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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017.
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number: 001-11311
 learlogoa08.jpg
(Exact name of registrant as specified in its charter) 
_______________________________________  
 
Delaware
 
13-3386776
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
21557 Telegraph Road, Southfield, MI
 
48033
(Address of principal executive offices)
 
(Zip code)
(248) 447-1500
(Registrant’s telephone number, including area code)
________________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 23, 2017, the number of shares outstanding of the registrant’s common stock was 67,560,732 shares.
 

Table of Contents
LEAR CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

INDEX

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

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LEAR CORPORATION AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the unaudited condensed consolidated financial statements of Lear Corporation and subsidiaries pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended December 31, 2016.
The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.


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LEAR CORPORATION AND SUBSIDIARIES

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

 
September 30,
2017 (1)
 
December 31,
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,253.7

 
$
1,271.6

Accounts receivable
3,357.9

 
2,746.5

Inventories
1,232.9

 
1,020.6

Other
718.5

 
610.6

Total current assets
6,563.0

 
5,649.3

LONG-TERM ASSETS:
 
 
 
Property, plant and equipment, net
2,378.1

 
2,019.3

Goodwill
1,387.1

 
1,121.3

Other
1,383.8

 
1,110.7

Total long-term assets
5,149.0

 
4,251.3

Total assets
$
11,712.0

 
$
9,900.6

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
1.8

 
$
8.6

Accounts payable and drafts
3,176.0

 
2,640.5

Accrued liabilities
1,706.2

 
1,497.6

Current portion of long-term debt
9.0

 
35.6

Total current liabilities
4,893.0

 
4,182.3

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
1,953.0

 
1,898.0

Other
691.0

 
627.4

Total long-term liabilities
2,644.0

 
2,525.4

 
 
 
 
Redeemable noncontrolling interest
147.7

 
—

 
 
 
 
EQUITY:
 
 
 
Preferred stock, 100,000,000 shares authorized (including 10,896,250 Series A convertible preferred stock authorized); no shares outstanding
—

 
—

Common stock, $0.01 par value, 300,000,000 shares authorized; 72,563,291 and 80,563,291 shares issued as of September 30, 2017 and December 31, 2016, respectively
0.7

 
0.8

Additional paid-in capital
1,199.3

 
1,385.3

Common stock held in treasury, 5,003,036 and 11,131,648 shares as of September 30, 2017 and December 31, 2016, respectively, at cost
(602.4
)
 
(1,200.2
)
Retained earnings
3,810.3

 
3,706.9

Accumulated other comprehensive loss
(536.8
)
 
(835.6
)
Lear Corporation stockholders’ equity
3,871.1

 
3,057.2

Noncontrolling interests
156.2

 
135.7

Equity
4,027.3

 
3,192.9

Total liabilities and equity
$
11,712.0

 
$
9,900.6

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

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LEAR CORPORATION AND SUBSIDIARIES

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Net sales
$
4,981.5

 
$
4,526.4

 
$
15,103.2

 
$
13,914.1

 
 
 
 
 
 
 
 
Cost of sales
4,425.6

 
4,012.5

 
13,387.0

 
12,324.1

Selling, general and administrative expenses
158.2

 
153.6

 
471.1

 
456.9

Amortization of intangible assets
12.5

 
15.2

 
34.1

 
41.7

Interest expense
21.7

 
20.6

 
63.9

 
62.0

Other (income) expense, net
(21.8
)
 
14.2

 
(12.3
)
 
(0.8
)
Consolidated income before provision for income taxes and equity in net income of affiliates
385.3

 
310.3

 
1,159.4

 
1,030.2

Provision for income taxes
77.8

 
88.2

 
240.2

 
287.4

Equity in net income of affiliates
(7.5
)
 
(12.9
)
 
(41.3
)
 
(49.2
)
Consolidated net income
315.0

 
235.0

 
960.5

 
792.0

Less: Net income attributable to noncontrolling interests
19.8

 
20.6

 
47.6

 
46.8

Net income attributable to Lear
$
295.2

 
$
214.4

 
$
912.9

 
$
745.2

 
 
 
 
 
 
 
 
Basic net income per share available to Lear common stockholders
$
4.00

 
$
3.01

 
$
12.92

 
$
10.19

 
 
 
 
 
 
 
 
Diluted net income per share available to Lear common stockholders
$
3.96

 
$
2.98

 
$
12.80

 
$
10.10

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.50

 
$
0.30

 
$
1.50

 
$
0.90

 
 
 
 
 
 
 
 
Average common shares outstanding
68,061,718

 
71,259,766

 
68,874,682

 
73,102,327

 
 
 
 
 
 
 
 
Average diluted shares outstanding
68,834,279

 
72,052,270

 
69,536,808

 
73,809,220

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (Note 13)
$
392.3

 
$
245.3

 
$
1,265.4

 
$
816.0

Less: Comprehensive income attributable to noncontrolling interests
22.6

 
20.6

 
53.7

 
44.2

Comprehensive income attributable to Lear
$
369.7

 
$
224.7

 
$
1,211.7

 
$
771.8

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

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LEAR CORPORATION AND SUBSIDIARIES

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

 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
Cash Flows from Operating Activities:
 
 
 
Consolidated net income
$
960.5

 
$
792.0

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
313.2

 
283.4

Net change in recoverable customer engineering, development and tooling
(37.4
)
 
2.1

Loss on extinguishment of debt
21.2

 
—

Net change in working capital items (see below)
(31.0
)
 
3.0

Other, net
(42.2
)
 
13.4

Net cash provided by operating activities
1,184.3

 
1,093.9

Cash Flows from Investing Activities:
 
 
 
Additions to property, plant and equipment
(430.2
)
 
(300.3
)
Acquisition of Antolin Seating
(286.8
)
 
—

Other, net
16.9

 
51.8

Net cash used in investing activities
(700.1
)
 
(248.5
)
Cash Flows from Financing Activities:
 
 
 
New credit agreement borrowings
250.0

 
—

Prior credit agreement repayments
(468.7
)
 
(15.6
)
Short-term borrowings, net
(7.2
)
 
8.9

Proceeds from the issuance of senior notes
744.7

 
—

Repurchase of senior notes
(517.0
)
 
—

Payment of debt issuance and other financing costs
(11.7
)
 
—

Repurchase of common stock
(332.2
)
 
(557.7
)
Dividends paid to Lear Corporation stockholders
(104.4
)
 
(68.1
)
Dividends paid to noncontrolling interests
(42.7
)
 
(14.8
)
Other, net
(56.6
)
 
(52.1
)
Net cash used in financing activities
(545.8
)

(699.4
)
Effect of foreign currency translation
43.7

 
(1.0
)
Net Change in Cash and Cash Equivalents
(17.9
)
 
145.0

Cash and Cash Equivalents as of Beginning of Period
1,271.6

 
1,196.6

Cash and Cash Equivalents as of End of Period
$
1,253.7

 
$
1,341.6

 
 
 
 
Changes in Working Capital Items:
 
 
 
Accounts receivable
$
(280.6
)
 
$
(440.2
)
Inventories
(114.7
)
 
(87.3
)
Accounts payable
245.6

 
203.6

Accrued liabilities and other
118.7

 
326.9

Net change in working capital items
$
(31.0
)
 
$
3.0

 
 
 
 
Supplementary Disclosure:
 
 
 
Cash paid for interest
$
91.6

 
$
85.3

Cash paid for income taxes, net of refunds received
$
224.9

 
$
151.6

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

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1) Basis of Presentation
Lear Corporation ("Lear," and together with its consolidated subsidiaries, the "Company") and its affiliates design and manufacture automotive seating and electrical distribution systems and related components. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide.
The accompanying condensed consolidated financial statements include the accounts of Lear, a Delaware corporation, and the wholly owned and less than wholly owned subsidiaries controlled by Lear. In addition, Lear consolidates all entities, including variable interest entities, in which it has a controlling financial interest. Investments in affiliates in which Lear does not have control but does have the ability to exercise significant influence over operating and financial policies are accounted for under the equity method.
The Company’s annual financial results are reported on a calendar year basis, and quarterly interim results are reported using a thirteen week reporting calendar.
Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation used in the quarter ended September 30, 2017.
Cost of Sales and Selling, General and Administrative Expenses
Cost of sales includes material, labor and overhead costs associated with the manufacture and distribution of the Company’s products. Distribution costs include inbound freight costs, purchasing and receiving costs, inspection costs, warehousing costs and other costs of the Company’s distribution network. Selling, general and administrative expenses include selling, engineering and development and administrative costs not directly associated with the manufacture and distribution of the Company’s products.

(2) Acquisitions
Grupo Antolin Seating
On April 28, 2017, the Company completed the acquisition of Grupo Antolin's automotive seating business ("Antolin Seating") for $291.5 million, net of cash acquired. Antolin Seating is headquartered in France with operations in five countries in Europe and North Africa. The Antolin Seating business is comprised of just-in-time seat assembly, as well as seat structures, mechanisms and seat covers with annual sales of approximately $370 million.
The Antolin Seating acquisition was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheet as of September 30, 2017. The operating results and cash flows of Antolin Seating are included in the accompanying condensed consolidated financial statements from the date of acquisition and in the Company's seating segment.
The net purchase price of $291.5 million is subject to adjustment and consists of cash paid of $286.8 million, net of cash acquired, and contingent consideration of $4.7 million. In addition, the Company incurred transaction costs of $3.1 million related to advisory services in the nine months ended September 30, 2017, which have been expensed as incurred and are recorded in selling, general and administrative expenses. The purchase price and preliminary allocation are shown below (in millions):
Purchase price paid, net of cash acquired
 
$
286.8

Acquisition date contingent consideration
 
4.7

Net purchase price
 
$
291.5

 
 
 
Property, plant and equipment
 
$
81.7

Other assets purchased and liabilities assumed, net
 
(34.2
)
Goodwill
 
122.6

Intangible assets
 
121.4

Preliminary purchase price allocation
 
$
291.5


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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Contingent consideration represents the discounted value of estimated amounts due to the seller pending the resolution of certain matters. As of the acquisition date, the value of estimated contingent consideration was $4.7 million.
Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do not qualify for separate recognition.
Intangible assets consist of provisional amounts recognized for the fair value of customer-based assets and were based on an independent appraisal. Customer-based assets include Antolin Seating's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. It is currently estimated that these intangible assets have a weighted average useful life of approximately fifteen years.
The purchase price and related allocation are preliminary and will be revised as a result of additional information regarding the assets acquired and liabilities assumed, including, but not limited to, certain tax attributes, contingent liabilities and revisions of provisional estimates of fair values resulting from the completion of independent appraisals and valuations of property, plant and equipment and intangible assets.
The pro-forma effects of this acquisition do not materially impact the Company's reported results for any period presented.
For further information related to acquired assets measured at fair value, see Note 16, "Financial Instruments."
AccuMED
On December 21, 2016, the Company completed the acquisition of 100% of the outstanding equity interests of AccuMED Holdings Corp. ("AccuMED"), a privately-held developer and manufacturer of specialty fabrics, for $148.5 million, net of cash acquired. AccuMED has annual sales of approximately $80 million. The AccuMED acquisition was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016. The operating results and cash flows of AccuMED are included in the accompanying condensed consolidated financial statements from the date of acquisition and in the Company's seating segment. The purchase price and preliminary allocation are shown below (in millions):
Purchase price paid, net of cash acquired
 
$
148.5

 
 
 
Property, plant and equipment
 
$
11.2

Other assets purchased and liabilities assumed, net
 
7.2

Goodwill
 
77.1

Intangible assets
 
53.0

Preliminary purchase price allocation
 
$
148.5

Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do not qualify for separate recognition.
Intangible assets consist of amounts recognized for the fair value of customer-based assets and were based on an independent appraisal. Customer-based assets include AccuMED's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. It is estimated that these intangible assets have a weighted average useful life of approximately thirteen years.
The purchase price allocation is preliminary and will be revised as a result of additional information regarding the assets acquired and liabilities assumed, including, but not limited to, certain tax attributes and contingent liabilities.
The pro-forma effects of this acquisition do not materially impact the Company's reported results for any period presented.
For further information related to acquired assets measured at fair value, see Note 16, "Financial Instruments."

