
422

 
$
443

 
$
398

 
$
377

 
$
370

North American vehicle production (in millions) (10)
17.8

 
17.5

 
17.0

 
16.2

 
15.4

European content per vehicle (11)
$
316

 
$
314

 
$
341

 
$
315

 
$
283

European vehicle production (in millions) (12)
22.3

 
21.5

 
20.6

 
19.8

 
19.6

(1)
2016 results include $69.6 million of restructuring and related manufacturing inefficiency charges (including $4.7 million of fixed asset impairment charges), $34.2 million non-cash pension settlement charge, $1.3 million of transaction costs, $30.3 million gain related to the consolidation of an affiliate and $23.6 million of net tax benefits related to restructuring charges, a non-cash pension settlement charge and various other items.
(2)
2015 results include $97.2 million of restructuring and related manufacturing inefficiency charges (including $3.9 million of fixed asset impairment charges), $10.9 million of transaction and other related costs, $15.8 million charge due to an acquisition-related inventory fair value adjustment, $14.3 million loss on the extinguishment of debt, $1.8 million loss related to an affiliate and $43.1 million of net tax benefits related to restructuring charges, debt redemption costs, acquisition costs and various other items.
(3)
2014 results include $115.3 million of restructuring and related manufacturing inefficiency charges (including $0.5 million of fixed asset impairment charges), $5.3 million of transaction costs, $17.9 million loss on the extinguishment of debt, $0.8 million of losses related to affiliates and $149.1 million of net tax benefits related to net reductions in valuation allowances with respect to the deferred tax assets of certain foreign subsidiaries, reductions in tax reserves due to audit settlements, debt redemption costs, restructuring charges and various other items.
(4)
2013 results include $83.8 million of restructuring and related manufacturing inefficiency charges (including $9.2 million of fixed asset impairment charges), $3.0 million of costs related to a proxy contest, $7.3 million of losses and incremental costs related to the destruction of assets caused by a fire at one of our European production facilities, $3.6 million loss on the partial extinguishment of debt and $27.8 million of net tax benefits related to restructuring, net changes in valuation allowances with respect to the deferred tax assets of certain foreign subsidiaries, the retroactive reinstatement of the U.S. research and development tax credit by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, and various other items.
(5)
2012 results include $55.6 million of restructuring and related manufacturing inefficiency charges (including $6.0 million of fixed asset impairment charges), $6.2 million of transaction costs primarily related to advisory services for the acquisition of Guilford Mills, $10.1 million of fees and expenses related to our capital restructuring and other related matters, ($41.1) million of insurance recoveries, net of losses and incremental costs, related to the destruction of assets caused by a fire at one of our European production facilities, $5.1 million of gains related to affiliates, a $3.7 million loss on the partial extinguishment of debt and $764.4 million of net tax benefits related to the reversal of a valuation allowance on our deferred tax assets in the United States, as well as changes in valuation allowances in certain foreign countries, reductions in tax reserves due to audit settlements and various other items.
(6)
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.
(7)
"Fixed charges" consist of interest on debt, amortization of deferred financing fees and that portion of rental expenses representative of interest. "Earnings" consist of consolidated income before provision (benefit) for income taxes and equity in the undistributed net income of affiliates and fixed charges.
(8)
The balance sheet data for 2014, 2013 and 2012 has been restated to reflect the presentation of debt issuance costs as a reduction of current portion of long-term debt and long-term debt in conjunction with the 2015 adoption of Accounting

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Standards Update ("ASU") 2015-03, "Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," and ASU 2015-15, "Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting." In addition, the balance sheet data for 2014, 2013 and 2012 has been restated to reflect the presentation of all deferred tax assets and liabilities, as well as related valuation allowances, as non-current in conjunction with the 2015 adoption of ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." For further information, see Note 6 , " Debt ," and Note 7 , " Income Taxes ," to the consolidated financial statements included in this Report.
(9)
"North American content per vehicle" is our net sales in North America divided by total North American vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for 2015 has been updated to reflect actual production levels.
(10)
"North American vehicle production" includes car and light truck production for vehicle weights up to 3.5 tons in the United States, Canada and Mexico as provided by IHS Automotive. Production data for 2015 has been updated to reflect actual production levels.
(11)
"European content per vehicle" is our net sales in Europe and Africa divided by total European and African vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for 2015 has been updated to reflect actual production levels.
(12)
"European vehicle production" includes car and light truck production for vehicle weights up to 3.5 tons in Austria, Belarus, Belgium, Bosnia, Bulgaria, Czech Republic, Finland, France, Germany, Hungary, Italy, Morocco, Netherlands, Norway, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, South Africa, Spain, Sweden, Turkey, Ukraine and the United Kingdom as provided by IHS Automotive. Production data for 2015 has been updated to reflect actual production levels.

