ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
We are a leading Tier 1 supplier to the global automotive industry. We supply seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to 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 wire harnesses, terminals and connectors and junction boxes, including components and systems for high power battery electric vehicle and hybrid electric vehicle power management and distribution systems. 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 electronic hardware and software capabilities in wireless communication 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, and we have automotive content on more than 400 vehicle nameplates worldwide. 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 product development and manufacturing processes, as well as common customer support and regional infrastructures. Our core capabilities are shared across component categories and include high-precision manufacturing and assembly with short lead times, management of complex supply chains, global engineering and program management skills, the agility to establish and/or move facilities quickly and a unique customer-focused culture. Our businesses utilize proprietary, industry-specific processes and standards, leverage common low-cost engineering centers and share centralized operating support functions, such as logistics, supply chain management, quality and health and safety, as well as all major administrative functions.
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
2017
, as compared to
2016
, are shown below (in millions of units):
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
% Change
|
North America
|
17.1
|
|
17.8
|
|
(4
|
)%
|
Europe and Africa
|
22.9
|
|
22.3
|
|
3
|
%
|
Asia
|
48.2
|
|
47.1
|
|
3
|
%
|
South America
|
3.1
|
|
2.6
|
|
21
|
%
|
Other
|
2.0
|
|
1.6
|
|
21
|
%
|
Global light vehicle production
|
93.3
|
|
91.4
|
|
2
|
%
|
Automotive sales and production can be affected by the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles, restructuring actions of our customers and suppliers, facility closures, changing consumer attitudes toward vehicle ownership and usage and other factors. Our operating results are also significantly impacted by the overall commercial success of the vehicle platforms for which we supply particular products, as well as the profitability of the products that we supply for these platforms. The loss of business with respect to any vehicle model for which we are a significant supplier, or a decrease in the production levels of any such models,
could adversely affect our operating results. In addition, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating results.
Our percentage of consolidated net sales by region in
2017
and
2016
is shown below:
|
|
|
|
|
|
|
|
2017
|
|
2016
|
North America
|
38
|
%
|
|
40
|
%
|
Europe and Africa
|
40
|
%
|
|
38
|
%
|
Asia
|
19
|
%
|
|
19
|
%
|
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 trends have broadly emerged as major drivers of change and growth in the automotive industry: efficiency, connectivity and safety. These trends are rapidly evolving and advancing into the technology trends of electrification, connectivity and autonomy / advanced driver assistance, which are likely to be at the forefront of our industry for the foreseeable future with each converging long-term toward fully autonomous, connected, electric or hybrid electric 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. For further information related to these trends and our strategy, see Part 1 — Item 1, "Business — Industry and Strategy."
Our customers typically require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through product design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.
Our material cost as a percentage of net sales was 64.5% in
2017
, as compared to 64.8% in
2016
and 66.6% in
2015
. Raw material, energy and commodity costs can be volatile. We have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, such as the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. However, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. Certain of these strategies also may limit our opportunities in a declining commodity environment. In addition, the availability of raw materials, commodities and product components fluctuates from time to time due to factors outside of our control. If these costs increase or availability is restricted, it could have an adverse impact on our operating results in the foreseeable future. See Part I — Item 1A, "Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance," and "— Forward-Looking Statements."
Financial Measures
In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. In addition to maintaining and expanding our business with our existing customers in our more established markets, our expansion plans are focused primarily on emerging markets. Asia, and China 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 fourteen operating joint ventures with operations in Asia, as well as an additional joint venture in North America dedicated to serving Asian automotive manufacturers. We also have aggressively pursued this strategy by selectively increasing our vertical integration capabilities globally, as well as expanding our component manufacturing capacity in Asia, Brazil, Eastern Europe, Mexico and Northern Africa. Furthermore, we have expanded our low-cost engineering capabilities in India and the Philippines.
Our success in generating cash flow will depend, in part, on our ability to manage working capital effectively. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. Historically, we generally have been successful in aligning our vendor payment terms with our customer payment terms. However, our ability to continue to do so may be impacted by adverse automotive industry conditions, changes to our customers’ payment terms and the financial condition of our suppliers, as well as our financial condition. In addition, our cash flow is impacted by our ability to manage our inventory and capital spending effectively. We utilize return on invested capital as a measure of the efficiency with which our assets generate earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.
Acquisitions
Antolin Seating
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 3, "
Acquisitions
," to the consolidated financial statements included in this Report.
Subsequent Event
On January 10, 2018, we completed the acquisition of Israel-based EXO Technologies, a leading developer of differentiated GPS technology providing high-accuracy positioning solutions for autonomous and connected vehicle applications.
Operational Restructuring
In
2017
, we incurred pretax restructuring costs of approximately
$73 million
and related manufacturing inefficiency charges of approximately
$2 million
. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
For further information, see Note 4, "Restructuring," to the consolidated financial statements included in this Report.
Financing Transactions
Senior Notes
In 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 Financial Condition — Capitalization — Senior Notes" and Note
6
, "
Debt
," to the 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.
I
n 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 operational flexibility and borrowing capacity.
For further information, see "— Liquidity and Financial Condition — Capitalization — Credit Agreement" and Note
6
, "
Debt
," to the consolidated financial statements included in this Report.
Share Repurchase Program and Quarterly Cash Dividends
Since the first quarter of 2011, our Board of Directors has authorized
$4.1 billion
in share repurchases under our common stock share repurchase program. In
2017
, we completed
$454 million
of share repurchases and have a remaining repurchase authorization of
$546 million
, which will expire on December 31, 2019.
In 2017, our Board of Directors declared a quarterly cash dividend of
$0.50
per share of common stock.
For further information regarding our common stock share repurchase program and our quarterly dividends, see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," "— Liquidity and Financial Condition — Capitalization" and Note
9
, "
Capital Stock, Accumulated Other Comprehensive Loss and Equity
," to the consolidated financial statements included in this Report.
Other Matters
In 2017, we amended the 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 obtaining control 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 2017, we recognized a $15 million litigation charge, of which approximately $13 million is recorded in cost of sales and approximately $2 million is recorded in interest expense, related to an unfavorable ruling issued by a foreign court.
In 2017, we recognized tax expense of $131 million related to a one-time transition tax on accumulated foreign earnings and $43 million to reflect the new U.S. corporate tax rate and other tax reform changes to our deferred tax accounts, offset by tax benefits of $290 million related to foreign tax credits on repatriated earnings, $30 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries, $17 million related to a change in the accounting for share-based compensation, $14 million related to an incentive tax credit in a foreign subsidiary, $8 million related to the redemption of the 2023 Notes and $30 million related to restructuring charges and various other items.
In 2016, we amended the 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 gaining control of Beijing BAI and the valuation of our prior equity investment in Beijing BAI at fair value, we recognized a gain of approximately
$30 million
.
In 2016, we recognized a $34 million non-cash settlement charge, of which approximately $20 million was recorded in cost of sales and approximately $14 million was recorded in selling, general and administrative expenses, in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans.
In 2016, we recognized net tax benefits of $24 million related to restructuring charges, a non-cash pension settlement charge and various other items.
In 2015, we recognized net tax benefits of $43 million related to restructuring charges, debt redemption costs, acquisition costs and various other items.
As discussed above, our results for the years ended
December 31, 2017
,
2016
and
2015
, reflect the following items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Costs related to restructuring actions, including manufacturing inefficiencies of $2 million in 2017, $6 million in 2016 and $8 million in 2015
|
$
|
75
|
|
|
$
|
70
|
|
|
$
|
97
|
|
Pension settlement charge
|
—
|
|
|
34
|
|
|
—
|
|
Acquisition and other related costs
|
4
|
|
|
1
|
|
|
11
|
|
Acquisition-related inventory fair value adjustment
|
5
|
|
|
—
|
|
|
16
|
|
Litigation
|
15
|
|
|
—
|
|
|
—
|
|
Losses on extinguishment of debt
|
21
|
|
|
—
|
|
|
14
|
|
(Gain) loss related to affiliate
|
(54
|
)
|
|
(30
|
)
|
|
2
|
|
Tax benefits, net
|
(215
|
)
|
|
(24
|
)
|
|
(43
|
)
|
For further information regarding these items, see Note
3
, "
Acquisitions
," Note
4
, "
Restructuring
," Note
5
, "
Investments in Affiliates and Other Related Party Transactions
," Note
6
, "
Debt
," Note
7
, "
Income Taxes
," and Note 8, "Pension and Other
Postretirement Benefit Plans," to the consolidated financial statements included in this Report. This section includes forward-looking statements that are subject to risks and uncertainties. For further information regarding these and other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see Part I — Item 1A, "Risk Factors," and "— Forward-Looking Statements."
Results of Operations
A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
Seating
|
$
|
15,873.0
|
|
|
77.6
|
%
|
|
$
|
14,356.7
|
|
|
77.4
|
%
|
|
$
|
14,098.5
|
|
|
77.4
|
%
|
E-Systems
|
4,594.0
|
|
|
22.4
|
|
|
4,200.9
|
|
|
22.6
|
|
|
4,112.9
|
|
|
22.6
|
|
Net sales
|
20,467.0
|
|
|
100.0
|
|
|
18,557.6
|
|
|
100.0
|
|
|
18,211.4
|
|
|
100.0
|
|
Cost of sales
|
18,175.9
|
|
|
88.8
|
|
|
16,455.5
|
|
|
88.7
|
|
|
16,391.6
|
|
|
90.0
|
|
Gross profit
|
2,291.1
|
|
|
11.2
|
|
|
2,102.1
|
|
|
11.3
|
|
|
1,819.8
|
|
|
10.0
|
|
Selling, general and administrative expenses
|
635.2
|
|
|
3.1
|
|
|
621.9
|
|
|
3.4
|
|
|
580.5
|
|
|
3.2
|
|
Amortization of intangible assets
|
47.6
|
|
|
0.2
|
|
|
53.0
|
|
|
0.3
|
|
|
52.5
|
|
|
0.3
|
|
Interest expense
|
85.7
|
|
|
0.4
|
|
|
82.5
|
|
|
0.4
|
|
|
86.7
|
|
|
0.3
|
|
Other (income) expense, net
|
(4.1
|
)
|
|
—
|
|
|
6.4
|
|
|
—
|
|
|
68.6
|
|
|
0.4
|
|
Provision for income taxes
|
197.5
|
|
|
1.0
|
|
|
370.2
|
|
|
2.0
|
|
|
285.5
|
|
|
1.6
|
|
Equity in net income of affiliates
|
(51.7
|
)
|
|
(0.2
|
)
|
|
(72.4
|
)
|
|
(0.4
|
)
|
|
(49.8
|
)
|
|
(0.3
|
)
|
Net income attributable to noncontrolling interests
|
67.5
|
|
|
0.3
|
|
|
65.4
|
|
|
0.4
|
|
|
50.3
|
|
|
0.2
|
|
Net income attributable to Lear
|
$
|
1,313.4
|
|
|
6.4
|
%
|
|
$
|
975.1
|
|
|
5.3
|
%
|
|
$
|
745.5
|
|
|
4.3
|
%
|
Year Ended
December 31, 2017
, Compared With Year Ended
December 31, 2016
Net sales for the year ended
December 31, 2017
were
$20.5 billion
, as compared to
$18.6 billion
for the year ended
December 31, 2016
, an increase of
$1.9 billion
or
10%
. New business, primarily in North America, Europe and Asia, and the acquisition of Antolin Seating positively impacted net sales by $1.4 billion and $350 million, respectively.
|
|
|
|
|
|
(in millions)
|
|
Cost of Sales
|
2016
|
|
$
|
16,455.5
|
|
Material cost
|
|
1,270.2
|
|
Labor and other
|
|
400.5
|
|
Depreciation
|
|
49.7
|
|
2017
|
|
$
|
18,175.9
|
|
Cost of sales in
2017
was
$18.2 billion
, as compared to
$16.5 billion
in
2016
. New business, primarily in North America, Europe and Asia, and the acquisition of Antolin Seating resulted in an increase in cost of sales of $1.6 billion.
Gross profit and gross margin were
$2.3 billion
and
11.2%
of net sales in
2017
, as compared to
$2.1 billion
and
11.3%
of net sales in
2016
. New business and the acquisition of Antolin Seating positively impacted gross profit by $194 million. The impact of favorable operating performance, including the benefit of operational restructuring actions, of $257 million was more than offset by the impact of selling price reductions. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were
$635 million
for the year ended
December 31, 2017
, as compared to
$622 million
for the year ended
December 31, 2016
. In 2017, we recognized higher restructuring costs, as well as higher engineering and development expenses to support future business growth. In 2016, we recognized a $14 million non-cash settlement charge in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans. As a percentage of net sales, selling, general and administrative expenses were
3.1%
in
2017
, as compared to
3.4%
in
2016
.
Amortization of intangible assets was
$48 million
in
2017
, as compared to
$53 million
in
2016
.
Interest expense was
$86 million
in
2017
, as compared to
$83 million
in
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
($4) million
in
2017
, as compared to
$6 million
in
2016
. In
2017
, we recognized a gain of
$54 million
related to obtaining control of an affiliate and a loss of
$21 million
related to the extinguishment of debt. In
2016
, we recognized a gain of
$30 million
related to obtaining control of an affiliate.
In
2017
, the provision for income taxes was
$198 million
, representing an effective tax rate of
12.9%
on pretax income before equity in net income of affiliates of
$1.5 billion
. In
2016
, the provision for income taxes was
$370 million
, representing an effective tax rate of
27.7%
on pretax income before equity in net income of affiliates of
$1.3 billion
, for the reasons described below.
In 2017 and 2016, the provision for income taxes was impacted by the level and mix of earnings among tax jurisdictions. In 2017, we recognized tax expense of $131 million related to a one-time transition tax on accumulated foreign earnings and $43 million to reflect the new U.S. corporate tax rate and other tax reform changes to our deferred tax accounts. In addition, we recognized tax benefits of $290 million related to foreign tax credits on repatriated earnings, $30 million related to the reversal of valuation allowances on the deferred tax assets of certain foreign subsidiaries, $17 million related to a change in the accounting for share-based compensation, $14 million related to an incentive tax credit in a foreign subsidiary, $8 million related to the redemption of the 2023 Notes and $30 million related to restructuring charges and various other items. In addition, we recognized a gain of $54 million related to obtaining control of an affiliate, for which no tax expense was provided. In 2016, we recognized net tax benefits of $24 million related to restructuring charges, a non-cash pension settlement charge and various other items. In addition, we recognized a gain of $30 million related to obtaining control of an affiliate, for which no tax expense was provided. Excluding these items, the effective tax rate in 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.
For information related to our valuation allowances, see "Other Matters — Significant Accounting Policies and Critical Accounting Estimates — Income Taxes."
Equity in net income of affiliates was
$52 million
for the year ended
December 31, 2017
, as compared to
$72 million
for the year ended
December 31, 2016
, reflecting the consolidation of two of our affiliates.
Net income attributable to Lear was
$1,313 million
, or
$18.59
per diluted share, in
2017
, as compared to
$975 million
, or
$13.33
per diluted share, in
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 the periods.
Reportable Operating Segments
We have
two
reportable operating segments: Seating, which includes complete seat systems and all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests, and E-Systems, which includes complete electrical distribution systems, electronic control modules and associated software and wireless communication modules. Key components in the electrical distribution system include wire harnesses, terminals and connectors and junction boxes, including components and systems for high power battery electric vehicle and hybrid electric vehicle power management and distribution systems.
The 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
12
, "
Segment Reporting
," to the consolidated financial statements included in this Report.
Seating –
A summary of financial measures for our Seating segment is shown below (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
Net sales
|
$
|
15,873.0
|
|
|
$
|
14,356.7
|
|
Segment earnings
(1)
|
1,250.8
|
|
|
1,136.0
|
|
Margin
|
7.9
|
%
|
|
7.9
|
%
|
|
|
(1)
|
See definition above.
|
Seating net sales were
$15.9 billion
for the year ended
December 31, 2017
, as compared to
$14.4 billion
for the year ended
December 31, 2016
, an increase of
$1.5 billion
or
11%
. New business and the acquisition of Antolin Seating positively impacted net sales by $1.2 billion and $350 million, respectively.
Segment earnings, including restructuring costs, and the related margin on net sales were
$1.3 billion
and
7.9%
in
2017
, as compared to
$1.1 billion
and
7.9%
in
2016
. New business and the acquisition of Antolin Seating positively impacted segment earnings by $152 million. The impact of favorable operating performance, including the benefit of operational restructuring actions, of $202 million was offset by the impact of selling price reductions.
E-Systems –
A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
Net sales
|
$
|
4,594.0
|
|
|
$
|
4,200.9
|
|
Segment earnings
(1)
|
641.6
|
|
|
591.3
|
|
Margin
|
14.0
|
%
|
|
14.1
|
%
|
|
|
(1)
|
See definition above.
|
E-Systems net sales were
$4.6 billion
for the year ended
December 31, 2017
, as compared to
$4.2 billion
for the year ended
December 31, 2016
, an increase of
$393 million
or
9%
. New business, sales as a result of obtaining control of an affiliate and higher volumes on key Lear platforms positively impacted net sales by $210 million, $116 million and $45 million, respectively.
Segment earnings, including restructuring costs, and the related margin on net sales were
$642 million
and
14.0%
in
2017
, as compared to
$591 million
and
14.1%
in
2016
. New business, earnings as a result of obtaining control of an affiliate and higher production volumes on key Lear platforms positively impacted segment earnings by $56 million. The impact of improved operating performance of $77 million was more than 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):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
Segment earnings
(1)
|
(284.1
|
)
|
|
(300.1
|
)
|
Margin
|
N/A
|
|
|
N/A
|
|
|
|
(1)
|
See definition above.
|
Segment earnings related to our other category were
($284) million
in
2017
, as compared to
($300) million
in
2016
. In 2016, we recognized a $34 million non-cash settlement charge in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans.
Year Ended
December 31, 2016
, Compared With Year Ended
December 31, 2015
Net sales for the year ended
December 31, 2016
were
$18.6 billion
, as compared to
$18.2 billion
for the year ended
December 31, 2015
, an increase of
$346 million
or
2%
. New business in Asia, Europe and South America and higher
production volumes on key Lear platforms in Europe and Asia positively impacted net sales by $845 million and $139 million, respectively. These increases were partially offset by net foreign exchange rate fluctuations related to the strengthening of the U.S. dollar against most major currencies and selling price reductions, which reduced net sales by $602 million.
|
|
|
|
|
|
(in millions)
|
|
Cost of Sales
|
2015
|
|
$
|
16,391.6
|
|
Material cost
|
|
(91.4
|
)
|
Labor and other
|
|
128
|
|
Depreciation
|
|
27.3
|
|
2016
|
|
$
|
16,455.5
|
|
Cost of sales in
2016
was
$16.5 billion
, as compared to
$16.4 billion
in
2015
. New business in Asia, Europe and South America and higher production volumes on key Lear platforms in Europe and Asia resulted in an increase in cost of sales of $810 million. These increases were partially offset by favorable operating performance and the benefit of operational restructuring actions and net foreign exchange rate fluctuations related to the strengthening of the U.S. dollar against most major currencies, which reduced cost of sales by $703 million.
Gross profit and gross margin were
$2.1 billion
and
11.3%
of net sales in
2016
, as compared to
$1.8 billion
and
10.0%
of net sales in
2015
. New business and higher production volumes on key Lear platforms positively impacted gross profit by $148 million. The impact of favorable operating performance and the benefit of operational restructuring actions of $412 million more than offset the impact of selling price reductions and net foreign exchange rate fluctuations of $300 million. These factors had a corresponding impact on gross margin.
Selling, general and administrative expenses, including engineering and development expenses, were
$622 million
for the year ended
December 31, 2016
, as compared to
$581 million
for the year ended
December 31, 2015
, reflecting an increase in engineering and development expenses to support future business growth, as well as a $14 million non-cash settlement charge in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans. As a percentage of net sales, selling, general and administrative expenses were
3.4%
in
2016
, as compared to
3.2%
in
2015
.
Amortization of intangible assets was
$53 million
in
2016
and
2015
.
Interest expense was
$83 million
in
2016
, as compared to
$87 million
in
2015
.
Other (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, gains and losses on the extinguishment of debt, gains and losses on the disposal of fixed assets and other miscellaneous income and expense, was
$6 million
in
2016
, as compared to
$69 million
in
2015
. In 2016, we recognized a gain of $30 million related to obtaining control of an affiliate. In 2015, we recognized a loss of $14 million related to the redemption of the remaining outstanding aggregate principal amount of our 8.125% senior unsecured notes due 2020. Net foreign exchange losses decreased to $10 million in 2016, as compared to $23 million in 2015.
In
2016
, the provision for income taxes was
$370 million
, representing an effective tax rate of
27.7%
on pretax income before equity in net income of affiliates of
$1,338 million
. In
2015
, the provision for income taxes was
$286 million
, representing an effective tax rate of
27.7%
on pretax income before equity in net income of affiliates of
$1,032 million
.
In
2016
and
2015
, the provision for income taxes was impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of our restructuring charges and other expenses, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. In 2016, we recognized a gain of $30 million related to obtaining control of an affiliate, for which no tax expense was provided. In addition, we recognized net tax benefits of $24 million related to restructuring charges, a non-cash pension settlement charge and various other items. In 2015, we recognized net tax benefits of $43 million related to restructuring charges, debt redemption costs, acquisition costs and various other items. Excluding these items, the effective tax rate in 2016 and 2015 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.