(3) Restructuring
Restructuring costs include employee termination benefits, fixed asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These incremental costs principally include equipment and personnel relocation costs. The Company also incurs incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

recognized in the Company’s condensed consolidated financial statements in accordance with GAAP. Generally, charges are recorded as restructuring actions are approved and/or implemented.
In the first nine months of 2017, the Company recorded charges of $48.6 million in connection with its restructuring actions. These charges consist of $39.5 million recorded as cost of sales, $10.2 million recorded as selling, general and administrative expenses and net credits of $1.1 million recorded as other income. The restructuring charges consist of employee termination costs of $41.0 million, fixed asset impairment charges of $0.4 million, a pension benefit plan settlement loss of $0.8 million and contract termination costs of $1.5 million, as well as other related costs of $4.9 million. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Fixed asset impairment charges relate to the disposal of buildings, leasehold improvements and/or machinery and equipment with carrying values of $0.4 million in excess of related estimated fair values.
The Company expects to incur approximately $36 million of additional restructuring costs related to activities initiated as of September 30, 2017, and expects that the components of such costs will be consistent with its historical experience. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
A summary of 2017 activity, excluding the pension benefit plan settlement loss of $0.8 million (Note 9, "Pension and Other Postretirement Benefit Plans"), is shown below (in millions):
 
Accrual as of
 
2017
 
Utilization
 
Accrual as of
 
January 1, 2017
 
Charges
 
Cash
 
Non-cash
 
September 30, 2017
Employee termination benefits
$
69.4

 
$
41.0

 
$
(27.7
)
 
$
—

 
$
82.7

Asset impairment charges
—

 
0.4

 
—

 
(0.4
)
 
—

Contract termination costs
4.6

 
1.5

 
(1.2
)
 
—

 
4.9

Other related costs
—

 
4.9

 
(4.9
)
 
—

 
—

Total
$
74.0

 
$
47.8

 
$
(33.8
)
 
$
(0.4
)
 
$
87.6


(4) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. A summary of inventories is shown below (in millions):
 
September 30,
2017
 
December 31, 2016
Raw materials
$
909.2

 
$
746.3

Work-in-process
124.0

 
106.4

Finished goods
199.7

 
167.9

Inventories
$
1,232.9

 
$
1,020.6


(5) Pre-Production Costs Related to Long-Term Supply Agreements
The Company incurs pre-production engineering and development ("E&D") and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the Company does not have a non-cancelable right to use the tooling.
During the first nine months of 2017 and 2016, the Company capitalized $190.8 million and $110.5 million, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first nine months of 2017 and 2016, the Company also capitalized $93.5 million and $61.5 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the Company has a non-cancelable right to use the tooling. These amounts are included in other current and long-term assets in the accompanying condensed consolidated balance sheets.
During the first nine months of 2017 and 2016, the Company collected $247.7 million and $168.9 million, respectively, of cash related to E&D and tooling costs.

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The classification of recoverable customer E&D and tooling costs related to long-term supply agreements is shown below (in millions):
 
September 30,
2017
 
December 31, 2016
Current
$
232.5

 
$
185.9

Long-term
54.0

 
43.4

Recoverable customer E&D and tooling
$
286.5

 
$
229.3


(6) Long-Term Assets
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Costs associated with the repair and maintenance of the Company’s property, plant and equipment are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency or safety of the Company’s property, plant and equipment are capitalized and depreciated over the remaining useful life of the related asset. Depreciable property is depreciated over the estimated useful lives of the assets, using principally the straight-line method.
A summary of property, plant and equipment is shown below (in millions):
 
September 30,
2017
 
December 31, 2016
Land
$
119.1

 
$
101.7

Buildings and improvements
772.2

 
648.1

Machinery and equipment
2,939.2

 
2,459.6

Construction in progress
348.1

 
296.4

Total property, plant and equipment
4,178.6

 
3,505.8

Less – accumulated depreciation
(1,800.5
)
 
(1,486.5
)
Property, plant and equipment, net
$
2,378.1

 
$
2,019.3

Depreciation expense was $99.2 million and $83.5 million in the three months ended September 30, 2017 and October 1, 2016, respectively, and $279.1 million and $241.7 million in the nine months ended September 30, 2017 and October 1, 2016, respectively.
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP. If impairment indicators exist, the Company performs the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. Except as discussed below, the Company does not believe that there were any indicators that would have resulted in long-lived asset impairment charges as of September 30, 2017. The Company will, however, continue to assess the impact of any significant industry events on the realization of its long-lived assets.
In the first nine months of 2017 and 2016, the Company recognized fixed asset impairment charges of $0.4 million and $3.5 million, respectively, in conjunction with its restructuring actions (Note 3, "Restructuring").
Investment in Affiliates
On September 8, 2017, the Company gained control of Shanghai Lear STEC Automotive Parts Co., Ltd. (“Lear STEC”) by amending the existing joint venture agreement to eliminate the substantive participating rights of its joint venture partner. Prior to the amendment, Lear STEC was accounted for under the equity method. The consolidation of Lear STEC was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheet as of September 30, 2017. The operating results and cash flows of Lear STEC are included in the accompanying condensed consolidated financial statements from the date of the amended joint venture agreement and are reflected in the Company’s E-Systems segment.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A preliminary summary of the fair value of the assets acquired and liabilities assumed in conjunction with the consolidation is shown below (in millions):
Property, plant and equipment
$
16.2

Other assets and liabilities assumed, net
42.7

Goodwill
94.1

Intangible assets
66.0

 
$
219.0

Recognized goodwill is attributable to the assembled workforce, expected synergies and other intangible assets that do not qualify for separate recognition.
Intangible assets consist of amounts recognized for the fair value of customer-based assets and were based on an independent appraisal. Customer-based assets include Lear STEC’s established relationships with its customers and the ability of these customers to generate future economic profits for the Company. It is currently estimated that these intangible assets have a weighted average useful life of approximately 12 years.
The fair values of the assets acquired and liabilities assumed in conjunction with the consolidation contain provisional estimates that may be revised as a result of additional information obtained regarding such assets and liabilities.
As of the date of consolidation, the fair value of the Company’s previously held equity interest in Lear STEC was $94.0 million, and the fair value of the noncontrolling interest in Lear STEC was $125.0 million. As a result of valuing the Company’s prior equity interest in Lear STEC at fair value, the Company recognized a gain of $54.2 million, which is included in other (income) expense, net in the accompanying condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2017.
In connection with the consolidation, the noncontrolling interest holder obtained the option, which is embedded in the noncontrolling interest, to require the Company to purchase or redeem the 45% noncontrolling interest based on a pre-determined earnings multiple formula. In accordance with GAAP, the Company records redeemable noncontrolling interests at the greater of (1) the initial carrying amount adjusted for the noncontrolling interest holder’s share of total comprehensive income or loss and dividends (“noncontrolling interest carrying value”) or (2) the redemption value as of and based on conditions existing as of the reporting date. Required redemption adjustments are recorded as an increase to redeemable noncontrolling interests, with an offsetting adjustment to retained earnings. The redeemable noncontrolling interest is classified in mezzanine equity in the accompanying condensed consolidated balance sheet as of September 30, 2017.
Redemption value of a noncontrolling interest in excess of carrying value represents a dividend distribution that is different from dividend distributions to other common stockholders. Therefore, periodic redemption adjustments recorded in excess of carrying value are reflected as a reduction to the income available to common stockholders in the computation of earnings per share. Redeemable noncontrolling interest of $147.7 million related to Lear STEC is reflected in the Company's condensed consolidated balance sheet as of September 30, 2017. This amount includes a noncontrolling interest redemption adjustment of $22.7 million, representing the difference between the redemption value and carrying value.
Lear STEC’s annual sales are approximately $280 million. Lear STEC provides wire harnesses to SAIC Motor Corporation Limited and its joint ventures with both North American and European automotive manufacturers. The pro forma effects of this consolidation would not materially impact the Company’s reported results for any period presented.
For further information related to the redemption adjustment, see Note 13, "Comprehensive Income and Equity." For further information related to acquired assets measured at fair value, see Note 16, "Financial Instruments."


11
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(7) Goodwill
A summary of the changes in the carrying amount of goodwill, by operating segment, in the nine months ended September 30, 2017, is shown below (in millions):
 
Seating
 
E-Systems
 
Total
Balance at January 1, 2017
$
1,091.2

 
$
30.1

 
$
1,121.3

Acquisition
122.6

 
—

 
122.6

Consolidation of affiliate
—

 
94.1

 
94.1

Foreign currency translation and other
48.9

 
0.2

 
49.1

Balance at September 30, 2017
$
1,262.7

 
$
124.4

 
$
1,387.1

Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment testing as of the first day of its fourth quarter.
The Company does not believe that there were any indicators that would have resulted in goodwill impairment charges as of September 30, 2017. The Company will, however, continue to assess the impact of significant events or circumstances on its recorded goodwill.
For further information related to the acquisition, see Note 2, "Acquisitions." For further information related to the consolidation of an affiliate, see Note 6, "Long-Term Assets."

(8) Debt
A summary of long-term debt, net of unamortized debt issuance costs, and the related weighted average interest rates is shown below (in millions):
 
September 30, 2017
 
December 31, 2016
Debt Instrument
Long-Term Debt
 
Debt Issuance Costs (2)
 
Long-Term
Debt, Net
 
Weighted
Average
Interest
Rate
 
Long-Term Debt
 
Debt Issuance Costs (2)
 
Long-Term
Debt, Net
 
Weighted
Average
Interest
Rate
Credit Agreement — Term Loan Facility
$
250.0

 
$
(1.9
)
 
$
248.1

 
2.7%
 
$
468.7

 
$
(1.6
)
 
$
467.1

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

 
—

 
—

 
N/A
 
500.0

 
(4.8
)
 
495.2

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

 
(2.5
)
 
322.5

 
5.375%
 
325.0

 
(2.8
)
 
322.2

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

 
(6.0
)
 
644.0

 
5.25%
 
650.0

 
(6.6
)
 
643.4

 
5.25%
3.8% Senior Notes due 2027 ("2027 Notes") (1)
744.8

 
(6.0
)
 
738.8

 
3.885%
 
—

 
—

 
—

 
N/A
Other
8.6

 
—

 
8.6

 
N/A
 
5.7

 
—

 
5.7

 
N/A
 
$
1,978.4

 
$
(16.4
)
 
1,962.0

 
 
 
$
1,949.4

 
$
(15.8
)
 
1,933.6

 
 
Less — Current portion
 
 
 
 
(9.0
)
 
 
 
 
 
 
 
(35.6
)
 
 
Long-term debt
 
 
 
 
$
1,953.0

 
 
 
 
 
 
 
$
1,898.0

 
 
(1) Net of unamortized discount of $5.2 million
(2) Unamortized portion

12
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Senior Notes
The issuance date, maturity date and interest payable dates of the Company's senior unsecured 2024 Notes, 2025 Notes and 2027 Notes (together, the "Notes") are as shown below:
Note
Issuance Date
 
Maturity Date
 
Interest Payable Dates
2024 Notes
March 2014
 
March 15, 2024
 
March 15 and September 15
2025 Notes
November 2014
 
January 15, 2025
 
January 15 and July 15
2027 Notes
August 2017
 
September 15, 2027
 
March 15 and September 15
In August 2017, the Company issued $750.0 million in aggregate principal amount at maturity of senior unsecured notes due 2027 at a stated coupon rate of 3.8%. The 2027 Notes were priced at 99.294% of par, resulting in a yield to maturity of 3.885%. The proceeds from the offering of $744.7 million, after original issue discount, were used to redeem the $500.0 million in aggregate principal amount of the 2023 Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a "make-whole" premium of $17.0 million, as well as to refinance a portion of the Company's $500.0 million prior term loan facility (see "— Credit Agreement" below). In connection with these transactions, the Company recognized a loss of $21.2 million on the extinguishment of debt in the three and nine months ended September 30, 2017, and paid related issuance costs of $6.0 million.
Prior to June 15, 2027 (three months prior to the maturity date), the Company, at its option, may redeem some or all of the 2027 Notes at a redemption price equal to 100% of the principal amount thereof, plus a "make-whole" premium as of, and accrued and unpaid interest to, the redemption date. At any time on or after June 15, 2027, but prior to the maturity date of September 15, 2027, the Company, at its option, may redeem some or all of the 2027 Notes, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date.
Guarantees
The Notes are senior unsecured obligations. As discussed further in "— Credit Agreement" below, upon termination of the Company’s prior credit agreement, the subsidiaries that previously guaranteed the 2024 Notes and 2025 Notes were automatically released as guarantors. There are currently no guarantors of the Company’s obligations under the Notes.
Covenants
Subject to certain exceptions, the indentures governing the Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) create or permit certain liens and (ii) consolidate, merge or sell all or substantially all of the Company’s assets. The indenture governing the 2024 Notes limits the ability of the Company to enter into sale and leaseback transactions. The indentures governing the Notes also provide for customary events of default. As of September 30, 2017, the Company was in compliance with all covenants under the indentures governing the Notes.
Credit Agreement
In August 2017, the Company entered into a new unsecured credit agreement (the "Credit Agreement") consisting of a $1.75 billion revolving credit facility ("Revolving Credit Facility") and a $250.0 million term loan facility (the "Term Loan Facility"), both of which mature on August 8, 2022. In connection with this transaction, the Company borrowed $250.0 million under the Term Loan Facility and paid related issuance costs of $5.7 million. At the same time, the Company terminated its previously existing credit agreement, which consisted of a $1.25 billion revolving credit facility and a $500 million term loan facility, and repaid amounts outstanding under the term loan facility of $453.1 million. Together with the offering of the 2027 Notes, these transactions extended the Company's maturity profile and increased its borrowing capacity.
As of September 30, 2017, there were no borrowings outstanding under the Revolving Credit Facility and $250.0 million of borrowings outstanding under the Term Loan Facility. As of December 31, 2016, there were no borrowings outstanding under the Company's prior revolving credit facility and $468.7 million of borrowings outstanding under the Company's prior term loan facility.

