Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2012.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission file number: 001-11311

 

 

LEAR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3386776

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

21557 Telegraph Road,

Southfield, MI

  48033
(Address of principal executive offices)   (Zip code)

(248) 447-1500

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

As of October 24, 2012, the number of shares outstanding of the registrant’s common stock was 96,898,524 shares.

 

 

 


Table of Contents

LEAR CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 29, 2012

INDEX

 

     Page No.  

Part I – Financial Information

  

Item 1 – Condensed Consolidated Financial Statements

  

Introduction to the Condensed Consolidated Financial Statements

     3   

Condensed Consolidated Balance Sheets – September 29, 2012 (Unaudited) and December 31, 2011

     4   

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and Nine Months Ended September 29, 2012 and October 1, 2011

     5   

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September  29, 2012 and October 1, 2011

     6   

Notes to the Condensed Consolidated Financial Statements

     7   

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   

Item 3 – Quantitative and Qualitative Disclosures about Market Risk (included in Item 2)

  

Item 4 – Controls and Procedures

     43   

Part II – Other Information

  

Item 1 – Legal Proceedings

     44   

Item 1A – Risk Factors

     44   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     44   

Item 6 – Exhibits

     44   

Signatures

     45   

 

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Table of Contents

LEAR CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We have prepared the condensed consolidated financial statements of Lear Corporation and subsidiaries, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended December 31, 2011.

The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.

 

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LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

     September 29,
2012(1)
    December 31,
2011
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 1,269.6      $ 1,754.3   

Accounts receivable

     2,192.8        1,880.1   

Inventories

     763.4        637.8   

Other

     618.2        489.3   
  

 

 

   

 

 

 

Total current assets

     4,844.0        4,761.5   
  

 

 

   

 

 

 

LONG-TERM ASSETS:

    

Property, plant and equipment, net

     1,299.6        1,072.0   

Goodwill

     728.6        628.6   

Other

     590.1        548.8   
  

 

 

   

 

 

 

Total long-term assets

     2,618.3        2,249.4   
  

 

 

   

 

 

 

Total assets

   $ 7,462.3      $ 7,010.9   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable and drafts

   $ 2,264.6      $ 2,014.3   

Accrued liabilities

     1,033.1        1,049.2   
  

 

 

   

 

 

 

Total current liabilities

     3,297.7        3,063.5   
  

 

 

   

 

 

 

LONG-TERM LIABILITIES:

    

Long-term debt

     626.2        695.4   

Other

     736.2        690.9   
  

 

 

   

 

 

 

Total long-term liabilities

     1,362.4        1,386.3   
  

 

 

   

 

 

 

EQUITY:

    

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

     —          —     

Common stock, $0.01 par value, 300,000,000 shares authorized; 108,026,137 and 107,486,539 shares issued as of September 29, 2012 and December 31, 2011, respectively

     1.1        1.1   

Additional paid-in capital, including warrants to purchase common stock

     2,167.5        2,150.6   

Common stock held in treasury, 11,128,883 and 6,799,597 shares as of September 29, 2012 and December 31, 2011, respectively, at cost

     (483.8     (305.6

Retained earnings

     1,280.9        922.3   

Accumulated other comprehensive loss

     (298.3     (332.0
  

 

 

   

 

 

 

Lear Corporation stockholders’ equity

     2,667.4        2,436.4   

Noncontrolling interests

     134.8        124.7   
  

 

 

   

 

 

 

Equity

     2,802.2        2,561.1   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,462.3      $ 7,010.9   
  

 

 

   

 

 

 

 

(1) 

Unaudited.

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

 

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Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in millions, except per share data)

 

     Three Months Ended     Nine Months Ended  
     September 29,
2012
    October 1,
2011
    September 29,
2012
    October 1,
2011
 

Net sales

   $ 3,538.6      $ 3,460.0      $ 10,847.6      $ 10,648.0   

Cost of sales

     3,247.3        3,179.5        9,931.9        9,697.5   

Selling, general and administrative expenses

     113.4        114.9        346.8        351.6   

Amortization of intangible assets

     8.3        7.1        22.5        21.1   

Interest expense

     13.7        10.9        40.2        24.9   

Other expense, net

     1.5        10.1        12.0        15.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     154.4        137.5        494.2        537.6   

Provision for income taxes

     29.3        31.0        100.4        90.7   

Equity in net income of affiliates

     (3.0     (1.6     (33.3     (9.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     128.1        108.1        427.1        456.5   

Less: Net income attributable to noncontrolling interests

     6.7        7.4        26.2        22.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lear

   $ 121.4      $ 100.7      $ 400.9      $ 434.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to Lear

   $ 1.25      $ 0.97      $ 4.05      $ 4.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to Lear

   $ 1.23      $ 0.95      $ 3.99      $ 4.05   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Consolidated comprehensive income (loss) (Note 13)

   $ 174.3      $ (61.3   $ 461.1      $ 398.9   

Less: Comprehensive income attributable to noncontrolling interests

     7.9        7.8        26.5        24.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Lear

   $ 166.4      $ (69.1   $ 434.6      $ 374.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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LEAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)

 

     Nine Months Ended  
     September 29,
2012
    October 1,
2011
 

Cash Flows from Operating Activities:

    

Consolidated net income

   $ 427.1      $ 456.5   

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

    

Depreciation and amortization

     173.6        189.3   

Net change in recoverable customer engineering, development and tooling

     (66.6     (34.0

Net change in working capital items (see below)

     (167.1     (106.0

Other, net

     (6.3     10.7   
  

 

 

   

 

 

 

Net cash provided by operating activities

     360.7        516.5   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Additions to property, plant and equipment

     (300.5     (247.7

Insurance proceeds

     11.4        —     

Cash paid for acquisitions, net of cash acquired

     (246.1     (8.4

Other, net

     (0.9     31.3   
  

 

 

   

 

 

 

Net cash used in investing activities

     (536.1     (224.8
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Repurchase of senior notes

     (72.1     —     

Other long-term debt repayments, net

     —          (1.1

Short-term debt repayments, net

     —          (4.2

Payment of debt issuance costs

     —          (4.8

Repurchase of common stock

     (172.6     (194.2

Dividends paid to Lear Corporation stockholders

     (40.9     (38.3

Dividends paid to noncontrolling interests

     (4.3     (18.5

Other

     (15.4     (3.4
  

 

 

   

 

 

 

Net cash used in financing activities

     (305.3     (264.5
  

 

 

   

 

 

 

Effect of foreign currency translation

     (4.0     (4.8
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     (484.7     22.4   

Cash and Cash Equivalents as of Beginning of Period

     1,754.3        1,654.1   
  

 

 

   

 

 

 

Cash and Cash Equivalents as of End of Period

   $ 1,269.6      $ 1,676.5   
  

 

 

   

 

 

 

Changes in Working Capital Items:

    

Accounts receivable

   $ (276.8   $ (342.6

Inventories

     (99.6     (162.6

Accounts payable

     223.8        372.3   

Accrued liabilities and other

     (14.5     26.9   
  

 

 

   

 

 

 

Net change in working capital items

   $ (167.1   $ (106.0
  

 

 

   

 

 

 

Supplementary Disclosure:

    

Cash paid for interest

   $ 58.6      $ 57.3   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 59.9      $ 60.9   
  

 

 

   

 

 

 

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

 

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Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

Lear Corporation (“Lear,” and together with its consolidated subsidiaries, the “Company”) and its affiliates design and manufacture complete automotive seat systems and related components, as well as electrical distribution systems and related components. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide.