For information related to our valuation allowances, see "Other Matters — Significant Accounting Policies and Critical Accounting Estimates — Income Taxes."
Equity in net income of affiliates was
$72 million
for the year ended
December 31, 2016
, as compared to
$50 million
for the year ended
December 31, 2015
, reflecting the increase in sales and improved operating performance of our equity affiliates in China.
Net income attributable to Lear was
$975 million
, or $13.33 per diluted share, in
2016
, as compared to
$746 million
, or $9.59 per diluted share, in
2015
. Net income and diluted net income per share increased for the reasons described above. In addition, diluted net income per share was impacted by the decrease in average shares outstanding between the periods.
Reportable Operating Segments
For a description of our reportable operating segments, see "Year Ended
December 31, 2017
, Compared with Year Ended
December 31, 2016
— Reportable Operating Segments" above.
Seating –
A summary of financial measures for our Seating segment is shown below (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2016
|
|
2015
|
Net sales
|
$
|
14,356.7
|
|
|
$
|
14,098.5
|
|
Segment earnings
(1)
|
1,136.0
|
|
|
907.0
|
|
Margin
|
7.9
|
%
|
|
6.4
|
%
|
|
|
(1)
|
See definition above.
|
Seating net sales were
$14.4 billion
for the year ended
December 31, 2016
, as compared to
$14.1 billion
for the year ended
December 31, 2015
, an increase of
$258 million
or
2%
. New business positively impacted net sales by $656 million. This increase was partially offset by net foreign exchange rate fluctuations and selling price reductions, which negatively impacted net sales by $427 million.
Segment earnings, including restructuring costs, and the related margin on net sales were
$1,136 million
and
7.9%
in
2016
, as compared to
$907 million
and
6.4%
in
2015
. New business and lower restructuring costs positively impacted segment earnings by $122 million. The impact of favorable operating performance and the benefit of operational restructuring actions of $261 million more than offset the impact of selling price reductions and net foreign exchange rate fluctuations.
E-Systems –
A summary of financial measures for our E-Systems segment is shown below (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2016
|
|
2015
|
Net sales
|
$
|
4,200.9
|
|
|
$
|
4,112.9
|
|
Segment earnings
(1)
|
591.3
|
|
|
554.4
|
|
Margin
|
14.1
|
%
|
|
13.5
|
%
|
|
|
(1)
|
See definition above.
|
E-Systems net sales were
$4.2 billion
for the year ended
December 31, 2016
, as compared to
$4.1 billion
for the year ended
December 31, 2015
, an increase of
$88 million
or
2%
. New business and higher production volumes on key Lear platforms positively impacted net sales by $179 million and $71 million, respectively. These increases were partially offset by selling price reductions and net foreign exchange rate fluctuations, which negatively impacted net sales by $175 million.
Segment earnings, including restructuring costs, and the related margin on net sales were
$591 million
and
14.1%
in
2016
, as compared to
$554 million
and
13.5%
in
2015
. New business and higher production volumes on key Lear platforms positively impacted segment earnings by $52 million. The impact of improved operating performance of $111 million was offset by the impact of selling price reductions and net foreign exchange rate fluctuations.
Other –
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2016
|
|
2015
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
Segment earnings
(1)
|
(300.1
|
)
|
|
(274.6
|
)
|
Margin
|
N/A
|
|
|
N/A
|
|
|
|
(1)
|
See definition above.
|
Segment earnings related to our other category were
($300) million
in
2016
, as compared to
($275) million
in
2015
. In 2016, we recognized a $34 million non-cash settlement charge in connection with our lump-sum payout to certain terminated vested plan participants of our U.S. defined benefit pension plans.
Liquidity and Financial Condition
Our primary liquidity needs are to fund general business requirements, including working capital requirements, capital expenditures, operational restructuring actions and debt service requirements. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program (see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities"). Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties, intercompany loan repayments and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations.
As of
December 31, 2017
and
2016
, cash and cash equivalents of
$952 million
and
$767 million
, respectively, were held in foreign subsidiaries and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating additional income tax expense. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from our non-U.S. subsidiaries, see "— Adequacy of Liquidity Sources," below and Note
7
, "
Income Taxes
," to the consolidated financial statements included in this Report.
Cash Flows
Year Ended
December 31, 2017
, Compared with Year Ended
December 31, 2016
A summary of net cash provided by operating activities is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
Incremental Increase (Decrease) in Operating
Cash Flow
|
Consolidated net income and depreciation and amortization
|
$
|
1,809
|
|
|
$
|
1,419
|
|
|
$
|
390
|
|
Net change in working capital items:
|
|
|
|
|
|
Accounts receivable
|
(115
|
)
|
|
(176
|
)
|
|
61
|
|
Inventory
|
(76
|
)
|
|
(54
|
)
|
|
(22
|
)
|
Accounts payable
|
195
|
|
|
158
|
|
|
37
|
|
Accrued liabilities and other
|
68
|
|
|
160
|
|
|
(92
|
)
|
Net change in working capital items
|
72
|
|
|
88
|
|
|
(16
|
)
|
Other
|
(98
|
)
|
|
112
|
|
|
(210
|
)
|
Net cash provided by operating activities
|
$
|
1,783
|
|
|
$
|
1,619
|
|
|
$
|
164
|
|
In
2017
, increases in accounts receivable, inventories and accounts payable primarily reflect higher working capital to support the increase in our sales. In
2017
, changes in accrued liabilities and other primarily reflect the timing of payment of accrued liabilities. Other includes our deferred tax (benefit) provision, which was ($81) million in 2017, as compared to $104 million in 2016, resulting in a decrease in operating cash flows of $185 million between years.
Net cash used in investing activities was
$869 million
in
2017
, as compared to
$637 million
in
2016
. In 2017, we paid
$292 million
for the acquisition of Antolin Seating. In 2016, we paid
$149 million
for the acquisition of AccuMED Holdings Corp. ("AccuMED"). Capital spending in
2018
is estimated at
$630 million
.
Net cash used in financing activities was
$742 million
in
2017
, as compared to
$873 million
in
2016
. In
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 repaid a net of $203 million in connection with the refinancing of the Credit Agreement (see "— Credit Agreement" and "— Senior Notes" below). Also in
2017
, we paid
$451 million
for repurchases of our common stock,
$138 million
of dividends to Lear stockholders and
$82 million
of dividends to noncontrolling interest holders. In 2016, we paid
$659 million
for repurchases of our common stock,
$89 million
of dividends to Lear stockholders and
$33 million
of dividends to noncontrolling interest holders.
For further information regarding our
2017
and
2016
financing transactions, see "— Capitalization" below and Note
6
, "
Debt
," and Note
9
, "
Capital Stock, Accumulated Other Comprehensive Loss and Equity
," to the consolidated financial statements included in this Report.
Year Ended
December 31, 2016
, Compared with Year Ended
December 31, 2015
A summary of net cash provided by operating activities is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2016
|
|
2015
|
|
Incremental Increase (Decrease) in Operating
Cash Flow
|
Consolidated net income and depreciation and amortization
|
$
|
1,419
|
|
|
$
|
1,144
|
|
|
$
|
275
|
|
Net change in working capital items:
|
|
|
|
|
|
Accounts receivable
|
(176
|
)
|
|
(173
|
)
|
|
(3
|
)
|
Inventory
|
(54
|
)
|
|
4
|
|
|
(58
|
)
|
Accounts payable
|
158
|
|
|
76
|
|
|
82
|
|
Accrued liabilities and other
|
160
|
|
|
151
|
|
|
9
|
|
Net change in working capital items
|
88
|
|
|
58
|
|
|
30
|
|
Other
|
112
|
|
|
69
|
|
|
43
|
|
Net cash provided by operating activities
|
$
|
1,619
|
|
|
$
|
1,271
|
|
|
$
|
348
|
|
In
2016
, increases in accounts receivable, inventories and accounts payable primarily reflect higher working capital to support the increase in our sales. In
2016
, changes in accrued liabilities and other primarily reflect the timing of payment of accrued liabilities.
Net cash used in investing activities was $637 million in 2016, as compared to $965 million in 2015. In 2016, we paid $149 million for the acquisition of AccuMED. In 2015, we paid $465 million for the acquisition of Everett Smith Group Ltd., the parent of Eagle Ottawa, LLC ("Eagle Ottawa").
Net cash used in financing activities was $873 million in 2016, as compared to $156 million in 2015. In 2016 and 2015, we paid $659 million and $487 million, respectively, for repurchases of our common stock. In 2015, we borrowed $500 million under our prior term loan facility (see "— Credit Agreement" below) to finance, in part, the acquisition of Eagle Ottawa.
For further information regarding our 2016 and 2015 financing transactions, see "— Capitalization" below and Note 6, "Debt," and Note 9, "Capital Stock, Equity and Accumulated Other Comprehensive Loss," to the consolidated financial statements included in this Report.
Capitalization
From time to time, we utilize committed and uncommitted credit facilities to fund our capital expenditures and working capital requirements at certain of our foreign subsidiaries, in addition to cash provided by operating activities. As of
December 31, 2017
, we had no short-term debt balances outstanding. As of
December 31, 2016
, our short-term debt balance was
$9 million
. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors.
Senior Notes
As of
December 31, 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 (the "2027 Notes")
|
|
750
|
|
|
3.8%
|
|
|
$
|
1,725
|
|
|
|
The issue, maturity and interest payable dates of the Notes are 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
|
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 outstanding $500 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 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.
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.
The indentures governing the Notes contain certain restrictive covenants and customary events of default. As of
December 31, 2017
, we were in compliance with all covenants under the indentures governing the Notes.
For further information related to the Notes, including information on early redemption, covenants and events of default, see Note
6
, "
Debt
," to the consolidated financial statements included in this Report and the indentures governing the Notes which have been incorporated by reference as exhibits to this Report.
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.
I
n 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 operational flexibility and borrowing capacity.
The Credit Agreement eliminated subsidiary guarantees required under our prior credit agreement. There are currently no guarantors of our obligations under the Credit Agreement.
As of
December 31, 2017
, we were in compliance with all covenants under the Credit Agreement.
For further information related to the Credit Agreement, including information on pricing, covenants and events of default, see Note
6
, "
Debt
," to the consolidated financial statements included in this Report and the amended and restated credit agreement, which has been incorporated by reference as an exhibit to this Report.
Contractual Obligations
The scheduled maturities of the Notes, obligations under the Credit Agreement and the scheduled interest payments on the Notes as of the date of this Report are shown below (in millions). In addition, our lease commitments under non-cancelable operating leases as of
December 31, 2017
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
Senior notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,725
|
|
|
$
|
1,725
|
|
Credit agreement —
term loan facility
|
6
|
|
|
8
|
|
|
14
|
|
|
14
|
|
|
206
|
|
|
—
|
|
|
248
|
|
Scheduled interest payments
|
83
|
|
|
80
|
|
|
80
|
|
|
80
|
|
|
80
|
|
|
254
|
|
|
657
|
|
Lease commitments
|
103
|
|
|
90
|
|
|
77
|
|
|
60
|
|
|
49
|
|
|
170
|
|
|
549
|
|
Total
|
$
|
192
|
|
|
$
|
178
|
|
|
$
|
171
|
|
|
$
|
154
|
|
|
$
|
335
|
|
|
$
|
2,149
|
|
|
$
|
3,179
|
|
We enter into agreements with our customers to produce products at the beginning of a vehicle’s life cycle. Although such agreements do not provide for a specified quantity of products, once we enter into such agreements, we are generally required to fulfill our customers’ purchasing requirements for the production life of the vehicle. Prior to being formally awarded a program, we typically work closely with our customers in the early stages of the design and engineering of a vehicle’s systems. Failure to complete the design and engineering work related to a vehicle’s systems, or to fulfill a customer’s contract, could have a material adverse impact on our business.
We also enter into agreements with suppliers to assist us in meeting our customers’ production needs. These agreements vary as to duration and quantity commitments. Historically, most have been short-term agreements, which do not provide for minimum purchases, or are requirements-based contracts.
We may be required to make significant cash outlays related to our unrecognized tax benefits, including interest and penalties. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits, including interest and penalties, of $43 million as of
December 31, 2017
, have been excluded from the contractual obligations table above. For further information related to our unrecognized tax benefits, see Note
7
, "
Income Taxes
," to the consolidated financial statements included in this Report.
We also have minimum funding requirements with respect to our pension obligation. We may elect to make contributions in excess of the minimum funding requirements in response to investment performance or changes in interest rates or when we believe that it is financially advantageous to do so and based on our other cash requirements. Our minimum funding requirements after
2018
will depend on several factors, including investment performance and interest rates. Our minimum funding requirements may also be affected by changes in applicable legal requirements. Our minimum required contributions to our domestic and foreign pension plans, including distributions to participants in certain of our non-qualified defined benefit plans, are expected to be approximately
$10 million
to
$15 million
in
2018
. We also have payments due with respect to our postretirement benefit obligation. We do not fund our postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees. We expect payments related to our postretirement benefit obligation to be approximately
$6 million
in
2018
.
For further information related to our pension and other postretirement benefit plans, see "— Other Matters — Pension and Other Postretirement Defined Benefit Plans" and Note
8
, "
Pension and Other Postretirement Benefit Plans
," to the consolidated financial statements included in this Report.
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
December 31, 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
See Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Dividends
See Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Adequacy of Liquidity Sources
As of
December 31, 2017
, we had approximately
$1.5 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. In addition, we expect to continue to pay quarterly dividends and repurchase shares of our common stock pursuant to our authorized common stock share repurchase program (see Item 5, "Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities"). Our 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 Part I — Item 1A, "Risk Factors," "— Executive Overview" above and "— Forward-Looking Statements" below.
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):
|
|
|
|
|
|
|
|
|
December 31
|
2017
|
|
2016
|
Notional amount (contract maturities < 24 months)
|
$
|
2,220
|
|
|
$
|
1,956
|
|
Fair value
|
(23
|
)
|
|
(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)
|
December 31
|
Hypothetical Strengthening %
(1)
|
|
2017
|
|
2016
|
U.S. dollar
|
10%
|
|
$
|
(19
|
)
|
|
$
|
(19
|
)
|
Euro
|
10%
|
|
25
|
|
|
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
|
December 31
|
Hypothetical
Change %
(2)
|
|
2017
|
|
2016
|
U.S. dollar
|
10%
|
|
$
|
23
|
|
|
$
|
50
|
|
Euro
|
10%
|
|
76
|
|
|
35
|
|
|
|
(2)
|
Relative to all other currencies to which it is exposed
|
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.
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
2017
, net sales outside of the United States accounted for
81%
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 Part I — Item 1A, "Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance," and "— Forward-Looking Statements."
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
13
, "
Financial Instruments
," to the 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
December 31, 2017
, we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of
$26 million
. In addition, as of
December 31, 2017
, we had recorded reserves for product liability claims and environmental matters of
$47 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 Part I — Item 1A, "Risk Factors." For a more complete description of our outstanding material legal proceedings, see Note
11
, "
Commitments and Contingencies
," to the consolidated financial statements included in this Report.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are more fully described in Note
2
, "
Summary of Significant Accounting Policies
," to the consolidated financial statements included in this Report. 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.
We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations.
Pre-Production Costs Related to Long-Term Supply Agreements
We incur pre-production engineering and development ("E&D") and tooling costs related to the products produced for our customers under long-term supply agreements. We expense all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, we expense all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which we do not have a non-cancelable right to use the tooling.
A change in the commercial arrangements affecting any of our significant programs that would require us to expense E&D or tooling costs that we currently capitalize could have a material adverse impact on our operating results.
Impairment of Goodwill
As of
December 31, 2017
and
2016
, we had recorded goodwill of
$1,401 million
and
$1,121 million
, respectively. 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 our annual impairment testing, we may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. We conduct our annual impairment testing as of the first day of our fourth quarter.
We utilize an income approach to estimate the fair value of each of our reporting units and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt ("cost of capital") derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted by reporting unit to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income approach provides a reasonable estimate of the fair value of our reporting units. The market valuation approach is used to further support our analysis and is based on recent transactions involving comparable companies.
In
2017
, we performed a qualitative assessment of our reporting units. The assessment was completed as of the first day of our fourth quarter. The assessment indicated that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying value. We do not believe that any of our reporting units is at risk for impairment.
Impairment of Long-Lived Assets
We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP. If impairment indicators exist, we perform 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. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of our long-lived assets.
For the years ended
December 31, 2017
,
2016
and
2015
, we recognized fixed asset impairment charges of
$1 million
,
$5 million
and
$4 million
, respectively, in conjunction with our restructuring actions, as well as additional fixed asset impairment charges of
$2 million
,
$1 million
and
$2 million
, respectively. See Note
4
, "
Restructuring
," to the consolidated financial statements included in this Report.
Impairment of Investments in Affiliates
As of
December 31, 2017
and
2016
, we had aggregate investments in affiliates of
$147 million
and
$154 million
, respectively. We monitor our investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If we determine that an other-than-temporary decline in value has occurred, we recognize an
impairment loss, which is measured as the difference between the recorded book value and the fair value of the investment. Fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values. A deterioration in industry conditions and decline in the operating results of our non-consolidated affiliates could result in the impairment of our investments.
Restructuring
Accruals have been recorded in conjunction with our restructuring actions. These accruals include estimates primarily related to facility consolidations and closures, employment reductions and contract termination costs. Actual costs may vary from these estimates. Restructuring-related accruals are reviewed on a quarterly basis, and changes to restructuring actions are appropriately recognized when identified.
Legal and Other Contingencies
We are involved from time to time in various legal proceedings and claims, including commercial or contractual disputes, product liability claims and environmental and other matters, that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes related to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. We have accrued for estimated losses in accordance with GAAP for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of the loss is reasonably estimable. The determination of the amount of such reserves is based on knowledge and experience with regard to past and current matters and consultation with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. The amount of such reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution. See Note
11
, "
Commitments and Contingencies
," to the consolidated financial statements included in this Report.
Pension and Other Postretirement Defined Benefit Plans
We provide certain pension and other postretirement benefits to our employees and retired employees, including pensions, postretirement health care benefits and other postretirement benefits.
Approximately
7%
of our active workforce is covered by defined benefit pension plans, and less than
1%
of our active workforce is covered by other postretirement benefit plans. Pension plans provide benefits based on plan-specific benefit formulas as defined by the applicable plan documents. Postretirement benefit plans generally provide for the continuation of medical benefits for all eligible employees. We also have contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, our policy is to fund our pension benefit obligation based on legal requirements, tax and liquidity considerations and local practices. We do not fund our postretirement benefit obligation.
Plan assets and obligations are measured using various actuarial assumptions, such as discount rates, rate of compensation increase, mortality rates, turnover rates and health care cost trend rates, which are determined as of the current year measurement date. The measurement of net periodic benefit cost is based on various actuarial assumptions, including discount rates, expected return on plan assets and rate of compensation increase, which are determined as of the prior year measurement date. We review our actuarial assumptions on an annual basis and modify these assumptions when appropriate. As required by GAAP, the effects of the modifications are recorded currently or are amortized over future periods.
The determination of the discount rate is generally based on an index created from a hypothetical bond portfolio consisting of high-quality fixed income securities with durations that match the timing of expected benefit payments. Changes in the selected discount rate could have a material impact on the projected benefit obligations, unfunded status and related net periodic benefit cost of our pension and other postretirement benefit plans.
The expected return on plan assets is determined based on several factors, including adjusted historical returns, historical risk premiums for various asset classes and target asset allocations within the portfolio. Adjustments made to the historical returns are based on recent return experience in the equity and fixed income markets and the belief that deviations from historical returns are likely over the relevant investment horizon.
Key assumptions are shown below:
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Postretirement
|
Benefit obligations as of December 31, 2017
|
$
|
1,049
|
|
|
$
|
98
|
|
Discount rate -
|
|
|
|
Domestic plans
|
3.6
|
%
|
|
3.5
|
%
|
Foreign plans
|
3.1
|
%
|
|
3.5
|
%
|
Net periodic benefit cost for the year ended December 31, 2017
|
$
|
7
|
|
|
$
|
2
|
|
Discount rate -
|
|
|
|
Domestic plans
|
4.1
|
%
|
|
3.9
|
%
|
Foreign plans
|
3.3
|
%
|
|
3.9
|
%
|
Expected return on plan assets -
|
|
|
|
Domestic plans
|
7.3
|
%
|
|
N/A
|
|
Foreign plans
|
6.3
|
%
|
|
N/A
|
|
Net periodic benefit cost for the year ended December 31, 2018
(1)
|
$
|
(1
|
)
|
|
$
|
1
|
|
Discount rate -
|
|
|
|
Domestic plans
|
3.6
|
%
|
|
3.5
|
%
|
Foreign plans
|
3.1
|
%
|
|
3.5
|
%
|
Expected return on plan assets -
|
|
|
|
Domestic plans
|
6.5
|
%
|
|
N/A
|
|
Foreign plans
|
5.9
|
%
|
|
N/A
|
|
(1) Forecasted
The sensitivity to a 100 basis point ("bp") decrease in the discount rate and expected return on plan assets is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Benefit Obligation
|
|
Increase in 2018
Net Periodic Benefit Cost
|
|
Pension
|
|
Other Postretirement
|
|
Pension
|
|
Other Postretirement
|
100 bp decrease in discount rate
|
$
|
162
|
|
|
$
|
13
|
|
|
$
|
4
|
|
|
$
|
1
|
|
100 bp decrease in expected return on plan assets
|
N/A
|
|
|
N/A
|
|
|
$
|
8
|
|
|
N/A
|
|
For further information related to our pension and other postretirement benefit plans, see "— Liquidity and Financial Condition — Capitalization — Contractual Obligations" above and Note
8
, "
Pension and Other Postretirement Benefit Plans
," to the consolidated financial statements included in this Report.