13
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Advances under the Revolving Credit Facility and the Term Loan Facility generally bear interest based on (i) the Eurocurrency Rate (as defined in the Credit Agreement) or (ii) the Base Rate (as defined in the Credit Agreement) plus a margin, determined in accordance with a pricing grid. The range and the rate as of September 30, 2017, are as follows (in percentages):
 
 
Eurocurrency Rate
 
Base Rate
 
 
Minimum
 
Maximum
 
Rate as of
September 30, 2017
 
Minimum
 
Maximum
 
Rate as of
September 30,
2017
Revolving Credit Agreement
 
1.00
%
 
1.60
%
 
1.30
%
 
0.00
%
 
0.60
%
 
0.30
%
Term Loan Facility
 
1.125
%
 
1.90
%
 
1.50
%
 
0.125
%
 
0.90
%
 
0.50
%
A facility fee, which ranges from 0.125% to 0.30% of the total amount committed under the Revolving Credit Facility, is payable quarterly.
Guarantees
The Credit Agreement eliminated the subsidiary guarantees required under the Company's prior credit agreement. There are currently no guarantors of the Company’s obligations under the Credit Agreement.
Covenants
The Credit Agreement contains various customary representations, warranties and covenants by the Company, including, without limitation, (i) covenants regarding maximum leverage, (ii) limitations on fundamental changes involving the Company or its subsidiaries and (iii) limitations on indebtedness and liens. As of September 30, 2017, the Company was in compliance with all covenants under the Credit Agreement.
Scheduled Maturities
As of September 30, 2017, scheduled maturities related to the Term Loan Facility for the five succeeding years, as of the date of this Report, are shown below (in millions):
2017 (1)
$
1.6

2018
6.3

2019
7.8

2020
14.0

2021
14.0

2022
206.3

(1) Scheduled maturities for the fourth quarter of 2017
Other
As of September 30, 2017, other long-term debt consists of amounts outstanding under capital leases.
For further information related to the 2024 Notes, the 2025 Notes and the prior credit agreement, see Note 6, "Debt," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.


14
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(9) Pension and Other Postretirement Benefit Plans
The Company sponsors defined benefit pension plans and other postretirement benefit plans (primarily for the continuation of medical benefits) for eligible employees in the United States and certain other countries.
Net Periodic Pension and Other Postretirement Benefit (Credit) Cost
The components of the Company’s net periodic pension benefit cost are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$
1.3

 
$
1.8

 
$
1.4

 
$
1.6

 
$
3.8

 
$
5.3

 
$
4.2

 
$
4.8

Interest cost
5.5

 
4.0

 
7.5

 
3.8

 
16.4

 
11.2

 
22.4

 
11.9

Expected return on plan assets
(7.3
)
 
(5.9
)
 
(9.5
)
 
(5.9
)
 
(21.7
)
 
(17.0
)
 
(28.6
)
 
(17.5
)
Amortization of actuarial loss
0.6

 
1.3

 
0.6

 
0.8

 
1.9

 
3.8

 
2.0

 
2.3

Settlement loss
—

 
—

 
—

 
—

 
0.2

 
0.8

 
0.2

 
—

Net periodic benefit cost
$
0.1

 
$
1.2

 
$
—

 
$
0.3

 
$
0.6

 
$
4.1

 
$
0.2

 
$
1.5

In the nine months ended September 30, 2017, the Company recognized a pension settlement loss of $0.8 million related to its restructuring actions.
The components of the Company’s net periodic other postretirement benefit (credit) cost are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
U.S.
 
Foreign
Service cost
$
—

 
$
0.1

 
$
—

 
$
0.1

 
$
0.1

 
$
0.4

 
$
0.1

 
$
0.4

Interest cost
0.6

 
0.4

 
0.9

 
0.4

 
1.8

 
1.2

 
2.4

 
1.2

Amortization of actuarial (gain) loss
(0.7
)
 
0.1

 
(0.3
)
 
0.1

 
(2.0
)
 
0.2

 
(0.9
)
 
0.2

Amortization of prior service credit
—

 
(0.1
)
 
—

 
(0.1
)
 
—

 
(0.3
)
 
—

 
(0.3
)
Special termination benefits
—

 
—

 
—

 
—

 
—

 
0.1

 
—

 
0.3

Net periodic benefit (credit) cost
$
(0.1
)
 
$
0.5

 
$
0.6

 
$
0.5

 
$
(0.1
)
 
$
1.6

 
$
1.6

 
$
1.8

Contributions
In the nine months ended September 30, 2017, employer contributions to the Company’s domestic and foreign defined benefit pension plans were $7.6 million.
The Company expects contributions to its domestic and foreign defined benefit pension plans to be approximately $10 million to $15 million in 2017. The Company may elect to make contributions in excess of minimum funding requirements in response to investment performance or changes in interest rates or when the Company believes that it is financially advantageous to do so and based on its other cash requirements.


15
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(10) Other (Income) Expense, Net
Other (income) expense, net includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, losses on the extinguishment of debt, gains and losses on the disposal of fixed assets and other miscellaneous income and expense.
A summary of other (income) expense, net is shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Other expense
$
34.4

 
$
15.5

 
$
47.2

 
$
34.7

Other income
(56.2
)
 
(1.3
)
 
(59.5
)
 
(35.5
)
Other (income) expense, net
$
(21.8
)
 
$
14.2

 
$
(12.3
)
 
$
(0.8
)
In the three and nine months ended September 30, 2017, other expense includes a loss of $21.2 million on the extinguishment of debt and net foreign currency transaction losses of $5.3 million and $3.9 million, respectively. In the three and nine months ended September 30, 2017, other income includes a gain of $54.2 million related to the consolidation of an affiliate (Note 6, "Long-Term Assets").
In the three and nine months ended October 1, 2016, other expense includes net foreign currency transaction losses of $3.6 million and $5.4 million, respectively. In the nine months ended October 1, 2016, other income includes a gain of $30.3 million related to the consolidation of an affiliate. For further information related to the 2016 consolidation of an affiliate, see Note 5, "Investments in Affiliates and Other Related Party Transactions," to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

(11) Income Taxes
A summary of the provision for income taxes and the corresponding effective tax rate for the three and nine months ended September 30, 2017 and October 1, 2016, is shown below (in millions, except effective tax rates):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Provision for income taxes
$
77.8

 
$
88.2

 
$
240.2

 
$
287.4

Pretax income before equity in net income of affiliates
$
385.3

 
$
310.3

 
$
1,159.4

 
$
1,030.2

Effective tax rate
20.2
%
 
28.4
%
 
20.7
%
 
27.9
%
On January 1, 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, "Improvements to Employee Share-Based Payment Accounting." The new standard requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the Company’s condensed consolidated statement of comprehensive income in the reporting period in which such awards vest. The standard also required a modified retrospective adoption for previously unrecognized excess tax benefits. Accordingly, the Company recognized a deferred tax asset of $54.5 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-09 were not significant.
In the first nine months of 2017 and 2016, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. In the first nine months of 2017, the Company recognized net tax benefits of $68.4 million, of which $28.7 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries, $16.3 million related to the change in the accounting for share-based compensation discussed above, $7.5 million related to the redemption of the 2023 Notes and $15.9 million related to restructuring charges and various other items. In addition, the Company recognized a gain of $54.2 million related to the consolidation of an affiliate, for which no tax expense was provided. In the first nine months of 2016, the Company recognized net tax benefits of $14.5 million related to restructuring charges and various other items. In addition, the Company recognized a gain of $30.3 million related to the consolidation of an affiliate, for which no tax expense was provided. Excluding these items, the effective tax rate for the first nine months of 2017 and 2016 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.

16
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company’s current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. The Company’s future provision for income taxes will include no tax benefit with respect to losses incurred and, except for certain jurisdictions, no tax expense with respect to income generated in these countries until the respective valuation allowances are eliminated. Accordingly, income taxes are impacted by changes in valuation allowances and the mix of earnings among jurisdictions. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. In completing this evaluation, the Company considers all available evidence in order to determine whether, based on the weight of the evidence, a valuation allowance for its deferred tax assets is necessary. Such evidence includes historical results, future reversals of existing taxable temporary differences and expectations for future taxable income (exclusive of the reversal of temporary differences and carryforwards), as well as the implementation of feasible and prudent tax planning strategies. If, based on the weight of the evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a valuation allowance is recorded. If operating results improve or decline on a continual basis in a particular jurisdiction, the Company’s decision regarding the need for a valuation allowance could change, resulting in either the initial recognition or reversal of a valuation allowance in that jurisdiction, which could have a significant impact on income tax expense in the period recognized and subsequent periods.
As of September 30, 2017, the Company has approximately $300 million of excess foreign tax credits at certain foreign subsidiaries that cannot be recognized under GAAP until the related foreign earnings are repatriated to the United States through dividends. It is likely that the Company will repatriate these foreign earnings and recognize all or a substantial portion of such foreign tax credits in the fourth quarter of 2017. The recognition of these foreign tax credits would create a deferred tax asset that under current U.S. tax law may reduce U.S. tax on certain foreign source income over the next several years.
For further information related to the 2017 consolidation of an affiliate, see Note 6, "Long-Term Assets." For further information related to the Company's income taxes, see Note 7, "Income Taxes," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

(12) Net Income Per Share Attributable to Lear
Basic net income per share available to Lear common stockholders is computed using the two-class method by dividing net income attributable to Lear, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding during the period. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement are considered common shares outstanding and are included in the computation of basic net income per share available to Lear common stockholders.
Diluted net income per share available to Lear common stockholders is computed using the two-class method by dividing net income attributable to Lear, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding, including the dilutive effect of common stock equivalents computed using the treasury stock method and the average share price during the period.
A summary of information used to compute basic and diluted net income per share available to Lear common stockholders is shown below (in millions, except share and per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Net income attributable to Lear
$
295.2

 
$
214.4

 
$
912.9

 
$
745.2

Less: Redeemable noncontrolling interest adjustment
(22.7
)
 
—

 
(22.7
)
 
—

Net income available to Lear common stockholders
$
272.5

 
$
214.4

 
$
890.2

 
$
745.2

 
 
 
 
 
 
 
 
Average common shares outstanding
68,061,718

 
71,259,766

 
68,874,682

 
73,102,327

Dilutive effect of common stock equivalents
772,561

 
792,504

 
662,126

 
706,893

Average diluted shares outstanding
68,834,279

 
72,052,270

 
69,536,808

 
73,809,220

 
 
 
 
 
 
 
 
Basic net income per share available to Lear common stockholders
$
4.00

 
$
3.01

 
$
12.92

 
$
10.19

 
 
 
 
 
 
 
 
Diluted net income per share available to Lear common stockholders
$
3.96

 
$
2.98

 
$
12.80

 
$
10.10

For further information related to the redeemable noncontrolling interest adjustment, see Note 6, "Long-Term Assets."