On November 9, 2009, Lear and certain of its U.S. and Canadian subsidiaries emerged from bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). In accordance with the provisions of FASB Accounting Standards CodificationTM (“ASC”) 852, “Reorganizations,” Lear adopted fresh-start accounting upon its emergence from Chapter 11 bankruptcy proceedings and became a new entity for financial reporting purposes as of November 7, 2009. For further information, see Note 1, “Basis of Presentation,” and Note 2, “Reorganization under Chapter 11,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The accompanying condensed consolidated financial statements include the accounts of Lear, a Delaware corporation, and the wholly owned and less than wholly owned subsidiaries controlled by Lear. In addition, Lear consolidates variable interest entities in which it has a controlling financial interest. Investments in affiliates in which Lear does not have control, but does have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method.

The Company’s annual financial results are reported on a calendar year basis and quarterly interim results are reported using a thirteen week reporting calendar.

Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation used in the quarter ended September 29, 2012.

Cost of Sales and Selling, General and Administrative Expenses

Cost of sales includes material, labor and overhead costs associated with the manufacture and distribution of the Company’s products. Distribution costs include inbound freight costs, purchasing and receiving costs, inspection costs, warehousing costs and other costs of the Company’s distribution network. Selling, general and administrative expenses include selling, engineering and development and administrative costs not directly associated with the manufacture and distribution of the Company’s products.

(2) Acquisition

On May 31, 2012, the Company completed the acquisition of Guilford Mills (“Guilford”), a privately-held portfolio company of Cerberus Capital Management, L.P., which manufactures fabrics for the automotive and specialty markets, for $246.1 million, net of cash acquired and excluding purchase price adjustments of $3.6 million. In addition, the Company incurred transaction costs related to advisory services of $0.3 million and $4.5 million in the three and nine months ended September 29, 2012, respectively, which have been expensed as incurred. Guilford is headquartered in Wilmington, North Carolina and has annual sales of approximately $400 million with operations in North America, Europe and Asia.

The Guilford acquisition was accounted for as a purchase, and accordingly, the assets acquired and liabilities assumed are included in the accompanying condensed consolidated balance sheet as of September 29, 2012. The operating results and cash flows of Guilford are included in the accompanying condensed consolidated financial statements from the date of acquisition. The preliminary purchase price and related allocation are shown below (in millions):

 

Purchase price paid to former owner, net of cash acquired

   $ 246.1   

Purchase price adjustments

     (3.6
  

 

 

 

Net purchase price

   $ 242.5   
  

 

 

 

Property, plant and equipment

   $ 93.0   

Other assets purchased and liabilities assumed, net

     (5.8

Goodwill

     102.3   

Intangible assets

     53.0   
  

 

 

 

Preliminary purchase price allocation

   $ 242.5   
  

 

 

 

Intangible assets include provisional amounts recognized for the fair value of customer-based and technology-related assets. It is currently estimated that these intangible assets have a weighted average useful life of approximately eight years.

 

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Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The purchase price and related allocation are preliminary and will be revised as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets, and certain tax attributes.

As of the acquisition date, the Company had amounts payable to Guilford of $8.9 million for purchases of raw materials. As a result of the acquisition, these amounts payable were effectively settled at carrying value, which approximated fair value. The purchase price paid to the former owner discussed above excludes cash paid to settle this pre-existing relationship.

The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented.

(3) Restructuring

In 2005, the Company initiated a multi-year operational restructuring strategy to (i) eliminate excess capacity and lower the operating costs of the Company, (ii) streamline the Company’s organizational structure and reposition its business for improved long-term profitability and (iii) better align the Company’s manufacturing capabilities with the changing needs of its customers. In light of industry conditions and customer announcements, the Company expanded this strategy in 2008. Through the end of 2011, the Company incurred pretax restructuring costs of $804.3 million. The Company’s current restructuring initiatives are substantially complete. Any future restructuring actions will depend upon market conditions, customer actions and other factors.

Restructuring costs include employee termination benefits, fixed asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These incremental costs principally include equipment and personnel relocation costs. The Company also incurs incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are recognized in the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). Generally, charges are recorded as restructuring actions are approved and/or implemented.

In the first nine months of 2012, the Company recorded charges of $11.0 million in connection with its restructuring actions. These charges consist of $9.4 million recorded as cost of sales, $1.7 million recorded as selling, general and administrative expenses and ($0.1) million recorded as other expense, net. The restructuring charges consist of employee termination benefits of $8.9 million and contract termination costs of $1.4 million, as well as other related restructuring costs of $0.7 million. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements and completed negotiations. The Company expects to incur approximately $7.5 million of additional restructuring costs related to activities initiated as of September 29, 2012, and expects that the components of such costs will be consistent with its historical experience.

A summary of 2012 activity is shown below (in millions):

 

                   Utilization         
     Accrual as of
January  1, 2012
     2012
Charges
     Cash     Non-cash      Accrual as of
September 29, 2012
 

Employee termination benefits

   $ 56.8       $ 8.9       $ (57.4   $ —         $ 8.3   

Contract termination costs

     5.7         1.4         (1.3     —           5.8   

Other related costs

     —           0.7         (0.7     —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 62.5       $ 11.0       $ (59.4   $ —         $ 14.1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

(4) Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. A summary of inventories is shown below (in millions):

 

     September 29,
2012
     December 31,
2011
 

Raw materials

   $ 619.6       $ 520.1   

Work-in-process

     37.1         36.0   

Finished goods

     106.7         81.7   
  

 

 

    

 

 

 

Inventories

   $ 763.4       $ 637.8   
  

 

 

    

 

 

 

 

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

(5) Pre-Production Costs Related to Long-Term Supply Agreements

The Company incurs pre-production engineering and development (“E&D”) and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the Company does not have a non-cancelable right to use the tooling. During the first nine months of 2012 and 2011, the Company capitalized $161.0 million and $135.4 million, respectively, of pre-production E&D costs for which reimbursement is contractually guaranteed by the customer. During the first nine months of 2012 and 2011, the Company also capitalized $121.6 million and $118.8 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the Company has a non-cancelable right to use the tooling. These amounts are included in other current and long-term assets in the accompanying condensed consolidated balance sheets. During the first nine months of 2012 and 2011, the Company collected $209.4 million and $222.1 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):

 

     September 29,
2012
     December 31,
2011
 

Current

   $ 167.3       $ 96.0   

Long-term

     57.8         64.2   
  

 

 

    

 

 

 

Recoverable customer engineering, development and tooling

   $ 225.1       $ 160.2   
  

 

 

    

 

 

 

(6) Property, Plant and Equipment

Property, plant and equipment is stated at cost; however, as a result of the adoption of fresh-start accounting, property, plant and equipment was re-measured at estimated fair value as of November 7, 2009. For further information, see Note 3, “Fresh-Start Accounting,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Costs associated with the repair and maintenance of the Company’s property, plant and equipment are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency or safety of the Company’s property, plant and equipment are capitalized and depreciated over the remaining useful life of the related asset. Depreciable property is depreciated over the estimated useful lives of the assets, using principally the straight-line method.