Revenue Recognition and Sales Commitments
We enter into agreements with our customers to produce products at the beginning of a vehicle’s life cycle. Although such agreements do not provide for a specified quantity of products, once we enter into such agreements, we are generally required to fulfill our customers’ purchasing requirements for the production life of the vehicle. These agreements generally may be terminated by our customers at any time. Historically, terminations of these agreements have been minimal. Sales are generally recorded upon shipment of product to customers and transfer of title under standard commercial terms. In certain instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses as they are incurred.
We receive purchase orders from our customers on an annual basis. Generally, each purchase order provides the annual terms, including pricing, related to a particular vehicle model. Purchase orders do not specify quantities. We recognize revenue based on the pricing terms included in our annual purchase orders. We are asked to provide our customers with annual productivity price reductions as part of certain agreements. We accrue for such amounts as a reduction of revenue as our products are shipped to our customers. In addition, we have ongoing adjustments to our pricing arrangements with our customers based on the related content, the cost of our products and other commercial factors. Such pricing accruals are adjusted as they are settled with our customers.
Income Taxes
We account for income taxes in accordance with GAAP. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Our current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our 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. We evaluate the realizability of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available evidence in order to determine whether, based on the weight of the evidence, a valuation allowance for our 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 our deferred tax assets will not be realized, a valuation allowance is recorded. As of
December 31, 2017
, we had a valuation allowance related to tax loss and credit carryforwards and other deferred tax assets of
$21 million
in the United States and
$381 million
in several international jurisdictions. If operating results improve or decline on a continual basis in a particular jurisdiction, our 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. In determining the provision for income taxes for financial statement purposes, we make certain estimates and judgments, which affect our evaluation of the carrying value of our deferred tax assets, as well as our calculation of certain tax liabilities.
The calculation of our gross unrecognized tax benefits and liabilities includes uncertainties in the application of, and changes in, complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these benefits and liabilities based on changing facts and circumstances; however, due to the complexity of these uncertainties and the impact of tax audits, the ultimate resolutions may differ significantly from our estimates.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed our accounting for the tax effects of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of $174 million related to items for which we were able to determine a reasonable estimate. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may be affected as additional regulatory guidance is issued with respect to the Act. Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined, but in any event, no later than the fourth quarter of 2018.
Provisional Amounts
Deferred tax assets and liabilities:
We remeasured our U.S. deferred tax assets and liabilities at 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of $43 million related to the remeasurement of deferred tax balances.
Transition Tax on Deferred Foreign Earnings:
The one-time transition tax is based on our post-1986 earnings and profits ("E&P") that were previously deferred from U.S. income taxes. In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of $131 million related to the one-time transition tax liability of our foreign subsidiaries. We have not completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 E&P previously deferred from U.S. income taxes and the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax. However, we continue to recognize a deferred tax liability related to foreign withholding tax that will be incurred for undistributed foreign earnings that are not permanently reinvested.
For further information, see "— Forward-Looking Statements," and Note
7
, "
Income Taxes
," to the consolidated financial statements included in this Report.
Fair Value Measurements
We measure certain assets and liabilities at fair value on a non-recurring basis using unobservable inputs (Level 3 input based on the GAAP fair value hierarchy). For further information on these fair value measurements, see "— Impairment of Goodwill," "— Impairment of Long-Lived Assets," "— Restructuring" and "— Impairment of Investments in Affiliates" above.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires 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. During
2017
, there were no material changes in the methods or policies used to establish estimates and assumptions. Other matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of fixed and intangible assets, unsettled pricing discussions with customers and suppliers, restructuring accruals, deferred tax asset valuation allowances and income taxes, pension and other postretirement benefit plan assumptions, accruals related to litigation, warranty and environmental remediation costs and self-insurance accruals. Actual results may differ significantly from our estimates.
Recently Issued Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see Note
15
, "
Accounting Pronouncements
," to the consolidated financial statements included in this Report.
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;
|
|
|
•
|
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 Part I — Item 1A, "Risk Factors," as well as the risks and information provided from time to time in our filings with the Securities and Exchange Commission.
|
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 8 – CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Lear Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lear Corporation and subsidiaries (the Company) as of
December 31, 2017
and
2016
, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended
December 31, 2017
, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at
December 31, 2017
and
2016
, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2017
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of
December 31, 2017
, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 6, 2018
, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Detroit, Michigan
February 6, 2018
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Lear Corporation
Opinion on Internal Control over Financial Reporting
We have audited Lear Corporation and subsidiaries’ internal control over financial reporting as of
December 31, 2017
, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lear Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017
, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Grupo Antolin's automotive seating business ("Antolin Seating"), which is included in the 2017 consolidated financial statements of the Company and constituted 4% of total assets as of
December 31, 2017
, and 2% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Antolin Seating.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Lear Corporation and subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule, and our report dated
February 6, 2018
, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Detroit, Michigan
February 6, 2018
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Assets
|
|
|
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,500.4
|
|
|
$
|
1,271.6
|
|
Accounts receivable
|
3,230.8
|
|
|
2,746.5
|
|
Inventories
|
1,205.7
|
|
|
1,020.6
|
|
Other
|
676.1
|
|
|
610.6
|
|
Total current assets
|
6,613.0
|
|
|
5,649.3
|
|
Long-Term Assets:
|
|
|
|
Property, plant and equipment, net
|
2,459.4
|
|
|
2,019.3
|
|
Goodwill
|
1,401.3
|
|
|
1,121.3
|
|
Other
|
1,472.2
|
|
|
1,110.7
|
|
Total long-term assets
|
5,332.9
|
|
|
4,251.3
|
|
Total assets
|
$
|
11,945.9
|
|
|
$
|
9,900.6
|
|
Liabilities and Equity
|
|
|
|
Current Liabilities:
|
|
|
|
Short-term borrowings
|
$
|
—
|
|
|
$
|
8.6
|
|
Accounts payable and drafts
|
3,167.2
|
|
|
2,640.5
|
|
Accrued liabilities
|
1,678.1
|
|
|
1,497.6
|
|
Current portion of long-term debt
|
9.0
|
|
|
35.6
|
|
Total current liabilities
|
4,854.3
|
|
|
4,182.3
|
|
Long-Term Liabilities:
|
|
|
|
Long-term debt
|
1,951.5
|
|
|
1,898.0
|
|
Other
|
694.1
|
|
|
627.4
|
|
Total long-term liabilities
|
2,645.6
|
|
|
2,525.4
|
|
|
|
|
|
Redeemable noncontrolling interest
|
153.4
|
|
|
—
|
|
|
|
|
|
Equity:
|
|
|
|
Preferred stock, 100,000,000 shares authorized (including 10,896,250 shares
of 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 December 31, 2017 and 2016, respectively
|
0.7
|
|
|
0.8
|
|
Additional paid-in capital
|
1,215.4
|
|
|
1,385.3
|
|
Common stock held in treasury, 5,689,527 and 11,131,648 shares
as of December 31, 2017 and 2016, respectively, at cost
|
(724.1
|
)
|
|
(1,200.2
|
)
|
Retained earnings
|
4,171.9
|
|
|
3,706.9
|
|
Accumulated other comprehensive loss
|
(513.4
|
)
|
|
(835.6
|
)
|
Lear Corporation stockholders’ equity
|
4,150.5
|
|
|
3,057.2
|
|
Noncontrolling interests
|
142.1
|
|
|
135.7
|
|
Equity
|
4,292.6
|
|
|
3,192.9
|
|
Total liabilities and equity
|
$
|
11,945.9
|
|
|
$
|
9,900.6
|
|
The accompanying notes are an integral part of these consolidated balance sheets.
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Net sales
|
$
|
20,467.0
|
|
|
$
|
18,557.6
|
|
|
$
|
18,211.4
|
|
Cost of sales
|
18,175.9
|
|
|
16,455.5
|
|
|
16,391.6
|
|
Selling, general and administrative expenses
|
635.2
|
|
|
621.9
|
|
|
580.5
|
|
Amortization of intangible assets
|
47.6
|
|
|
53.0
|
|
|
52.5
|
|
Interest expense
|
85.7
|
|
|
82.5
|
|
|
86.7
|
|
Other (income) expense, net
|
(4.1
|
)
|
|
6.4
|
|
|
68.6
|
|
Consolidated income before provision for income taxes and equity in net income of affiliates
|
1,526.7
|
|
|
1,338.3
|
|
|
1,031.5
|
|
Provision for income taxes
|
197.5
|
|
|
370.2
|
|
|
285.5
|
|
Equity in net income of affiliates
|
(51.7
|
)
|
|
(72.4
|
)
|
|
(49.8
|
)
|
Consolidated net income
|
1,380.9
|
|
|
1,040.5
|
|
|
795.8
|
|
Less: Net income attributable to noncontrolling interests
|
67.5
|
|
|
65.4
|
|
|
50.3
|
|
Net income attributable to Lear
|
$
|
1,313.4
|
|
|
$
|
975.1
|
|
|
$
|
745.5
|
|
|
|
|
|
|
|
Basic net income per share available to Lear common stockholders
|
$
|
18.79
|
|
|
$
|
13.48
|
|
|
$
|
9.71
|
|
|
|
|
|
|
|
Diluted net income per share available to Lear common stockholders
|
$
|
18.59
|
|
|
$
|
13.33
|
|
|
$
|
9.59
|
|
|
|
|
|
|
|
Average common shares outstanding
|
68,542,363
|
|
|
72,345,436
|
|
|
76,754,270
|
|
|
|
|
|
|
|
Average diluted shares outstanding
|
69,277,981
|
|
|
73,124,949
|
|
|
77,767,017
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Consolidated net income
|
$
|
1,380.9
|
|
|
$
|
1,040.5
|
|
|
$
|
795.8
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Defined benefit plan adjustments
|
8.8
|
|
|
1.8
|
|
|
24.6
|
|
Derivative instruments and hedging activities
|
22.2
|
|
|
(6.4
|
)
|
|
(5.5
|
)
|
Foreign currency translation adjustments
|
305.0
|
|
|
(109.5
|
)
|
|
(251.1
|
)
|
Total other comprehensive income (loss)
|
336.0
|
|
|
(114.1
|
)
|
|
(232.0
|
)
|
Consolidated comprehensive income
|
1,716.9
|
|
|
926.4
|
|
|
563.8
|
|
Less: Comprehensive income attributable to noncontrolling interests
|
81.3
|
|
|
56.8
|
|
|
46.4
|
|
Comprehensive income attributable to Lear
|
$
|
1,635.6
|
|
|
$
|
869.6
|
|
|
$
|
517.4
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Non-
controlling Interests
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional Paid-in Capital
|
|
Common
Stock Held in Treasury
|
|
Retained
Earnings
|
Balance as of December 31, 2014
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
1,475.2
|
|
|
$
|
(176.9
|
)
|
|
$
|
2,161.7
|
|
Comprehensive income (loss):
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
745.5
|
|
Other comprehensive income (loss)
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total comprehensive income (loss)
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
745.5
|
|
Stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
65.7
|
|
|
—
|
|
|
—
|
|
Excess tax benefits related to stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
—
|
|
Net issuances of 807,015 shares held in treasury in settlement of stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
(91.5
|
)
|
|
41.3
|
|
|
—
|
|
Repurchases of 4,366,365 shares of common stock at an average price of $111.62 per share
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(487.4
|
)
|
|
—
|
|
Dividends declared to Lear Corporation stockholders
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(79.4
|
)
|
Dividends paid to noncontrolling interests
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Additions to noncontrolling interests
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2015
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
1,451.9
|
|
|
$
|
(623.0
|
)
|
|
$
|
2,827.8
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
975.1
|
|
Other comprehensive income (loss)
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total comprehensive income (loss)
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
975.1
|
|
Stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
68.2
|
|
|
—
|
|
|
—
|
|
Excess tax benefits related to stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
8.8
|
|
|
—
|
|
|
—
|
|
Net issuances of 783,793 shares held in treasury in settlement of stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
(124.2
|
)
|
|
81.6
|
|
|
(4.7
|
)
|
Repurchases of 5,816,363 shares of common stock at an average price of $113.26 per share
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(658.8
|
)
|
|
—
|
|
Dividends declared to Lear Corporation stockholders
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(89.1
|
)
|
Dividends paid to noncontrolling interests
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Affiliate transaction
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition of outstanding noncontrolling interests
|
—
|
|
|
|
—
|
|
|
—
|
|
|
(19.4
|
)
|
|
—
|
|
|
—
|
|
Noncontrolling interests — other
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.2
|
)
|
Balance as of December 31, 2016
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
1,385.3
|
|
|
$
|
(1,200.2
|
)
|
|
$
|
3,706.9
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
3.2
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,313.4
|
|
Other comprehensive income
|
4.6
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total comprehensive income
|
7.8
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,313.4
|
|
Adoption of ASU 2016-09 (Note 7, "Taxes")
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52.9
|
|
Stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
70.2
|
|
|
—
|
|
|
—
|
|
Net issuances of 456,252 shares held in treasury in settlement of stock-based compensation
|
—
|
|
|
|
—
|
|
|
—
|
|
|
(84.2
|
)
|
|
39.0
|
|
|
|
|
Repurchases of 3,014,131 shares of common stock at an average price of $150.77 per share
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(454.4
|
)
|
|
—
|
|
Retirement of 8,000,000 shares held in treasury at average price of $111.43 per share
|
—
|
|
|
|
—
|
|
|
(0.1
|
)
|
|
(155.9
|
)
|
|
891.5
|
|
|
(735.5
|
)
|
Dividends declared to Lear Corporation stockholders
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(140.3
|
)
|
Dividends declared to noncontrolling interests
|
(4.9
|
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Affiliate transaction
|
125.0
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Redeemable noncontrolling interest adjustment
|
25.5
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25.5
|
)
|
Balance as of December 31, 2017
|
$
|
153.4
|
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
1,215.4
|
|
|
$
|
(724.1
|
)
|
|
$
|
4,171.9
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(continued)
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax
|
|
|
|
Defined
Benefit Plans
|
|
Derivative
Instruments and
Hedging
Activities
|
|
Cumulative
Translation
Adjustments
|
|
Lear
Corporation
Stockholders’
Equity
|
|
Non-controlling
Interests
|
|
Equity
|
Balance as of December 31, 2014
|
$
|
(219.2
|
)
|
|
$
|
(33.2
|
)
|
|
$
|
(249.6
|
)
|
|
$
|
2,958.8
|
|
|
$
|
70.5
|
|
|
$
|
3,029.3
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
745.5
|
|
|
50.3
|
|
|
795.8
|
|
Other comprehensive income (loss)
|
24.6
|
|
|
(5.5
|
)
|
|
(247.2
|
)
|
|
(228.1
|
)
|
|
(3.9
|
)
|
|
(232.0
|
)
|
Total comprehensive income (loss)
|
24.6
|
|
|
(5.5
|
)
|
|
(247.2
|
)
|
|
517.4
|
|
|
46.4
|
|
|
563.8
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
65.7
|
|
|
—
|
|
|
65.7
|
|
Excess tax benefits related to stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
2.5
|
|
Net issuances of 807,015 shares held in treasury in settlement of stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
(50.2
|
)
|
|
—
|
|
|
(50.2
|
)
|
Repurchases of 4,366,365 shares of common stock at an average price of $111.62 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(487.4
|
)
|
|
—
|
|
|
(487.4
|
)
|
Dividends declared to Lear Corporation stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
(79.4
|
)
|
|
—
|
|
|
(79.4
|
)
|
Dividends paid to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29.3
|
)
|
|
(29.3
|
)
|
Additions to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
|
2.7
|
|
Balance as of December 31, 2015
|
$
|
(194.6
|
)
|
|
$
|
(38.7
|
)
|
|
$
|
(496.8
|
)
|
|
$
|
2,927.4
|
|
|
$
|
90.3
|
|
|
$
|
3,017.7
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
975.1
|
|
|
65.4
|
|
|
1,040.5
|
|
Other comprehensive income (loss)
|
1.8
|
|
|
(6.4
|
)
|
|
(100.9
|
)
|
|
(105.5
|
)
|
|
(8.6
|
)
|
|
(114.1
|
)
|
Total comprehensive income (loss)
|
1.8
|
|
|
(6.4
|
)
|
|
(100.9
|
)
|
|
869.6
|
|
|
56.8
|
|
|
926.4
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
68.2
|
|
|
—
|
|
|
68.2
|
|
Excess tax benefits related to stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
8.8
|
|
|
—
|
|
|
8.8
|
|
Net issuances of 783,793 shares held in treasury in settlement of stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
(47.3
|
)
|
|
—
|
|
|
(47.3
|
)
|
Repurchases of 5,816,363 shares of common stock at an average price of $113.26 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(658.8
|
)
|
|
—
|
|
|
(658.8
|
)
|
Dividends declared to Lear Corporation stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
(89.1
|
)
|
|
—
|
|
|
(89.1
|
)
|
Dividends paid to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(41.2
|
)
|
|
(41.2
|
)
|
Affiliate transaction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41.0
|
|
|
41.0
|
|
Acquisition of outstanding noncontrolling interests
|
|
|
|
|
|
|
(19.4
|
)
|
|
(13.4
|
)
|
|
(32.8
|
)
|
Noncontrolling interests — other
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.2
|
)
|
|
2.2
|
|
|
—
|
|
Balance as of December 31, 2016
|
$
|
(192.8
|
)
|
|
$
|
(45.1
|
)
|
|
$
|
(597.7
|
)
|
|
$
|
3,057.2
|
|
|
$
|
135.7
|
|
|
$
|
3,192.9
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
1,313.4
|
|
|
64.3
|
|
|
1,377.7
|
|
Other comprehensive income
|
8.8
|
|
|
22.2
|
|
|
291.2
|
|
|
322.2
|
|
|
9.2
|
|
|
331.4
|
|
Total comprehensive income
|
8.8
|
|
|
22.2
|
|
|
291.2
|
|
|
1,635.6
|
|
|
73.5
|
|
|
1,709.1
|
|
Adoption of ASU 2016-09 (Note 7, "Taxes")
|
—
|
|
|
—
|
|
|
—
|
|
|
52.9
|
|
|
—
|
|
|
52.9
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
70.2
|
|
|
—
|
|
|
70.2
|
|
Net issuances of 456,252 shares held in treasury in settlement of stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
(45.2
|
)
|
|
—
|
|
|
(45.2
|
)
|
Repurchases of 3,014,131 shares of common stock at an average price of $150.77 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(454.4
|
)
|
|
—
|
|
|
(454.4
|
)
|
Retirement of 8,000,000 shares held in treasury at average price of $111.43 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared to Lear Corporation stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
(140.3
|
)
|
|
—
|
|
|
(140.3
|
)
|
Dividends declared to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(67.1
|
)
|
|
(67.1
|
)
|
Affiliate transaction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Redeemable noncontrolling interest adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(25.5
|
)
|
|
|
|
(25.5
|
)
|
Balance as of December 31, 2017
|
$
|
(184.0
|
)
|
|
$
|
(22.9
|
)
|
|
$
|
(306.5
|
)
|
|
$
|
4,150.5
|
|
|
$
|
142.1
|
|
|
$
|
4,292.6
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Consolidated net income
|
$
|
1,380.9
|
|
|
$
|
1,040.5
|
|
|
$
|
795.8
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities –
|
|
|
|
|
|
Equity in net income of affiliates
|
(51.7
|
)
|
|
(72.4
|
)
|
|
(49.8
|
)
|
Loss on extinguishment of debt
|
21.2
|
|
|
—
|
|
|
14.3
|
|
Fixed asset impairment charges
|
3.4
|
|
|
5.4
|
|
|
5.7
|
|
Deferred tax (benefit) provision
|
(81.3
|
)
|
|
103.6
|
|
|
48.6
|
|
Depreciation and amortization
|
427.7
|
|
|
378.2
|
|
|
347.8
|
|
Stock-based compensation
|
70.2
|
|
|
68.2
|
|
|
65.7
|
|
Net change in recoverable customer engineering, development and tooling
|
(54.1
|
)
|
|
(16.9
|
)
|
|
(57.8
|
)
|
Net change in working capital items (see below)
|
72.5
|
|
|
88.1
|
|
|
58.0
|
|
Changes in other long-term liabilities
|
6.6
|
|
|
(12.9
|
)
|
|
(20.2
|
)
|
Changes in other long-term assets
|
2.1
|
|
|
38.3
|
|
|
44.3
|
|
Other, net
|
(14.4
|
)
|
|
(0.8
|
)
|
|
18.7
|
|
Net cash provided by operating activities
|
1,783.1
|
|
|
1,619.3
|
|
|
1,271.1
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Additions to property, plant and equipment
|
(594.5
|
)
|
|
(528.3
|
)
|
|
(485.8
|
)
|
Acquisitions, net of cash acquired and use of $350 million restricted cash in 2015 (see non-cash investing activities below) (Note 3)
|
(292.4
|
)
|
|
(155.9
|
)
|
|
(499.2
|
)
|
Other, net
|
18.3
|
|
|
47.1
|
|
|
19.7
|
|
Net cash used in investing activities
|
(868.6
|
)
|
|
(637.1
|
)
|
|
(965.3
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
New credit agreement borrowings
|
250.0
|
|
|
—
|
|
|
—
|
|
New credit agreement repayments
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
Prior credit agreement borrowings
|
—
|
|
|
—
|
|
|
500.0
|
|
Prior credit agreement repayments
|
(468.7
|
)
|
|
(21.9
|
)
|
|
(9.4
|
)
|
Short-term borrowings (repayments), net
|
(8.9
|
)
|
|
9.1
|
|
|
—
|
|
Proceeds from the issuance of senior notes
|
744.7
|
|
|
—
|
|
|
—
|
|
Repurchase of senior notes, net of use of $250 million restricted cash in 2015 (see non-cash financing activities below) (Note 6)
|
(517.0
|
)
|
|
—
|
|
|
(5.0
|
)
|
Payment of debt issuance and other financing costs
|
(11.9
|
)
|
|
—
|
|
|
—
|
|
Repurchase of common stock
|
(450.5
|
)
|
|
(658.8
|
)
|
|
(487.4
|
)
|
Dividends paid to Lear Corporation stockholders
|
(137.7
|
)
|
|
(88.8
|
)
|
|
(78.5
|
)
|
Dividends paid to noncontrolling interests
|
(81.6
|
)
|
|
(33.3
|
)
|
|
(27.8
|
)
|
Other, net
|
(58.8
|
)
|
|
(79.2
|
)
|
|
(48.2
|
)
|
Net cash used in financing activities
|
(742.0
|
)
|
|
(872.9
|
)
|
|
(156.3
|
)
|
Effect of foreign currency translation
|
56.3
|
|
|
(34.3
|
)
|
|
(47.0
|
)
|
Net Change in Cash and Cash Equivalents
|
228.8
|
|
|
75.0
|
|
|
102.5
|
|
Cash and Cash Equivalents as of Beginning of Period
|
1,271.6
|
|
|
1,196.6
|
|
|
1,094.1
|
|
Cash and Cash Equivalents as of End of Period
|
$
|
1,500.4
|
|
|
$
|
1,271.6
|
|
|
$
|
1,196.6
|
|
Changes in Working Capital Items:
|
|
|
|
|
|
Accounts receivable
|
$
|
(115.2
|
)
|
|
$
|
(176.3
|
)
|
|
$
|
(173.4
|
)
|
Inventories
|
(76.0
|
)
|
|
(53.5
|
)
|
|
4.1
|
|
Accounts payable (including $45.7 million of cash paid in 2015 in conjunction with the acquisition of Eagle Ottawa to settle pre-existing accounts payable)
|
195.3
|
|
|
157.6
|
|
|
76.2
|
|
Accrued liabilities and other
|
68.4
|
|
|
160.3
|
|
|
151.1
|
|
Net change in working capital items
|
$
|
72.5
|
|
|
$
|
88.1
|
|
|
$
|
58.0
|
|
Supplementary Disclosure:
|
|
|
|
|
|
Cash paid for interest
|
$
|
94.0
|
|
|
$
|
88.8
|
|
|
$
|
85.6
|
|
Cash paid for income taxes, net of refunds received of $35.5 million in 2017, $16.4 million in 2016 and $11.9 million in 2015
|
$
|
284.0
|
|
|
$
|
237.6
|
|
|
$
|
218.7
|
|
Non-cash Investing Activities:
|
|
|
|
|
|
Cash restricted for use - acquisition of Eagle Ottawa
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(350.0
|
)
|
Non-cash Financing Activities:
|
|
|
|
|
|
Cash restricted for use - repurchase of senior notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(250.0
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
Lear Corporation and Subsidiaries
Notes to 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 consolidated financial statements include the accounts of Lear, a Delaware corporation, and the wholly owned and less than wholly owned subsidiaries controlled by Lear.