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
We are a leading Tier 1 supplier to the global automotive industry. We supply seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to virtually every major automotive manufacturer in the world.
We use our product, design and technological expertise, global reach and competitive manufacturing footprint to achieve our financial goals and objectives of continuing to deliver profitable growth (balancing risks and returns), maintaining a strong balance sheet with investment grade credit metrics and consistently returning excess cash to our shareholders.
Our seating business consists of the design, development, engineering, just-in-time assembly and delivery of complete seat systems, as well as the design, development, engineering and manufacture of all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests. Further, we have capabilities in active sensing and comfort for seats, utilizing electronically controlled sensor and adjustment systems and internally developed algorithms. Our E-Systems (formerly electrical) business consists of the design, development, engineering and manufacture of complete electrical distribution systems that route electrical signals and manage electrical power within the vehicle for traditional vehicle architectures, as well as high power and hybrid electric systems. 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. We also design, develop, engineer and manufacture sophisticated electronic control modules that facilitate signal, data and power management within the vehicle, as well as associated software. We have added capabilities in wireless communication modules and cybersecurity that securely process various signals to, from and within the vehicle, as well road infrastructure.
We serve all of the world's major automotive manufacturers across both our seating and E-Systems businesses. It is common to have both seating and electrical content on the same and multiple vehicle platforms with a single customer. Our businesses benefit globally from leveraging common operating standards and disciplines, including world-class development and manufacturing processes, as well as common customer support and regional infrastructures. Our core capabilities are shared across component categories, including high-precision manufacturing and assembly with short lead times, management of complex supply chains, global engineering and program management skills and a unique customer-focused culture. Our businesses utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating support functions, such as logistics, supply chain management, quality and health and safety, as well as all major administrative functions.
Industry Overview
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles, and our content per vehicle. Global automotive industry production volumes in 2016 , as compared to 2015 , are shown below (in millions of units):
 
2016
 
2015
 
% Change
North America
17.8
 
17.5
 
2
 %
Europe and Africa
22.3
 
21.5
 
4
 %
Asia
47.0
 
43.9
 
7
 %
South America
2.6
 
2.9
 
(9
)%
Other
1.5
 
1.3
 
19
 %
Global light vehicle production
91.2
 
87.1
 
5
 %
Automotive sales and production can be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles, restructuring actions of our customers and suppliers, facility closures, changing consumer attitudes toward vehicle ownership and usage and other factors. Our operating results are also significantly impacted by the overall commercial success of the vehicle platforms for which we supply particular products, as well as the profitability of the products that we supply for these platforms. The loss of business with respect to any vehicle model for which we are a significant supplier, or a decrease in the production levels of any such models, could adversely affect our operating results. In addition, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating results.

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Our percentage of consolidated net sales by region in 2016 and 2015 is shown below:
 
2016
 
2015
North America
40
%
 
43
%
Europe and Africa
38
%
 
37
%
Asia
19
%
 
18
%
South America
3
%
 
2
%
Total
100
%
 
100
%
Our ability to reduce the risks inherent in certain concentrations of business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall.
Key trends that specifically affect our business include automotive manufacturers’ utilization of global vehicle platforms, increasing demand for luxury and performance features, including increasing levels of electrical and electronic content, and China’s emergence as the single largest major automotive market in the world. In addition, three major mega-trends have broadly emerged as major drivers of change and growth in the automotive industry: connectivity, safety and efficiency.
Our sales and marketing approach is based on addressing these trends, while our strategy focuses on the major imperatives for success as an automotive supplier: quality, service, cost and efficiency and innovation and technology. We have expanded key component and software capabilities through organic investment and acquisitions to ensure a full complement of the highest quality solutions for our customers. We have restructured, and continue to align, our manufacturing and engineering footprint to attain a leading competitive position globally. We have established or expanded our capabilities in new and growing markets, especially China, in support of our customers’ growth and global platform initiatives. These initiatives have helped us achieve our financial goals overall, as well as a more balanced regional, customer and vehicle segment diversification in our business. For further information related to these trends and our strategy, see Part 1 — Item 1, "Business — Industry and Strategy."
Our customers typically require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through product design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.
Our material cost as a percentage of net sales was 64.8% in 2016 , as compared to 66.6% in 2015 and 67.8% in 2014 . Raw material, energy and commodity costs can be volatile. We have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, such as the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. However, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. Certain of these strategies also may limit our opportunities in a declining commodity environment. In addition, the availability of raw materials, commodities and product components fluctuates from time to time due to factors outside of our control. If these costs increase or availability is restricted, it could have an adverse impact on our operating results in the foreseeable future. See Part I — Item 1A, "Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance," and "— Forward-Looking Statements."
Financial Measures
In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. In addition to maintaining and expanding our business with our existing customers in our more established markets, our expansion plans are focused primarily on emerging markets. Asia, in particular, continues to present significant growth opportunities, as major global automotive manufacturers implement production expansion plans and local automotive manufacturers aggressively expand their operations to meet increasing demand in this region. We currently have fifteen joint ventures with operations in Asia, as well as an additional joint venture in North America dedicated to serving Asian automotive manufacturers. We also have aggressively pursued this strategy by selectively increasing our vertical integration capabilities globally, as well as expanding our component manufacturing capacity in Asia, Brazil, Eastern Europe, Mexico and Northern Africa. Furthermore, we have expanded our low-cost engineering capabilities in India and the Philippines.