17
Table of Contents
LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)


(13) Comprehensive Income and Equity
Comprehensive Income
Comprehensive income is defined as all changes in the Company’s net assets except changes resulting from transactions with stockholders. It differs from net income in that certain items recorded in equity are included in comprehensive income.
A summary of comprehensive income and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three and nine months ended September 30, 2017, is shown below (in millions):
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
3,756.2

 
$
3,621.9

 
$
134.3

 
$
3,192.9

 
$
3,057.2

 
$
135.7

Stock-based compensation transactions
14.9

 
14.9

 
—

 
8.4

 
8.4

 
—

Repurchase of common stock
(77.9
)
 
(77.9
)
 
—

 
(332.2
)
 
(332.2
)
 
—

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

 
(105.8
)
 
(105.8
)
 
—

Dividends declared to noncontrolling interest holders
(0.7
)
 
—

 
(0.7
)
 
(33.2
)
 
—

 
(33.2
)
Adoption of ASU 2016-09 (Note 11, "Taxes")
—

 
—

 
—

 
54.5

 
54.5

 
—

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

 
(22.7
)
 
(22.7
)
 
—

Comprehensive income:


 
 
 
 
 


 
 
 
 
Net income
315.0

 
295.2

 
19.8

 
960.5

 
912.9

 
47.6

Other comprehensive income, net of tax:


 
 
 
 
 


 
 
 
 
Defined benefit plan adjustments
(1.8
)
 
(1.8
)
 
—

 
(3.0
)
 
(3.0
)
 
—

Derivative instruments and hedging activities
(10.8
)
 
(10.8
)
 
—

 
57.2

 
57.2

 
—

Foreign currency translation adjustments
89.9

 
87.1

 
2.8

 
250.7

 
244.6

 
6.1

Other comprehensive income
77.3

 
74.5

 
2.8

 
304.9

 
298.8

 
6.1

Comprehensive income
392.3

 
369.7

 
22.6

 
1,265.4

 
1,211.7

 
53.7

Ending equity balance
$
4,027.3

 
$
3,871.1

 
$
156.2

 
$
4,027.3

 
$
3,871.1

 
$
156.2


18
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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

 
3.4

Other comprehensive loss recognized during the period (net of tax impact of $— million in the three and nine months ended September 30, 2017)
(2.7
)
 
(6.4
)
Balance at end of period
$
(195.8
)
 
$
(195.8
)
 
 
 
 
Derivative instruments and hedging:
 
 
 
Balance at beginning of period
$
22.9

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

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

Balance at end of period
$
12.1

 
$
12.1

 
 
 
 
Foreign currency translation:
 
 
 
Balance at beginning of period
$
(440.2
)
 
$
(597.7
)
Other comprehensive income recognized during the period (net of tax impact of $— million in the three and nine months ended September 30, 2017)
87.1

 
244.6

Balance at end of period
$
(353.1
)
 
$
(353.1
)
In the three and nine months ended September 30, 2017, foreign currency translation adjustments are related primarily to the strengthening of the Euro and, to a lesser extent, the Chinese renminbi relative to the U.S. dollar. In the three and nine months ended September 30, 2017, foreign currency translation adjustments include pretax losses of $0.2 million and pretax gains of $0.6 million, respectively, related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.



19
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of comprehensive income and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three and nine months ended October 1, 2016, is shown below (in millions):
 
Three Months Ended October 1, 2016
 
Nine Months Ended October 1, 2016
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
 
Equity
 
Lear
Corporation
Stockholders'
Equity
 
Non-
controlling
Interests
Beginning equity balance
$
3,156.1

 
$
3,012.8

 
$
143.3

 
$
3,017.7

 
$
2,927.4

 
$
90.3

Stock-based compensation transactions
15.6

 
15.6

 
—

 
6.7

 
6.7

 
—

Repurchase of common stock
(152.7
)
 
(152.7
)
 
—

 
(557.7
)
 
(557.7
)
 
—

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

 
(67.5
)
 
(67.5
)
 
—

Dividends declared to noncontrolling interest holders
(0.4
)
 
—

 
(0.4
)
 
(13.2
)
 
—

 
(13.2
)
Consolidation of affiliate
1.0

 
—

 
1.0

 
41.0

 
—

 
41.0

Non-controlling interests — other
—

 
—

 
—

 
—

 
(2.2
)
 
2.2

Comprehensive income:

 
 
 
 
 

 
 
 
 
Net income
235.0

 
214.4

 
20.6

 
792.0

 
745.2

 
46.8

Other comprehensive income (loss), net of tax:

 
 
 
 
 

 
 
 
 
Defined benefit plan adjustments
1.5

 
1.5

 
—

 
(0.2
)
 
(0.2
)
 
—

Derivative instruments and hedging activities
0.8

 
0.8

 
—

 
(10.6
)
 
(10.6
)
 
—

Foreign currency translation adjustments
8.0

 
8.0

 
—

 
34.8

 
37.4

 
(2.6
)
Other comprehensive income (loss)
10.3

 
10.3

 
—

 
24.0

 
26.6

 
(2.6
)
Comprehensive income
245.3

 
224.7

 
20.6

 
816.0

 
771.8

 
44.2

Ending equity balance
$
3,243.0

 
$
3,078.5

 
$
164.5

 
$
3,243.0

 
$
3,078.5

 
$
164.5


20
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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

 
2.5

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

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

 
46.2

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

 
37.4

Balance at end of period
$
(459.4
)
 
$
(459.4
)
In the three months ended October 1, 2016, foreign currency translation adjustments are related primarily to the strengthening of the Euro relative to the U.S. dollar. In the nine months ended October 1, 2016, foreign currency translation adjustments are related primarily to the strengthening of the Euro and Brazilian real relative to the U.S. dollar, partially offset by the weakening of the Chinese renminbi relative to the U.S. dollar, and include pretax losses of $0.5 million related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future.
For further information regarding reclassification adjustments related to the Company's defined benefit plans, see Note 9, "Pension and Other Postretirement Benefit Plans." For further information regarding reclassification adjustments related to the Company's derivative and hedging activities, see Note 16, "Financial Instruments."
Lear Corporation Stockholders’ Equity
Common Stock Share Repurchase Program
In February 2017, the Company's Board of Directors authorized a $658.8 million increase to the existing common stock share repurchase program to provide for a remaining aggregate repurchase authorization of $1.0 billion and extended the term of the program to December 31, 2019. In the first nine months of 2017, the Company paid, in aggregate, $332.2 million for repurchases of its outstanding common stock (2,320,469 shares at an average purchase price of $143.14 per share, excluding commissions). As of the end of the third quarter of 2017, the Company has a remaining repurchase authorization of $667.8 million under its ongoing common stock share repurchase program. The Company may implement these share repurchases through a variety of methods, including, but not limited to, open market purchases, accelerated stock repurchase programs and structured repurchase transactions. The extent to which the Company will repurchase its outstanding common stock and the timing of such repurchases will depend upon its financial condition, prevailing market conditions, alternative uses of capital and other factors.

21
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Since the first quarter of 2011, the Company's Board of Directors has authorized $4.1 billion in share repurchases under its common stock share repurchase program. As of the end of the third quarter of 2017, the Company has paid, in aggregate, $3.4 billion for repurchases of its outstanding common stock, at an average price of $78.18 per share, excluding commissions and related fees.
In addition to shares repurchased under the Company’s common stock share repurchase program described in the preceding paragraphs, the Company classified shares withheld from the settlement of the Company’s restricted stock unit and performance share awards to cover minimum tax withholding requirements as common stock held in treasury in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.
As approved by the Board of Directors, in May 2017, the Company retired 8.0 million shares of common stock held in treasury. These retired shares are reflected as authorized, but not issued, in the accompanying condensed consolidated balance sheet as of September 30, 2017. The retirement of shares held in treasury resulted in a reduction in the par value of common stock, additional paid-in capital and retained earnings of $0.1 million, $155.9 million and $735.5 million, respectively. These reductions were offset by a corresponding reduction in shares held in treasury of $891.5 million. Accordingly, there was no effect on stockholders’ equity as a result of this transaction.
Quarterly Dividend
In the first nine months of 2017 and 2016, the Company’s Board of Directors declared quarterly cash dividends of $0.50 and $0.30 per share of common stock, respectively. In the first nine months of 2017, declared dividends totaled $105.8 million, and dividends paid totaled $104.4 million. In the first nine months of 2016, declared dividends totaled $67.5 million, and dividends paid totaled $68.1 million. Dividends payable on common shares to be distributed under the Company’s stock-based compensation program and common shares contemplated as part of the Company’s emergence from Chapter 11 bankruptcy proceedings will be paid when such common shares are distributed.
Noncontrolling Interests
In the first nine months of 2017 and 2016, the Company gained control of and consolidated affiliates. For further information related to the 2017 consolidation, see Note 6, "Long-Term Assets." For further information related to the 2016 consolidation, see Note 5, "Investment in Affiliates and Other Related Party Transactions," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

(14) Legal and Other Contingencies
As of September 30, 2017 and December 31, 2016, the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $8.7 million and $11.0 million, respectively. Such reserves reflect amounts recognized in accordance with GAAP and exclude the cost of legal representation. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
Commercial Disputes
The Company is involved from time to time in legal proceedings and claims, including, without limitation, commercial or contractual disputes with its customers, suppliers and competitors. These disputes vary in nature and are usually resolved by negotiations between the parties.
Product Liability and Warranty Matters
In the event that use of the Company’s products results in, or is alleged to result in, bodily injury and/or property damage or other losses, the Company may be subject to product liability lawsuits and other claims. Such lawsuits generally seek compensatory damages, punitive damages and attorneys’ fees and costs. In addition, if any of the Company’s products are, or are alleged to be, defective, the Company may be required or requested by its customers to participate in a recall or other corrective action involving such products. Certain of the Company’s customers have asserted claims against the Company for costs related to recalls or other corrective actions involving its products. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend such claims.
To a lesser extent, the Company is a party to agreements with certain of its customers, whereby these customers may pursue claims against the Company for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims.

22
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In certain instances, allegedly defective products may be supplied by Tier 2 suppliers. The Company may seek recovery from its suppliers of materials or services included within the Company’s products that are associated with product liability and warranty claims. The Company carries insurance for certain legal matters, including product liability claims, but such coverage may be limited. The Company does not maintain insurance for product warranty or recall matters. Future dispositions with respect to the Company’s product liability claims that were subject to compromise under the Chapter 11 bankruptcy proceedings will be satisfied out of a common stock and warrant reserve established for that purpose.
The Company records product warranty reserves when liability is probable and related amounts are reasonably estimable.
A summary of the changes in reserves for product liability and warranty claims for the nine months ended September 30, 2017, is shown below (in millions):
Balance at January 1, 2017
$
49.1

Expense, net (including changes in estimates)
12.5

Settlements
(15.5
)
Foreign currency translation and other
3.0

Balance at September 30, 2017
$
49.1

Environmental Matters
The Company is subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. The Company’s policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance with this standard. However, the Company currently is, has been and in the future may become the subject of formal or informal enforcement actions or procedures.
As of September 30, 2017 and December 31, 2016, the Company had recorded environmental reserves of $9.0 million. The Company does not believe that the environmental liabilities associated with its current and former properties will have a material adverse impact on its business, financial condition, results of operations or cash flows; however, no assurances can be given in this regard.
Other Matters
The Company is involved from time to time in various other legal proceedings and claims, including, without limitation, intellectual property matters, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, the Company does not believe that any of the other legal proceedings or claims in which the Company is currently involved, either individually or in the aggregate, will have a material adverse impact on its business, financial condition, results of operations or cash flows. However, no assurances can be given in this regard.
Although the Company records reserves for legal disputes, product liability and warranty claims and environmental and other matters in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain. Actual results may differ significantly from current estimates.

(15) Segment Reporting
The Company has two reportable operating segments: seating, which includes complete seat systems and all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests, and E-Systems, which includes complete electrical distribution systems, electronic control modules and associated software and wireless communication modules. Key components in the electrical distribution system include wiring harnesses, terminals and connectors and junction boxes, including components for high power and hybrid electric systems. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment.
The Company evaluates the performance of its operating segments based primarily on (i) revenues from external customers, (ii) pretax income before equity in net income of affiliates, interest expense and other expense, net, ("segment earnings") and (iii) cash flows, being defined as segment earnings less capital expenditures plus depreciation and amortization.

23
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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of revenues from external customers and other financial information by reportable operating segment is shown below (in millions):
 
Three Months Ended September 30, 2017
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,868.9

 
$
1,112.6

 
$
—

 
$
4,981.5

Segment earnings (1)
298.8

 
155.5

 
(69.1
)
 
385.2

Depreciation and amortization
76.7

 
31.3

 
3.7

 
111.7

Capital expenditures
109.7

 
42.7

 
3.8

 
156.2

Total assets
7,413.5

 
2,262.7

 
2,035.8

 
11,712.0

 
Three Months Ended October 1, 2016
 
Seating
 
E-Systems
 
Other
 
Consolidated
Revenues from external customers
$
3,513.3

 
$
1,013.1

 
$
—

 
$
4,526.4

Segment earnings (1)
269.5

 
140.3

 
(64.7
)
 
345.1

Depreciation and amortization
67.9

 
27.5

 
3.3

 
98.7

Capital expenditures
80.3

 
34.9

 
3.4

 
118.6

Total assets
6,348.8

 
1,746.6

 
2,182.0

 
10,277.4

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

 
$
3,341.2

 
$
—

 
$
15,103.2

Segment earnings (1)
941.8

 
476.7

 
(207.5
)
 
1,211.0

Depreciation and amortization
213.2

 
89.0

 
11.0

 
313.2

Capital expenditures
287.1

 
126.2

 
16.9

 
430.2

Total assets
7,413.5

 
2,262.7

 
2,035.8

 
11,712.0

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

 
$
3,158.4

 
$
—

 
$
13,914.1

Segment earnings (1)
848.8

 
441.5

 
(198.9
)
 
1,091.4

Depreciation and amortization
193.8

 
80.5

 
9.1

 
283.4

Capital expenditures
204.6

 
79.5

 
16.2

 
300.3

Total assets
6,348.8

 
1,746.6

 
2,182.0

 
10,277.4

(1) See definition above
For the three months ended September 30, 2017, segment earnings include restructuring charges of $13.3 million, $2.7 million and $1.0 million in the seating and E-Systems segments and in the other category, respectively. For the nine months ended September 30, 2017, segment earnings include restructuring charges of $29.6 million, $6.3 million and $12.7 million in the seating and E-Systems segments and in the other category, respectively (Note 3, "Restructuring").
For the three months ended October 1, 2016, segment earnings include restructuring charges of $7.8 million, $6.9 million and $0.2 million in the seating and E-Systems segments and in the other category, respectively. For the nine months ended October 1, 2016, segment earnings include restructuring charges of $30.8 million, $17.5 million and $2.9 million in the seating and E-Systems segments and in the other category, respectively (Note 3, "Restructuring").