(
2
)
Summary of Significant Accounting Policies
Consolidation
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 (Note
5
, "
Investments in Affiliates and Other Related Party Transactions
").
Fiscal Period Reporting
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.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of ninety days or less.
Accounts Receivable
The Company records accounts receivable as title is transferred to its customers. The Company’s customers are the world’s major automotive manufacturers. The Company records accounts receivable reserves for known collectibility issues, as such issues relate to specific transactions or customer balances. As of
December 31, 2017
and
2016
, accounts receivable are reflected net of reserves of
$41.8 million
and
$32.8 million
, respectively. The Company writes off accounts receivable when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected. Generally, the Company does not require collateral for its accounts receivable.
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. The Company records reserves for inventory in excess of production and/or forecasted requirements and for obsolete inventory in production and service inventories. A summary of inventories is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Raw materials
|
$
|
869.3
|
|
|
$
|
746.3
|
|
Work-in-process
|
120.8
|
|
|
106.4
|
|
Finished goods
|
324.8
|
|
|
262.3
|
|
Reserves
|
(109.2
|
)
|
|
(94.4
|
)
|
Inventories
|
$
|
1,205.7
|
|
|
$
|
1,020.6
|
|
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.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During
2017
and
2016
, the Company capitalized
$257.4 million
and
$179.3 million
, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During
2017
and
2016
, the Company also capitalized
$115.4 million
and
$96.0 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 consolidated balance sheets as of December 31, 2016 and 2015. During
2017
and
2016
, the Company collected
$311.1 million
and
$264.6 million
, respectively, of cash related to E&D and tooling costs.
The classification of recoverable customer E&D and tooling costs related to long-term supply agreements is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Current
|
$
|
248.1
|
|
|
$
|
185.9
|
|
Long-term
|
59.3
|
|
|
43.4
|
|
Recoverable customer E&D and tooling
|
$
|
307.4
|
|
|
$
|
229.3
|
|
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 as follows:
|
|
|
Buildings and improvements
|
10 to 40 years
|
Machinery and equipment
|
5 to 10 years
|
A summary of property, plant and equipment is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Land
|
$
|
118.8
|
|
|
$
|
101.7
|
|
Buildings and improvements
|
797.7
|
|
|
648.1
|
|
Machinery and equipment
|
3,077.4
|
|
|
2,459.6
|
|
Construction in progress
|
355.6
|
|
|
296.4
|
|
Total property, plant and equipment
|
4,349.5
|
|
|
3,505.8
|
|
Less – accumulated depreciation
|
(1,890.1
|
)
|
|
(1,486.5
|
)
|
Net property, plant and equipment
|
$
|
2,459.4
|
|
|
$
|
2,019.3
|
|
For the years ended
December 31, 2017
,
2016
and
2015
, depreciation expense was
$380.1 million
,
$325.2 million
and
$295.3 million
, respectively. As of December 31,
2017
,
2016
and
2015
, capital expenditures recorded in accounts payable totaled
$119.7 million
,
$117.8 million
and
$91.6 million
, respectively.
Impairment of Goodwill
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 utilizes an income approach to estimate the fair value of each of its reporting units and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of the Company’s estimated cost of equity and of debt ("cost of capital") derived using both known and estimated customary market metrics. The Company’s weighted average cost of capital is adjusted by reporting unit to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units. The market valuation approach is used to further support the Company’s analysis and is based on recent transactions involving comparable companies.
In
2017
, the Company performed a qualitative assessment of its reporting units. The assessment was completed as of the first day of our fourth quarter. The assessment indicated that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying value. The Company does not believe that any of our reporting units is at risk for impairment.
A summary of the changes in the carrying amount of goodwill for each of the periods in the two years ended
December 31, 2017
, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seating
|
|
E-Systems
|
|
Total
|
Balance as of December 31, 2015
|
$
|
1,026.8
|
|
|
$
|
27.0
|
|
|
$
|
1,053.8
|
|
Acquisitions
|
72.0
|
|
|
2.6
|
|
|
74.6
|
|
Affiliate transaction
|
8.9
|
|
|
—
|
|
|
8.9
|
|
Foreign currency translation and other
|
(16.5
|
)
|
|
0.5
|
|
|
(16.0
|
)
|
Balance as of December 31, 2016
|
1,091.2
|
|
|
30.1
|
|
|
1,121.3
|
|
Acquisition
|
123.3
|
|
|
—
|
|
|
123.3
|
|
Affiliate transaction
|
—
|
|
|
94.4
|
|
|
94.4
|
|
Foreign currency translation and other
|
59.9
|
|
|
2.4
|
|
|
62.3
|
|
Balance as of December 31, 2017
|
$
|
1,274.4
|
|
|
$
|
126.9
|
|
|
$
|
1,401.3
|
|
For further information related to acquisitions and affiliate transactions, see Note
3
, "
Acquisitions
," and Note
5
, "
Investments in Affiliates and Other Related Party Transactions
."
Intangible Assets
As of
December 31, 2017
, intangible assets consist primarily of certain intangible assets recorded in connection with the acquisitions of Guilford Mills in 2012, Eagle Ottawa in 2015, AccuMED in 2016 and Antolin Seating in 2017 (Note
3
, "
Acquisitions
"). These intangible assets were recorded at their estimated fair value, based on independent appraisals, as of the transaction or acquisition date. The value assigned to technology intangibles is based on the royalty savings method, which applies a hypothetical royalty rate to projected revenues attributable to the identified technologies. Royalty rates were determined based primarily on analysis of market information. The customer-based intangible asset includes the acquired entity's established relationships with its customers and the ability of these customers to generate future economic profits for the Company. The value assigned to customer-based intangibles is based on the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets.
A summary of intangible assets as of
December 31, 2017
and
2016
, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted
Average Useful
Life (years)
|
Technology
|
$
|
22.2
|
|
|
$
|
(9.3
|
)
|
|
$
|
12.9
|
|
|
8.6
|
Customer-based
|
544.6
|
|
|
(113.9
|
)
|
|
430.7
|
|
|
11.6
|
Other
|
1.4
|
|
|
(0.9
|
)
|
|
0.5
|
|
|
5.2
|
Balance as of December 31, 2017
|
$
|
568.2
|
|
|
$
|
(124.1
|
)
|
|
$
|
444.1
|
|
|
11.5
|
Intangible assets with a gross carrying value of
$17.0 million
became fully amortized in 2017 and are no longer included in the intangible asset gross carrying value or accumulated amortization as of December 31, 2017.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted
Average Useful
Life (years)
|
Technology
|
$
|
24.6
|
|
|
$
|
(16.4
|
)
|
|
$
|
8.2
|
|
|
8.6
|
Customer-based
|
338.2
|
|
|
(68.3
|
)
|
|
269.9
|
|
|
7.4
|
Other
|
10.7
|
|
|
(1.7
|
)
|
|
9.0
|
|
|
5.8
|
Balance as of December 31, 2016
|
$
|
373.5
|
|
|
$
|
(86.4
|
)
|
|
$
|
287.1
|
|
|
7.5
|
Excluding the impact of any future acquisitions, the Company’s estimated annual amortization expense for the five succeeding years is shown below (in millions):
|
|
|
|
|
Year
|
Expense
|
2018
|
$
|
51.4
|
|
2019
|
50.8
|
|
2020
|
49.1
|
|
2021
|
47.3
|
|
2022
|
46.3
|
|
Impairment of Long-Lived Assets
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with accounting principles generally accepted in the United States ("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. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates.
For the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized fixed asset impairment charges of
$1.3 million
,
$4.7 million
and
$3.9 million
respectively, in conjunction with its restructuring actions (Note
4
, "
Restructuring
"), as well as additional fixed asset impairment charges of
$2.1 million
,
$0.7 million
and
$1.8 million
, respectively. Fixed asset impairment charges are recorded in cost of sales in the accompanying consolidated statements of income for the years ended
December 31, 2017
,
2016
and
2015
.
Impairment of Investments in Affiliates
The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded book value and the fair value of the investment. Fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values.
Revenue Recognition and Sales Commitments
The Company enters into agreements with its customers to produce products at the beginning of a vehicle’s life cycle. Although such agreements do not provide for a specified quantity of products, once the Company enters into such agreements, the Company is generally required to fulfill its customers’ purchasing requirements for the production life of the vehicle. These agreements generally may be terminated by the Company’s customers at any time. Historically, terminations of these agreements have been minimal. Sales are generally recorded upon shipment of product to customers and transfer of title under standard commercial terms. In certain instances, the Company may be committed under existing agreements to supply products to its customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, the Company recognizes losses as they are incurred.
The Company receives purchase orders from its customers on an annual basis. Generally, each purchase order provides the annual terms, including pricing, related to a particular vehicle model. Purchase orders do not specify quantities. The Company recognizes revenue based on the pricing terms included in its annual purchase orders. The Company is asked to provide its customers with annual price reductions as part of certain agreements. The Company accrues for such amounts as a reduction of revenue as its products are shipped to its customers. In addition, the Company has ongoing adjustments to its pricing
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
arrangements with its customers based on the related content, the cost of its products and other commercial factors. Such pricing accruals are adjusted as they are settled with the Company’s customers.
Amounts billed to customers related to shipping and handling costs are included in net sales in the consolidated statements of income. Shipping and handling costs are included in cost of sales in the consolidated statements of income.
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.
Restructuring Costs
Restructuring costs include employee termination benefits, fixed asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These incremental costs principally include equipment and personnel relocation costs. In addition to restructuring costs, the Company also incurs incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are recognized in the Company’s consolidated financial statements in accordance with GAAP. Generally, charges are recorded as restructuring actions are approved and/or implemented.
Engineering and Development
Costs incurred in connection with product launches, to the extent not recoverable from the Company’s customers, are charged to cost of sales as incurred. All other engineering and development costs are charged to selling, general and administrative expenses when incurred. Engineering and development costs charged to selling, general and administrative expenses totaled
$147.9 million
,
$143.7 million
and
$126.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Other (Income) Expense, Net
Other (income) expense, net includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the extinguishment of debt (Note
6
, "
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Other expense
|
$
|
57.2
|
|
|
$
|
42.2
|
|
|
$
|
71.4
|
|
Other income
|
(61.3
|
)
|
|
(35.8
|
)
|
|
(2.8
|
)
|
Other (income) expense, net
|
$
|
(4.1
|
)
|
|
$
|
6.4
|
|
|
$
|
68.6
|
|
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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. In determining the provision for income taxes for financial statement purposes, the Company makes certain estimates and judgments, which affect its evaluation of the carrying value of its deferred tax assets, as well as its calculation of certain tax liabilities.
The calculation of the Company’s gross unrecognized tax benefits and liabilities includes uncertainties in the application of, and changes in, complex tax regulations in a multitude of jurisdictions across its global operations. The Company recognizes tax benefits and liabilities based on its estimates of whether, and the extent to which, additional taxes will be due. The Company adjusts these benefits and liabilities based on changing facts and circumstances; however, due to the complexity of these uncertainties and the impact of tax audits, the ultimate resolutions may differ significantly from the Company’s estimates.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed its accounting for the tax effects of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of
$173.5 million
related to items for which the Company was able to determine a reasonable estimate. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company's estimates may be affected as additional regulatory guidance is issued with respect to the Act. Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined, but in any event, no later than the fourth quarter of 2018.
Provisional Amounts
Deferred tax assets and liabilities:
The Company remeasured its U.S. deferred tax assets and liabilities at 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of
$42.5 million
related to the remeasurement of deferred tax balances.
Transition Tax on Deferred Foreign Earnings:
The one-time transition tax is based on the Company's post-1986 earnings and profits ("E&P") that were previously deferred from U.S. income taxes. In the year ended December 31, 2017, the provision for income taxes includes provisional income tax expense of
$131.0 million
related to the one-time transition tax liability of the Company's foreign subsidiaries. The Company has not completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 E&P previously deferred from U.S. income taxes and the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax. However, the Company continues to recognize a deferred tax liability related to foreign withholding tax that will be incurred for undistributed foreign earnings that are not permanently reinvested.
Foreign Currency
Assets and liabilities of foreign subsidiaries that use a functional currency other than the U.S. dollar are translated into U.S. dollars at the foreign exchange rates in effect at the end of the period. Revenues and expenses of foreign subsidiaries are translated into U.S. dollars using an average of the foreign exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary’s financial statements from the functional currency to the U.S. dollar are reflected in accumulated other comprehensive loss in the consolidated balance sheets.
Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except certain long-term intercompany transactions, are included in the consolidated statements of income as incurred. For the years ended
December 31, 2017
,
2016
and
2015
, other (income) expense, net includes net foreign currency transaction losses of
$5.1 million
,
$7.6 million
and
$28.5 million
, respectively.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation
The Company measures stock-based employee compensation expense at fair value in accordance with GAAP and recognizes such expense over the vesting period of the stock-based employee awards.
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 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Net income attributable to Lear
|
$
|
1,313.4
|
|
|
$
|
975.1
|
|
|
$
|
745.5
|
|
Less: Redeemable noncontrolling interest adjustment
|
(25.5
|
)
|
|
—
|
|
|
—
|
|
Net income available to Lear common stockholders
|
$
|
1,287.9
|
|
|
$
|
975.1
|
|
|
$
|
745.5
|
|
|
|
|
|
|
|
Average common shares outstanding
|
68,542,363
|
|
|
72,345,436
|
|
|
76,754,270
|
|
Dilutive effect of common stock equivalents
|
735,618
|
|
|
779,513
|
|
|
1,012,747
|
|
Average diluted shares outstanding
|
69,277,981
|
|
|
73,124,949
|
|
|
77,767,017
|
|
|
|
|
|
|
|
Basic net income per share available to Lear common stockholders
|
$
|
18.79
|
|
|
$
|
13.48
|
|
|
$
|
9.71
|
|
|
|
|
|
|
|
Diluted net income per share available to Lear common stockholders
|
$
|
18.59
|
|
|
$
|
13.33
|
|
|
$
|
9.59
|
|
For further information related to the redeemable noncontrolling interest adjustment, see Note
5
, "
Investments in Affiliates and Other Related Party Transactions
."
Product Warranty
Product warranty reserves are recorded when liability is probable and related amounts are reasonably estimable.
Segment Reporting
The Company has
two
reportable operating segments: Seating, which includes complete seat systems and all major seat components, including seat covers and surface materials such as leather and fabric, seat structures and mechanisms, seat foam and headrests, and E-Systems, which includes complete electrical distribution systems, electronic control modules and associated software and wireless communication modules. Key components in the electrical distribution system include wire harnesses, terminals and connectors and junction boxes, including components and systems for high power battery electric vehicle and hybrid electric vehicle power management and distribution systems. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment.
Each of the Company’s operating segments reports its results from operations and makes its requests for capital expenditures directly to the chief operating decision maker. The economic performance of each operating segment is driven primarily by automotive production volumes in the geographic regions in which it operates, as well as by the success of the vehicle platforms for which it supplies products. Also, each operating segment operates in the competitive Tier 1 automotive supplier environment and is continually working with its customers to manage costs and improve quality. The Company’s production processes generally make use of hourly labor, dedicated facilities, sequential manufacturing and assembly processes and commodity raw materials.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 ("segment earnings") and (iii) cash flows, being defined as segment earnings less capital expenditures plus depreciation and amortization.
The accounting policies of the Company’s operating segments are the same as those described in this note to the consolidated financial statements.
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) or (3) a hedge of a net investment in a foreign operation (a net investment hedge).
For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the 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 consolidated balance sheet. When the underlying hedged transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the 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 consolidated balance sheet. In addition, for both cash flow and net investment hedges, changes in the fair value of the derivative that are excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of the derivative are recorded in earnings and reflected in the consolidated statement of income as other expense, net.
The Company formally documents its hedge relationships, including the identification of the hedging instruments and the related hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded at fair value in other current and long-term assets and other current and long-term liabilities in the consolidated balance sheet. The Company also formally assesses, both at inception and at least quarterly thereafter, whether a derivative used in a hedging transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a derivative ceases to be highly effective, the Company discontinues hedge accounting.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires 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. During
2017
, there were no material changes in the methods or policies used to establish estimates and assumptions. Other matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of fixed and intangible assets and unsettled pricing discussions with customers and suppliers (Note
2
, "
Summary of Significant Accounting Policies
"); acquisitions (Note
3
, "
Acquisitions
"); restructuring accruals (Note
4
, "
Restructuring
"); deferred tax asset valuation allowances and income taxes (Note
7
, "
Income Taxes
"); pension and other postretirement benefit plan assumptions (Note
8
, "
Pension and Other Postretirement Benefit Plans
"); accruals related to litigation, warranty and environmental remediation costs (Note
11
, "
Commitments and Contingencies
"); and self-insurance accruals. Actual results may differ significantly from the Company’s estimates.
Reclassifications
Certain amounts in prior years’ financial statements have been reclassified to conform to the presentation used in the year ended
December 31, 2017
.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(
3
)
Acquisitions
Grupo Antolin Seating
On April 28, 2017, the Company completed the acquisition of Grupo Antolin's automotive seating business ("Antolin Seating") for
$292.4 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
$485 million
. In addition, the Company incurred transaction costs of
$3.0 million
related to advisory services, which were expensed as incurred and are recorded in selling, general and administrative expenses in the accompanying consolidated statement of income for the year ended
December 31, 2017
.
The Antolin Seating acquisition was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying consolidated balance sheet as of
December 31, 2017
. The operating results and cash flows of Antolin Seating are included in the accompanying 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):
|
|
|
|
|
|
Net purchase price
|
|
$
|
292.4
|
|
|
|
|
Property, plant and equipment
|
|
$
|
79.2
|
|
Other assets purchased and liabilities assumed, net
|
|
(31.5
|
)
|
Goodwill
|
|
123.3
|
|
Intangible assets
|
|
121.4
|
|
Preliminary purchase price allocation
|
|
$
|
292.4
|
|
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 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
13
, "
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 consolidated balance sheets as of
December 31, 2017
and 2016. The operating results and cash flows of AccuMED are included in the accompanying consolidated financial statements from the date of acquisition and in the Company's Seating segment. The purchase price and allocation are shown below (in millions):
|
|
|
|
|
|
Purchase price paid, net of cash acquired
|
|
$
|
148.5
|
|
|
|
|
Property, plant and equipment
|
|
$
|
10.5
|
|
Other assets purchased and liabilities assumed, net
|
|
6.5
|
|
Goodwill
|
|
78.5
|
|
Intangible assets
|
|
53.0
|
|
Purchase price allocation
|
|
$
|
148.5
|
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 pro-forma effects of this acquisition would not materially impact the Company's reported results for any period presented.