A summary of property, plant and equipment is shown below (in millions):

 

     September 29,
2012
    December 31,
2011
 

Land

   $ 106.5      $ 106.1   

Buildings and improvements

     470.2        406.1   

Machinery and equipment

     1,264.5        988.6   

Construction in progress

     31.3        3.3   
  

 

 

   

 

 

 

Total property, plant and equipment

     1,872.5        1,504.1   

Less – accumulated depreciation

     (572.9     (432.1
  

 

 

   

 

 

 

Net property, plant and equipment

   $ 1,299.6      $ 1,072.0   
  

 

 

   

 

 

 

Depreciation expense was $54.9 million and $56.4 million in the three months ended September 29, 2012 and October 1, 2011, respectively, and $151.0 million and $168.2 million in the nine months ended September 29, 2012 and October 1, 2011, respectively.

The Company monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP. If impairment indicators exist, the Company performs the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. The Company does not believe that there were any indicators that would have resulted in long-lived asset impairment charges as of September 29, 2012. The Company will, however, continue to assess the impact of any significant industry events and long-term automotive production estimates on the realization of its long-lived assets.

 

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

(7) Goodwill

A summary of the changes in the carrying amount of goodwill, all of which relates to the seating segment, for the nine months ended September 29, 2012, is shown below (in millions):

 

Balance as of January 1, 2012

   $ 628.6   

Acquisition

     102.3   

Foreign currency translation

     (2.3
  

 

 

 

Balance as of September 29, 2012

   $ 728.6   
  

 

 

 

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 impairment testing, the Company first performs 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, the Company then compares the fair value of each of its reporting units to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment testing as of the first day of its fourth quarter.

The Company does not believe that there were any indicators that would have resulted in goodwill impairment charges as of September 29, 2012. The Company will, however, continue to assess the impact of any significant industry events and long-term automotive production estimates on its recorded goodwill.

(8) Long-Term Debt

A summary of long-term debt and the related weighted average interest rates is shown below (in millions):

 

     September 29, 2012     December 31, 2011  
     Long-Term
Debt
     Weighted
Average

Interest  Rate
    Long-Term
Debt
     Weighted
Average

Interest  Rate
 

7.875% Senior Notes due 2018

   $ 313.3         8.00   $ 347.9         8.00

8.125% Senior Notes due 2020

     312.9         8.25     347.5         8.25
  

 

 

      

 

 

    

Long-term debt

   $ 626.2         $ 695.4      
  

 

 

      

 

 

    

Senior Notes

As of September 29, 2012, the Company’s long-term debt consisted of $315 million in aggregate principal amount at maturity of senior unsecured notes due 2018 at a stated coupon rate of 7.875% (the “2018 Notes”) and $315 million in aggregate principal amount at maturity of senior unsecured notes due 2020 at a stated coupon rate of 8.125% (the “2020 Notes” and together with the 2018 Notes, the “Notes”). The 2018 Notes were priced at 99.276% of par, resulting in a yield to maturity of 8.00%, and the 2020 Notes were priced at 99.164% of par, resulting in a yield to maturity of 8.25%.

On August 24, 2012, the Company redeemed 10% of the original aggregate principal amount of each of the 2018 Notes and the 2020 Notes at a redemption price equal to 103% of the aggregate principal amount redeemed, plus accrued and unpaid interest. In connection with this transaction, the Company paid $72.1 million and recognized a loss of $3.7 million on the partial extinguishment of debt.

The Notes were issued on March 26, 2010, and interest on the Notes is payable on March 15 and September 15 of each year. The 2018 Notes mature on March 15, 2018, and the 2020 Notes mature on March 15, 2020.

The Notes are senior unsecured obligations. The Company’s obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain domestic subsidiaries, which are directly or indirectly 100% owned by Lear. See Note 18, “Supplemental Guarantor Condensed Consolidating Financial Statements.”

The indenture governing the Notes contains restrictive covenants that, among other things, limit the ability of the Company and its subsidiaries to: (i) incur additional debt, (ii) pay dividends and make other restricted payments, (iii) create or permit certain liens, (iv) issue or sell capital stock of the Company’s restricted subsidiaries, (v) use the proceeds from sales of assets and subsidiary stock,

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

(vi) create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to the Company, (vii) enter into transactions with affiliates, (viii) enter into sale and leaseback transactions and (ix) consolidate or merge or sell all or substantially all of the Company’s assets. The foregoing limitations are subject to exceptions as set forth in the Notes. In addition, if in the future the Notes have an investment grade credit rating from both Moody’s Investors Service and Standard & Poor’s Ratings Services and no default has occurred and is continuing, certain of these covenants will, thereafter, no longer apply to the Notes for so long as the Notes have an investment grade credit rating by both rating agencies. The indenture governing the Notes also contains customary events of default. As of September 29, 2012, the Company was in compliance with all covenants under the indenture governing the Notes.

Revolving Credit Facility

The Company’s amended and restated senior secured credit agreement provides for a $500 million revolving credit facility. The revolving credit facility permits borrowings for general corporate and working capital purposes and the issuance of letters of credit. The commitments under the revolving credit facility expire on June 17, 2016. As of September 29, 2012, there were no borrowings outstanding under the revolving credit facility.

Advances under the revolving credit facility generally bear interest at a variable rate per annum equal to (i) the Eurocurrency Rate (as defined) plus an adjustable margin of 1.375% to 3.0% based on the Company’s corporate rating (2.25% as of September 29, 2012), payable on the last day of each applicable interest period but in no event less frequently than quarterly, or (ii) the Adjusted Base Rate (as defined) plus an adjustable margin of 0.375% to 2.0% based on the Company’s corporate rating (1.25% as of September 29, 2012), payable quarterly. A facility fee is payable which ranges from 0.375% to 0.50% of the total amount committed under the revolving credit facility.

The Company’s obligations under the amended and restated senior secured credit agreement are secured on a first priority basis by a lien on substantially all of the U.S. assets of the Company and its domestic subsidiaries, as well as 100% of the stock of the Company’s domestic subsidiaries and 65% of the stock of certain of the Company’s foreign subsidiaries. In addition, obligations under the amended and restated senior secured credit agreement are guaranteed, jointly and severally, on a first priority basis, by certain domestic subsidiaries, which are directly or indirectly 100% owned by Lear. See Note 18, “Supplemental Guarantor Condensed Consolidating Financial Statements.”

The amended and restated senior secured credit agreement contains various customary representations, warranties and covenants by the Company, including, without limitation, (i) covenants regarding maximum leverage and minimum interest coverage, (ii) limitations on fundamental changes involving the Company or its subsidiaries and (iii) limitations on indebtedness, liens, investments and restricted payments. As of September 29, 2012, the Company was in compliance with all covenants under the agreement governing the amended and restated senior secured credit agreement.