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Our success in generating cash flow will depend, in part, on our ability to manage working capital effectively. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. Historically, we generally have been successful in aligning our vendor payment terms with our customer payment terms. However, our ability to continue to do so may be impacted by adverse automotive industry conditions, changes to our customers’ payment terms and the financial condition of our suppliers, as well as our financial condition. In addition, our cash flow is impacted by our ability to manage our inventory and capital spending effectively. We utilize return on invested capital as a measure of the efficiency with which our assets generate earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.
Acquisitions
Eagle Ottawa
On January 5, 2015, we completed the acquisition of Everett Smith Group Ltd., the parent of Eagle Ottawa, LLC ("Eagle Ottawa"), the world's leading provider of leather for the automotive industry, with annual sales of approximately $1 billion (including annual sales to Lear of approximately $200 million), for approximately $844 million. Eagle Ottawa was a privately-held company based in Auburn Hills, Michigan and has a reputation for superior quality, product innovation and craftsmanship. This acquisition has further strengthened our global seating business, enhanced our position as the industry leader in luxury and performance automotive seating and complemented our existing capabilities in the design and manufacturing of seat covers.
Other
In 2016, we acquired AccuMED Holdings Corp. ("AccuMED"), a privately-held developer and manufacturer of specialty fabrics. AccuMED provides innovative fabric processing technology that will benefit our automotive fabric operations, and it adds critical mass to our existing non-automotive fabric products.
In 2015, we acquired intellectual property and technology from Autonet Mobile, a developer of software and devices for automotive applications, and completed the acquisition of Arada Systems Inc, an automotive technology company that specializes in vehicle-to-vehicle and vehicle-to-infrastructure communications. These acquisitions have added software and hardware capabilities that will improve connectivity and communication features in vehicles, as well as provide growth opportunities for our E-Systems segment.
Subsequent Event
On February 6, 2017, we signed a definitive agreement to acquire Grupo Antolin's automotive seating business. Grupo Antolin's seating business is headquartered in France with sales and operations concentrated in five European countries. Grupo Antolin's seating business is comprised of just-in-time seat assembly, as well as seat structures, mechanisms and trim. The transaction is valued at approximately €286 million on a cash and debt free basis. The closing of the transaction is expected to occur in the second quarter of 2017 and is subject to customary conditions, including regulatory approvals.
Operational Restructuring
In 2016 , we incurred pretax restructuring costs of approximately $64 million and related manufacturing inefficiency charges of approximately $6 million . Any future restructuring actions will depend upon market conditions, customer actions and other factors.
For further information, see Note 4 , " Restructuring ," to the consolidated financial statements included in this Report.
Financing Transactions
Senior Notes
In November 2014, we issued $650 million in aggregate principal amount of 5.25% senior unsecured notes due 2025 (the "2025 Notes"). In January 2015, we used $350 million of the net 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, we used $250 million of the net proceeds from the offering, along with $5 million in available cash, to redeem the remaining outstanding aggregate principal amount of our 8.125% senior unsecured notes due 2020 (the "2020 Notes"). In connection with this transaction, we recognized a loss of approximately $14 million on the extinguishment of debt.
In March 2014, we refinanced certain of our outstanding indebtedness to lower our borrowing costs and extend our debt maturity profile. In March 2014, we issued $325 million in aggregate principal amount of 5.375% senior unsecured notes due 2024 (the "2024 Notes") and paid $327 million to redeem the remaining outstanding aggregate principal amount of our 7.875%

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senior unsecured notes due 2018 (the "2018 Notes") and 10% of the original aggregate principal amount of the 2020 Notes. In connection with these transactions, we recognized losses of approximately $18 million on the extinguishment of debt.
For further information, see "— Liquidity and Financial Condition — Capitalization — Senior Notes" and Note 6 , " Debt ," to the consolidated financial statements included in this Report.
Credit Agreement
In November 2014, we amended and restated our senior secured credit agreement ("Credit Agreement") to, among other things, increase the borrowing capacity of our revolving credit facility (the "Revolving Credit Facility") from $1.0 billion to $1.25 billion , extend the maturity of the facility from January 30, 2018 to November 14, 2019, and establish a $500 million delayed-draw term loan facility (the "Term Loan Facility"), which matures on January 5, 2020. In January 2015, we borrowed $500 million under the Term Loan Facility to finance, in part, the acquisition of Eagle Ottawa. For further information, see "— Liquidity and Financial Condition — Capitalization — Credit Agreement" and Note 6 , " Debt ," to the consolidated financial statements included in this Report.
Share Repurchase Program and Quarterly Cash Dividends
Since the first quarter of 2011, our Board of Directors has authorized $3.4 billion in share repurchases under our common stock share repurchase program. In 2016 , we completed $659 million of share repurchases and have a remaining repurchase authorization of $341 million , which will expire on December 31, 2017.
Our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock in 2016 .
For further information regarding our common stock share repurchase program and our quarterly dividends, see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," "— Liquidity and Financial Condition — Capitalization" and Note 9 , " Capital Stock, Equity and Accumulated Other Comprehensive Loss ," to the consolidated financial statements included in this Report.
Other Matters
In 2016, we amended the existing joint venture agreement of Beijing BAI Lear Automotive Systems Co., Ltd. (“Beijing BAI”) to eliminate the substantive participating rights of our joint venture partner. In conjunction with the consolidation of Beijing BAI and the valuation of our prior equity investment in Beijing BAI at fair value, we recognized a gain of approximately $30 million.
In 2016, we recognized a $34 million non-cash settlement charge, of which approximately $20 million is recorded in cost of sales and approximately $14 million is recorded in selling, general and administrative expenses, in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans.
In 2016, we recognized net tax benefits of $24 million related to restructuring charges, a non-cash pension settlement charge and various other items.
In 2015, we recognized net tax benefits of $43 million related to restructuring charges, debt redemption costs, acquisition costs and various other items.
In 2014, we recognized net tax benefits of $111 million primarily related to net reductions in valuation allowances with respect to the deferred tax assets of certain foreign subsidiaries and reductions in tax reserves due to audit settlements and net tax benefits of $38 million related to debt redemption costs, restructuring charges and various other items.
As discussed above, our results for the years ended December 31, 2016 , 2015 and 2014 , reflect the following items (in millions):
For the year ended December 31,
2016
 