For further information on acquired assets measured at fair value, see Note
13
, "
Financial Instruments
."
Eagle Ottawa
On January 5, 2015, the Company completed the acquisition of
100%
of the outstanding equity interests of Everett Smith Group, Ltd., the parent company of Eagle Ottawa, LLC ("Eagle Ottawa") for a purchase price of
$843.9 million
, net of cash acquired. Eagle Ottawa is a leading provider of leather for the automotive industry. The Eagle Ottawa acquisition was accounted for as a business combination.
Subsequent Event
On January 10, 2018, the Company completed the acquisition of Israel-based EXO Technologies ("EXO"), a leading developer of differentiated GPS technology providing high-accuracy positioning solutions for autonomous and connected vehicle applications. EXO has operations in San Mateo, California and Tel Aviv, Israel. EXO Technologies has developed core technology that addresses the need for high-accuracy positioning of a vehicle. Its proprietary technology works with existing GPS receivers to provide centimeter-level accuracy anywhere on the globe without the need for terrestrial base-station networks. The integration of EXO's technology with the Company's vehicle and connectivity expertise enables an industry-leading vehicle positioning solution.
The EXO acquisition will be accounted for as a business combination, and the assets acquired and liabilities assumed will be recognized and measured at fair value as of the acquisition date. The operating results and cash flows of EXO will be included in the consolidated financial statements from the acquisition date. The Company is preparing the preliminary estimates of the fair values of the assets acquired and liabilities assumed, which will be included in the Company's Quarterly Report on Form 10-Q for the period ending March 31, 2018. The EXO acquisition is not a material business combination.
(
4
)
Restructuring
2017
In
2017
, the Company recorded charges of
$72.6 million
in connection with its restructuring actions. These charges consist of
$59.2 million
recorded as cost of sales,
$14.3 million
recorded as selling, general and administrative expenses and
$0.9 million
recorded as other income. The restructuring charges consist of employee termination benefits of
$62.9 million
, asset impairment charges of
$1.3 million
, pension benefit plan curtailment and settlement losses of
$1.7 million
and other contract termination costs of
$1.7 million
, as well as other related costs of
$5.0 million
. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Asset impairment charges relate to the disposal of buildings, leasehold improvements and machinery and equipment with carrying values
$1.3 million
in excess of related estimated fair values. The Company expects to incur approximately
$21 million
of additional restructuring costs related to activities initiated as of
December 31, 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 curtailment and settlement losses of
$1.7 million
, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
2017
|
|
Utilization
|
|
Accrual as of
|
|
January 1, 2017
|
|
Charges
|
|
Cash
|
|
Non-cash
|
|
December 31, 2017
|
Employee termination benefits
|
$
|
69.4
|
|
|
$
|
62.9
|
|
|
$
|
(39.3
|
)
|
|
$
|
—
|
|
|
$
|
93.0
|
|
Asset impairments
|
—
|
|
|
1.3
|
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
Contract termination costs
|
4.6
|
|
|
1.7
|
|
|
(1.3
|
)
|
|
—
|
|
|
5.0
|
|
Other related costs
|
—
|
|
|
5.0
|
|
|
(5.0
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
74.0
|
|
|
$
|
70.9
|
|
|
$
|
(45.6
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
98.0
|
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2016
In
2016
, the Company recorded charges of
$63.6 million
in connection with its restructuring actions. These charges consist of
$55.4 million
recorded as cost of sales,
$8.5 million
recorded as selling, general and administrative expenses and
$0.3 million
recorded as other income. The restructuring charges consist of employee termination benefits of
$54.1 million
, asset impairment charges of
$4.7 million
and contract termination costs of
$0.1 million
, as well as other related costs of
$4.7 million
. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Asset impairment charges relate to the disposal of buildings, leasehold improvements and machinery and equipment with carrying values
$4.7 million
in excess of related estimated fair values.
A summary of
2016
activity is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
2016
|
|
Utilization
|
|
Accrual as of
|
|
January 1, 2016
|
|
Charges
|
|
Cash
|
|
Non-cash
|
|
December 31, 2016
|
Employee termination benefits
|
$
|
66.5
|
|
|
$
|
54.1
|
|
|
$
|
(51.2
|
)
|
|
$
|
—
|
|
|
$
|
69.4
|
|
Asset impairments
|
—
|
|
|
4.7
|
|
|
—
|
|
|
(4.7
|
)
|
|
—
|
|
Contract termination costs
|
5.3
|
|
|
0.1
|
|
|
(0.8
|
)
|
|
—
|
|
|
4.6
|
|
Other related costs
|
—
|
|
|
4.7
|
|
|
(4.7
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
71.8
|
|
|
$
|
63.6
|
|
|
$
|
(56.7
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
74.0
|
|
2015
In
2015
, the Company recorded charges of
$88.8 million
in connection with its restructuring actions. These charges consist of
$68.4 million
recorded as cost of sales,
$18.4 million
recorded as selling, general and administrative expenses and
$2.0 million
recorded as other expense. The restructuring charges consist of employee termination benefits of
$70.0 million
, asset impairment charges of
$3.9 million
, a pension benefit plan curtailment loss of
$7.7 million
and other contract termination costs
$1.7 million
, as well as other related costs of
$5.5 million
. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy. Asset impairment charges relate to the disposal of buildings, leasehold improvements and machinery and equipment with carrying values of
$3.9 million
in excess of related estimated fair values.
A summary of
2015
activity, excluding the pension benefit plan curtailment loss of
$7.7 million
, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
2015
|
|
Utilization
|
|
Accrual as of
|
|
January 1, 2015
|
|
Charges
|
|
Cash
|
|
Non-cash
|
|
December 31, 2015
|
Employee termination benefits
|
$
|
45.1
|
|
|
$
|
70.0
|
|
|
$
|
(48.6
|
)
|
|
$
|
—
|
|
|
$
|
66.5
|
|
Asset impairments
|
—
|
|
|
3.9
|
|
|
—
|
|
|
(3.9
|
)
|
|
—
|
|
Contract termination costs
|
5.1
|
|
|
1.7
|
|
|
(1.5
|
)
|
|
—
|
|
|
5.3
|
|
Other related costs
|
—
|
|
|
5.5
|
|
|
(3.5
|
)
|
|
(2.0
|
)
|
|
—
|
|
Total
|
$
|
50.2
|
|
|
$
|
81.1
|
|
|
$
|
(53.6
|
)
|
|
$
|
(5.9
|
)
|
|
$
|
71.8
|
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(
5
)
Investments in Affiliates and Other Related Party Transactions
The Company’s beneficial ownership in affiliates accounted for under the equity method is shown below:
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
|
2015
|
Beijing BHAP Lear Automotive Systems Co., Ltd. (China)
|
50%
|
|
50%
|
|
50%
|
Dong Kwang Lear Yuhan Hoesa (Korea)
|
50
|
|
50
|
|
50
|
Industrias Cousin Freres, S.L. (Spain)
|
50
|
|
50
|
|
50
|
Jiangxi Jiangling Lear Interior Systems Co., Ltd. (China)
|
50
|
|
50
|
|
50
|
Lear Dongfeng Automotive Seating Co., Ltd. (China)
|
50
|
|
50
|
|
50
|
Changchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd. (China)
|
49
|
|
49
|
|
49
|
Changchun Lear FAWSN Automotive Seat Systems Co., Ltd. (China)
|
49
|
|
49
|
|
49
|
Honduras Electrical Distribution Systems S. de R.L. de C.V. (Honduras)
|
49
|
|
49
|
|
49
|
Kyungshin-Lear Sales and Engineering LLC
|
49
|
|
49
|
|
49
|
eLumigen, LLC
|
46
|
|
46
|
|
30
|
Beijing Lear Dymos Automotive Systems Co., Ltd. (China)
|
40
|
|
40
|
|
40
|
Dymos Lear Automotive India Private Limited (India)
|
35
|
|
35
|
|
35
|
RevoLaze, LLC
|
20
|
|
20
|
|
20
|
HB Polymer Company, LLC
|
10
|
|
10
|
|
10
|
Shanghai Lear STEC Automotive Parts Co., Ltd. (China)
|
—
|
|
55
|
|
55
|
Beijing BAI Lear Automotive Systems Co., Ltd. (China)
|
—
|
|
—
|
|
50
|
Summarized group financial information for affiliates accounted for under the equity method as of
December 31, 2017
and
2016
, and for the years ended
December 31, 2017
,
2016
and
2015
, is shown below (unaudited; in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Balance sheet data:
|
|
|
|
Current assets
|
$
|
961.4
|
|
|
$
|
1,011.0
|
|
Non-current assets
|
203.0
|
|
|
197.3
|
|
Current liabilities
|
813.0
|
|
|
850.5
|
|
Non-current liabilities
|
26.1
|
|
|
26.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Income statement data:
|
|
|
|
|
|
Net sales
|
$
|
2,000.4
|
|
|
$
|
2,186.4
|
|
|
$
|
2,087.8
|
|
Gross profit
|
172.8
|
|
|
200.6
|
|
|
155.5
|
|
Income before provision for income taxes
|
169.6
|
|
|
195.3
|
|
|
127.4
|
|
Net income attributable to affiliates
|
117.8
|
|
|
155.4
|
|
|
96.0
|
|
A summary of amounts recorded in the Company's consolidated balance sheets related to its affiliates is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Aggregate investment in affiliates
|
$
|
146.5
|
|
|
$
|
153.5
|
|
Receivables due from affiliates (including notes and advances)
|
140.7
|
|
|
121.8
|
|
Payables due to affiliates
|
0.2
|
|
|
4.3
|
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A summary of transactions with affiliates accounted for under the equity method and other related parties is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Sales to affiliates
|
$
|
499.9
|
|
|
$
|
147.0
|
|
|
$
|
198.5
|
|
Purchases from affiliates
|
9.5
|
|
|
17.8
|
|
|
26.3
|
|
Management and other fees for services provided to affiliates
|
26.6
|
|
|
25.3
|
|
|
36.8
|
|
Dividends received from affiliates
|
33.0
|
|
|
35.6
|
|
|
54.1
|
|
The Company’s investment in HB Polymer Company, LLC is accounted for under the equity method as the Company’s interest in this entity is similar to a partnership interest.
2017
On September 8, 2017, the Company gained control of Shanghai Lear STEC Automotive Parts Co., Ltd. ("Lear STEC") by amending the 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. This transaction was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying consolidated balance sheet as of
December 31, 2017
. The operating results and cash flows of Lear STEC are included in the accompanying consolidated financial statements from the date of the amended joint venture agreement and are reflected in the Company’s E-Systems segment.
A preliminary summary of the fair value of the assets acquired and liabilities assumed in conjunction with the transaction is shown below (in millions):
|
|
|
|
|
Property, plant and equipment
|
$
|
16.2
|
|
Other assets and liabilities assumed, net
|
42.4
|
|
Goodwill
|
94.4
|
|
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
twelve years
.
The fair values of the assets acquired and liabilities assumed in conjunction with the transaction contain preliminary estimates that may be revised as a result of additional information regarding such assets and liabilities.
As of the date of the transaction, 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 previously held 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 consolidated statements of income for the year ended December 31, 2017.
In connection with the transaction, 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 consolidated balance sheet as of
December 31, 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
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
share. Redeemable noncontrolling interest of
$153.4 million
related to Lear STEC is reflected in the Company's consolidated balance sheet as of
December 31, 2017
. This amount includes a noncontrolling interest redemption adjustment of
$25.5 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
9
, "
Capital Stock, Accumulated Other Comprehensive Loss and Equity
." For further information related to acquired assets measured at fair value, see Note
13
, "
Financial Instruments
."
2016
On June 21, 2016, the Company gained control of Beijing BAI Lear Automotive Systems Co., Ltd. ("Beijing BAI") by amending the joint venture agreement to eliminate the substantive participating rights of its joint venture partner. Prior to the amendment, Beijing BAI was accounted for under the equity method. This transaction was accounted for as a business combination, and accordingly, the assets acquired and liabilities assumed are included in the accompanying consolidated balance sheets as of
December 31, 2017
and 2016. The operating results and cash flows of Beijing BAI are included in the accompanying consolidated financial statements from the date of the amended joint venture agreement and are reflected in the Company's Seating segment.
A summary of the fair value of the assets acquired and liabilities assumed in conjunction with the transaction is shown below (in millions):
|
|
|
|
|
Property, plant and equipment
|
$
|
20.7
|
|
Other assets and liabilities assumed, net
|
42.1
|
|
Goodwill
|
7.2
|
|
Intangible assets
|
34.0
|
|
|
$
|
104.0
|
|
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 Beijing BAI’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
eight
years.
As of the date of the transaction, the fair value of the Company’s previously held equity interest in Beijing BAI was
$63.0 million
, and the fair value of the noncontrolling interest in Beijing BAI was
$41.0 million
. As a result of valuing the Company’s previously held equity interest in Beijing BAI at fair value, the Company recognized a gain of
$30.3 million
, which is included in other (income) expense, net in the accompanying consolidated statement of income for the year ended December 31, 2016.
For further information related to acquired assets measured at fair value, see Note
13
, "
Financial Instruments
."
Also in 2016, the Company acquired an additional ownership interest in eLumigen LLC, thereby increasing its ownership interest to
46%
from
30%
.
Subsequent Event
In January 2018, the Company gained control of Changchun Lear FAWSN Automotive Electrical and Electronics Co., Ltd. ("Lear FAWSN") by acquiring an additional
20%
interest from a joint venture partner and by amending the joint venture agreement to eliminate the substantive participating rights of the remaining joint venture partner. Prior to the amendment, Lear FAWSN was accounted for under the equity method.
This transaction will be accounted for as a business combination, and the assets acquired and liabilities assumed will be recognized and measured at fair value as of the transaction date. The operating results and cash flows of Lear FAWSN will be included in the consolidated financial statements from the transaction date. The Company is preparing the preliminary estimates of the fair values of the assets acquired and liabilities assumed, which will be included in the Company's Quarterly Report on Form 10-Q for the period ending March 31, 2018. The gain, if any, on the Company's previously held equity interest in Lear FAWSN is not expected to be material.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(
6
)
Debt
Short-Term Borrowings
The Company utilizes committed and uncommitted lines of credit as needed for its short-term working capital fluctuations. As of
December 31, 2017
and
2016
, the Company had lines of credit from banks totaling
$47.5 million
and
$21.4 million
, respectively. As of
December 31, 2017
, the Company had
no
short-term debt balances outstanding related to draws on the lines of credit. As of
December 31, 2016
, the Company's short-term debt balance was
$8.6 million
related to draws on the lines of credit.
Long-Term 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
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
|
$
|
248.4
|
|
|
$
|
(1.8
|
)
|
|
$
|
246.6
|
|
|
3.000%
|
|
$
|
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
|
|
|
(2.4
|
)
|
|
322.6
|
|
|
5.375%
|
|
325.0
|
|
|
(2.8
|
)
|
|
322.2
|
|
|
5.375%
|
5.25% Senior Notes due 2025 ("2025 Notes")
|
650.0
|
|
|
(5.8
|
)
|
|
644.2
|
|
|
5.25%
|
|
650.0
|
|
|
(6.6
|
)
|
|
643.4
|
|
|
5.25%
|
3.8% Senior Notes due 2027 ("2027 Notes")
(1)
|
744.9
|
|
|
(5.9
|
)
|
|
739.0
|
|
|
3.885%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
N/A
|
Other
|
8.1
|
|
|
—
|
|
|
8.1
|
|
|
N/A
|
|
5.7
|
|
|
—
|
|
|
5.7
|
|
|
N/A
|
|
$
|
1,976.4
|
|
|
$
|
(15.9
|
)
|
|
1,960.5
|
|
|
|
|
$
|
1,949.4
|
|
|
$
|
(15.8
|
)
|
|
1,933.6
|
|
|
|
Less — Current portion
|
|
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
(35.6
|
)
|
|
|
Long-term debt
|
|
|
|
|
$
|
1,951.5
|
|
|
|
|
|
|
|
|
$
|
1,898.0
|
|
|
|
|
|
(1)
|
Net of unamortized discount of
$5.1 million
|
Senior Notes
The issuance, maturity and interest payable dates of the Company's senior unsecured 2024 Notes, 2025 Notes and 2027 Notes (collectively, 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
|
2024 Notes
The proceeds from the 2024 Notes offering of
$325 million
, net of related issuance costs of
$3.9 million
, together with existing cash on hand, were used to redeem the remaining outstanding aggregate principal amount of the Company's senior notes due 2018 (
$280 million
) and to redeem
10%
of the original aggregate principal amount at maturity of the Company's senior notes due 2020 ("2020 Notes") (
$35 million
) at stated redemption prices, plus accrued and unpaid interest to the respective redemption dates.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company may redeem the 2024 Notes, in whole or in part, on or after March 15, 2019, at the redemption prices set forth below, plus accrued and unpaid interest to the redemption date.
|
|
|
Twelve-Month Period Commencing March 15,
|
2024 Notes
|
2019
|
102.688%
|
2020
|
101.792%
|
2021
|
100.896%
|
2022 and thereafter
|
100.000%
|
Prior to March 15, 2019, the Company may redeem the 2024 Notes, in whole or in part, at a redemption price equal to
100%
of the aggregate principal amount thereof, plus a "make-whole" premium as of, and accrued and unpaid interest to, the redemption date.
2025 Notes
Of the
$650 million
of proceeds from the 2025 Notes offering, net of related issuance costs of
$8.4 million
,
$250 million
was restricted for the redemption of the remaining outstanding aggregate principal amount of the 2020 Notes (
$245 million
) and
$350 million
was restricted to finance, in part, the acquisition of Eagle Ottawa (Note
3
, "
Acquisitions
"). In January 2015, the Company used
$350 million
of restricted cash proceeds from the offering, along with
$500 million
in borrowings under the prior term loan facility (see "— Credit Agreement" below), to finance the acquisition of Eagle Ottawa. In March 2015, the Company redeemed the 2020 Notes at a price equal to
104.063%
of the principal amount thereof, plus accrued and unpaid interest to the redemption date. In connection with this transaction, the Company paid
$255.0 million
, including
$250 million
of restricted cash proceeds from the offering, and recognized a loss of
$14.3 million
on the extinguishment of debt in the year ended December 31, 2015. The use of restricted cash for the acquisition of Eagle Ottawa and the redemption of the 2020 Notes is reflected as non-cash investing and financing activities, respectively, in the accompanying consolidated statement of cash flows for the year ended December 31, 2015. The remaining proceeds from the offering were used for general corporate purposes, including the payment of fees and expenses associated with the acquisition of Eagle Ottawa and related financing transactions.
The Company may redeem the 2025 Notes, in whole or in part, on or after January 15, 2020, at the redemption prices set forth below, plus accrued and unpaid interest to the redemption date.
|
|
|
Twelve-Month Period Commencing January 15,
|
2025 Notes
|
2020
|
102.625%
|
2021
|
101.750%
|
2022
|
100.875%
|
2023 and thereafter
|
100.000%
|
Prior to January 15, 2020, the Company may redeem the 2025 Notes, in whole or in part, at a redemption price equal to
100%
of the aggregate principal amount thereof, plus a "make-whole" premium as of, and accrued and unpaid interest to, the redemption date.
2027 Notes
In 2017, the Company issued
$750.0 million
in aggregate principal amount at maturity of 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
$744.7 million
, after original issue discount, were used to redeem the outstanding
$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 and paid related issuance costs of
$6.0 million
.
Prior to June 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 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.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
December 31, 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 operational flexibility and borrowing capacity.
In
2017
, aggregate borrowings and repayments under the Revolving Credit Facility and prior revolving credit facility were
$109.5 million
. In
2016
, there were
no
borrowings or repayments under the prior revolving credit facility. In 2015, aggregate borrowings and repayments under the prior revolving credit facility were
$48.0 million
. As of
December 31, 2017
and
2016
, there were
no
borrowings outstanding under the Revolving Credit Facility and prior revolving credit facility, respectively.
In
2017
, the Company made required principal payments of
$1.6 million
under the Term Loan Facility. In addition, the Company made principal payments of
$468.7 million
under the prior term loan facility, which include payments of
$453.1 million
made in connection with Credit Agreement described above. In
2016
, the Company made required principal payments of
$21.9 million
under the prior term loan facility.
Advances under the Revolving Credit Facility and the Term Loan Facility generally bear interest based on (i) the Eurocurrency Rate (as defined in the Credit Agreement) or (ii) the Base Rate (as defined in the Credit Agreement) plus a margin, determined in accordance with a pricing grid. As of
December 31, 2017
, the ranges and rates are as follows (in percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurocurrency Rate
|
|
Base Rate
|
|
|
Minimum
|
|
Maximum
|
|
Rate as of
December 31, 2017
|
|
Minimum
|
|
Maximum
|
|
Rate as of
December 31,
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
December 31, 2017
, the Company was in compliance with all covenants under the Credit Agreement.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Other
As of
December 31, 2017
, other long-term debt consists of amounts outstanding under capital leases.