24
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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A reconciliation of segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates is shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Segment earnings
$
385.2

 
$
345.1

 
$
1,211.0

 
$
1,091.4

Interest expense
21.7

 
20.6

 
63.9

 
62.0

Other (income) expense, net
(21.8
)
 
14.2

 
(12.3
)
 
(0.8
)
Consolidated income before provision for income taxes and equity in net income of affiliates
$
385.3

 
$
310.3

 
$
1,159.4

 
$
1,030.2


(16) Financial Instruments
Debt Instruments
The carrying values of the Company’s debt instruments vary from their fair values. The fair values were determined by reference to the quoted market prices of these securities (Level 2 input based on the GAAP fair value hierarchy). The estimated fair value, as well as the carrying value, of the Company's debt instruments are shown below (in millions):
 
September 30,
2017
 
December 31, 2016
Estimated aggregate fair value
$
2,037.8

 
$
2,004.8

Aggregate carrying value (1)
1,975.0

 
1,943.7

(1) Credit agreement and senior notes, excluding the impact of unamortized original issue discount and debt issuance costs
Accounts Receivable Factoring
One of the Company's European subsidiaries has an uncommitted factoring agreement, which provides for aggregate purchases of specified customer accounts of up to €200 million. As of September 30, 2017, there were no factored receivables outstanding. The Company cannot provide any assurances that this factoring facility will be available or utilized in the future.
Marketable Equity Securities
Included in other current assets in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, are $40.7 million and $30.2 million, respectively, of marketable equity securities, which the Company accounts for under the fair value option. Accordingly, unrealized gains and losses arising from changes in the fair value of the marketable equity securities are recognized in the accompanying condensed consolidated statement of income as a component of other expense, net. The fair value of the marketable equity securities is determined by reference to quoted market prices in active markets (Level 1 input based on the GAAP fair value hierarchy).
Derivative Instruments and Hedging Activities
The Company has used derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates and interest rates and the resulting variability of the Company’s operating results. The Company is not a party to leveraged derivatives. The Company’s derivative financial instruments are subject to master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. On the date that a derivative contract for a hedging instrument is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or (4) a contract not designated as a hedging instrument.
For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the condensed consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the condensed consolidated balance sheet. When the underlying hedged

25
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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the condensed consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the effective portion of the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the condensed consolidated balance sheet. In addition, changes in the fair value of contracts not designated as hedging instruments and the ineffective portion of both cash flow and net investment hedges are recorded in earnings and reflected in the condensed consolidated statement of income as other expense, net.
Foreign Exchange
The Company uses forwards, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates on known foreign currency exposures. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce exposure to fluctuations in foreign exchange rates. The principal currencies hedged by the Company include the Mexican peso, various European currencies, the Thai baht, the Japanese yen, the Canadian dollar and the Philippine peso.
The notional amount, estimated fair value and related balance sheet classification of the Company's foreign currency derivative contracts are shown below (in millions, except for maturities):
 
September 30,
2017
 
December 31,
2016
Fair value of foreign currency contracts designated as cash flow hedges:
 
 
 
Other current assets
$
29.2

 
$
11.2

Other long-term assets
7.5

 
0.5

Other current liabilities
(14.7
)
 
(58.3
)
Other long-term liabilities
(2.5
)
 
(9.9
)
 
19.5

 
(56.5
)
Notional amount
$
1,287.8

 
$
1,275.0

Outstanding maturities in months, not to exceed
24

 
24

 
 
 
 
Fair value of foreign currency contracts not designated as hedging instruments:
 
 
 
Other current assets
$
6.1

 
$
5.9

Other current liabilities
(4.2
)
 
(3.8
)
 
1.9

 
2.1

 
 
 
 
Notional amount
$
1,020.3

 
$
681.2

Outstanding maturities in months, not to exceed
12

 
12

 
 
 
 
Total fair value
$
21.4

 
$
(54.4
)
Total notional amount
$
2,308.1

 
$
1,956.2

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

26
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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Accumulated Other Comprehensive Loss - Derivative Instruments and Hedging
Pretax amounts related to foreign currency derivative contracts designated as cash flow hedges that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Gains (losses) recognized in accumulated other comprehensive loss:
$
(5.5
)
 
$
(22.3
)
 
$
68.1

 
$
(77.2
)
 
 
 
 
 
 
 
 
(Gains) losses reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Net sales
0.8

 
2.2

 
1.4

 
3.6

Cost of sales
(4.6
)
 
20.9

 
6.5

 
59.3


(3.8
)
 
23.1

 
7.9

 
62.9

Comprehensive income (loss)
$
(9.3
)
 
$
0.8

 
$
76.0

 
$
(14.3
)
As of September 30, 2017 and December 31, 2016, pretax net gains (losses) of approximately $19.5 million and ($56.5) million, respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the next twelve month period, the Company expects to reclassify into earnings net gains of approximately $14.6 million recorded in accumulated other comprehensive loss as of September 30, 2017. Such gains will be reclassified at the time that the underlying hedged transactions are realized.
During the three and nine months ended September 30, 2017 and October 1, 2016, amounts recognized in the accompanying condensed consolidated statements of comprehensive income related to changes in the fair value of cash flow and fair value hedges excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of cash flow and fair value hedges were not material.
Fair Value Measurements
GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:
Market:
 
This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
 
 
Income:
 
This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
 
 
 
Cost:
 
This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:
Level 1:
 
Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
 
 
 
Level 2:
 
Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.
 
 
 
Level 3:
 
Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.
The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Items Measured at Fair Value on a Recurring Basis
Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, are shown below (in millions):
 
September 30, 2017
 
Frequency
 
Asset
(Liability)
 
Valuation
Technique
 
Level 1
 
Level 2
 
Level 3

Foreign currency contracts, net
Recurring
 
$
21.4

 
Market/ Income
 
$
—

 
$
21.4

 
$
—

Marketable equity securities
Recurring
 
$
40.7

 
Market
 
$
40.7

 
$
—

 
$
—

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

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

 
$
(54.4
)
 
$
—

Marketable equity securities
Recurring
 
$
30.2

 
Market
 
$
30.2

 
$
—

 
$
—

The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, the Company adjusts these discount rates, if required, by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. If an estimate of the credit spread is required, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy. As of September 30, 2017 and December 31, 2016, there were no derivative contracts that were classified within Level 3 of the fair value hierarchy. In addition, there were no transfers in or out of Level 3 of the fair value hierarchy in 2017.
Items Measured at Fair Value on a Non-Recurring Basis
The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy.
As a result of the 2017 consolidation of Lear STEC, Level 3 fair value estimates of $16.2 million related to property, plant and equipment, $66.0 million related to customer-based intangible assets and $125.0 million related to redeemable noncontrolling interest are recorded in the accompanying condensed consolidated balance sheet as of September 30, 2017. In addition, the consolidation of Lear STEC required a Level 3 fair value estimate of $94.0 million related to the Company's previously held equity interest.
As a result of the 2017 acquisition of Antolin Seating, Level 3 fair value estimates of $81.7 million related to property, plant and equipment and $121.4 million related to intangible assets are recorded in the accompanying condensed consolidated balance sheet as of September 30, 2017.
As a result of the 2016 acquisition of AccuMED, Level 3 fair value estimates of $11.2 million and $13.9 million related to property, plant and equipment are recorded in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively. Level 3 fair value estimates of $53.0 million related to intangible assets are recorded in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.
Fair value estimates of property, plant and equipment were based on independent appraisals, giving consideration to the highest and best use of the assets. Key assumptions used in the appraisals were based on a combination of market and cost approaches, as appropriate. Fair value estimates of customer-based intangible assets were based on the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets. Fair value estimates of redeemable noncontrolling and equity interests were based on the present value of future cash flows and a value to earnings multiple approach and reflect discounts for the lack of control and the lack of marketability associated with noncontrolling and equity interests. Further, the fair value estimate of the redeemable noncontrolling interest includes an estimate of the fair value

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

associated with the noncontrolling interest holder's embedded redemption option. The fair value of this redemption option was determined using the Monte Carlo valuation model and includes various assumptions including the expected volatility, risk free rate and dividend yield.
For further information related to assets and liabilities measured at fair value on a non-recurring basis, see Note 2, “Acquisitions,” and Note 6, "Long-Term Assets."
As of September 30, 2017, there were no additional significant assets or liabilities measured at fair value on a non-recurring basis.

(17) Accounting Pronouncements
The Company has considered the ASUs issued by the Financial Accounting Standards Board ("FASB") summarized below, which could significantly impact its financial statements:
Standards Pending Adoption
 
Description
 
Effective Date
 
Anticipated Impact
ASU 2014-09, Revenue from Contracts with Customers (1)
 
The standard replaces existing revenue recognition guidance and requires additional financial statement disclosures. The provisions of these updates may be applied through either a full retrospective or a modified retrospective approach.
 
January 1, 2018
 
The Company is finalizing its review of the impact of adopting this standard and is developing and executing a comprehensive implementation plan. Reviews of a significant portion of commercial contracts have been completed and changes to processes and internal controls are being identified to meet the standard’s reporting and disclosure requirements. At this time, the Company does not believe that this standard will have a material effect on its revenues, results of operations or financial position. The Company expects to make additional disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers as required by the new standard. The Company currently plans to adopt the new standard using the modified retrospective approach; however, a final decision regarding the adoption method has not been made at this time.
ASU 2016-02, Leases
 
The standard requires that a lessee recognize on its balance sheet right-of-use assets and corresponding liabilities resulting from leasing transactions, as well as additional financial statement disclosures. Currently, GAAP only requires balance sheet recognition for leases classified as capital leases. The provisions of this update apply to substantially all leased assets, with certain permitted exceptions, and must be adopted using a modified retrospective approach.
 
January 1, 2019
 
The Company is currently evaluating the impact of this update. For additional information on the Company’s operating lease commitments, see Note 11, "Commitments and Contingencies," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
 
The standard was issued to address the net presentation of the components of net benefit cost. It requires the classification of service cost in the same line item as other current employee compensation costs. It also requires the presentation of the remaining components of net benefit cost in a separate line item outside any subtotal for income from operations.
 
January 1, 2018
 
The update will result in the retrospective reclassification of the non-service cost components of net benefit cost from cost of sales and selling, general and administrative expenses to other expense, net. There will be no impact on consolidated net income.
(1) Along with four subsequent ASUs amending and clarifying ASU 2014-09:
ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date"
ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)"
ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients"


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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In addition to the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," discussed in Note 11, "Income Taxes," the Company adopted the ASUs summarized below in 2017. The effects of adopting the ASUs listed below did not significantly impact the Company's financial statements:
Standard
 
Description
 
Effective Date
ASU 2015-11, Simplifying the Measurement of Inventory
 
The standard requires the measurement of inventory at the lower of cost or net realizable value rather than at the lower of cost or market.
 
January 1, 2017
ASU 2016-05, Effects of Derivative Contract Novations on Existing Hedge Accounting Relationships and ASU 2016-06, Contingent Put and Call Options in Debt Instruments.
 
The standards provide clarification when there is a change in a counterparty to a derivative hedging instrument and the steps required when assessing the economic characteristics of embedded put or call options.
 
January 1, 2017
ASU 2016-07, Simplifying the Transition to Equity Method of Accounting
 
The standard eliminates the requirement to retroactively apply the equity method of accounting as a result of an increase in the level of ownership or degree of influence.
 
January 1, 2017
ASU 2016-17, Interests Held through Related Parties that Are under Common Control
 
The standard changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity in certain instances involving entities under common control.
 
January 1, 2017
The Company has considered the recent ASUs summarized below, none of which are expected to significantly impact its financial statements:
Standard
 
Description
 
Effective Date
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities
 
The standard requires equity investments and other ownership interests in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value through earnings. A practicability exception exists for equity investments without readily determinable fair values.
 