For further information on the Notes and the revolving credit facility, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

(9) Pension and Other Postretirement Benefit Plans

Net Periodic Pension and Other Postretirement Benefit Cost

The components of the Company’s net periodic pension benefit cost are shown below (in millions):

 

     Three Months Ended     Nine Months Ended  
     September 29, 2012     October 1, 2011     September 29, 2012     October 1, 2011  
     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  

Service cost

   $ 0.8      $ 1.9      $ 0.7      $ 1.7      $ 2.4      $ 5.8      $ 2.2      $ 5.0   

Interest cost

     6.6        4.7        5.8        6.4        18.3        14.1        17.5        19.1   

Expected return on plan assets

     (7.5     (5.5     (6.5     (7.9     (20.6     (16.5     (19.7     (23.6

Amortization of actuarial loss

     1.0        1.4        —          0.1        2.9        4.2        —          0.2   

Settlement (gain) loss

     —          —          —          —          0.6        —          (0.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 0.9      $ 2.5      $ —        $ 0.3      $ 3.6      $ 7.6      $ (0.1   $ 0.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The components of the Company’s net periodic other postretirement benefit cost are shown below (in millions):

 

     Three Months Ended      Nine Months Ended  
     September 29, 2012     October 1, 2011      September 29, 2012     October 1, 2011  
     U.S.      Foreign     U.S.      Foreign      U.S.      Foreign     U.S.      Foreign  

Service cost

   $ 0.1       $ 0.3      $ 0.1       $ 0.4       $ 0.3       $ 0.8      $ 0.3       $ 0.8   

Interest cost

     1.1         0.9        1.4         0.8         3.3         2.4        4.1         2.8   

Amortization of actuarial loss

     0.1         0.1        —           0.1         0.3         0.2        0.2         0.1   

Amortization of prior service credit

     —           (0.1     —           —           —           (0.1     —           —     

Special termination benefits

     —           0.1        —           —           —           0.3        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 1.3       $ 1.3      $ 1.5       $ 1.3       $ 3.9       $ 3.6      $ 4.6       $ 3.7   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Contributions

Employer contributions to the Company’s domestic and foreign defined benefit pension plans for the nine months ended September 29, 2012, were $25.7 million. The Company expects contributions to its domestic and foreign defined benefit pension plans of approximately $35 million in 2012. 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.

Employer contributions to the Company’s defined contribution retirement program for its salaried employees, determined as a percentage of each covered employee’s eligible compensation, for the nine months ended September 29, 2012, were $11.3 million. The Company expects total contributions to this program of $14.3 million in 2012.

(10) Other Expense, Net

Other expense, net includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the sales of fixed assets and other miscellaneous income and expense. A summary of other expense, net is shown below (in millions):

 

     Three Months Ended     Nine Months Ended  
     September 29,
2012
    October 1,
2011
    September 29,
2012
    October 1,
2011
 

Other expense

   $ 9.3      $ 13.0      $ 25.5      $ 18.4   

Other income

     (7.8     (2.9     (13.5     (3.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

   $ 1.5      $ 10.1      $ 12.0      $ 15.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three and nine months ended September 29, 2012, other expense includes a loss of $3.7 million on the partial extinguishment of debt. See Note 8, “Long-Term Debt.”

For the three and nine months ended September 29, 2012, other income includes gains of $7.2 million and $12.3 million, respectively, resulting from insurance recoveries related to the destruction of property, plant and equipment due to a fire. See Note 14, “Legal and Other Contingencies.”

For the three and nine months ended October 1, 2011, other income includes gains of $1.9 million and $5.8 million, respectively, related to affiliate transactions.

(11) Income Taxes

The provision for income taxes was $29.3 million for the third quarter of 2012, representing an effective tax rate of 19.0% on pretax income before equity in net income of affiliates of $154.4 million, as compared to $31.0 million for the third quarter of 2011, representing an effective tax rate of 22.5% on pretax income before equity in net income of affiliates of $137.5 million. The provision for income taxes was $100.4 million for the nine months ended September 29, 2012, representing an effective tax rate of 20.3% on pretax income before equity in net income of affiliates of $494.2 million, as compared to $90.7 million for the nine months ended October 1, 2011, representing an effective tax rate of 16.9% on a pretax income before equity in net income of affiliates of $537.6 million.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

In the first nine months of 2012 and 2011, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of the Company’s restructuring charges and other expenses, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. In the first nine months of 2011, the Company recognized a tax benefit of $22.9 million related to the reversal of a full valuation allowance with respect to the deferred tax assets of two foreign subsidiaries and an increase in tax expense related to the phase out of preferential holiday tax rates in several Chinese subsidiaries. Excluding these items, the effective tax rate in the first nine months of 2012 and 2011 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items.

The Company’s current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances in certain countries, particularly the United States. 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 no tax expense with respect to income generated in these countries until the respective valuation allowances are eliminated. Accordingly, income taxes are impacted by the U.S. and foreign valuation allowances and the mix of earnings among jurisdictions.

For a description of the Company’s valuation allowances, see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Three Months Ended September 29, 2012 vs. Three Months Ended October 1, 2011.”

In connection with the Company’s emergence from Chapter 11 bankruptcy proceedings, the Company increased its U.S. net operating loss carryforwards and retained its capital loss and tax credit carryforwards (collectively, the “Tax Attributes”). However, Internal Revenue Code (“IRC”) Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. The Company’s emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. As a result, the Company’s future U.S. taxable income may not be fully offset by the Tax Attributes if such income exceeds its annual limitation, and the Company may incur a tax liability with respect to such income. In addition, subsequent changes in ownership for purposes of the IRC could further limit the Company’s ability to use its Tax Attributes.

For further information , see Note 9, “Income Taxes,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

(12) Net Income Per Share Attributable to Lear

Basic net income per share attributable to Lear is computed by dividing net income attributable to Lear by the average number of common shares outstanding during the period. Common shares issuable upon the satisfaction of certain conditions pursuant to a contractual agreement, such as those common shares contemplated as part of the Company’s emergence from Chapter 11 bankruptcy proceedings, are considered common shares outstanding and are included in the computation of basic net income per share attributable to Lear.

Diluted net income per share attributable to Lear is computed using the treasury stock method by dividing net income attributable to Lear by the average number of common shares outstanding, including the dilutive effect of common stock equivalents using the average share price during the period.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

A summary of information used to compute basic and diluted net income per share attributable to Lear is shown below (in millions, except share data):

 

     Three Months Ended      Nine Months Ended  
     September 29,
2012
     October 1,
2011
     September 29,
2012
     October 1,
2011
 

Net income attributable to Lear

   $ 121.4       $ 100.7       $ 400.9       $ 434.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Average common shares outstanding

     97,482,353         103,356,696         98,975,335         104,363,937   

Dilutive effect of common stock equivalents

     1,382,520         2,452,053         1,493,131         2,795,339   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted shares outstanding

     98,864,873         105,808,749         100,468,466         107,159,276   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Basic net income per share attributable to Lear

   $ 1.25       $ 0.97       $ 4.05       $ 4.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share attributable to Lear

   $ 1.23       $ 0.95       $ 3.99       $ 4.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

(13) Comprehensive Income and Equity

Comprehensive Income

Comprehensive income is defined as all changes in the Company’s net assets except changes resulting from transactions with stockholders. It differs from net income in that certain items recorded in equity are included in comprehensive income.