2015
 
2014
Costs related to restructuring actions, including manufacturing inefficiencies of $6 million in 2016, $8 million in 2015 and $8 million in 2014
$
70

 
$
97

 
$
115

Pension settlement charge
34

 

 

Acquisition and other related costs
1

 
11

 
5

Acquisition-related inventory fair value adjustment

 
16

 

Losses on extinguishment of debt

 
14

 
18

(Gain) loss related to affiliate
(30
)
 
2

 
1

Tax benefits, net
(24
)
 
(43
)
 
(149
)

33

Table of Contents


For further information regarding these items, see Note  3 , " Acquisitions ," Note 4 , " Restructuring ," Note 5 , " Investments in Affiliates and Other Related Party Transactions ," Note 6 , " Debt ," Note 7 , " Income Taxes ," and Note 8, "Pension and Other Postretirement Benefit Plans," to the consolidated financial statements included in this Report. This section includes forward-looking statements that are subject to risks and uncertainties. For further information regarding these and other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see Part I — Item 1A, "Risk Factors," and "— Forward-Looking Statements."

Results of Operations
A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:
For the year ended December 31,
2016
 
2015
 
2014
Net sales
 
 
 
 
 
 
 
 
 
 
 
Seating
$
14,356.7

 
77.4
 %
 
$
14,098.5

 
77.4
 %
 
$
13,310.6

 
75.1
 %
E-Systems
4,200.9

 
22.6

 
4,112.9

 
22.6

 
4,416.7

 
24.9

Net sales
18,557.6

 
100.0

 
18,211.4

 
100.0

 
17,727.3

 
100.0

Cost of sales
16,455.5

 
88.7

 
16,391.6

 
90.0

 
16,234.5

 
91.6

Gross profit
2,102.1

 
11.3

 
1,819.8

 
10.0

 
1,492.8

 
8.4

Selling, general and administrative expenses
621.9

 
3.4

 
580.5

 
3.2

 
529.9

 
3.0

Amortization of intangible assets
53.0

 
0.3

 
52.5

 
0.3

 
33.7

 
0.2

Interest expense
82.5

 
0.4

 
86.7

 
0.3

 
67.5

 
0.4

Other expense, net
6.4

 

 
68.6

 
0.4

 
74.3

 
0.3

Provision for income taxes
370.2

 
2.0

 
285.5

 
1.6

 
121.4

 
0.7

Equity in net income of affiliates
(72.4
)
 
(0.4
)
 
(49.8
)
 
(0.3
)
 
(36.3
)
 
(0.2
)
Net income attributable to noncontrolling interests
65.4

 
0.3

 
50.3

 
0.2

 
29.9

 
0.1

Net income attributable to Lear
$
975.1

 
5.3
 %
 
$
745.5

 
4.3
 %
 
$
672.4

 
3.9
 %
Year Ended December 31, 2016 , Compared With Year Ended December 31, 2015
Net sales for the year ended December 31, 2016 were $18.6 billion , as compared to $18.2 billion for the year ended December 31, 2015 , an increase of $346 million or 2% . New business in Asia, Europe and South America and higher production volumes on key Lear platforms in Europe and Asia positively impacted net sales by $845 million and $139 million, respectively. These increases were partially offset by net foreign exchange rate fluctuations related to the strengthening of the U.S. dollar against most major currencies and selling price reductions, which reduced net sales by $602 million.
(in millions)
 
Cost of Sales
2015
 
$
16,391.6

Material cost
 
(91.4
)
Labor and other
 
128.0

Depreciation
 
27.3

2016
 
$
16,455.5

Cost of sales in 2016 was $16.5 billion , as compared to $16.4 billion in 2015 . New business in Asia, Europe and South America and higher production volumes on key Lear platforms in Europe and Asia resulted in an increase in cost of sales of $810 million. These increases were partially offset by favorable operating performance and the benefit of operational restructuring actions and net foreign exchange rate fluctuations related to the strengthening of the U.S. dollar against most major currencies, which reduced cost of sales by $703 million.
Gross profit and gross margin were $2.1 billion and 11.3% of net sales in 2016 , as compared to $1.8 billion and 10.0% of net sales in 2015 . New business and higher production volumes on key Lear platforms positively impacted gross profit by $148 million. The impact of favorable operating performance and the benefit of operational restructuring actions of $412 million more than offset the impact of selling price reductions and net foreign exchange rate fluctuations of $300 million. These factors had a corresponding impact on gross margin.