January 1, 2018
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
 
The standard addresses the classification of cash flows related to various transactions, including debt prepayment and extinguishment costs, contingent consideration and proceeds from insurance claims.
 
January 1, 2018
ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other than Inventory
 
The standard requires the recognition of the income tax effects of intercompany sales and transfers (other than inventory) when the sales and transfers occur.
 
January 1, 2018
ASU 2016-18, Restricted Cash
 
The standard provides guidance on the presentation of restricted cash on the statement of cash flows.
 
January 1, 2018
ASU 2017-01, Clarifying the Definition of a Business
 
The standard provides a new framework to use when determining if a set of assets and activities is a business.
 
January 1, 2018
ASU 2017-05, Gains and Losses from the Derecognition of Nonfinancial Assets
 
The standard provides guidance for recognizing gains and losses on nonfinancial assets (including land, buildings and intangible assets) to noncustomers. Adoption must coincide with ASU 2014-09.
 
January 1, 2018
ASU 2017-09, Stock Compensation - Scope of Modification Accounting
 
The standard provides guidance intended to reduce diversity in practice when accounting for a modification to the terms and conditions of a share-based payment award.
 
January 1, 2018
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities
 
The standard contains changes intended to better portray the economic results of hedging activities, as well as targeted improvements to simplify hedge accounting.
 
January 1, 2019
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
 
The standard changes the impairment model for most financial instruments to an "expected loss" model. The new model will generally result in earlier recognition of credit losses.
 
January 1, 2020
ASU 2017-04, Simplifying the Test for Goodwill Impairment
 
The standard simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based on the amount of a reporting unit's carrying value in excess of its fair value. This eliminates the requirement to calculate the implied fair value of goodwill or what is known as "Step 2" under the current guidance.
 
January 1, 2020


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ITEM 2 — 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 all of the world's major automotive manufacturers.
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 stockholders.
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 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 as capabilities to provide roadside modules that communicate real-time traffic information to vehicles in the area.
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 the first nine months of 2017, as compared to the first nine months of 2016, are shown below (in millions of units):
 
Nine Months Ended
 
 
 
September 30, 2017
 
October 1, 2016
 
% Change
North America
13.0
 
13.5
 
(4
)%
Europe and Africa
17.1
 
16.7
 
2
 %
Asia
34.9
 
33.3
 
5
 %
South America
2.3
 
1.9
 
21
 %
Other
1.2
 
1.1
 
9
 %
Global light vehicle production
68.5
 
66.5
 
3
 %
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

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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.
In the first nine months of 2017 and 2016, our percentage of net sales by region is shown below:
 
2017
 
2016
North America
39
%
 
41
%
Europe and Africa
40
%
 
39
%
Asia
18
%
 
17
%
South America
3
%
 
3
%
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. These trends support shared mobility and long-term convergence to fully connected, fully autonomous and fully electric / highly efficient vehicles.
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.
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 65.0% in the first nine months of 2017, as compared to 65.1% in the first nine months of 2016. 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 "— Forward-Looking Statements" below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016.
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

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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.
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.
Acquisition
On April 28, 2017, we completed the acquisition of Grupo Antolin's automotive seating business ("Antolin Seating") for $292 million, net of cash acquired. Antolin Seating is headquartered in France with operations in five countries in Europe and North Africa. The Antolin Seating business is comprised of just-in-time seat assembly, as well as seat structures, mechanisms and seat covers.
For further information, see Note 2, "Acquisitions," to the condensed consolidated financial statements included in this Report.
Operational Restructuring
In the first nine months of 2017, we incurred pretax restructuring costs of approximately $49 million. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
For further information, see Note 3, "Restructuring," to the condensed consolidated financial statements included in this Report.
Financing Transactions
Senior Notes
In August 2017, we issued $750 million in aggregate principal amount at maturity of senior unsecured notes due 2027 (the "2027 Notes”) at a stated coupon rate of 3.8%. The 2027 Notes were priced at 99.294% of par, resulting in a yield to maturity of 3.885%. The proceeds from the offering of $745 million, after original issue discount, were used to redeem the $500 million in aggregate principal amount of senior unsecured notes due 2023 (the "2023 Notes") at a redemption price equal to 100% of the aggregate principal amount thereof, plus a "make-whole" premium of $17 million, as well as to refinance a portion of our $500 million prior term loan facility (see "— Credit Agreement" below). In connection with these transactions, we recognized a loss of $21 million on the extinguishment of debt and paid related issuance costs of $6 million.
For further information, see "— Liquidity and Capital Resources — Capitalization — Senior Notes" and Note 8, "Debt," to the condensed consolidated financial statements included in this Report.
Credit Agreement
In August 2017, we entered into a new unsecured credit agreement (the "Credit Agreement") consisting of a $1.75 billion revolving credit facility (the "Revolving Credit Facility") and a $250 million term loan facility (the "Term Loan Facility"), both of which mature on August 8, 2022. In connection with this transaction, we borrowed $250 million under the Term Loan Facility and paid related issuance costs of $6 million. At the same time, we terminated our previously existing credit agreement, which consisted of a $1.25 billion revolving credit facility and a $500 million term loan facility, and repaid amounts outstanding under the term loan facility of $453 million. Together with the offering of the 2027 Notes, these transactions extended our maturity profile and increased our borrowing capacity.
For further information, see "— Liquidity and Capital Resources — Capitalization — Credit Agreement" and Note 8, "Debt," to the condensed 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 $4.1 billion in share repurchases under our common stock share repurchase program. In the first nine months of 2017, we repurchased $332 million of shares and have a remaining repurchase authorization of $668 million, which will expire on December 31, 2019.
In each of the first three quarters of 2017, our Board of Directors declared a quarterly cash dividend of $0.50 per share of common stock, reflecting a 67% increase over the quarterly cash dividend declared in 2016.

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For further information related to our common stock share repurchase program and our quarterly dividends, see "— Liquidity and Capital Resources — Capitalization" and Note 13, "Comprehensive Income and Equity," to the condensed consolidated financial statements included in this Report.
Other Matters
In September 2017, we amended the existing joint venture agreement of Shanghai Lear STEC Automotive Parts Co., Ltd. (“Lear STEC”) to eliminate the substantive participating rights of our joint venture partner. In conjunction with the consolidation of Lear STEC and the valuation of our prior equity investment in Lear STEC at fair value, we recognized a gain of approximately $54 million in the three and nine months ended September 30, 2017.
In the three months ended September 30, 2017, we recognized net tax benefits of $14 million related to the redemption of the 2023 Notes, restructuring charges and various other items. In the nine months ended September 30, 2017, we recognized net tax benefits of $68 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries, a change in the accounting for share-based compensation, the redemption of the 2023 Notes, restructuring charges and various other items.
In June 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 the nine months ended October 1, 2016.
In the three and nine months ended October 1, 2016, we recognized net tax benefits of $2 million and $15 million, respectively, related to restructuring charges and various other items.
As discussed above, our results for the three and nine months ended September 30, 2017 and October 1, 2016, reflect the following items (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Costs related to restructuring actions, including manufacturing inefficiencies of $1 million in the nine months ended September 30, 2017, and $2 million and $5 million in the three and nine months ended October 1, 2016, respectively
$
17

 
$
17

 
$
50

 
$
56

Acquisition and other related costs
1

 
—

 
4

 
—

Acquisition-related inventory fair value adjustment
1

 
—

 
5

 
—

Loss on extinguishment of debt
21

 
—

 
21

 
—

Gains related to affiliates
(54
)
 
—

 
(54
)
 
(30
)
Tax benefit, net
(14
)
 
(2
)
 
(68
)
 
(15
)
For further information regarding these items, see Note 2, "Acquisitions," Note 3, "Restructuring," Note 6, "Long-Term Assets,", Note 8, "Debt," and Note 11, "Income Taxes," to the condensed consolidated financial statements included in this Report.
This Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," includes forward-looking statements that are subject to risks and uncertainties. For further information regarding other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see "— Forward-Looking Statements" below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016.


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RESULTS OF OPERATIONS
A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seating
$
3,868.9

 
77.7
 %
 
$
3,513.3

 
77.6
 %
 
$
11,762.0

 
77.9
 %
 
$
10,755.7

 
77.3
 %
E-Systems
1,112.6

 
22.3

 
1,013.1

 
22.4

 
3,341.2

 
22.1

 
3,158.4

 
22.7

Net sales
4,981.5

 
100.0

 
4,526.4

 
100.0

 
15,103.2

 
100.0

 
13,914.1

 
100.0

Cost of sales
4,425.6

 
88.8

 
4,012.5

 
88.6

 
13,387.0

 
88.6

 
12,324.1

 
88.6

Gross profit
555.9

 
11.2

 
513.9

 
11.4

 
1,716.2

 
11.4

 
1,590.0

 
11.4

Selling, general and administrative expenses
158.2

 
3.2

 
153.6

 
3.4

 
471.1

 
3.1

 
456.9

 
3.3

Amortization of intangible assets
12.5

 
0.3

 
15.2

 
0.3

 
34.1

 
0.3

 
41.7

 
0.3

Interest expense
21.7

 
0.4

 
20.6

 
0.5

 
63.9

 
0.4

 
62.0

 
0.4

Other (income) expense, net
(21.8
)
 
(0.4
)
 
14.2

 
0.3

 
(12.3
)
 
(0.1
)
 
(0.8
)
 
—

Provision for income taxes
77.8

 
1.6

 
88.2

 
2.0

 
240.2

 
1.6

 
287.4

 
2.1

Equity in net income of affiliates
(7.5
)
 
(0.2
)
 
(12.9
)
 
(0.3
)
 
(41.3
)
 
(0.3
)
 
(49.2
)
 
(0.4
)
Net income attributable to noncontrolling interests
19.8

 
0.4

 
20.6

 
0.5

 
47.6

 
0.4

 
46.8

 
0.3

Net income attributable to Lear
$
295.2

 
5.9
 %
 
$
214.4

 
4.7
 %
 
$
912.9

 
6.0
 %
 
$
745.2

 
5.4
 %

Three Months Ended September 30, 2017 vs. Three Months Ended October 1, 2016
Net sales in the third quarter of 2017 were $5.0 billion, as compared to $4.5 billion in the third quarter of 2016, an increase of $455 million or 10%. New business, primarily in North America and Europe, the acquisition of Antolin Seating and net foreign exchange rate fluctuations, positively impacted net sales by $376 million, $118 million and $92 million, respectively. These increases were partially offset by lower production volumes on key Lear platforms, primarily in North America, which reduced net sales by $164 million.
(in millions)
 
Cost of Sales
Third quarter 2016
 
$
4,013

Material cost
 
304

Labor and other
 
95

Depreciation
 
14

Third quarter 2017
 
$
4,426

Cost of sales in the third quarter of 2017 was $4.4 billion, as compared to $4.0 billion in the third quarter of 2016. New business, primarily in North America and Europe, the acquisition of Antolin Seating and net foreign exchange rate fluctuations resulted in an increase in cost of sales of $530 million. These increases were partially offset by lower production volumes on key Lear platforms, primarily in North America, which reduced cost of sales by $142 million.
Gross profit and gross margin were $556 million and 11.2% of net sales in the third quarter of 2017, as compared to $514 million and 11.4% of net sales in the third quarter of 2016. New business, the acquisition of Antolin Seating and net foreign exchange rate fluctuations positively impacted gross profit by $56 million. The impact of favorable operating performance, including the benefit of operational restructuring actions, of $74 million was more than offset by the impact of selling price reductions and lower production volumes on key Lear platforms. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were $158 million in the third quarter of 2017, as compared to $154 million in the third quarter of 2016. As a percentage of net sales, selling, general and administrative expenses were 3.2% in the third quarter of 2017, as compared to 3.4% in the third quarter of 2016.
Amortization of intangible assets was $13 million in the third quarter of 2017, as compared to $15 million in the third quarter of 2016.
Interest expense was $22 million in the third quarter of 2017, as compared to $21 million in the third quarter of 2016.