A summary of comprehensive income and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three and nine months ended September 29, 2012, is shown below (in millions):

 

     Three Months Ended September 29, 2012     Nine Months Ended September 29, 2012  
     Equity     Attributable
to Lear
Corporation
Stockholders
    Non-controlling
Interests
    Equity     Attributable
to Lear
Corporation
Stockholders
    Non-controlling
Interests
 

Beginning equity balance

   $ 2,700.5      $ 2,565.5      $ 135.0      $ 2,561.1      $ 2,436.4      $ 124.7   

Stock-based compensation transactions and other

     8.8        8.8        —          22.8        22.8        —     

Repurchase of common stock

     (50.1     (50.1     —          (172.6     (172.6     —     

Dividends declared to Lear Corporation stockholders

     (13.9     (13.9     —          (42.3     (42.3     —     

Dividends paid to noncontrolling interests

     —          —          —          (4.3     —          (4.3

Acquisition of noncontrolling interests

     (17.4     (9.3     (8.1     (23.6     (11.5     (12.1

Comprehensive income:

            

Net income

     128.1        121.4        6.7        427.1        400.9        26.2   

Other comprehensive income (loss), net of tax:

            

Defined benefit plan adjustments

     2.6        2.6        —          0.8        0.8        —     

Derivative instruments and hedging activities

     18.0        18.0        —          54.0        54.0        —     

Foreign currency translation adjustments

     25.6        24.4        1.2        (20.8     (21.1     0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     46.2        45.0        1.2        34.0        33.7        0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     174.3        166.4        7.9        461.1        434.6        26.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending equity balance

   $ 2,802.2      $ 2,667.4      $ 134.8      $ 2,802.2      $ 2,667.4      $ 134.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In the three months ended September 29, 2012, foreign currency translation adjustments relate primarily to the Euro, the Chinese renminbi and the British pound sterling. In the nine months ended September 29, 2012, foreign currency translation adjustments relate primarily to the Euro and the Brazilian real.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

A summary of comprehensive income (loss) and reconciliations of equity, Lear Corporation stockholders’ equity and noncontrolling interests for the three and nine months ended October 1, 2011, is shown below (in millions):

 

     Three Months Ended October 1, 2011     Nine Months Ended October 1, 2011  
     Equity     Attributable
to Lear
Corporation
Stockholders
    Non-controlling
Interests
    Equity     Attributable
to Lear
Corporation
Stockholders
    Non-controlling
Interests
 

Beginning equity balance

   $ 2,901.9      $ 2,792.7      $ 109.2      $ 2,568.8      $ 2,460.2      $ 108.6   

Stock-based compensation transactions and other

     10.3        10.3        —          25.8        25.8        —     

Repurchase of common stock

     (94.2     (94.2     —          (194.2     (194.2     —     

Dividends declared to Lear Corporation stockholders

     (13.2     (13.2     —          (40.0     (40.0     —     

Dividends paid to noncontrolling interests

     (0.3     —          (0.3     (18.5     —          (18.5

Transaction with affiliates

     —          —          —          2.4        —          2.4   

Comprehensive income:

            

Net income

     108.1        100.7        7.4        456.5        434.2        22.3   

Other comprehensive income (loss), net of tax:

            

Defined benefit plan adjustments

     0.1        0.1        —          0.3        0.3        —     

Derivative instruments and hedging activities

     (51.9     (51.9     —          (45.0     (45.0     —     

Foreign currency translation adjustments

     (117.6     (118.0     0.4        (12.9     (14.8     1.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (169.4     (169.8     0.4        (57.6     (59.5     1.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (61.3     (69.1     7.8        398.9        374.7        24.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending equity balance

   $ 2,743.2      $ 2,626.5      $ 116.7      $ 2,743.2      $ 2,626.5      $ 116.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In the three months ended October 1, 2011, foreign currency translation adjustments relate primarily to the Euro.

Lear Corporation Stockholders’ Equity

Common Stock Share Repurchase Program — The Company’s Board of Directors has authorized a three year, $700 million common stock share repurchase program. Under this program, the Company will repurchase shares of common stock from time to time in open market or privately negotiated transactions at prices, times and amounts to be determined by the Company. The common stock repurchase authorization expires on February 16, 2014.

In the first nine months of 2012, the Company repurchased 4,200,151 shares of its outstanding common stock at an average purchase price of $41.10 per share, excluding commissions, for an aggregate purchase price of $172.6 million. In the first nine months of 2011, the Company repurchased 4,082,523 shares of its outstanding common stock at an average purchase price of $47.57 per share, excluding commissions, for an aggregate purchase price of $194.2 million. As of September 29, 2012, the Company had repurchased 10,382,580 shares of its outstanding common stock at an average purchase price of $43.51 per share, excluding commissions, and was authorized to repurchase an additional $248.3 million in shares of its outstanding common stock under this program. The extent to which the Company will repurchase its outstanding common stock and the timing of such repurchases will depend upon its financial condition, prevailing market conditions, alternative uses of capital and other factors. In addition, the Company’s amended and restated credit facility and the indenture governing the Notes place certain limitations on the repurchase of common shares.

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 awards to cover minimum tax withholding requirements as common stock held in treasury in the accompanying condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011.

Quarterly Dividend — In the first nine months of 2012 and 2011, the Company’s Board of Directors declared quarterly cash dividends of $0.14 and $0.125 per share of common stock, respectively. In the first nine months of 2012, declared dividends totaled $42.3 million, and dividends paid totaled $40.9 million. In the first nine months of 2011, declared dividends totaled $40.0 million, and dividends paid totaled $38.3 million. Dividends payable on common shares to be distributed under the Company’s stock-based compensation program and common shares contemplated as part of the Company’s emergence from Chapter 11 bankruptcy proceedings will be paid when such common shares are distributed.

 

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Noncontrolling Interests

In the first nine months of 2012, the Company acquired certain noncontrolling interests in two consolidated subsidiaries. In the first nine months of 2011, the Company acquired a controlling interest in an affiliate previously accounted for under the equity method.

(14) Legal and Other Contingencies

As of September 29, 2012 and December 31, 2011, the Company had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $14.2 million and $17.0 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.

On October 5, 2011, a plaintiff filed a putative class action complaint in the United States District Court for the Eastern District of Michigan against the Company and several other global suppliers of automotive wire harnesses alleging violations of federal and state antitrust and related laws. Since that time, a number of other plaintiffs have filed substantially similar class action complaints against the Company and these and other suppliers and individuals in a number of different federal district courts, and it is possible that additional similar lawsuits may be filed in the future. Plaintiffs purport to be direct and indirect purchasers of automotive wire harnesses supplied by the Company and/or the other defendants during the relevant period. The complaints allege that the defendants conspired to fix prices at which automotive wire harnesses were sold and that this had an anticompetitive effect upon interstate commerce in the United States. The complaints further allege that defendants fraudulently concealed their alleged conspiracy. The plaintiffs in these proceedings seek injunctive relief and recovery of an unspecified amount of damages, as well as costs and expenses relating to the proceedings, including attorneys’ fees. On February 7, 2012, the Judicial Panel on Multidistrict Litigation entered an order transferring and coordinating the various civil actions, for pretrial purposes, into one proceeding in the United States District Court for the Eastern District of Michigan. On May 14, 2012, three purported classes of plaintiffs — direct purchasers of automotive wire harnesses; automotive dealers that indirectly purchased automotive wire harnesses or vehicles containing such harnesses; and indirect purchasers that purchased or leased vehicles containing automotive wire harnesses (or purchased replacement automotive wire harnesses for their vehicles) — filed consolidated amended complaints in the consolidated proceeding. With respect to the Company, the consolidated amended complaints are substantially similar to the individual complaints that had been filed in the various jurisdictions. On July 13, 2012, the Company filed a motion to have these actions dismissed for failure to state a claim for relief, because plaintiffs failed to plead a plausible claim against the Company and because, even if it existed, such a claim would be barred following the Company’s emergence from bankruptcy.