34



Selling, general and administrative expenses, including engineering and development expenses, were $622 million for the year ended December 31, 2016 , as compared to $581 million for the year ended December 31, 2015 , reflecting an increase in engineering and development expenses to support future business growth, as well as a $14 million non-cash settlement charge in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans. As a percentage of net sales, selling, general and administrative expenses were 3.4% in 2016 , as compared to 3.2% in 2015 .
Engineering and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $144 million in 2016 , as compared to $127 million in 2015 . In certain situations, the reimbursement of pre-production engineering and design costs is contractually guaranteed by, and fully recoverable from, our customers and, therefore, is capitalized. We capitalized $179 million of such costs in 2016 , as compared to $194 million in 2015 .
Amortization of intangible assets was $53 million in 2016 and 2015 .
Interest expense was $83 million in 2016 , as compared to $87 million in 2015 .
Other expense, net, which 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, was $6 million in 2016 , as compared to $69 million in 2015 . In 2016 , we recognized a gain of approximately $30 million related to the consolidation of an affiliate. In 2015 , we recognized a loss of approximately $14 million related to the redemption of the remaining outstanding aggregate principal amount of our 8.125% senior unsecured notes due 2020. Net foreign exchange losses decreased to $10 million in 2016 , as compared to $23 million in 2015 .
In 2016 , the provision for income taxes was $370 million , representing an effective tax rate of 27.7% on pretax income before equity in net income of affiliates of $1,338 million . In 2015 , the provision for income taxes was $286 million , representing an effective tax rate of 27.7%  on pretax income before equity in net income of affiliates of $1,032 million .
In 2016 and 2015, the provision for income taxes was impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of our 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 2016, we recognized a gain of approximately $30 million related to the consolidation of an affiliate, for which no tax expense was provided. In addition, we recognized net tax benefits of $24 million related to restructuring charges, a non-cash pension settlement charge and various other items. In 2015, we recognized net tax benefits of $43 million related to restructuring charges, debt redemption costs, acquisition costs and various other items. Excluding these items, the effective tax rate in 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.
For information related to our valuation allowances, see "Other Matters — Significant Accounting Policies and Critical Accounting Estimates — Income Taxes."
Equity in net income of affiliates was $72 million for the year ended December 31, 2016 , as compared to $50 million for the year ended December 31, 2015 , reflecting the increase in sales and improved operating performance of our equity affiliates in China.
Net income attributable to Lear was $975 million , or $13.33 per diluted share, in 2016 , as compared to $746 million , or $9.59 per diluted share, in 2015 . Net income and diluted net income per share increased for the reasons described above. In addition, diluted net income per share was impacted by the decrease in average shares outstanding between the periods.
Reportable Operating Segments
We have 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 financial information presented below is for our two reportable operating segments and our other category for the periods presented. 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. Corporate and regional headquarters costs include various support functions, such as information technology, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment’s pretax income before equity

35



in net income of affiliates, interest expense and other expense ("segment earnings") and segment earnings divided by net sales ("margin") are not measures of performance under accounting principles generally accepted in the United States ("GAAP"). Segment earnings and the related margin are used by management to evaluate the performance of our reportable operating segments. Segment earnings should not be considered in isolation or as a substitute for net income attributable to Lear, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates, see Note 12 , " Segment Reporting ," to the consolidated financial statements included in this Report.
Seating –
A summary of financial measures for our seating segment is shown below (dollar amounts in millions):
For the year ended December 31,
2016
 
2015
Net sales
$
14,356.7

 
$
14,098.5

Segment earnings (1)
1,136.0

 
907.0

Margin
7.9
%
 
6.4
%
(1)
See definition above.
Seating net sales were $14.4 billion for the year ended December 31, 2016 , as compared to $14.1 billion for the year ended December 31, 2015 , an increase of $258 million or 2% . New business positively impacted net sales by $656 million. This increase was partially offset by net foreign exchange rate fluctuations and selling price reductions, which negatively impacted net sales by $427 million. Segment earnings, including restructuring costs, and the related margin on net sales were $1,136 million and 7.9% in 2016 , as compared to $907 million and 6.4% in 2015 . New business and lower restructuring costs positively impacted segment earnings by $122 million. The impact of favorable operating performance and the benefit of operational restructuring actions of $261 million more than offset the impact of selling price reductions and net foreign exchange rate fluctuations.
E-Systems –
A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):
For the year ended December 31,
2016
 
2015
Net sales
$
4,200.9

 
$
4,112.9

Segment earnings (1)
591.3

 
554.4

Margin
14.1
%
 
13.5
%
(1)
See definition above.
E-Systems net sales were $4.2 billion for the year ended December 31, 2016 , as compared to $4.1 billion for the year ended December 31, 2015 , an increase of $88 million or 2% . New business and higher production volumes on key Lear platforms positively impacted net sales by $179 million and $71 million, respectively. These increases were partially offset by selling price reductions and net foreign exchange rate fluctuations, which negatively impacted net sales by $175 million. Segment earnings, including restructuring costs, and the related margin on net sales were $591 million and 14.1% in 2016 , as compared to $554 million and 13.5% in 2015 . New business and higher production volumes on key Lear platforms positively impacted segment earnings by $52 million. The impact of improved operating performance of $111 million was offset by the impact of selling price reductions and net foreign exchange rate fluctuations.

36



Other –
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
For the year ended December 31,
2016
 
2015
Net sales
$

 
$

Segment earnings (1)
(300.1
)
 
(274.6
)
Margin
N/A

 
N/A

(1)
See definition above.
Segment earnings related to our other category were ($300) million in 2016 , as compared to ($275) million in 2015 . In 2016, we recognized a $34 million non-cash settlement charge in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans.
Year Ended December 31, 2015 , Compared With Year Ended December 31, 2014
Net sales for the year ended December 31, 2015 were $18.2 billion , as compared to $17.7 billion for the year ended December 31, 2014 , an increase of $484 million or 3% . The acquisition of Eagle Ottawa, new business in Europe, North America and Asia and higher production volumes on key Lear platforms in North America and Europe positively impacted net sales by $820 million, $769 million and $426 million, respectively. These increases were offset by net foreign exchange rate fluctuations, primarily related to the Euro, which negatively impacted net sales by $1.5 billion.
(in millions)
 