Scheduled Maturities
As of
December 31, 2017
, scheduled maturities related to the Credit Agreement — Term Loan Facility for the five succeeding years, as of the date of this Report, are shown below (in millions):
|
|
|
|
|
2018
|
$
|
6.3
|
|
2019
|
7.8
|
|
2020
|
14.0
|
|
2021
|
14.0
|
|
2022
|
206.3
|
|
(
7
)
Income Taxes
A summary of consolidated income before provision for income taxes and equity in net income of affiliates and the components of provision for income taxes is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Consolidated income before provision for income taxes and equity in net income of affiliates:
|
|
|
|
|
|
Domestic
|
$
|
449.5
|
|
|
$
|
457.3
|
|
|
$
|
344.7
|
|
Foreign
|
1,077.2
|
|
|
881.0
|
|
|
686.8
|
|
|
$
|
1,526.7
|
|
|
$
|
1,338.3
|
|
|
$
|
1,031.5
|
|
Domestic (benefit) provision for income taxes:
|
|
|
|
|
|
Current provision
|
$
|
25.8
|
|
|
$
|
46.6
|
|
|
$
|
45.4
|
|
Deferred (benefit) provision
|
(46.1
|
)
|
|
99.2
|
|
|
55.0
|
|
Total domestic (benefit) provision
|
(20.3
|
)
|
|
145.8
|
|
|
100.4
|
|
Foreign provision for income taxes:
|
|
|
|
|
|
Current provision
|
253.0
|
|
|
220.0
|
|
|
191.5
|
|
Deferred (benefit) provision
|
(35.2
|
)
|
|
4.4
|
|
|
(6.4
|
)
|
Total foreign provision
|
217.8
|
|
|
224.4
|
|
|
185.1
|
|
Provision for income taxes
|
$
|
197.5
|
|
|
$
|
370.2
|
|
|
$
|
285.5
|
|
The domestic (benefit) provision includes withholding taxes related to dividends and royalties paid by the Company’s foreign subsidiaries, as well as state and local taxes. In
2017
,
2016
and
2015
, the foreign deferred (benefit) provision includes the benefit of prior unrecognized net operating loss carryforwards of
$11.5 million
,
$5.4 million
and
$1.7 million
, respectively.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A summary of the differences between the provision for income taxes calculated at the United States federal statutory income tax rate of
35%
and the consolidated provision for income taxes is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Consolidated income before provision for income taxes and equity in net income of affiliates multiplied by the United States federal statutory income tax rate
|
$
|
534.4
|
|
|
$
|
468.4
|
|
|
$
|
361.0
|
|
Differences in income taxes on foreign earnings, losses and remittances
|
(128.9
|
)
|
|
(43.9
|
)
|
|
(79.2
|
)
|
Valuation allowance adjustments
|
(56.8
|
)
|
|
(44.2
|
)
|
|
24.6
|
|
Tax credits
|
(26.8
|
)
|
|
(2.7
|
)
|
|
(5.7
|
)
|
Repatriation of certain foreign earnings
|
(289.7
|
)
|
|
—
|
|
|
—
|
|
Transition tax on accumulated foreign earnings
|
131.0
|
|
|
—
|
|
|
—
|
|
U.S. tax rate change and other tax reform items
|
42.5
|
|
|
—
|
|
|
—
|
|
Tax audits and assessments
|
(1.4
|
)
|
|
(1.8
|
)
|
|
0.7
|
|
Other
|
(6.8
|
)
|
|
(5.6
|
)
|
|
(15.9
|
)
|
Provision for income taxes
|
$
|
197.5
|
|
|
$
|
370.2
|
|
|
$
|
285.5
|
|
For the years ended
December 31, 2017
,
2016
and
2015
, income in foreign jurisdictions with tax holidays was
$124.1 million
,
$89.7 million
and
$72.2 million
, respectively. Such tax holidays generally expire from 2018 through 2027.
Deferred income taxes represent temporary differences in the recognition of certain items for financial reporting and income tax purposes. A summary of the components of the net deferred income tax asset is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
Tax loss carryforwards
|
$
|
452.9
|
|
|
$
|
485.1
|
|
Tax credit carryforwards
|
341.0
|
|
|
187.9
|
|
Retirement benefit plans
|
58.2
|
|
|
89.4
|
|
Accrued liabilities
|
144.1
|
|
|
158.2
|
|
Self-insurance reserves
|
5.9
|
|
|
8.4
|
|
Current asset basis differences
|
37.4
|
|
|
44.6
|
|
Long-term asset basis differences
|
(88.1
|
)
|
|
(77.3
|
)
|
Deferred compensation
|
41.4
|
|
|
57.3
|
|
Recoverable customer engineering, development and tooling
|
3.6
|
|
|
(6.9
|
)
|
Undistributed earnings of foreign subsidiaries
|
(41.7
|
)
|
|
(62.4
|
)
|
Derivative instruments and hedging activities
|
3.3
|
|
|
20.1
|
|
Other
|
(0.4
|
)
|
|
0.6
|
|
|
957.6
|
|
|
905.0
|
|
Valuation allowance
|
(402.2
|
)
|
|
(445.6
|
)
|
Net deferred income tax asset
|
$
|
555.4
|
|
|
$
|
459.4
|
|
As of
December 31, 2017
and
2016
, the valuation allowance with respect to the Company’s deferred tax assets was
$402.2 million
and
$445.6 million
, respectively, a net decrease of
$43.4 million
.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence, such as cumulative losses in recent years, which is objective and verifiable. When measuring cumulative losses in recent years, the Company uses a rolling three-year period of pretax book income, adjusted for permanent differences between book and taxable income and certain other items. As of
December 31, 2017
, the Company continues to maintain a valuation allowance of
$20.9 million
with respect to certain U.S. deferred tax assets that, due to their nature, are not likely to be realized. In addition, the Company continues to maintain a valuation allowance of
$381.3 million
with respect to its deferred tax assets in several international jurisdictions.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The classification of the net deferred income tax asset is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Long-term deferred income tax assets
|
$
|
646.8
|
|
|
$
|
504.4
|
|
Long-term deferred income tax liabilities
|
(91.4
|
)
|
|
(45.0
|
)
|
Net deferred income tax asset
|
$
|
555.4
|
|
|
$
|
459.4
|
|
As of
December 31, 2017
, deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries since all of these earnings are subject to the one-time transition tax and are not taxable upon repatriation to the United States. However, the Company continues to provide a deferred tax liability for foreign withholding tax that will be incurred with respect to the undistributed foreign earnings that are not permanently reinvested.
As of
December 31, 2017
, the Company had tax loss carryforwards of
$1.9 billion
. Of the total tax loss carryforwards,
$1.5 billion
have no expiration date, and
$342.0 million
expire between 2018 and 2037. In addition, the Company had tax credit carryforwards of
$341.0 million
, comprised principally of U.S. foreign tax credits, research and development credits and investment tax credits that generally expire between 2018 and 2037.
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 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
$52.9 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.
As of
December 31, 2017
and
2016
, the Company’s gross unrecognized tax benefits were
$33.2 million
and
$29.5 million
(excluding interest and penalties), respectively, all of which, if recognized, would affect the Company’s effective tax rate. The gross unrecognized tax benefits are recorded in other long-term liabilities.
A summary of the changes in gross unrecognized tax benefits is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
29.5
|
|
|
$
|
30.4
|
|
|
$
|
39.7
|
|
Additions based on tax positions related to current year
|
5.4
|
|
|
4.0
|
|
|
5.0
|
|
Reductions based on tax positions related to prior years
|
(0.3
|
)
|
|
(0.9
|
)
|
|
(0.2
|
)
|
Settlements
|
(0.8
|
)
|
|
—
|
|
|
(12.3
|
)
|
Statute expirations
|
(2.2
|
)
|
|
(2.9
|
)
|
|
(0.6
|
)
|
Foreign currency translation
|
1.6
|
|
|
(1.1
|
)
|
|
(1.2
|
)
|
Balance at end of period
|
$
|
33.2
|
|
|
$
|
29.5
|
|
|
$
|
30.4
|
|
The Company recognizes interest and penalties with respect to unrecognized tax benefits as income tax expense. As of
December 31, 2017
and
2016
, the Company had recorded gross reserves of
$9.9 million
and
$7.8 million
, respectively, related to interest and penalties, all of which, if recognized, would affect the Company’s effective tax rate.
The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign tax authorities. During the next twelve months, it is reasonably possible that, as a result of audit settlements, the conclusion of current examinations and the expiration of the statute of limitations in multiple jurisdictions, the Company may decrease the amount of its gross unrecognized tax benefits by
$2.2 million
, all of which, if recognized, would affect the Company’s effective tax rate. The gross unrecognized tax benefits subject to potential decrease involve issues related to transfer pricing and various other tax items in multiple jurisdictions. However, as a result of ongoing examinations, tax proceedings in certain countries, additions to the gross unrecognized tax benefits for positions taken and interest and penalties, if any, arising in
2018
, it is not possible to estimate the potential net increase or decrease to the Company’s gross unrecognized tax benefits during the next twelve months.
The Company considers its significant tax jurisdictions to include China, Germany, Hungary, Italy, Mexico, Poland, Spain, the United Kingdom and the United States. The Company or its subsidiaries generally remain subject to income tax examination in certain U.S. state and local jurisdictions for years after 2012. Further, the Company or its subsidiaries remain subject to income tax examination in Spain for years after 2005, in Mexico for years after 2006, in Hungary and Poland for years after 2011, in
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Italy generally for years after 2012, in China and the United Kingdom for years after 2013 and in the United States generally for years after 2016.
(
8
)
Pension and Other Postretirement Benefit Plans
The Company has noncontributory defined benefit pension plans covering certain domestic employees and certain employees in foreign countries, principally Canada. The Company’s salaried pension plans provide benefits based on final average earnings formulas. The Company’s hourly pension plans provide benefits under flat benefit and cash balance formulas. The Company also has contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund its pension benefit obligation based on legal requirements, tax and liquidity considerations and local practices.
The Company has postretirement benefit plans covering certain domestic and Canadian employees. The Company’s postretirement benefit plans generally provide for the continuation of medical benefits for all eligible employees who complete a specified number of years of service and retire from the Company at age
55
or older. The Company does not fund its postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees.
Obligations and Funded Status
A reconciliation of the change in benefit obligation and the change in plan assets for the years ended
December 31, 2017
and
2016
, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
548.2
|
|
|
$
|
442.5
|
|
|
$
|
686.6
|
|
|
$
|
427.4
|
|
|
|
$
|
64.7
|
|
|
$
|
38.8
|
|
|
$
|
78.9
|
|
|
$
|
36.5
|
|
Service cost
|
5.0
|
|
|
7.3
|
|
|
5.6
|
|
|
6.5
|
|
|
|
0.1
|
|
|
0.5
|
|
|
0.2
|
|
|
0.5
|
|
Interest cost
|
21.8
|
|
|
15.0
|
|
|
29.8
|
|
|
15.8
|
|
|
|
2.4
|
|
|
1.5
|
|
|
3.2
|
|
|
1.6
|
|
Actuarial (gain) loss
|
8.6
|
|
|
11.7
|
|
|
3.5
|
|
|
27.4
|
|
|
|
(4.5
|
)
|
|
(0.7
|
)
|
|
(12.8
|
)
|
|
0.8
|
|
Benefits paid
|
(25.6
|
)
|
|
(23.6
|
)
|
|
(22.4
|
)
|
|
(29.1
|
)
|
|
|
(4.0
|
)
|
|
(1.6
|
)
|
|
(4.8
|
)
|
|
(1.9
|
)
|
Lump sum payout
(1)
|
—
|
|
|
—
|
|
|
(154.9
|
)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment
|
—
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
|
(2.1
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.3
|
|
Translation adjustment
|
—
|
|
|
36.9
|
|
|
—
|
|
|
(5.5
|
)
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
|
1.0
|
|
Benefit obligation at end of period
|
$
|
558.0
|
|
|
$
|
490.6
|
|
|
$
|
548.2
|
|
|
$
|
442.5
|
|
|
|
$
|
56.6
|
|
|
$
|
41.2
|
|
|
$
|
64.7
|
|
|
$
|
38.8
|
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of period
|
$
|
412.6
|
|
|
$
|
367.1
|
|
|
$
|
522.1
|
|
|
$
|
368.2
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
49.1
|
|
|
28.2
|
|
|
30.2
|
|
|
21.1
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
2.1
|
|
|
7.5
|
|
|
37.6
|
|
|
8.5
|
|
|
|
4.0
|
|
|
1.6
|
|
|
4.8
|
|
|
1.9
|
|
Benefits paid
|
(25.6
|
)
|
|
(23.6
|
)
|
|
(22.4
|
)
|
|
(29.1
|
)
|
|
|
(4.0
|
)
|
|
(1.6
|
)
|
|
(4.8
|
)
|
|
(1.9
|
)
|
Lump sum payout
(1)
|
—
|
|
|
—
|
|
|
(154.9
|
)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Translation adjustment
|
—
|
|
|
27.2
|
|
|
—
|
|
|
(1.6
|
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of period
|
$
|
438.2
|
|
|
$
|
406.4
|
|
|
$
|
412.6
|
|
|
$
|
367.1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
$
|
(119.8
|
)
|
|
$
|
(84.2
|
)
|
|
$
|
(135.6
|
)
|
|
$
|
(75.4
|
)
|
|
|
$
|
(56.6
|
)
|
|
$
|
(41.2
|
)
|
|
$
|
(64.7
|
)
|
|
$
|
(38.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Amounts recognized in the consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
Other long-term assets
|
$
|
0.1
|
|
|
$
|
38.1
|
|
|
$
|
—
|
|
|
$
|
40.3
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued liabilities
|
(2.1
|
)
|
|
(2.9
|
)
|
|
(2.2
|
)
|
|
(2.7
|
)
|
|
|
(4.2
|
)
|
|
(1.5
|
)
|
|
(4.2
|
)
|
|
(1.5
|
)
|
Other long-term liabilities
|
(117.8
|
)
|
|
(119.4
|
)
|
|
(133.4
|
)
|
|
(113.0
|
)
|
|
|
(52.4
|
)
|
|
(39.7
|
)
|
|
(60.5
|
)
|
|
(37.3
|
)
|
|
|
(1)
|
See Lump-Sum Payout below for further discussion
|
Accumulated Benefit Obligation
As of
December 31, 2017
and
2016
, the accumulated benefit obligation for all of the Company’s pension plans was
$1,034.7 million
and
$973.7 million
, respectively.
As of
December 31, 2017
and
2016
, the majority of the Company's pension plans had accumulated benefit obligations in excess of plan assets. Information related to pension plans with accumulated benefit obligations in excess of plan assets is shown below (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Projected benefit obligation
|
$
|
768.1
|
|
|
$
|
747.3
|
|
Accumulated benefit obligation
|
754.1
|
|
|
730.4
|
|
Fair value of plan assets
|
525.7
|
|
|
496.0
|
|
Lump-Sum Payout
In 2016, the Company initiated a limited lump-sum payout offer ("Lump-Sum Payout") to certain terminated vested plan participants of its U.S. defined benefit pension plans. The offer provided participants with the flexibility to receive their pension benefits early and reduces the Company's future administrative costs and risks related to its U.S. defined benefit pension plans. Under this offer, eligible plan participants were able to voluntarily elect an early payout of their pension benefits, primarily in the form of a lump-sum payment equal to the present value of the participant’s pension benefits. In connection with the Lump-Sum Payout, payments of
$154.9 million
were distributed from existing defined benefit pension plan assets, and the Company recognized a
$34.2 million
non-cash settlement charge. Payments under the Lump-Sum Payout are reflected as benefits paid in the reconciliations of the change in benefit obligation and the change in plan assets for the year ended December 31, 2016.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
Pretax amounts recognized in other comprehensive income (loss) for the years ended
December 31, 2017
and
2016
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Actuarial gains (losses) recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments
|
$
|
2.6
|
|
|
$
|
5.1
|
|
|
$
|
2.7
|
|
|
$
|
3.1
|
|
|
|
$
|
(2.6
|
)
|
|
$
|
0.3
|
|
|
$
|
(1.3
|
)
|
|
$
|
0.2
|
|
Actuarial gain (loss) arising during the period
|
11.4
|
|
|
(6.0
|
)
|
|
(10.1
|
)
|
|
(30.0
|
)
|
|
|
4.5
|
|
|
0.7
|
|
|
12.8
|
|
|
(0.8
|
)
|
Effect of curtailment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
2.1
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Effect of settlement
|
0.2
|
|
|
0.8
|
|
|
33.2
|
|
|
0.4
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service credit recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.3
|
)
|
Translation adjustment
|
—
|
|
|
(8.2
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
$
|
14.2
|
|
|
$
|
(8.3
|
)
|
|
$
|
25.8
|
|
|
$
|
(27.5
|
)
|
|
|
$
|
4.0
|
|
|
$
|
0.4
|
|
|
$
|
11.5
|
|
|
$
|
(1.0
|
)
|
In addition, the Company recognized tax expense in other comprehensive income (loss) related to its defined benefit plans of
$1.5 million
,
$7.1 million
and
$8.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Pretax amounts recorded in accumulated other comprehensive loss not yet recognized in net periodic benefit cost (credit) as of
December 31, 2017
and
2016
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Net unrecognized actuarial gain (loss)
|
$
|
(95.9
|
)
|
|
$
|
(109.2
|
)
|
|
$
|
(110.1
|
)
|
|
$
|
(100.9
|
)
|
|
|
$
|
27.0
|
|
|
$
|
(5.4
|
)
|
|
$
|
25.1
|
|
|
$
|
(6.1
|
)
|
Prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
2.1
|
|
|
0.6
|
|
|
—
|
|
|
0.9
|
|
|
$
|
(95.9
|
)
|
|
$
|
(109.2
|
)
|
|
$
|
(110.1
|
)
|
|
$
|
(100.9
|
)
|
|
|
$
|
29.1
|
|
|
$
|
(4.8
|
)
|
|
$
|
25.1
|
|
|
$
|
(5.2
|
)
|
Pretax amounts recorded in accumulated other comprehensive loss as of
December 31, 2017
, that are expected to be recognized as components of net periodic benefit cost (credit) in the year ending
December 31
,
2018
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
Net unrecognized actuarial gain (loss)
|
$
|
(2.1
|
)
|
|
$
|
(6.0
|
)
|
|
|
$
|
2.2
|
|
|
$
|
(0.1
|
)
|
Prior service credit
|
—
|
|
|
—
|
|
|
|
0.2
|
|
|
0.3
|
|
|
$
|
(2.1
|
)
|
|
$
|
(6.0
|
)
|
|
|
$
|
2.4
|
|
|
$
|
0.2
|
|
The Company uses the corridor approach when amortizing actuarial losses. Under the corridor approach, net unrecognized actuarial losses in excess of 10% of the greater of i) the projected benefit obligation or ii) the fair value of plan assets are amortized over future periods. For plans with little to no active participants, the amortization period is the remaining average life expectancy of the participants. For plans with active participants, the amortization period is the remaining average service period of the active participants. The amortization periods range from
5
to
31
years for the Company's defined benefit pension plans and from
3
to
17
years for the Company's other postretirement benefit plans.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Net Periodic Pension and Other Postretirement Benefit Cost (Credit)
The components of the Company’s net periodic pension benefit cost (credit) are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Pension
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Service cost
|
$
|
5.0
|
|
|
$
|
7.3
|
|
|
$
|
5.6
|
|
|
$
|
6.5
|
|
|
$
|
4.7
|
|
|
$
|
8.4
|
|
Interest cost
|
21.8
|
|
|
15.0
|
|
|
29.8
|
|
|
15.8
|
|
|
28.7
|
|
|
16.2
|
|
Expected return on plan assets
|
(28.9
|
)
|
|
(22.9
|
)
|
|
(38.1
|
)
|
|
(23.2
|
)
|
|
(39.4
|
)
|
|
(25.7
|
)
|
Amortization of actuarial loss
|
2.6
|
|
|
5.1
|
|
|
2.7
|
|
|
3.1
|
|
|
2.6
|
|
|
4.1
|
|
Curtailment loss
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.7
|
|
Settlement loss
|
0.2
|
|
|
0.8
|
|
|
34.4
|
|
|
0.4
|
|
|
0.2
|
|
|
—
|
|
Net periodic benefit cost (credit)
|
$
|
0.7
|
|
|
$
|
6.2
|
|
|
$
|
34.4
|
|
|
$
|
2.6
|
|
|
$
|
(3.2
|
)
|
|
$
|
10.7
|
|
The components of the Company’s net periodic other postretirement benefit cost (credit) are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Other Postretirement
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
Service cost
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
Interest cost
|
2.4
|
|
|
1.5
|
|
|
3.2
|
|
|
1.6
|
|
|
3.1
|
|
|
1.7
|
|
Amortization of actuarial (gain) loss
|
(2.6
|
)
|
|
0.3
|
|
|
(1.3
|
)
|
|
0.2
|
|
|
(1.2
|
)
|
|
0.5
|
|
Amortization of prior service credit
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.4
|
)
|
Special termination benefits
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.8
|
|
Net periodic benefit cost (credit)
|
$
|
(0.1
|
)
|
|
$
|
2.0
|
|
|
$
|
2.1
|
|
|
$
|
2.3
|
|
|
$
|
2.1
|
|
|
$
|
3.3
|
|
For the year ended December 31, 2017, the Company recognized pension curtailment and settlement losses of
$1.7 million
related to its restructuring actions (Note
4
, "
Restructuring
").