Beginning in early 2012, single putative class action complaints were filed in the Superior Courts of Justice in Ontario and Quebec against the Company and several other global suppliers of automotive wire harnesses alleging violations of Canadian laws related to competition. The allegations in these complaints are substantially similar to those complaints that have been filed in the United States.

On November 17, 2011, the Company filed a motion with the United States Bankruptcy Court for the Southern District of New York seeking entry of an order enforcing the Company’s 2009 Plan of Reorganization and directing dismissal of the pending class action complaints. The bankruptcy court heard oral argument on the motion and, on February 10, 2012, ruled that claims against the Company alleging violation of antitrust law are enjoined to the extent that they arose prior to the Company’s emergence from Chapter 11 bankruptcy proceedings on November 9, 2009. The bankruptcy court further held that the District Court was the appropriate forum to address antitrust claims arising after the Company’s emergence from Chapter 11 bankruptcy proceedings. The Company is currently appealing the bankruptcy court’s decision on the issue of claims against the Company after November 9, 2009, not being enjoined.

The ultimate outcome of this litigation, and consequently, an estimate of the possible loss, if any, related to this litigation, cannot reasonably be determined at this time. However, the Company believes the plaintiffs’ allegations against it are without merit and intends to vigorously defend itself in these proceedings.

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.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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, the Company is a party to warranty-sharing and other agreements with certain of its customers related to its products. 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. 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. 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.

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 based on its individual customer agreements. Product warranty reserves are recorded for known warranty issues when liability for such issues is probable and related amounts are reasonably estimable.

A summary of the changes in reserves for product liability and warranty claims for the nine months ended September 29, 2012, is shown below (in millions):

 

Balance as of January 1, 2012

   $  23.4   

Expense, net (including changes in estimates)

     3.4   

Settlements

     (2.7

Foreign currency translation and other

     0.9   
  

 

 

 

Balance as of September 29, 2012

   $ 25.0   
  

 

 

 

Environmental Matters

The Company is subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. The Company’s policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance with this standard. However, the Company currently is, has been and in the future may become the subject of formal or informal enforcement actions or procedures.

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

As of September 29, 2012 and December 31, 2011, the Company had recorded environmental reserves of $5.2 million and $2.8 million, respectively. 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 these 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.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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.

Insurance Recoveries

The Company has incurred losses and incremental costs related to the destruction of assets caused by a fire at one of its European production facilities in the third quarter of 2011 and is pursuing, and will continue to pursue, recovery of such costs under applicable insurance policies. Anticipated proceeds from insurance recoveries related to losses and incremental costs that have been incurred (“loss recoveries”) are recognized when receipt is probable. Anticipated proceeds from insurance recoveries in excess of the net book value of destroyed property, plant and equipment (“insurance gain contingencies”) are recognized when all contingencies related to the claim have been resolved. Loss recoveries related to the destruction of inventory and incremental costs are included in costs of sales, and loss recoveries and insurance gain contingencies related to the destruction of property, plant and equipment are included in other expense, net. Cash proceeds related to the destruction of inventory and incremental costs are included in cash flows from operating activities, and cash proceeds related to the destruction of property, plant and equipment are included in cash flows from investing activities.

Since the fire in the third quarter of 2011, the Company incurred cumulative losses and incremental costs of $51.4 million ($9.6 million and $27.4 million incurred in the three and nine months ended September 29, 2012, respectively). The Company also recognized in cost of sales cumulative loss recoveries of $36.1 million ($5.8 million and $26.0 million recognized in the three and nine months ended September 29, 2012, respectively) and in other expense cumulative loss recoveries and insurance gain contingencies of $15.7 million ($7.2 million and $12.3 million recognized in the three and nine months ended September 29, 2012, respectively). In addition, the Company has received cumulative cash proceeds of $50.4 million ($37.8 million received in the nine months ended September 29, 2012), of which $35.5 million ($26.4 million in the nine months ended September 29, 2012) has been reflected in cash flows from operating activities and $14.9 million ($11.4 million in the nine months ended September 29, 2012) has been reflected in cash flows from investing activities.

(15) Segment Reporting

The Company has two reportable operating segments: seating, which includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam, and electrical power management systems (“EPMS”), which includes wiring, connectors, junction boxes and various other components of electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment.

The Company evaluates the performance of its operating segments based primarily on (i) revenues from external customers, (ii) pretax income before equity in net income of affiliates, interest expense and other expense (“segment earnings”) and (iii) cash flows, defined as segment earnings less capital expenditures plus depreciation and amortization. A summary of revenues from external customers and other financial information by reportable operating segment is shown below (in millions):

 

     Three Months Ended September 29, 2012  
     Seating      EPMS      Other     Consolidated  

Revenues from external customers

   $ 2,661.6       $ 877.0       $ —        $ 3,538.6   

Segment earnings (1)

     154.8         65.2         (50.4     169.6   

Depreciation and amortization

     40.7         20.3         2.3        63.3   

Capital expenditures

     83.7         35.6         0.8        120.1   

Total assets

     4,414.6         1,476.8         1,570.9        7,462.3   

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

     Three Months Ended October 1, 2011  
     Seating      EPMS      Other     Consolidated  

Revenues from external customers

   $ 2,687.8       $ 772.2       $ —        $ 3,460.0   

Segment earnings (1)

     169.9         40.6         (52.0     158.5   

Depreciation and amortization

     36.6         25.0         1.9        63.5   

Capital expenditures

     56.1         33.7         1.7        91.5   

Total assets

     3,919.4         1,313.5         1,983.0        7,215.9   
     Nine Months Ended September 29, 2012  
     Seating      EPMS      Other     Consolidated  

Revenues from external customers

   $ 8,268.8       $ 2,578.8       $ —        $ 10,847.6   

Segment earnings (1)

     524.2         176.4         (154.2     546.4   

Depreciation and amortization

     109.9         57.2         6.5        173.6   

Capital expenditures

     186.4         108.8         5.3        300.5   

Total assets

     4,414.6         1,476.8         1,570.9        7,462.3   
     Nine Months Ended October 1, 2011  
     Seating      EPMS      Other     Consolidated  

Revenues from external customers

   $ 8,272.7       $ 2,375.3       $ —        $ 10,648.0   

Segment earnings (1)

     601.8         133.2         (157.2     577.8   

Depreciation and amortization

     111.7         72.1         5.5        189.3   

Capital expenditures

     135.5         107.9         4.3        247.7   

Total assets

     3,919.4         1,313.5         1,983.0        7,215.9   

 

  (1) 

See definition above.

For the three months ended September 29, 2012, segment earnings include restructuring charges (credits) of $2.2 million, $0.8 million and ($0.1) million in the seating and EPMS segments and in the other category, respectively. For the nine months ended September 29, 2012, segment earnings include restructuring charges of $8.5 million, $2.4 million and $0.2 million in the seating and EPMS segments and in the other category, respectively. For the three months ended October 1, 2011, segment earnings include restructuring charges (credits) of $8.6 million, $0.8 million and ($0.1) million in the seating and EPMS segments and in the other category, respectively. For the nine months ended October 1, 2011, segment earnings include restructuring charges of $12.0 million and $1.9 million in the seating and EPMS segments, respectively. See Note 3, “Restructuring.”