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Other (income) expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, losses on the extinguishment of debt, gains and losses on the disposal of fixed assets and other miscellaneous income and expense, was ($22) million in the third quarter of 2017, as compared to $14 million in the third quarter of 2016. In the third quarter of 2017, we recognized a gain of approximately $54 million related to the consolidation of an affiliate and a loss of $21 million on the extinguishment of debt.
In the third quarter of 2017, the provision for income taxes was $78 million, representing an effective tax rate of 20.2% on pretax income before equity in net income of affiliates of $385 million. In the third quarter of 2016, the provision for income taxes was $88 million, representing an effective tax rate of 28.4% on pretax income before equity in net income of affiliates of $310 million, for the reasons described below.
In the third quarters of 2017 and 2016, the provision for income taxes was impacted by the level and mix of earnings among tax jurisdictions. In the third quarter of 2017, we recognized net tax benefits of $14 million, of which $8 million related to the redemption of the 2023 Notes and $6 million related to restructuring charges and various other items. In addition, we recognized a gain of approximately $54 million related to the consolidation of an affiliate, for which no tax expense was provided. In the third quarter of 2016, we recognized net tax benefits of $2 million related to restructuring charges and various other items. Excluding these items, the effective tax rate for the third quarters of 2017 and 2016 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
Equity in net income of affiliates was $8 million in the third quarter of 2017, as compared to $13 million in the third quarter of 2016.
Net income attributable to Lear was $295 million, or $3.96 per diluted share, in the third quarter of 2017, as compared to $214 million, or $2.98 per diluted share, in the third quarter of 2016. 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 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 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 15, "Segment Reporting," to the condensed consolidated financial statements included in this Report.
Seating
A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):
 
Three Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
3,868.9

 
$
3,513.3

Segment earnings (1)
298.8

 
269.5

Margin
7.7
%
 
7.7
%
(1) See definition above

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Seating net sales were $3.9 billion in the third quarter of 2017, as compared to $3.5 billion in the third quarter of 2016, an increase of $356 million or 10%. New business, the acquisition of Antolin Seating and foreign exchange rate fluctuations positively impacted net sales by $314 million, $118 million and $67 million, respectively. These increases were partially offset by the lower production volumes on key Lear platforms, which reduced net sales by $156 million. Segment earnings, including restructuring costs, and the related margin on net sales were $299 million and 7.7% in the third quarter of 2017, as compared to $270 million and 7.7% in the third quarter of 2016. New business positively impacted segment earnings by $34 million. The impact of favorable operating performance, including the benefit of operational restructuring actions, of $63 million was offset by the impact of selling price reductions and lower production volumes on key Lear platforms.
E-Systems
A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):
 
Three Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
1,112.6

 
$
1,013.1

Segment earnings (1)
155.5

 
140.3

Margin
14.0
%
 
13.8
%
(1) See definition above
E-Systems net sales were $1.1 billion in the third quarter of 2017, as compared to $1.0 billion in the third quarter of 2016, an increase of $100 million or 10%. New business and net foreign exchange rate fluctuations positively impacted net sales by $62 million and $25 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $156 million and 14.0% in the third quarter of 2017, as compared to $140 million and 13.8% in the third quarter of 2016. New business and lower restructuring costs positively impacted segment earnings by $15 million. The impact of improved operating performance of $17 million was offset by the impact of selling price reductions.
Other
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
 
Three Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
—

 
$
—

Segment earnings (1)
(69.1
)
 
(64.7
)
Margin
N/A

 
N/A

(1) See definition above
Segment earnings related to our other category were ($69) million in the third quarter of 2017, as compared to ($65) million in the third quarter of 2016, reflecting higher restructuring and acquisition costs.

Nine Months Ended September 30, 2017 vs. Nine Months Ended October 1, 2016
Net sales for the nine months ended September 30, 2017, were $15.1 billion, as compared to $13.9 billion for the nine months ended October 1, 2016, an increase of $1,189 million or 9%. New business, primarily in Europe, North America and Asia, and the acquisition of Antolin Seating positively impacted net sales by $962 million and $211 million, respectively.
(in millions)
 
Cost of Sales
First nine months of 2016
 
$
12,324

Material cost
 
760

Labor and other
 
269

Depreciation
 
34

First nine months of 2017
 
$
13,387


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Cost of sales in the first nine months of 2017 were $13.4 billion, as compared to $12.3 billion in the first nine months of 2016. New business, primarily in Europe, North America and Asia, and the acquisition of Antolin Seating resulted in an increase in cost of sales of $1.0 billion.
Gross profit and gross margin were $1.7 billion and 11.4% of net sales for the nine months ended September 30, 2017, as compared to $1.6 billion and 11.4% of net sales for the nine months ended October 1, 2016. New business and the acquisition of Antolin Seating positively impacted gross profit by $136 million. The impact of favorable operating performance, including the benefit of operational restructuring actions, of $182 million was more than offset by the impact of selling price reductions and net foreign exchange rate fluctuations. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were $471 million in the first nine months of 2017, as compared to $457 million in the first nine months of 2016, reflecting higher program development and restructuring costs. As a percentage of net sales, selling, general and administrative expenses were 3.1% in the first nine months of 2017, as compared to 3.3% in the first nine months of 2016.
Amortization of intangible assets was $34 million in the first nine months of 2017, as compared to $42 million in the first nine months of 2016.
Interest expense was $64 million in the first nine months of 2017, as compared to $62 million in the first nine months of 2016.
Other (income) expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, losses on the extinguishment of debt, gains and losses on the disposal of fixed assets and other miscellaneous income and expense, was ($12) million for the nine months ended September 30, 2017, as compared to ($1) million for the nine months ended October 1, 2016. In the first nine months of 2017, we recognized a gain of approximately $54 million related to the consolidation of an affiliate and a loss of $21 million related to the extinguishment of debt. In the nine months ended October 1, 2016, we recognized a gain of approximately $30 million related to the consolidation of an affiliate. Net foreign exchange losses were $5 million in the first nine months of 2017, as compared to $9 million in the first nine months of 2016.
For the nine months ended September 30, 2017, the provision for income taxes was $240 million, representing an effective tax rate of 20.7% on pretax income before equity in net income of affiliates of $1.2 billion. For the nine months ended October 1, 2016, the provision for income taxes was $287 million, representing an effective tax rate of 27.9% on pretax income before equity in net income of affiliates of $1.0 billion, for the reasons described below.
In the first nine months of 2017 and 2016, the provision for income taxes was impacted by the level and mix of earnings among tax jurisdictions. In the first nine months of 2017, we recognized net tax benefits of $68 million, of which $29 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries, $16 million related to a change in the accounting for share-based compensation, $8 million related to the redemption of the 2023 Notes and $15 million related to restructuring charges and various other items. In addition, we recognized a gain of approximately $54 million related to the consolidation of an affiliate, for which no tax expense was provided. In the first nine months of 2016, we recognized net tax benefits of $15 million related to restructuring charges and various other items. In addition, we recognized a gain of approximately $30 million related to the consolidation of an affiliate, for which no tax expense was provided. Excluding these items, the effective tax rate for the first nine months of 2017 and 2016 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
Equity in net income of affiliates was $41 million in the first nine months of 2017, as compared to $49 million in the first nine months of 2016.
Net income attributable to Lear was $913 million, or $12.80 per diluted share, for the nine months ended September 30, 2017, as compared to $745 million, or $10.10 per diluted share, for the nine months ended October 1, 2016. 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 periods.


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Seating
A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
11,762.0

 
$
10,755.7

Segment earnings (1)
941.8

 
848.8

Margin
8.0
%
 
7.9
%
(1) See definition above
Seating net sales were $11.8 billion for the nine months ended September 30, 2017, as compared to $10.8 billion for the nine months ended October 1, 2016, an increase of $1.0 billion or 9%. New business and the acquisition of Antolin Seating positively impacted net sales by $829 million and $211 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $942 million and 8.0% for the nine months ended September 30, 2017, as compared to $849 million and 7.9% for the nine months ended October 1, 2016. New business and the acquisition of Antolin Seating positively impacted segment earnings by $109 million. The impact of favorable operating performance, including the benefit of operational restructuring actions, of $133 million was more than offset by 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):
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
3,341.2

 
$
3,158.4

Segment earnings (1)
476.7

 
441.5

Margin
14.3
%
 
14.0
%
(1) See definition above
E-Systems net sales were $3.3 billion for the nine months ended September 30, 2017, as compared to $3.2 billion for the nine months ended October 1, 2016, an increase of $183 million or 6%. New business and higher production volumes on key Lear platforms positively impacted net sales by $133 million and $46 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $477 million and 14.3% for the nine months ended September 30, 2017, as compared to $442 million and 14.0% for the nine months ended October 1, 2016. New business and higher production volumes on key Lear platforms positively impacted segment earnings by $33 million. The impact of improved operating performance of $59 million was more than offset by the impact of selling price reductions and net foreign exchange rate fluctuations.
Other
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
—

 
$
—

Segment earnings (1)
(207.5
)
 
(198.9
)
Margin
N/A

 
N/A

(1) See definition above
Segment earnings related to our other category were ($208) million in the first nine months of 2017, as compared to ($199) million in the first nine months of 2016.


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LIQUIDITY AND CAPITAL RESOURCES
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. 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 September 30, 2017 and December 31, 2016, cash and cash equivalents of $917 million and $767 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 related to 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 our Annual Report on Form 10-K for the year ended December 31, 2016.
Cash Flows
A summary of net cash provided by operating activities is shown below (in millions):
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
 
Incremental Increase (Decrease) in Operating
Cash Flow
Consolidated net income and depreciation and amortization
$
1,274

 
$
1,075

 
$
199

Net change in working capital items:
 
 
 
 
 
Accounts receivable
(281
)
 
(440
)
 
159

Inventory
(115
)
 
(87
)
 
(28
)
Accounts payable
246

 
204

 
42

Accrued liabilities and other
119

 
327

 
(208
)
Net change in working capital items
(31
)
 
3

 
(34
)
Other
(58
)
 
16

 
(74
)
Net cash provided by operating activities
$
1,184

 
$
1,094

 
$
90

In the first nine months of 2017, increases in accounts receivable, inventories and accounts payable primarily reflect higher working capital to support the increase in our sales. In the first nine months of 2017, changes in accrued liabilities and other primarily reflect the timing of payment of accrued liabilities.
Net cash used in investing activities was $700 million in the first nine months of 2017, as compared to $249 million in the first nine months of 2016. This increase is primarily due to cash paid of $287 million related to the acquisition of Antolin Seating. In addition, capital spending was $430 million in the first nine months of 2017, as compared to $300 million in the first nine months of 2016. Capital spending in 2017 is estimated at $585 million.
Net cash used in financing activities was $546 million in the first nine months of 2017, as compared to $699 million in the first nine months of 2016. In the first nine months of 2017, we received net proceeds of $745 million related to the issuance of the 2027 Notes, paid $517 million related to the redemption of the outstanding 2023 Notes and paid a net of $203 million related to the refinancing of the Credit Agreement (see "— Credit Agreement" and "— Senior Notes" below). Also in 2017, we paid $332 million for repurchases of our common stock, $104 million of dividends to Lear stockholders and $43 million of dividends to noncontrolling interest holders. In 2016, we paid $558 million for repurchases of our common stock, $68 million of dividends to Lear stockholders and $15 million of dividends to noncontrolling interest holders.
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 September 30, 2017 and December 31, 2016, our outstanding short-term debt balance was $2 million and $9 million, respectively. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors.


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Senior Notes
As of September 30, 2017, our senior notes (collectively, the "Notes") consist of the amounts shown below (in millions, except stated coupon rates):
Note
 
Aggregate Principal Amount at Maturity
 
Stated Coupon Rate
Senior unsecured notes due 2024 (the "2024 Notes")
 
$
325

 
5.375
%
Senior unsecured notes due 2025 (the "2025 Notes")
 
650

 
5.25
%
Senior unsecured notes due 2027
 
750

 
3.8
%
 
 
$
1,725

 
 
In August 2017, we issued the 2027 Notes, resulting in proceeds of $745 million, after original issue discount. The proceeds from the offering were used to redeem the outstanding 2023 Notes at a redemption price of $517 million, as well as to refinance a portion of the $500 million prior term loan facility (see "— Credit Agreement," below). In connection with the redemption transaction, we recognized a loss of $21 million on the extinguishment of debt.
The Notes are senior unsecured obligations. As discussed further in "— Credit Agreement" below, upon termination of our prior credit agreement, the subsidiaries that previously guaranteed the 2024 Notes and 2025 Notes were automatically released as guarantors. There are currently no guarantors of our obligations under the Notes.
For further information related to the Notes, including information on early redemption, covenants and events of default, see Note 8, "Debt," to the condensed consolidated financial statements included in this Report and Note 6, "Debt," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Credit Agreement
In August 2017, we entered into a new Credit Agreement consisting of a $1.75 billion Revolving Credit Facility and a $250 Term Loan Facility, both of which mature on August 8, 2022. In connection with this transaction, we borrowed $250 million under the Term Loan Facility. At the same time, we terminated our previously existing credit agreement, which consisted of a $1.25 billion revolving credit facility and a $500 million term loan facility, and repaid amounts outstanding under the term loan facility of $453 million. Together with the offering of the 2027 Notes, these transactions extended our maturity profile and increased our borrowing capacity.
The Credit Agreement eliminated subsidiary guarantees previously required under the prior credit agreement. There are currently no guarantors of our obligations under the Credit Agreement.
For further information related to the Credit Agreement, including information on pricing, covenants and events of default, see Note 8, "Debt," to the condensed consolidated financial statements included in this Report.
Scheduled Interest Payment and Covenants
There are no scheduled cash interest payments for the remaining three months of 2017.
As of September 30, 2017, we were in compliance with all covenants under the Credit Agreement and the indentures governing the Notes.