For the year ended December 31, 2016, the Company recognized a pension settlement loss of
$34.2 million
related to its Lump-Sum Payout described above.
For the year ended December 31, 2015, the Company recognized a pension curtailment loss of
$7.7 million
related to its restructuring actions (Note
4
, "
Restructuring
").
Assumptions
The weighted average actuarial assumptions used in determining the benefit obligations are shown below:
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Postretirement
|
December 31,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Discount rate:
|
|
|
|
|
|
|
|
Domestic plans
|
3.6%
|
|
4.1%
|
|
3.5%
|
|
3.9%
|
Foreign plans
|
3.1%
|
|
3.3%
|
|
3.5%
|
|
3.9%
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
Foreign plans
|
3.3%
|
|
3.3%
|
|
N/A
|
|
N/A
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The weighted average actuarial assumptions used in determining the net periodic benefit cost (credit) are shown below:
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Pension
|
|
|
|
|
|
Discount rate:
|
|
|
|
|
|
Domestic plans
|
4.1
|
%
|
|
4.4
|
%
|
|
4.1
|
%
|
Foreign plans
|
3.3
|
%
|
|
3.8
|
%
|
|
3.6
|
%
|
Expected return on plan assets:
|
|
|
|
|
|
Domestic plans
|
7.3
|
%
|
|
7.5
|
%
|
|
7.8
|
%
|
Foreign plans
|
6.3
|
%
|
|
6.3
|
%
|
|
6.5
|
%
|
Rate of compensation increase:
|
|
|
|
|
|
Foreign plans
|
3.3
|
%
|
|
3.3
|
%
|
|
3.1
|
%
|
Other postretirement
|
|
|
|
|
|
Discount rate:
|
|
|
|
|
|
Domestic plans
|
3.9
|
%
|
|
4.2
|
%
|
|
3.9
|
%
|
Foreign plans
|
3.9
|
%
|
|
4.2
|
%
|
|
4.0
|
%
|
The expected return on plan assets is determined based on several factors, including adjusted historical returns, historical risk premiums for various asset classes and target asset allocations within the portfolio. Adjustments made to the historical returns are based on recent return experience in the equity and fixed income markets and the belief that deviations from historical returns are likely over the relevant investment horizon.
Healthcare Trend Rate
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefit plans. The sensitivity to a 100 basis point ("bp") change in the assumed healthcare cost trend rates is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Obligation
|
|
Net Periodic Postretirement Cost
|
100 bp increase in healthcare cost trend rates
|
$
|
13.9
|
|
|
$
|
0.8
|
|
100 bp decrease in healthcare cost trend rates
|
$
|
(11.3
|
)
|
|
$
|
(0.6
|
)
|
The assumed healthcare cost trend rates used to measure the postretirement benefit obligation as of
December 31, 2017
, are shown below:
|
|
|
|
|
|
U.S. Plans
|
|
Foreign Plans
|
Initial healthcare cost trend rate
|
6.5%
|
|
5.4%
|
Ultimate healthcare cost trend rate
|
4.5%
|
|
4.5%
|
Year ultimate healthcare cost trend rate achieved
|
2021
|
|
2031
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Plan Assets
Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s pension plan assets measured at fair value on a recurring basis as of
December 31, 2017
and
2016
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation Technique
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
Equity securities -
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
149.6
|
|
|
$
|
149.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Market
|
Common stock
|
80.5
|
|
|
54.9
|
|
|
25.6
|
|
|
—
|
|
|
Market
|
Fixed income -
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
101.6
|
|
|
101.6
|
|
|
—
|
|
|
—
|
|
|
Market
|
Corporate bonds
|
24.8
|
|
|
—
|
|
|
24.8
|
|
|
—
|
|
|
Market
|
Government obligations
|
23.5
|
|
|
—
|
|
|
23.5
|
|
|
—
|
|
|
Market
|
Preferred stock
|
1.5
|
|
|
1.0
|
|
|
0.5
|
|
|
—
|
|
|
Market
|
Cash and short-term investments
|
6.4
|
|
|
1.6
|
|
|
4.8
|
|
|
—
|
|
|
Market
|
Assets at fair value
|
387.9
|
|
|
$
|
308.7
|
|
|
$
|
79.2
|
|
|
$
|
—
|
|
|
|
Investments measured at net asset value -
|
|
|
|
|
|
|
|
|
|
Alternative investments
|
50.3
|
|
|
|
|
|
|
|
|
|
Assets at fair value
|
$
|
438.2
|
|
|
|
|
|
|
|
|
|
Foreign Plans:
|
|
|
|
|
|
|
|
|
|
Equity securities -
|
|
|
|
|
|
|
|
|
|
Equity funds
|
$
|
163.3
|
|
|
$
|
—
|
|
|
$
|
163.3
|
|
|
$
|
—
|
|
|
Market
|
Common stock
|
71.6
|
|
|
71.6
|
|
|
—
|
|
|
—
|
|
|
Market
|
Fixed income -
|
|
|
|
|
|
|
|
|
|
Fixed income funds
|
30.9
|
|
|
—
|
|
|
30.9
|
|
|
—
|
|
|
Market
|
Corporate bonds
|
37.0
|
|
|
—
|
|
|
37.0
|
|
|
—
|
|
|
Market
|
Government obligations
|
58.8
|
|
|
—
|
|
|
58.8
|
|
|
—
|
|
|
Market
|
Cash and short-term investments
|
9.0
|
|
|
3.4
|
|
|
5.6
|
|
|
—
|
|
|
Market
|
Assets at fair value
|
370.6
|
|
|
$
|
75.0
|
|
|
$
|
295.6
|
|
|
$
|
—
|
|
|
|
Investments measured at net asset value -
|
|
|
|
|
|
|
|
|
|
Alternative investments
|
35.8
|
|
|
|
|
|
|
|
|
|
Assets at fair value
|
$
|
406.4
|
|
|
|
|
|
|
|
|
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation Technique
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
Equity securities -
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
137.7
|
|
|
$
|
137.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Market
|
Common stock
|
77.5
|
|
|
51.1
|
|
|
26.4
|
|
|
—
|
|
|
Market
|
Fixed income -
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
86.5
|
|
|
86.5
|
|
|
—
|
|
|
—
|
|
|
Market
|
Corporate bonds
|
18.1
|
|
|
—
|
|
|
18.1
|
|
|
—
|
|
|
Market
|
Government obligations
|
29.9
|
|
|
—
|
|
|
29.9
|
|
|
—
|
|
|
Market
|
Preferred stock
|
1.4
|
|
|
0.9
|
|
|
0.5
|
|
|
—
|
|
|
Market
|
Cash and short-term investments
|
8.4
|
|
|
0.9
|
|
|
7.5
|
|
|
—
|
|
|
Market
|
Assets at fair value
|
359.5
|
|
|
$
|
277.1
|
|
|
$
|
82.4
|
|
|
$
|
—
|
|
|
|
Investments measured at net asset value -
|
|
|
|
|
|
|
|
|
|
Alternative investments
|
53.1
|
|
|
|
|
|
|
|
|
|
Assets at fair value
|
$
|
412.6
|
|
|
|
|
|
|
|
|
|
Foreign Plans:
|
|
|
|
|
|
|
|
|
|
Equity securities -
|
|
|
|
|
|
|
|
|
|
Equity funds
|
$
|
132.6
|
|
|
$
|
—
|
|
|
$
|
132.6
|
|
|
$
|
—
|
|
|
Market
|
Common stock
|
73.2
|
|
|
73.2
|
|
|
—
|
|
|
—
|
|
|
Market
|
Fixed income -
|
|
|
|
|
|
|
|
|
|
Fixed income funds
|
31.2
|
|
|
—
|
|
|
31.2
|
|
|
—
|
|
|
Market
|
Corporate bonds
|
37.1
|
|
|
—
|
|
|
37.1
|
|
|
—
|
|
|
Market
|
Government obligations
|
53.8
|
|
|
—
|
|
|
53.8
|
|
|
—
|
|
|
Market
|
Cash
|
6.0
|
|
|
3.2
|
|
|
2.8
|
|
|
—
|
|
|
Market
|
Assets at fair value
|
333.9
|
|
|
$
|
76.4
|
|
|
$
|
257.5
|
|
|
$
|
—
|
|
|
|
Investments measured at net asset value -
|
|
|
|
|
|
|
|
|
|
Alternative investments
|
33.2
|
|
|
|
|
|
|
|
|
|
Assets at fair value
|
$
|
367.1
|
|
|
|
|
|
|
|
|
|
For further information on the GAAP fair value hierarchy, see Note
13
, "
Financial Instruments
." Pension plan assets for the foreign plans relate to the Company’s pension plans primarily in Canada and the United Kingdom.
In 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-07, "Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent)." ASU 2015-07 removes the requirement to categorize, within the fair value hierarchy, investments for which fair values are estimated using the net asset value ("NAV") as a practical expedient as provided by Accounting Standards Codification 820, "Fair Value Measurement." In 2016, the Company early adopted the provisions of this update with respect to its defined benefit pension plan assets and retroactively applied the new presentation requirements to all periods presented. Accordingly, the alternative investments of the U.S. defined benefit pension plans, for which fair values are estimated using the NAV as a practical expedient, are no longer categorized and presented within the fair value hierarchy. These assets are shown below the fair value hierarchy in order to present total pension plan assets at fair value.
The Company’s investment policies incorporate an asset allocation strategy that emphasizes the long-term growth of capital. The Company believes that this strategy is consistent with the long-term nature of plan liabilities and ultimate cash needs of the plans. For the domestic portfolio, the Company targets an equity allocation of
50%
—
75%
of plan assets, a fixed income allocation of
15%
—
40%
, an alternative investment allocation of
0%
—
30%
and a cash allocation of
0%
—
10%
. For the foreign portfolio, the Company targets an equity allocation of
45%
—
65%
of plan assets, a fixed income allocation of
25%
—
45%
, an alternative investment allocation of
0%
—
25%
and a cash allocation of
0%
—
15%
. Differences in the target allocations of the domestic and foreign portfolios are reflective of differences in the underlying plan liabilities. Diversification within the investment portfolios is pursued by asset class and investment management style. The investment portfolios are
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
reviewed on a quarterly basis to maintain the desired asset allocations, given the market performance of the asset classes and investment management styles. Alternative investments are redeemable in the near term, generally with 60 days notice.
The Company utilizes investment management firms to manage these assets in accordance with the Company’s investment policies. Excluding alternative investments, mutual funds and ETFs, retained investment managers are provided investment guidelines which restrict the use of certain assets, including commodities contracts, futures contracts, options, venture capital, real estate, interest-only or principal-only strips and investments in the Company’s own debt or equity. Derivative instruments are also prohibited without the specific approval of the Company. Investment managers are limited in the maximum size of individual security holdings and the maximum exposure to any one industry relative to the total portfolio. Fixed income managers are provided further investment guidelines that indicate minimum credit ratings for debt securities and limitations on weighted average maturity and portfolio duration.
The Company evaluates investment manager performance against market indices which the Company believes are appropriate to the investment management style for which the investment manager has been retained. The Company’s investment policies incorporate an investment goal of aggregate portfolio returns which exceed the returns of the appropriate market indices by a reasonable spread over the relevant investment horizon.
Contributions
The Company's minimum required contributions to its domestic and foreign pension plans are expected to be approximately
$10.0 million
to
$15.0 million
in
2018
. The Company may elect to make contributions in excess of minimum funding requirements in response to investment performance or changes in interest rates or when the Company believes that it is financially advantageous to do so and based on its other cash requirements. The Company’s minimum funding requirements after
2018
will depend on several factors, including investment performance and interest rates. The Company’s minimum funding requirements may also be affected by changes in applicable legal requirements.
Benefit Payments
As of
December 31, 2017
, the Company’s estimate of expected benefit payments in each of the five succeeding years and in the aggregate for the five years thereafter are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other Postretirement
|
Year
|
U.S.
|
|
Foreign
|
|
|
U.S.
|
|
Foreign
|
2018
|
$
|
23.9
|
|
|
$
|
18.9
|
|
|
|
$
|
4.3
|
|
|
$
|
1.5
|
|
2019
|
25.4
|
|
|
18.7
|
|
|
|
4.3
|
|
|
1.5
|
|
2020
|
26.2
|
|
|
19.5
|
|
|
|
4.2
|
|
|
1.6
|
|
2021
|
26.9
|
|
|
19.9
|
|
|
|
4.2
|
|
|
1.7
|
|
2022
|
28.3
|
|
|
21.7
|
|
|
|
4.0
|
|
|
1.7
|
|
Five years thereafter
|
146.0
|
|
|
116.9
|
|
|
|
18.5
|
|
|
9.8
|
|
Multi-Employer Pension Plans
The Company currently participates in
two
multi-employer pension plans, the U.A.W. Labor-Management Group Pension Plan and UNITE Here National Retirement Fund, for certain of its employees. Contributions to these plans are based on
three
collective bargaining agreements.
One
of the agreements expires on April 24, 2020, and
two
of the agreements expire on July 3, 2020. Detailed information related to these plans is shown below (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection Act
Zone Status
|
|
|
|
|
|
Contributions to Multiemployer Pension Plans
|
Employer Identification Number
|
December 31,
2017
Certification
|
|
December 31,
2016
Certification
|
|
FIP/RP
Pending or
Implemented
|
|
Surcharge
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
516099782-001
|
Green
|
|
Red
|
|
Yes
|
|
No
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
13-6130178
|
Red
|
|
Red
|
|
Yes
|
|
No
|
|
0.4
|
|
|
0.4
|
|
|
0.3
|
|
For its plan years 2017 and 2016, the Company's contributions to the U.A.W. Labor-Management Group Pension Plan represented more than
5%
of the plan's total contributions.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Defined Contribution Plan
The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries. Contributions are determined as a percentage of each covered employee’s salary. For the years ended
December 31, 2017
,
2016
and
2015
, the aggregate cost of the defined contribution plans was
$15.0 million
,
$14.4 million
and
$13.3 million
, respectively.
The Company also has a defined contribution retirement program for its salaried employees. Contributions to this program are determined as a percentage of each covered employee’s eligible compensation. For the years ended
December 31, 2017
,
2016
and
2015
, the Company recorded expense of
$21.3 million
,
$21.2 million
and
$19.4 million
, respectively, related to this program.
(
9
)
Capital Stock, Accumulated Other Comprehensive Loss and Equity
Common Stock
The Company is authorized to issue up to
300,000,000
shares of Common Stock. The Company’s Common Stock is listed on the New York Stock Exchange under the symbol "LEA" and has the following rights and privileges:
|
|
•
|
Voting Rights
– All shares of the Company’s common stock have identical rights and privileges. With limited exceptions, holders of common stock are entitled to
one
vote for each outstanding share of common stock held of record by each stockholder on all matters properly submitted for the vote of the Company’s stockholders.
|
|
|
•
|
Dividend Rights
– Subject to applicable law, any contractual restrictions and the rights of the holders of outstanding preferred stock, if any, holders of common stock are entitled to receive ratably such dividends and other distributions that the Company’s Board of Directors, in its discretion, declares from time to time.
|
|
|
•
|
Liquidation Rights
– Upon the dissolution, liquidation or winding up of the Company, subject to the rights of the holders of outstanding preferred stock, if any, holders of common stock are entitled to receive ratably the assets of the Company available for distribution to the Company’s stockholders in proportion to the number of shares of common stock held by each stockholder.
|
|
|
•
|
Conversion, Redemption and Preemptive Rights
– Holders of common stock have no conversion, redemption, sinking fund, preemptive, subscription or similar rights.
|
Common Stock Share Repurchase Program
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
December 31, 2017
, the Company has paid
$3.5 billion
in aggregate for repurchases of its common stock, at an average price of
$79.73
per share, excluding commissions and related fees.
In
2017
, the Company repurchased
$454.4 million
in aggregate of its common stock (
3,014,131
shares repurchased at an average purchase price of
$150.77
per share, excluding commissions), of which
$450.5
was paid in cash with the remaining amount to be paid in the first quarter of 2018. In
2016
, the Company paid
$658.8 million
in aggregate for repurchases of its common stock, (
5,816,363
shares repurchased at an average purchase price of
$113.26
per share, excluding commissions). In
2015
, the Company paid
$487.4 million
in aggregate for repurchases of its common stock, (
4,366,365
shares repurchased at an average purchase price of
$111.62
per share, excluding commissions).
As of
December 31, 2017
, the Company has a remaining repurchase authorization of
$545.6 million
under its current common stock share repurchase program, which will expire on December 31, 2019. The Company may implement these share repurchases through a variety of methods, including, but not limited to, open market purchases, accelerated stock repurchase programs and structured repurchase transactions. The extent to which the Company will repurchase its outstanding common stock and the timing of such repurchases will depend upon its financial condition, prevailing market conditions, alternative uses of capital and other factors.
In addition to shares repurchased under the Company’s common stock share repurchase program described above, the Company classified shares withheld from the settlement of the Company’s restricted stock unit and performance share awards to cover tax withholding requirements as common stock held in treasury in the accompanying consolidated balance sheets as of
December 31, 2017
and
2016
.
In 2017, the Company’s Board of Directors approved the retirement of
8 million
shares of common stock held in treasury. These retired shares are reflected as authorized, but not issued, in the accompanying consolidated balance sheet as of
December 31, 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
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
2017
,
2016
and
2015
, the Company’s Board of Directors declared quarterly cash dividends of
$0.50
,
$0.30
and
$0.25
, respectively, per share of common stock. In
2017
, declared dividends totaled
$140.3 million
, and dividends paid totaled
$137.7 million
. In
2016
, declared dividends totaled
$89.1 million
, and dividends paid totaled
$88.8 million
. In
2015
, declared dividends totaled
$79.4 million
, and dividends paid totaled
$78.5 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.
Accumulated Other Comprehensive Loss
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 changes in accumulated other comprehensive loss, net of tax is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Defined benefit plans:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(192.8
|
)
|
|
$
|
(194.6
|
)
|
|
$
|
(219.2
|
)
|
Reclassification adjustments (net of tax expense of $1.1 million in 2017, $12.1 million in 2016 and $1.4 million in 2015)
|
4.9
|
|
|
25.9
|
|
|
4.2
|
|
Other comprehensive income (loss) recognized during the period (net of tax benefit (expense) of ($0.4) million in 2017, $5.0 million in 2016 and ($6.9) million in 2015)
|
3.9
|
|
|
(24.1
|
)
|
|
20.4
|
|
Balance at end of year
|
$
|
(184.0
|
)
|
|
$
|
(192.8
|
)
|
|
$
|
(194.6
|
)
|
Derivative instruments and hedging activities:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(45.1
|
)
|
|
$
|
(38.7
|
)
|
|
$
|
(33.2
|
)
|
Reclassification adjustments (net of tax expense of $3.1 million in 2017, $28.8 million in 2016 and $14.9 million in 2015)
|
6.4
|
|
|
57.9
|
|
|
23.7
|
|
Other comprehensive income (loss) recognized during the period (net of tax benefit (expense) of ($12.8) million in 2017, $32.7 million in 2016 and $18.4 million in 2015)
|
15.8
|
|
|
(64.3
|
)
|
|
(29.2
|
)
|
Balance at end of year
|
$
|
(22.9
|
)
|
|
$
|
(45.1
|
)
|
|
$
|
(38.7
|
)
|
Cumulative translation adjustments:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(597.7
|
)
|
|
$
|
(496.8
|
)
|
|
$
|
(249.6
|
)
|
Other comprehensive income (loss) recognized during the period (net of tax benefit of $— million in 2017, $1.1 million in 2016 and $6.0 million in 2015)
|
291.2
|
|
|
(100.9
|
)
|
|
(247.2
|
)
|
Balance at end of year
|
$
|
(306.5
|
)
|
|
$
|
(597.7
|
)
|
|
$
|
(496.8
|
)
|
For the years ended
December 31, 2017
,
2016
and
2015
, other comprehensive loss related to cumulative translation adjustments includes pretax gains (losses) related to intercompany transactions for which settlement is not planned or anticipated in the foreseeable future of
$0.9 million
,
($0.2) million
and
($10.7) million
, respectively.
Noncontrolling Interests
In 2017 and 2016, the Company gained control of an affiliate. For further information related to these transactions, see Note
5
, "
Investments in Affiliates and Other Related Party Transactions
." Also in 2016, the Company acquired the outstanding noncontrolling interests in a consolidated subsidiary, Shenyang Lear Automotive Seating and Interior Systems Co., Ltd., for
$32.6 million
and now owns
100%
of the subsidiary.
In 2015, a noncontrolling interest was established in a new less than wholly owned consolidated subsidiary.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(
10
)
Stock-Based Compensation
The Company adopted the Lear Corporation 2009 Long-Term Stock Incentive Plan as of November 9, 2009 (as amended, the "2009 LTSIP"). The 2009 LTSIP reserves
11,815,748
shares of common stock for issuance under stock option, restricted stock, restricted stock unit, restricted unit, performance share, performance unit and stock appreciation right awards.