A reconciliation of consolidated segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates is shown below (in millions):

 

     Three Months Ended      Nine Months Ended  
     September 29,
2012
     October 1,
2011
     September 29,
2012
     October 1,
2011
 

Segment earnings

   $ 169.6       $ 158.5       $ 546.4       $ 577.8   

Interest expense

     13.7         10.9         40.2         24.9   

Other expense, net

     1.5         10.1         12.0         15.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 154.4       $ 137.5       $ 494.2       $ 537.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

(16) Financial 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 of the fair value hierarchy). As of September 29, 2012, the aggregate carrying value of the Company’s Notes was $626.2 million, as compared to an estimated aggregate fair value of $700.6 million. As of December 31, 2011, the aggregate carrying value of the Company’s Notes was $695.4 million, as compared to an estimated aggregate fair value of $764.6 million.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Derivative Instruments and Hedging Activities

The Company has used derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates, interest rates and commodity prices and the resulting variability of the Company’s operating results. The Company is not a party to leveraged derivatives. On the date that a derivative contract is entered into, the Company designates the derivative as either (1) a hedge of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to 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).

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 Chinese renminbi and the Canadian dollar. Forwards, swaps and other derivative contracts are accounted for as cash flow hedges when the hedged item is a forecasted transaction or relates to the variability of cash flows to be received or paid. As of September 29, 2012 and December 31, 2011, contracts designated as cash flow hedges with $593.2 million and $585.7 million, respectively, of notional amount were outstanding with maturities of less than 15 months and 17 months, respectively. As of September 29, 2012 and December 31, 2011, the fair value of these contracts was approximately $14.6 million and ($39.1) million, respectively. As of September 29, 2012 and December 31, 2011, other foreign currency derivative contracts that did not qualify for hedge accounting with $43.0 million and $148.4 million, respectively, of notional amount were outstanding. These foreign currency derivative contracts consist principally of hedges of cash transactions of up to seven months, hedges of intercompany loans and hedges of certain other balance sheet exposures. As of September 29, 2012 and December 31, 2011, the fair value of these contracts was approximately ($1.7) million and ($5.4) million, respectively.

The fair value of outstanding foreign currency derivative contracts and the related classification in the accompanying condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011, is shown below (in millions):

 

     September 29,
2012
    December 31,
2011
 

Contracts qualifying for hedge accounting:

    

Other current assets

   $ 15.9      $ 0.2   

Other long-term assets

     1.8        —     

Other current liabilities

     (3.0     (38.1

Other long-term liabilities

     (0.1     (1.2
  

 

 

   

 

 

 
     14.6        (39.1
  

 

 

   

 

 

 

Contracts not qualifying for hedge accounting:

    

Other current assets

     0.4        —     

Other current liabilities

     (2.1     (5.4
  

 

 

   

 

 

 
     (1.7     (5.4
  

 

 

   

 

 

 
   $ 12.9      $ (44.5
  

 

 

   

 

 

 

Pretax amounts related to foreign currency derivative contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):

 

     Three Months Ended     Nine Months Ended  
     September 29,
2012
    October 1,
2011
    September 29,
2012
     October 1,
2011
 

Contracts qualifying for hedge accounting:

         

Gains (losses) recognized in accumulated other comprehensive loss

   $ 18.3      $ (55.2   $ 48.1       $ (45.8

(Gains) losses reclassified from accumulated other comprehensive loss

     (0.3     3.9        5.6         1.6   
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

   $ 18.0      $ (51.3   $ 53.7       $ (44.2
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

For the three and nine months ended September 29, 2012, net sales includes gains of $0.2 million and $0.7 million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the three and nine months ended September 29, 2012, cost of sales includes gains (losses) of $0.1 million and ($6.3) million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the three and nine months ended October 1, 2011, net sales includes losses of $0.8 million and $1.0 million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the three and nine months ended October 1, 2011, cost of sales includes losses of $3.1 million and $0.6 million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts.

Interest rate — Historically, the Company used interest rate swap and other derivative contracts to manage its exposure to fluctuations in interest rates. Interest rate swap and other derivative contracts which fix the interest payments of certain variable rate debt instruments or fix the market rate component of anticipated fixed rate debt instruments are accounted for as cash flow hedges. Interest rate swap and other derivative contracts which hedge the change in fair value of certain fixed rate debt instruments are accounted for as fair value hedges. As of September 29, 2012 and December 31, 2011, there were no interest rate contracts outstanding. The Company will continue to evaluate, and may use, derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to manage its exposures to fluctuations in interest rates in the future.

Commodity prices — The Company uses derivative instruments to reduce its exposure to fluctuations in certain commodity prices. These derivative instruments are utilized to hedge forecasted inventory purchases and to the extent that they qualify and meet hedge accounting criteria, they are accounted for as cash flow hedges. Commodity swap contracts that are not designated as cash flow hedges are marked to market with changes in fair value recognized immediately in the condensed consolidated statements of comprehensive income (loss). See Note 10, “Other Expense, Net.” As of September 29, 2012 and December 31, 2011, commodity swap contracts with $0.7 million and $3.4 million, respectively, of notional amount were outstanding with maturities of less than one month and ten months, respectively. As of September 29, 2012 and December 31, 2011, the fair market value of these contracts was approximately zero and ($0.3) million, respectively.

The fair value of outstanding commodity swap contracts and the related classification in the accompanying condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011, are shown below (in millions):

 

     September 29,
2012
     December 31,
2011
 

Contracts qualifying for hedge accounting:

     

Other current liabilities

   $ —         $ (0.3
  

 

 

    

 

 

 

Pretax amounts related to commodity swap contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):

 

     Three
Months Ended
    Nine Months Ended  
     October 1,
2011
    September 29,
2012
     October 1,
2011
 

Contracts qualifying for hedge accounting:

    

Gains (losses) recognized in accumulated other comprehensive loss

   $ (0.7   $ 0.1       $ (0.9

Losses reclassified from accumulated other comprehensive loss

     0.1        0.2         0.1   
  

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

   $ (0.6   $ 0.3       $ (0.8
  

 

 

   

 

 

    

 

 

 

For the nine months ended September 29, 2012, cost of sales includes losses of $0.2 million reclassified from accumulated other comprehensive loss related to commodity swap contracts. For the three and nine months ended October 1, 2011, cost of sales includes losses of $0.1 million reclassified from accumulated other comprehensive loss related to commodity swap contracts.

As of September 29, 2012 and December 31, 2011, pretax net gains (losses) of approximately $14.6 million and ($39.4) million, respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the twelve month period ending September 28, 2013, the Company expects to reclassify into earnings net

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

gains of approximately $12.9 million recorded in accumulated other comprehensive loss as of September 29, 2012. Such gains will be reclassified at the time that the underlying hedged transactions are realized. For the three and nine months ended September 29, 2012, amounts recognized in the accompanying condensed consolidated statements of comprehensive income (loss) 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. For the three and nine months ended October 1, 2011, other expense, net includes gains (losses) of ($2.1) million and $5.0 million, respectively, related to changes in the fair value of foreign currency derivative contracts that did not qualify for hedge accounting.