Cost of Sales
2014
 
$
16,234.5

Material cost
 
97.1

Labor and other
 
46.1

Depreciation
 
13.9

2015
 
$
16,391.6

Cost of sales in 2015 was $16.4 billion , as compared to $16.2 billion in 2014 . Net foreign exchange rate fluctuations, primarily related to the Euro, reduced cost of sales by $1.4 billion. This decrease was more than offset by new business in Europe, North America and Asia, higher production volumes on key Lear platforms in North America and Europe and the acquisition of Eagle Ottawa.
Gross profit and gross margin were $1.8 billion and 10.0% of net sales in 2015 , as compared to $1.5 billion and 8.4% of net sales in 2014 . New business, higher production volumes on key Lear platforms and the acquisition of Eagle Ottawa positively impacted gross profit by $383 million. The impact of favorable operating performance and the benefit of operational restructuring actions of $325 million was more than offset by selling price reductions and net foreign exchange fluctuations of $404 million. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were $581 million for the year ended December 31, 2015 , as compared to $530 million for the year ended December 31, 2014 , reflecting the acquisition of Eagle Ottawa. As a percentage of net sales, selling, general and administrative expenses were 3.2% in 2015 , as compared to 3.0% in 2014 .
Engineering and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $127 million in 2015 , as compared to $102 million in 2014 , reflecting the acquisition of Eagle Ottawa. In certain situations, the reimbursement of pre-production engineering and design costs is contractually guaranteed by, and fully recoverable from, our customers and, therefore, is capitalized. We capitalized $194 million of such costs in 2015 , as compared to $232 million in 2014 .
Amortization of intangible assets was $53 million in 2015 , as compared to $34 million in 2014 , reflecting the amortization of intangible assets related to the acquisition of Eagle Ottawa.
Interest expense was $87 million in 2015 , as compared to $68 million in 2014 , primarily reflecting debt incurred to finance the acquisition of Eagle Ottawa, partially offset by the refinancing of certain of our senior notes at lower interest rates.

37



Other expense, net, which 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, was $69 million in 2015 , as compared to $74 million in 2014 . In 2015, we recognized a loss of $14 million related to the redemption of the remaining outstanding aggregate principal amount of the 2020 Notes. In 2014, we recognized losses of $18 million related to the redemption of the remaining aggregate principal amount of our 2018 Notes and 10% of the original aggregate principal amount of our 2020 Notes and a gain of $5 million related to a transaction with an affiliate. Net foreign exchange losses decreased $7 million between periods.
In 2015 , the provision for income taxes was $286 million , representing an effective tax rate of 27.7% on pretax income before equity in net income of affiliates of $1,032 million . In 2014 , the provision for income taxes was $121 million , representing an effective tax rate of 15.4%  on pretax income before equity in net income of affiliates of $787 million .
In 2015 and 2014 , the provision for income taxes was impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of our 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 2015, we recognized net tax benefits of $43 million related to restructuring charges, debt redemption costs, acquisition costs and various other items. In 2014, we recognized net tax benefits of $111 million primarily related to net reductions in valuation allowances with respect to the deferred tax assets of certain foreign subsidiaries and reductions in tax reserves due to audit settlements and net tax benefits of $38 million related to debt redemption costs, restructuring charges and various other items. The reduction in valuation allowances includes the reversal of a valuation allowance of $79 million with respect to the deferred tax assets of our subsidiaries in Spain. During the fourth quarter of 2014, our subsidiaries in Spain became profitable on a three-year cumulative basis and forecasted continued profitability in 2015 and subsequent years. As a result, we concluded that it was more likely than not that the deferred tax assets in Spain would be realized, and therefore, the valuation allowance was no longer necessary. Excluding these items, the effective tax rate in 2015 and 2014 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.
For information related to our valuation allowances, see "Other Matters — Significant Accounting Policies and Critical Accounting Estimates — Income Taxes."
Equity in net income of affiliates was $50 million for the year ended December 31, 2015 , as compared to $36 million for the year ended December 31, 2014 , reflecting the improved operating performance of our equity affiliates in China.
Net income attributable to Lear was $746 million , or $9.59 per diluted share, in 2015 , as compared to $672 million , or $8.23 per diluted share, in 2014 . Net income and diluted net income per share increased for the reasons described above. In addition, diluted net income per share was impacted by the decrease in average shares outstanding between the periods.
Reportable Operating Segments
For a description of our reportable operating segments, see "Year Ended December 31, 2016 , Compared with Year Ended December 31, 2015 — Reportable Operating Segments" above.
Seating –
A summary of financial measures for our seating segment is shown below (dollar amounts in millions):
For the year ended December 31,
2015
 
2014
Net sales
$
14,098.5

 
$
13,310.6

Segment earnings (1)
907.0

 
655.2

Margin
6.4
%
 
4.9
%
(1)
See definition above.
Seating net sales were $14.1 billion for the year ended December 31, 2015 , as compared to $13.3 billion for the year ended December 31, 2014 , an increase of $788 million or 6% . The acquisition of Eagle Ottawa, new business and higher production volumes on key Lear platforms positively impacted net sales by $820 million, $617 million and $362 million, respectively. These increases were partially offset by net foreign exchange rate fluctuations, which negatively impacted net sales by $1.0 billion. Segment earnings, including restructuring costs, and the related margin on net sales were $907 million and 6.4% in 2015 , as compared to $655 million and 4.9% in 2014 . New business, higher production volumes on key Lear platforms and the acquisition of Eagle Ottawa positively impacted segment earnings by $256 million. The impact of favorable operating performance and the benefit of operational restructuring actions of $181 million was more than offset by selling price reductions and net foreign exchange fluctuations.