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Contractual Obligations
As a result of the financing transactions discussed in "Credit Agreement" and "Senior Notes" above, our scheduled maturities of long-term debt, including capital lease obligations, and scheduled interest payments on the Notes as of September 30, 2017, are shown below (in millions):
 
2017(1)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Senior notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,725

 
$
1,725

Credit agreement —
term loan facility
2

 
6

 
8

 
14

 
14

 
206

 
250

Scheduled interest payments
—

 
80

 
80

 
80

 
80

 
335

 
655

Total
$
2

 
$
86

 
$
88

 
$
94

 
$
94

 
$
2,266

 
$
2,630

(1) Scheduled maturities for the fourth quarter of 2017
Accounts Receivable Factoring
One of our European subsidiaries has an uncommitted factoring agreement, which provides for aggregate purchases of specified customer accounts of up to €200 million. As of September 30, 2017, there were no factored receivables outstanding. We cannot provide any assurances that this factoring facility will be available or utilized in the future.
Common Stock Share Repurchase Program
In February 2017, our Board of Directors authorized a $659 million increase to our existing common stock share repurchase program to provide for a remaining aggregate repurchase authorization of $1 billion and extended the term of the program to December 31, 2019. In the first nine months of 2017, we paid, in aggregate, $332 million for repurchases of our outstanding common stock (2,320,469 shares at an average purchase price of $143.14 per share, excluding commissions). As of the end of the third quarter of 2017, we have a remaining repurchase authorization of $668 million.
We may implement these share repurchases through a variety of methods, including, but not limited to, open market purchases, accelerated stock repurchase programs and structured repurchase transactions. The extent to which 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 (see "—Forward-Looking Statements").
Since the first quarter of 2011, our Board of Directors has authorized $4.1 billion in share repurchases under our common stock share repurchase program. As of the end of the third quarter of 2017, we have paid, in aggregate, $3.4 billion for repurchases of our outstanding common stock, at an average price of $78.18 per share, excluding commissions and related fees.
For further information related to our common stock share repurchase program, see Note 13, "Comprehensive Income and Equity," to the condensed consolidated financial statements included in this Report.
Dividends
The quarterly cash dividend declared in each of the first three quarters of 2017 reflects a 67% increase over the quarterly cash dividend declared in each of the first three quarters of 2016. A summary of 2017 dividends is shown below:
Payment Date
 
Dividend Per Share
 
Declaration Date
 
Record Date
March 23, 2017
 
$
0.50

 
February 10, 2017
 
March 3, 2017
June 28, 2017
 
$
0.50

 
May 18, 2017
 
June 9, 2017
September 19, 2017
 
$
0.50

 
August 9, 2017
 
August 31, 2017
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.
Adequacy of Liquidity Sources
As of September 30, 2017, we had approximately $1.3 billion of cash and cash equivalents on hand and $1.75 billion in available borrowing capacity under our Revolving Credit Facility. Together with cash provided by operating activities, we believe that this will enable us to meet our liquidity needs to satisfy ordinary course business obligations, as well as pay quarterly dividends and repurchase shares of our common stock, pursuant to our authorized common stock share repurchase

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program (see "— Common Stock Share Repurchase Program," above). Our future financial results and our ability to continue to meet our liquidity needs are subject to, and will be affected by, cash flows from operations, including the impact of restructuring activities, automotive industry conditions, the financial condition of our customers and suppliers and other related factors. Additionally, an economic downturn or reduction in production levels could negatively impact our financial condition. For further discussion of the risks and uncertainties affecting our cash flows from operations and our overall liquidity, see "— Executive Overview" above, "— Forward-Looking Statements" below and Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016.
Market Risk Sensitivity
In the normal course of business, we are exposed to market risks associated with fluctuations in foreign exchange rates, interest rates and commodity prices. We manage a portion of these risks through the use of derivative financial instruments in accordance with our policies. We enter into all hedging transactions for periods consistent with the underlying exposures. We do not enter into derivative instruments for trading purposes.
Foreign Exchange
Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies ("transactional exposure"). We may mitigate a portion of this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred where appropriate and included in the measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions.
A summary of the notional amount and estimated aggregate fair value of our outstanding foreign exchange contracts is shown below (in millions):
 
September 30,
2017
 
December 31,
2016
Notional amount (contract maturities < 24 months)
$
2,308

 
$
1,956

Fair value
21

 
(54
)
Currently, our most significant foreign currency transactional exposures relate to the Mexican peso, various European currencies, the Thai baht, the Chinese renminbi, the Brazilian real, the Japanese yen and the Canadian dollar. We have performed a sensitivity analysis of our net transactional exposure, as shown below (in millions):
 
 
 
Potential Earnings Benefit (Adverse Earnings Impact)
 
Hypothetical Strengthening % (1)
 
September 30, 2017
 
December 31, 2016
U.S. dollar 
10%
 
$
(19
)
 
$
(19
)
Euro
10%
 
22

 
16

(1) Relative to all other currencies to which it is exposed for a twelve-month period
We have performed a sensitivity analysis related to the aggregate fair value of our outstanding foreign exchange contracts, as shown below (in millions):
 
 
 
Estimated Change in Fair Value
 
Hypothetical Change % (2)
 
September 30, 2017
 
December 31, 2016
U.S. dollar
10%
 
$
34

 
$
50

Euro
10%
 
69

 
35

(2) Relative to all other currencies to which it is exposed for a twelve-month period
There are certain shortcomings inherent in the sensitivity analyses above. The analyses assume that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.

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In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars ("translational exposure"). In 2016, net sales outside of the United States accounted for 77% of our consolidated net sales, although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate our translational exposure.
Commodity Prices
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 cost environment. If these costs increase, it could have an adverse impact on our operating results in the foreseeable future. See "— Forward-Looking Statements" below and 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," in our Annual Report on Form 10-K for the year ended December 31, 2016.
We have commodity price risk with respect to purchases of certain raw materials, including steel, copper, diesel fuel, chemicals, resins and leather. Our main cost exposures relate to steel, copper and leather. 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. Approximately 89% of our copper purchases and a significant portion of our leather purchases are subject to price index agreements with our customers.
For further information related to the financial instruments described above, see Note 16, "Financial Instruments," to the condensed consolidated financial statements included in this Report.

OTHER MATTERS
Legal and Environmental Matters
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial and contractual disputes, product liability claims and environmental and other matters. As of September 30, 2017, we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $9 million. In addition, as of September 30, 2017, we had recorded reserves for product liability claims and environmental matters of $49 million and $9 million, respectively. Although these reserves were determined in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain, and actual results may differ significantly from current estimates. For a description of risks related to various legal proceedings and claims, see Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016. For a more complete description of our outstanding material legal proceedings, see Note 14, "Legal and Other Contingencies," to the condensed consolidated financial statements included in this Report.
Significant Accounting Policies and Critical Accounting Estimates
Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates. For a discussion of our significant accounting policies and critical accounting estimates, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant Accounting Policies and Critical Accounting Estimates," and Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in our significant accounting policies or critical accounting estimates during the third quarter of 2017.
Recently Issued Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see Note 17, "Accounting Pronouncements," to the condensed consolidated financial statements included in this Report.

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Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements. We also may provide forward-looking statements in oral statements or other written materials released to the public. All such forward-looking statements contained or incorporated in this Report or in any other public statements which address operating performance, events or developments that we expect or anticipate may occur in the future, including, without limitation, statements related to business opportunities, awarded sales contracts, sales backlog and ongoing commercial arrangements, or statements expressing views about future operating results, are forward-looking statements. Actual results may differ materially from any or all forward-looking statements made by us. Important factors, risks and uncertainties that may cause actual results to differ materially from anticipated results include, but are not limited to:
•
general economic conditions in the markets in which we operate, including changes in interest rates or currency exchange rates;
•
currency controls and the ability to economically hedge currencies;
•
the financial condition and restructuring actions of our customers and suppliers;
•
changes in actual industry vehicle production levels from our current estimates;
•
fluctuations in the production of vehicles or the loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier;
•
disruptions in the relationships with our suppliers;
•
labor disputes involving us or our significant customers or suppliers or that otherwise affect us;
•
the outcome of customer negotiations and the impact of customer-imposed price reductions;
•
the impact and timing of program launch costs and our management of new program launches;
•
the costs, timing and success of restructuring actions;
•
increases in our warranty, product liability or recall costs;
•
risks associated with conducting business in foreign countries;
•
the impact of regulations on our foreign operations;
•
the operational and financial success of our joint ventures;
•
competitive conditions impacting us and our key customers and suppliers;
•
disruptions to our information technology systems, including those related to cybersecurity;
•
the cost and availability of raw materials, energy, commodities and product components and our ability to mitigate such costs;
•
the outcome of legal or regulatory proceedings to which we are or may become a party;
•
the impact of pending legislation and regulations or changes in existing federal, state, local or foreign laws or regulations;
•
unanticipated changes in cash flow, including our ability to align our vendor payment terms with those of our customers;
•
limitations imposed by our existing indebtedness and our ability to access capital markets on commercially reasonable terms;
•
impairment charges initiated by adverse industry or market developments;
•
our ability to execute our strategic objectives;
•
changes in discount rates and the actual return on pension assets;
•
costs associated with compliance with environmental laws and regulations;
•
developments or assertions by or against us relating to intellectual property rights;
•
our ability to utilize our net operating loss, capital loss and tax credit carryforwards;

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•
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;
•
the impact of potential changes in tax and trade policies in the United States and related actions by countries in which we do business;
•
the anticipated changes in economic and other relationships between the United Kingdom and the European Union; and
•
other risks described in Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2016, and our other Securities and Exchange Commission ("SEC") filings.
The forward-looking statements in this Report are made as of the date hereof, and we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.

ITEM 4 — CONTROLS AND PROCEDURES

(a)
Disclosure Controls and Procedures
The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Based on the evaluation described above, the Company’s President and Chief Executive Officer along with the Company’s Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the desired control objectives were achieved as of the end of the period covered by this Report.
(b)
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In April 2017, the Company completed the acquisition of Grupo Antolin's automotive seating business ("Antolin Seating") and is currently integrating Antolin Seating into its operations, compliance programs and internal control processes. As permitted by SEC rules and regulations, the Company has excluded Antolin Seating from management's evaluation of internal controls over financial reporting as of September 30, 2017. Antolin Seating constituted approximately 4% of the Company's total assets as of September 30, 2017, and approximately 2% of the Company's net sales in the three months ended September 30, 2017.

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

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," in our Annual Report on Form 10-K for the year ended December 31, 2016. For a description of our outstanding material legal proceedings, see Note 14, "Legal and Other Contingencies," to the condensed consolidated financial statements included in this Report.

ITEM 1A — RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.


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ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As discussed in Part I — Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capitalization — Common Stock Share Repurchase Program," and Note 13, "Comprehensive Income and Equity," to the condensed consolidated financial statements included in this Report, we have a remaining repurchase authorization of $667.8 million under our ongoing common stock share repurchase program. A summary of the shares of our common stock repurchased during the quarter ended September 30, 2017, 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)
July 2, 2017 through July 29, 2017
 
—

 
$—
 
—

 
$
745.7

July 30, 2017 through August 26, 2017
 
276,345

 
$144.85
 
276,345

 
705.7

August 27, 2017 through September 30, 2017
 
251,057

 
$150.52
 
251,057

 
667.8

Total
 
527,402

 
$147.55
 
527,402

 
$
667.8


ITEM 6 — EXHIBITS

The exhibits listed on the "Index to Exhibits" on the following page are filed with this Form 10-Q or incorporated by reference as set forth below.


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Index to Exhibits

 
Exhibit
Number
 
Exhibit
 
1.1
 
 
4.1
 
 
4.2
 
 
10.1
 
*
10.2
 
*
10.3
 
*
10.4
 
*
10.5
 
*
10.6
 
*
31.1
 
*
31.2
 
*
32.1
 
*
32.2
 
**
101.INS
 
XBRL Instance Document.
**
101.SCH
 
XBRL Taxonomy Extension Schema Document.
**
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
**
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
**
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
**
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
*
Filed herewith.
**
Submitted electronically with the Report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

LEAR CORPORATION
 
 
 
 
 
 
Dated:
October 25, 2017
By:
/s/ Matthew J. Simoncini
 
 
 
Matthew J. Simoncini
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
By:
/s/ Jeffrey H. Vanneste
 
 
 
Jeffrey H. Vanneste
 
 
 
Senior Vice President and Chief Financial Officer


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