Under the 2009 LTSIP, the Company has granted restricted stock units and performance shares to certain of its employees. The restricted stock units and performance shares generally vest in
three years
following the grant date. For the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized compensation expense related to the restricted stock unit and performance share awards of
$68.7 million
,
$66.7 million
and
$64.5 million
, respectively. Unrecognized compensation expense related to the restricted stock unit and performance share awards of
$60.6 million
will be recognized over the next
1.5
years on a weighted average basis. In accordance with the provisions of the restricted stock unit and performance share awards, the Company withholds shares from the settlement of such awards to cover minimum statutory tax withholding requirements. The withheld shares are classified as common stock held in treasury in the accompanying consolidated balance sheets as of
December 31, 2017
and
2016
. A summary of restricted stock unit and performance share transactions for the year ended
December 31, 2017
, is shown below:
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
Weighted Average Grant Date
Fair Value
|
Performance
Shares
|
Weighted Average Grant Date
Fair Value
|
Outstanding as of December 31, 2016
|
623,142
|
|
$92.54
|
1,455,054
|
|
$94.19
|
Granted
|
153,675
|
|
$142.14
|
389,384
|
|
$132.94
|
Distributed (vested)
|
(194,373
|
)
|
|
(571,254
|
)
|
|
Cancelled
|
(10,231
|
)
|
|
(73,614
|
)
|
|
Outstanding as of December 31, 2017
(1)
|
572,213
|
|
$109.31
|
1,199,570
|
|
$115.33
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2017
|
572,213
|
|
|
1,150,611
|
|
|
|
|
(1)
|
Outstanding performance shares are reflected at the maximum possible payout that may be earned during the relevant performance periods.
|
The grant date fair values of restricted stock units and performance shares are based on the share price on the grant date. The weighted average grant date fair value of restricted stock units granted in
2016
and
2015
was
$120.42
and
$104.46
, respectively. The weighted average grant date fair value of performance shares granted in
2016
and
2015
was
$119.99
and
$97.92
, respectively.
(
11
)
Commitments and Contingencies
Legal and Other Contingencies
As of
December 31, 2017
and
2016
, the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of
$25.8 million
and
$11.0 million
, respectively. Such reserves reflect amounts recognized in accordance with GAAP and typically exclude the cost of legal representation. Product liability and warranty reserves are recorded separately from legal reserves, as described below.
Commercial Disputes
The Company is involved from time to time in legal proceedings and claims, including, without limitation, commercial or contractual disputes with its customers, suppliers and competitors. These disputes vary in nature and are usually resolved by negotiations between the parties.
Product Liability and Warranty Matters
In the event that use of the Company’s products results in, or is alleged to result in, bodily injury and/or property damage or other losses, the Company may be subject to product liability lawsuits and other claims. Such lawsuits generally seek compensatory damages, punitive damages and attorneys’ fees and costs. In addition, if any of the Company’s products are, or are alleged to be, defective, the Company may be required or requested by its customers to participate in a recall or other corrective action involving such products. Certain of the Company’s customers have asserted claims against the Company for costs related to recalls or other corrective actions involving its products. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend such claims.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
To a lesser extent, the Company is a party to agreements with certain of its customers, whereby these customers may pursue claims against the Company for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims.
In certain instances, allegedly defective products may be supplied by Tier 2 suppliers. The Company may seek recovery from its suppliers of materials or services included within the Company’s products that are associated with product liability and warranty claims. The Company carries insurance for certain legal matters, including product liability claims, but such coverage may be limited. The Company does not maintain insurance for product warranty or recall matters. Future dispositions with respect to the Company’s product liability claims that were subject to compromise under the Chapter 11 bankruptcy proceedings will be satisfied out of a common stock and warrant reserve established for that purpose.
The Company records product warranty reserves when liability is probable and related amounts are reasonably estimable.
A summary of the changes in reserves for product liability and warranty claims for each of the periods in the two years ended
December 31, 2017
, is shown below (in millions):
|
|
|
|
|
Balance as of January 1, 2016
|
$
|
33.0
|
|
Expense, net, including changes in estimates
|
27.3
|
|
Settlements
|
(10.4
|
)
|
Foreign currency translation and other
|
(0.8
|
)
|
Balance as of December 31, 2016
|
49.1
|
|
Expense, net, including changes in estimates
|
13.3
|
|
Settlements
|
(19.6
|
)
|
Foreign currency translation and other
|
3.7
|
|
Balance as of December 31, 2017
|
$
|
46.5
|
|
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
December 31, 2017
and
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.
Employees
Approximately
46%
of the Company’s employees are members of industrial trade unions and are employed under the terms of various labor agreements. Labor agreements covering approximately
77%
of the Company’s global unionized workforce of approximately
76,400
employees, including labor agreements in the United States and Canada covering approximately
2%
of the Company’s global unionized workforce, are scheduled to expire in
2018
. Management does not anticipate any significant difficulties with respect to the renewal of these agreements.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Lease Commitments
A summary of lease commitments as of
December 31, 2017
, under non-cancelable operating leases with terms exceeding one year is shown below (in millions):
|
|
|
|
|
2018
|
$
|
103.1
|
|
2019
|
90.4
|
|
2020
|
77.0
|
|
2021
|
59.7
|
|
2022
|
48.9
|
|
Thereafter
|
169.7
|
|
Total
|
$
|
548.8
|
|
The Company’s operating leases cover principally buildings and transportation equipment. For the years ended
December 31, 2017
,
2016
and
2015
, rent expense was
$144.7 million
,
$126.4 million
and
$126.2 million
, respectively.
(
12
)
Segment Reporting
A summary of revenues from external customers and other financial information by reportable operating segment is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Seating
|
|
E-Systems
|
|
Other
|
|
Consolidated
|
Revenues from external customers
|
$
|
15,873.0
|
|
|
$
|
4,594.0
|
|
|
$
|
—
|
|
|
$
|
20,467.0
|
|
Segment earnings
(1)
|
1,250.8
|
|
|
641.6
|
|
|
(284.1
|
)
|
|
1,608.3
|
|
Depreciation and amortization
|
289.5
|
|
|
123.4
|
|
|
14.8
|
|
|
427.7
|
|
Capital expenditures
|
398.3
|
|
|
176.3
|
|
|
19.9
|
|
|
594.5
|
|
Total assets
|
7,303.4
|
|
|
2,268.0
|
|
|
2,374.5
|
|
|
11,945.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Seating
|
|
E-Systems
|
|
Other
|
|
Consolidated
|
Revenues from external customers
|
$
|
14,356.7
|
|
|
$
|
4,200.9
|
|
|
$
|
—
|
|
|
$
|
18,557.6
|
|
Segment earnings
(1)
|
1,136.0
|
|
|
591.3
|
|
|
(300.1
|
)
|
|
1,427.2
|
|
Depreciation and amortization
|
258.1
|
|
|
107.6
|
|
|
12.5
|
|
|
378.2
|
|
Capital expenditures
|
341.6
|
|
|
162.4
|
|
|
24.3
|
|
|
528.3
|
|
Total assets
|
6,199.2
|
|
|
1,675.9
|
|
|
2,025.5
|
|
|
9,900.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Seating
|
|
E-Systems
|
|
Other
|
|
Consolidated
|
Revenues from external customers
|
$
|
14,098.5
|
|
|
$
|
4,112.9
|
|
|
$
|
—
|
|
|
$
|
18,211.4
|
|
Segment earnings
(1)
|
907.0
|
|
|
554.4
|
|
|
(274.6
|
)
|
|
1,186.8
|
|
Depreciation and amortization
|
239.3
|
|
|
99.3
|
|
|
9.2
|
|
|
347.8
|
|
Capital expenditures
|
317.2
|
|
|
134.4
|
|
|
34.2
|
|
|
485.8
|
|
|
|
(1)
|
For a definition of segment earnings, see Note 2, "Summary of Significant Accounting Policies — Segment Reporting."
|
For the year ended
December 31, 2017
, segment earnings include restructuring charges of
$45.7 million
,
$19.9 million
and
$7.9 million
in the Seating and E-Systems segments and in the other category, respectively (Note
4
, "
Restructuring
").
For the year ended
December 31, 2016
, segment earnings include restructuring charges of
$40.6 million
,
$20.1 million
and
$2.9 million
in the Seating and E-Systems segments and in the other category, respectively (Note
4
, "
Restructuring
").
For the year ended
December 31, 2015
, segment earnings include restructuring charges of
$60.8 million
,
$13.9 million
and
$12.1 million
in the Seating and E-Systems segments and in the other category, respectively (Note
4
, "
Restructuring
").
Lear Corporation and Subsidiaries
Notes to 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Segment earnings
|
$
|
1,892.4
|
|
|
$
|
1,727.3
|
|
|
$
|
1,461.4
|
|
Corporate and regional headquarters and elimination of intercompany activity ("Other")
|
(284.1
|
)
|
|
(300.1
|
)
|
|
(274.6
|
)
|
Consolidated income before interest, other expense, provision for income taxes and equity in net income of affiliates
|
1,608.3
|
|
|
1,427.2
|
|
|
1,186.8
|
|
Interest expense
|
85.7
|
|
|
82.5
|
|
|
86.7
|
|
Other (income) expense, net
|
(4.1
|
)
|
|
6.4
|
|
|
68.6
|
|
Consolidated income before provision for income taxes and equity in net income of affiliates
|
$
|
1,526.7
|
|
|
$
|
1,338.3
|
|
|
$
|
1,031.5
|
|
Revenues from external customers and tangible long-lived assets for each of the geographic areas in which the Company operates is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Revenues from external customers
|
|
|
|
|
|
United States
|
$
|
3,955.1
|
|
|
$
|
4,186.0
|
|
|
$
|
4,252.3
|
|
Mexico
|
3,170.9
|
|
|
2,684.4
|
|
|
2,777.3
|
|
China
|
2,519.3
|
|
|
2,277.6
|
|
|
2,141.9
|
|
Germany
|
2,139.4
|
|
|
2,076.0
|
|
|
1,987.3
|
|
Other countries
|
8,682.3
|
|
|
7,333.6
|
|
|
7,052.6
|
|
Total
|
$
|
20,467.0
|
|
|
$
|
18,557.6
|
|
|
$
|
18,211.4
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Tangible long-lived assets:
|
|
|
|
United States
|
$
|
385.4
|
|
|
$
|
361.2
|
|
Mexico
|
549.0
|
|
|
466.5
|
|
China
|
307.3
|
|
|
253.5
|
|
Germany
|
182.4
|
|
|
147.5
|
|
Other countries
|
1,035.3
|
|
|
790.6
|
|
Total
|
$
|
2,459.4
|
|
|
$
|
2,019.3
|
|
The following is a summary of the percentage of revenues from major customers:
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Ford
|
18.3%
|
|
21.0%
|
|
22.5%
|
General Motors
|
18.0%
|
|
20.9%
|
|
20.0%
|
BMW
|
8.1%
|
|
10.1%
|
|
10.5%
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(
13
)
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):
|
|
|
|
|
|
|
|
|
December 31
|
2017
|
|
2016
|
Estimated aggregate fair value
(1)
|
$
|
2,033.5
|
|
|
$
|
2,004.8
|
|
Aggregate carrying value
(1) (2)
|
1,973.4
|
|
|
1,943.7
|
|
|
|
(1)
|
Credit agreement and senior notes (excludes "other" debt)
|
|
|
(2)
|
Carrying value excludes 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
December 31, 2017
and
2016
, there were
no
factored receivables outstanding. The Company cannot provide any assurances that this factoring facility will be available or utilized in the future.
Marketable Equity Securities
As of
December 31, 2017
and
2016
, marketable equity securities of
$43.8 million
and
$30.2 million
, respectively, for which the Company accounts for under the fair value option, are included in the accompany consolidated balance sheets. Accordingly, unrealized gains and losses arising from changes in the fair value of the marketable equity securities are recognized in the 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
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 Chinese renminbi and the Philippine peso.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The notional amount, estimated fair value and related classification in the accompanying consolidated balance sheets of the Company's foreign currency derivative contracts are shown below (in millions, except for maturities):
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
Fair value of foreign currency contracts designated as cash flow hedges:
|
|
|
|
Other current assets
|
$
|
16.9
|
|
|
$
|
11.2
|
|
Other long-term assets
|
1.3
|
|
|
0.5
|
|
Other current liabilities
|
(28.4
|
)
|
|
(58.3
|
)
|
Other long-term liabilities
|
(8.0
|
)
|
|
(9.9
|
)
|
|
(18.2
|
)
|
|
(56.5
|
)
|
|
|
|
|
Notional amount
|
$
|
1,538.5
|
|
|
$
|
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
|
1.8
|
|
|
5.9
|
|
Other current liabilities
|
(6.4
|
)
|
|
(3.8
|
)
|
|
(4.6
|
)
|
|
2.1
|
|
|
|
|
|
Notional amount
|
$
|
681.1
|
|
|
$
|
681.2
|
|
Outstanding maturities in months, not to exceed
|
12
|
|
|
12
|
|
|
|
|
|
Total fair value
|
$
|
(22.8
|
)
|
|
$
|
(54.4
|
)
|
Total notional amount
|
$
|
2,219.6
|
|
|
$
|
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.
Accumulated Other Comprehensive Loss - Derivative Instruments and Hedging Activities
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
|
2016
|
|
2015
|
Gains (losses) recognized in accumulated other comprehensive loss:
|
$
|
28.8
|
|
|
$
|
(96.8
|
)
|
|
$
|
(47.3
|
)
|
|
|
|
|
|
|
(Gains) losses reclassified from accumulated other comprehensive loss to:
|
|
|
|
|
|
Net sales
|
2.1
|
|
|
4.8
|
|
|
(3.7
|
)
|
Cost of sales
|
7.4
|
|
|
81.9
|
|
|
42.3
|
|
|
9.5
|
|
|
86.7
|
|
|
38.6
|
|
Comprehensive income (loss)
|
$
|
38.3
|
|
|
$
|
(10.1
|
)
|
|
$
|
(8.7
|
)
|
As of
December 31, 2017
and
2016
, pretax net losses of
$18.2 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 losses of
$11.5 million
recorded in accumulated other comprehensive loss as of
December 31, 2017
. Such losses will be reclassified at the time that the underlying hedged transactions are realized.
For the years ended
December 31, 2017
,
2016
and
2015
, amounts recognized in the accompanying consolidated statements of 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. In addition, the Company recognized tax benefits (expense) of
($15.9) million
,
$3.9 million
and
$3.5 million
in other comprehensive income (loss) related to its derivative instruments and hedging activities for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Fair Value Measurements
GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:
|
|
|
|
Market:
|
|
This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
|
|
|
Income:
|
|
This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
|
|
|
Cost:
|
|
This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
|
Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:
|
|
|
|
Level 1:
|
|
Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
|
|
|
Level 2:
|
|
Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.
|
|
|
Level 3:
|
|
Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.
|
The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.
Items Measured at Fair Value on a Recurring Basis
Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of
December 31, 2017
and
2016
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Frequency
|
|
Asset
(Liability)
|
|
Valuation
Technique
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Foreign currency derivative contracts, net
|
Recurring
|
|
$
|
(22.8
|
)
|
|
Market / Income
|
|
$
|
—
|
|
|
$
|
(22.8
|
)
|
|
$
|
—
|
|
Marketable equity securities
|
Recurring
|
|
43.8
|
|
|
Market
|
|
43.8
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Frequency
|
|
Asset
(Liability)
|
|
Valuation
Technique
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Foreign currency derivative contracts, net
|
Recurring
|
|
$
|
(54.4
|
)
|
|
Market / Income
|
|
$
|
—
|
|
|
$
|
(54.4
|
)
|
|
$
|
—
|
|
Marketable equity securities
|
Recurring
|
|
30.2
|
|
|
Market
|
|
30.2
|
|
|
—
|
|
|
—
|
|
The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, the Company adjusts these discount rates, if required, by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. If an estimate of the credit spread is required, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
hierarchy. As of
December 31, 2017
and
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 during
2017
and
2016
.
For further information on fair value measurements and the Company’s defined benefit pension plan assets, see Note
8
, "
Pension and Other Postretirement Benefit Plans
."
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.
In 2017, as a result of the acquisition of Antolin Seating and the Lear STEC transaction, Level 3 fair value estimates related to property, plant and equipment of
$95.4 million
, intangible assets of
$187.4 million
and noncontrolling interests of
$125.0 million
are recorded in the accompanying consolidated balance sheet as of
December 31, 2017
. In addition, the Lear STEC transaction required a Level 3 fair value estimate related to the Company's previously held equity interest of
$94.0 million
. These Level 3 fair value estimates were determined as of the applicable transaction date.
In 2016, as a result of the acquisition of AccuMED and the Beijing BAI transaction, Level 3 fair value estimates related to property, plant and equipment of
$31.2 million
, intangible assets of
$87.0 million
and noncontrolling interests of
$41.0 million
are recorded in the accompanying consolidated balance sheet as of December 31, 2016. In addition, the Beijing BAI transaction required a Level 3 fair value estimate related to the Company's previously held equity interest of
$63.0 million
. These Level 3 fair value estimates were determined as of the applicable transaction date.
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 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 redeemable noncontrolling interest includes an estimate of the fair value 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 on assets and liabilities measured at fair value on a non-recurring basis, see Note
2
, "
Summary of Significant Accounting Policies
," Note
3
, "
Acquisitions
," Note
4
, "
Restructuring
," and Note
5
, "
Investments in Affiliates and Other Related Party Transactions
."
(
14
)
Quarterly Financial Data (unaudited)
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
April 1,
2017
|
|
July 1,
2017
|
|
September 30,
2017
|
|
December 31,
2017
|
Net sales
|
$
|
4,998.5
|
|
|
$
|
5,123.2
|
|
|
$
|
4,981.5
|
|
|
$
|
5,363.8
|
|
Gross profit
|
582.5
|
|
|
577.8
|
|
|
555.9
|
|
|
574.9
|
|
Consolidated net income
|
318.5
|
|
|
327.0
|
|
|
315.0
|
|
|
420.4
|
|
Net income attributable to Lear
|
305.8
|
|
|
311.9
|
|
|
295.2
|
|
|
400.5
|
|
Basic net income per share attributable to Lear
|
4.39
|
|
|
4.53
|
|
|
4.00
|
|
|
5.89
|
|
Diluted net income per share attributable to Lear
|
4.35
|
|
|
4.49
|
|
|
3.96
|
|
|
5.80
|
|
In the third quarter of 2017, the Company recognized a gain of
$54.2 million
related to obtaining control of an affiliate and a loss of
$21.2 million
related to the extinguishment of debt. In the first, second and third quarters of 2017, the Company recognized net tax benefits of
$19.1 million
,
$35.3 million
and
$14.0 million
, respectively, related to a change in accounting for share-based compensation, the reversal of valuation allowances, the redemption of the 2023 notes, restructuring charges and various other items. In the fourth quarter of 2017, the Company recognized net tax benefits of
$146.4 million
, comprised of
$289.7 million
of foreign tax credits on repatriated earnings and
$30.2 million
of other discrete tax benefits, offset by a
$131.0
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
million
one-time transition tax on accumulated foreign earnings and
$42.5 million
of tax expense to reflect the new U.S. corporate tax rate and other tax reform changes to the Company's deferred tax accounts.
For further information, see Note
5
, "
Investments in Affiliates and Other Related Party Transactions
," Note
6
, "
Debt
," and Note
7
, "
Income Taxes
."
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
April 2,
2016
|
|
July 2,
2016
|
|
October 1,
2016
|
|
December 31,
2016
|
Net sales
|
$
|
4,662.9
|
|
|
$
|
4,724.8
|
|
|
$
|
4,526.4
|
|
|
$
|
4,643.5
|
|
Gross profit
|
535.7
|
|
|
540.4
|
|
|
513.9
|
|
|
512.1
|
|
Consolidated net income
|
262.5
|
|
|
294.5
|
|
|
235.0
|
|
|
248.5
|
|
Net income attributable to Lear
|
248.4
|
|
|
282.4
|
|
|
214.4
|
|
|
229.9
|
|
Basic net income per share attributable to Lear
|
3.33
|
|
|
3.85
|
|
|
3.01
|
|
|
3.28
|
|
Diluted net income per share attributable to Lear
|
3.29
|
|
|
3.82
|
|
|
2.98
|
|
|
3.24
|
|
In the second quarter of 2016, the Company recognized a gain of
$30.3 million
related to obtaining control of an affiliate. In the fourth quarter of 2016, the Company recognized a
$34.2 million
non-cash settlement charge in connection with its lump-sum payout to certain terminated vested plan participants of its U.S. defined benefit pension plans. In the first, second, third and fourth quarters of 2016, the Company recognized
$5.0 million
,
$7.1 million
,
$2.4 million
and
$9.1 million
, respectively, of net tax benefits related to restructuring charges and various other items.
For further information see, Note
5
, "
Investments in Affiliates and Other Related Party Transactions
," Note
7
, "
Income Taxes
," and Note
8
, "
Pension and Other Postretirement Benefit Plans
."
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(
15
)
Accounting Pronouncements
The Company has considered the recent ASUs issued by the 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
|
|
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 has drafted its accounting policy with respect to the standard based on a detailed review of its business and contracts. While the Company continues to assess all potential impacts of the standard, it does not currently expect that the adoption will have a material impact on its revenues, results of operations or financial position. As required by the standard, 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. The Company plans to adopt the standard effective January 1, 2018, using the modified retrospective method. The Company continues to evaluate the effect of the standard on its ongoing financial reporting.
|
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."
|
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. The standard requires that service cost be presented in the same line item as other current employee compensation costs and that the remaining components of net benefit cost be presented in a separate line item outside of 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 (income) expense, net. There will be no impact on consolidated net income.
|
In addition to the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," discussed in Note
7
, "
Income Taxes
," the Company adopted the ASUs summarized below in 2017. The effects of the adoption of the ASUs listed below did not significantly impact the Company's financial statements:
|
|
|
|
|
|
Standards Adopted
|
|
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
|
Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company has considered the recently issued 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. The Company has elected to early adopt the standard effective January 1, 2018.
|
|
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
|