38



E-Systems –
A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):
For the year ended December 31,
2015
 
2014
Net sales
$
4,112.9

 
$
4,416.7

Segment earnings (1)
554.4

 
556.6

Margin
13.5
%
 
12.6
%
(1)
See definition above.
E-Systems net sales were $4.1 billion for the year ended December 31, 2015 , as compared to $4.4 billion for the year ended December 31, 2014 , a decrease of $304 million or 7% . Net foreign exchange rate fluctuations negatively impacted net sales by $452 million. This decrease was partially offset by new business and higher production volumes on key Lear platforms, which positively impacted net sales by $152 million and $64 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $554 million and 13.5% in 2015 , as compared to $557 million and 12.6% in 2014 . The impact of improved operating performance, new business and higher production volumes on key Lear platforms of $167 million was offset by selling price reductions and net foreign exchange fluctuations.
Other –
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
For the year ended December 31,
2015
 
2014
Net sales
$

 
$

Segment earnings (1)
(274.6
)
 
(282.6
)
Margin
N/A

 
N/A

(1)
See definition above.
Segment earnings related to our other category were ($275) million in 2015 , as compared to ($283) million in 2014 , reflecting favorable performance and the benefit of restructuring actions and net foreign exchange rate fluctuations, partially offset by transaction costs of $9 million related to the acquisition of Eagle Ottawa.
Liquidity and Financial Condition
Our primary liquidity needs are to fund general business requirements, including working capital requirements, capital expenditures, operational restructuring actions and debt service requirements. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program (see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities"). Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties, intercompany loan repayments and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations.
As of December 31, 2016 and 2015 , cash and cash equivalents of $767 million and $664 million, respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans, without creating additional income tax expense. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from our non-U.S. subsidiaries, see "— Adequacy of Liquidity Sources," below and Note 7 , " Income Taxes ," to the consolidated financial statements included in this Report.

39



Cash Flows
Year Ended December 31, 2016 , Compared with Year Ended December 31, 2015
A summary of net cash provided by operating activities is shown below (in millions):
For the year ended December 31,
2016
 
2015
 
Incremental Increase (Decrease) in Operating
Cash Flow
Consolidated net income and depreciation and amortization
$
1,419

 
$
1,144

 
$
275

Net change in working capital items:
 
 
 
 
 
Accounts receivable
(176
)
 
(173
)
 
(3
)
Inventory
(54
)
 
4

 
(58
)
Accounts payable
158

 
76

 
81

Accrued liabilities and other
160

 
151

 
9

Net change in working capital items
88

 
58

 
30

Other
113

 
70

 
43

Net cash provided by operating activities
$
1,619

 
$
1,271

 
$
348

In 2016 , increases in accounts receivable, inventories and accounts payable resulted in a use of cash of $176 million , a use of cash of $54 million and a source of cash of $158 million , respectively, primarily reflecting higher working capital to support the increase in our sales. In 2016 , changes in accrued liabilities and other resulted in a source of cash of $160 million , primarily reflecting the timing of payment of accrued liabilities.
Net cash used in investing activities was $637 million in 2016 , as compared to $965 million in 2015 . This decrease is primarily due to cash paid of $149 million for the acquisition of AccuMED in 2016, as compared to cash paid of $465 million for the acquisition of Eagle Ottawa in 2015. Capital spending in 2017 is estimated at $550 million.
Net cash used in financing activities was $873 million in 2016 , as compared to $156 million in 2015 . In 2016 and 2015 , we paid $659 million and $487 million , respectively, for repurchases of our common stock. In 2015 , financing activities included $500 million of borrowings under our Term Loan Facility (see "— Credit Agreement" below) to finance, in part, the acquisition of Eagle Ottawa.
For further information regarding our 2016 and 2015 financing transactions, see "— Capitalization," below and Note 6 , " Debt ," and Note 9 , " Capital Stock, Equity and Accumulated Other Comprehensive Loss ," to the consolidated financial statements included in this Report.
Year Ended December 31, 2015 , Compared with Year Ended December 31, 2014
A summary of net cash provided by operating activities is shown below (in millions):
For the year ended December 31,
2015
 
2014
 
Incremental Increase (Decrease) in Operating
Cash Flow
Consolidated net income and depreciation and amortization
$
1,144

 
$
1,013

 
$
130

Net change in working capital items:
 
 
 
 
 
Accounts receivable
(173
)
 
(359
)
 
185

Inventory
4

 
(91
)
 
95

Accounts payable
76

 
231

 
(155
)
Accrued liabilities and other
151

 
78

 
73

Net change in working capital items
58

 
(140
)
 
198

Other
70

 
55

 
15

Net cash provided by operating activities
$
1,271

 
$
928

 
$
343


40



In 2015 , increases in accounts receivable and accounts payable resulted in a use of cash of $173 million and a source of cash of $76 million , respectively, primarily reflecting higher working capital to support the increase in our sales. In 2015, changes in accrued liabilities and other resulted in a source of cash of $151 million , primarily reflecting the timing of payments of accrued liabilities.
Net cash used in investing activities was $965 million in 2015 , as compared to $781 million in 2014 . In 2015, we paid cash for the acquisition of Eagle Ottawa of $465 million, net of cash acquired and use of restricted cash of $350 million. In 2014, the partial restriction of the cash proceeds from the issuance of the 2025 Notes for the 2015 financing of the Eagle Ottawa acquisition resulted in a use of cash of $350 million. In addition, capital spending increased $61 million between periods.
Net cash used in financing activities was $156 million in 2015 , as compared to $161 million in 2014 . In 2015, we borrowed $500 million under our Term Loan Facility to finance, in part, the acquisition of Eagle Ottawa and made required principal payments of $9 million under the Term Loan Facility. In addition, we paid $5 million to redeem the remaining outstanding 2020 Notes, net of use of restricted cash of $250 million, and paid $487 million in aggregate for repurchases of our common stock. In 2014, we issued $975 million in aggregate principal amount of 2024 Notes and 2025 Notes and paid $327 million to redeem the remaining outstanding 2018 Notes and a portion of the outstanding 2020 Notes. In addition, we paid $411 million in aggregate to repurchase our common stock, including $356 million of open market repurchases and $55 million to settle the accelerated share repurchase ("ASR") program. The partial restriction of the cash proceeds from the issuance of the 2025 Notes for the 2015 redemption of the remaining outstanding 2020 Notes resulted in a use of cash of $250 million.
For further information regarding our 2015 and 2014 financing transactions, including the partial restriction of cash proceeds from the issuance of the 2025 Notes, see "— Capitalization," below and Note 6 , " Debt ," and Note 9 , " Capital Stock, Equity and Accumulated Other Comprehensive Loss ," to the consolidated financial statements included in this Report.
Capitalization
From time to time, we utilize uncommitted credit facilities to fund our capital expenditures and working capital requirements at certain of our foreign subsidiaries, in addition to cash provided by operating activities. As of December 31, 2016 , our short-term debt balance was $9 million . As of December 31, 2015 , there were no short-term debt balances outstanding. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors.
Senior Notes
As of December 31, 2016 , our senior notes (collectively, the "Notes") consist of the amounts shown below (in millions, except stated coupon rates):
Note
 
Aggregate Principal Amount
 
Stated Coupon Rate
Senior unsecured notes due 2023
 
$
500

 
4.75%
Senior unsecured notes due 2024
 
325

 
5.375%
Senior unsecured notes due 2025
 
650

 
5.25%
 
 
$
1,475

 
 
In November 2014, we issued the 2025 Notes, resulting in net proceeds of $642 million. In January 2015, we used $350 million of the net 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, we paid $255 million (which included $250 million of the net proceeds from the offering of the 2025 Notes) to redeem the remaining outstanding aggregate principal amount of the 2020 Notes. In connection with this transaction, we recognized a loss of approximately $14 million on the extinguishment of debt. 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.
The 2024 Notes were issued in March 2014. The net proceeds from the offering of $321 million, together with our existing sources of liquidity, were used to redeem the remaining outstanding aggregate principal amount of the 2018 Notes ($280 million) and to redeem 10% of the original aggregate principal amount at maturity of the 2020 Notes ($35 million) at stated redemption prices, plus accrued and unpaid interest to the respective redemption dates. In connection with these transactions, we paid an aggregate of $327 million and recognized losses of $18 million on the extinguishment of debt in 2014.
Interest is payable on January 15 and July 15 of each year, in the case of the 2023 Notes and 2025 Notes, and March 15 and September 15 of each year, in the case of the 2024 Notes. The 2023 Notes mature on January 15, 2023, the 2024 Notes mature on March 15, 2024, and the 2025 Notes mature on January 15, 2025. As of December 31, 2016 and 2015 , the aggregate carrying value of the Notes was $1.5 billion . The indentures governing the Notes contain certain restrictive covenants and

41



customary events of default. As of December 31, 2016 , we were in compliance with all covenants under the indentures governing the Notes.
The Notes are senior unsecured obligations. Our 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.
For further information related to the Notes, including information on early redemption, covenants and events of default, see Note 6 , " Debt ," to the consolidated financial statements included in this Report.
Credit Agreement
As of December 31, 2016 , our Credit Agreement consists of a $1.25 billion Revolving Credit Facility, which matures on November 14, 2019, and a $500 million Term Loan Facility, which matures on January 5, 2020. As of December 31, 2016 and 2015 , there were no borrowings outstanding under the Revolving Credit Facility and $469 million and $491 million , respectively, of borrowings outstanding under the Term Loan Facility. In 2016 , we made required principal payments of $22 million under the Term Loan Facility. As of December 31, 2016 , we were in compliance with all covenants under the Credit Agreement.
For further information related to the Credit Agreement, including information on pricing, covenants and events of default, see Note 6 , " Debt ," to the consolidated financial statements included in this Report and the amended and restated credit agreement, which has been incorporated by reference as an exhibit to this Report.
Contractual Obligations
The scheduled maturities of the Notes, obligations under the Credit Agreement and the scheduled interest payments on the Notes as of the date of this Report are shown below (in millions). In addition, our lease commitments under non-cancelable operating leases as of December 31, 2016 , are shown below (in millions):
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Senior notes
$

 
$

 
$

 
$

 
$

 
$
1,475.0

 
$
1,475.0

Credit agreement —
term loan facility
34.4

 
46.9

 
37.4