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 or disclosed at fair value on a recurring basis as of September 29, 2012 and December 31, 2011, are shown below (in millions):

 

     September 29, 2012  
     Frequency      Asset
(Liability)
     Valuation
Technique
     Level 1      Level 2      Level 3  

Foreign currency derivative contracts

     Recurring       $ 12.9         Market/Income       $ —         $ 12.9       $ —     

 

     December 31, 2011  
     Frequency      Asset
(Liability)
    Valuation
Technique
     Level 1      Level 2     Level 3  

Foreign currency derivative contracts

     Recurring       $ (44.5     Market/Income       $ —         $ (44.5   $ —     

Commodity swap contracts

     Recurring       $ (0.3     Market/Income       $ —         $ (0.3   $ —     

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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, these discount rates are adjusted by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. To estimate this credit spread, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy, to the extent that such adjustment is necessary. As of September 29, 2012 and December 31, 2011, 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 the first nine months of 2012.

Items measured at fair value on a non-recurring basis – The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. As a result of the Guilford acquisition, provisional Level 3 fair value estimates related to property, plant and equipment of $93.0 million and intangible assets of $53.0 million were recorded in the accompanying condensed consolidated balance sheet as of September 29, 2012. For further information on these provisional fair value measurements, see Note 2, “Acquisition.” As of December 31, 2011, there were no significant assets or liabilities measured at fair value on a non-recurring basis.

(17) Accounting Pronouncements

Comprehensive Income

The Financial Accounting Standards Board (“FASB”) amended ASC 220, “Comprehensive Income,” with ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income,” which revises the manner in which comprehensive income is presented in an entity’s financial statements. This update requires the presentation of the components of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive financial statements. The option to present comprehensive income in the statement of stockholders’ equity has been eliminated. The provisions of this update were effective as of January 1, 2012, and the Company has included a condensed consolidated statement of comprehensive income (loss) as part of the condensed consolidated financial statements included in this Report.

Fair Value Measurements

The FASB amended ASC 820, “Fair Value Measurements,” with ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This update provides converged guidance on how to measure fair value, which is largely consistent with existing GAAP. This update also requires additional fair value measurement disclosures. The provisions of this update were effective as of January 1, 2012. The effects of adoption were not significant.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

(18) Supplemental Guarantor Condensed Consolidating Financial Statements

 

     September 29, 2012  
     Lear     Guarantors      Non-
guarantors
     Eliminations     Consolidated  
     (Unaudited; in millions)  

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 402.1      $ 0.5       $ 867.0       $ —        $ 1,269.6   

Accounts receivable

     62.9        393.8         1,736.1         —          2,192.8   

Inventories

     5.8        271.3         486.3         —          763.4   

Other

     112.0        40.7         465.5         —          618.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     582.8        706.3         3,554.9         —          4,844.0   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LONG-TERM ASSETS:

            

Property, plant and equipment, net

     88.5        247.1         964.0         —          1,299.6   

Goodwill

     23.5        370.8         334.3         —          728.6   

Investments in subsidiaries

     1,169.0        1,235.7         —           (2,404.7     —     

Other

     108.2        57.3         424.6         —          590.1   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term assets

     1,389.2        1,910.9         1,722.9         (2,404.7     2,618.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,972.0      $ 2,617.2       $ 5,277.8       $ (2,404.7   $ 7,462.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable and drafts

   $ 107.7      $ 582.4       $ 1,574.5       $ —        $ 2,264.6   

Accrued liabilities

     99.4        169.7         764.0         —          1,033.1   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     207.1        752.1         2,338.5         —          3,297.7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LONG-TERM LIABILITIES:

            

Long-term debt

     626.2        —           —           —          626.2   

Intercompany accounts, net

     (1,731.4     665.1         1,066.3         —          —     

Other

     202.7        181.1         352.4         —          736.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     (902.5     846.2         1,418.7         —          1,362.4   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

EQUITY:

            

Lear Corporation stockholders’ equity

     2,667.4        1,018.9         1,385.8         (2,404.7     2,667.4   

Noncontrolling interests

     —          —           134.8         —          134.8   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Equity

     2,667.4        1,018.9         1,520.6         (2,404.7     2,802.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,972.0      $ 2,617.2       $ 5,277.8       $ (2,404.7   $ 7,462.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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

 

 

     December 31, 2011  
     Lear     Guarantors      Non-
guarantors
     Eliminations     Consolidated  
     (In millions)  

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 820.3      $ 1.4       $ 932.6       $ —        $ 1,754.3   

Accounts receivable

     56.4        299.1         1,524.6         —          1,880.1   

Inventories

     7.7        234.1         396.0         —          637.8   

Other

     99.4        18.4         371.5         —          489.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     983.8        553.0         3,224.7         —          4,761.5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LONG-TERM ASSETS:

            

Property, plant and equipment, net

     90.2        164.5         817.3         —          1,072.0   

Goodwill

     23.5        303.9         301.2         —          628.6   

Investments in subsidiaries

     594.2        945.3         —           (1,539.5     —     

Other

     115.2        30.9         402.7         —          548.8   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term assets

     823.1        1,444.6         1,521.2         (1,539.5     2,249.4   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,806.9      $ 1,997.6       $ 4,745.9       $ (1,539.5   $ 7,010.9   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable and drafts

   $ 92.2      $ 473.7       $ 1,448.4       $ —        $ 2,014.3   

Accrued liabilities

     135.5        171.0         742.7         —          1,049.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     227.7        644.7         2,191.1         —          3,063.5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LONG-TERM LIABILITIES:

            

Long-term debt

     695.4        —           —           —          695.4   

Intercompany accounts, net

     (1,754.6     675.2         1,079.4         —          —     

Other

     202.0        149.0         339.9         —          690.9   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     (857.2     824.2         1,419.3         —          1,386.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

EQUITY:

            

Lear Corporation stockholders’ equity

     2,436.4        528.7         1,010.8         (1,539.5     2,436.4   

Noncontrolling interests

     —          —           124.7         —          124.7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Equity

     2,436.4        528.7         1,135.5         (1,539.5     2,561.1   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,806.9      $ 1,997.6       $ 4,745.9       $ (1,539.5   $ 7,010.9   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

25


Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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

 

 

     For the Three Months Ended September 29, 2012  
     Lear     Guarantors     Non-
guarantors
    Eliminations     Consolidated  
     (Unaudited; in millions)  

Net sales

   $ 119.1      $ 1,412.3      $ 3,011.8      $ (1,004.6   $ 3,538.6   

Cost of sales

     137.2        1,258.1        2,856.6        (1,004.6     3,247.3   

Selling, general and administrative expenses

     33.6        41.0        38.8        —          113.4   

Amortization of intangible assets

     0.3        0.9        7.1        —          8.3   

Intercompany charges

     0.5        0.3        (0.8     —          —     

Interest expense

     0.8        4.1        8.8        —          13.7   

Other intercompany (income) expense, net

     (74.6     52.1        22.5        —          —     

Other expense, net

     3.6        0.1        (2.2     —          1.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income before income taxes and equity in net income of affiliates and subsidiaries

     17.7        55.7        81.0        —          154.4   

Provision for income taxes

     2.5        (1.2     28.0        —          29.3   

Equity in net income of affiliates

     4.5        (0.6     (6.9     —          (3.0

Equity in net income of subsidiaries

     (110.7     (32.2     —          142.9        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     121.4        89.7        59.9        (142.9     128.1   

Less: Net income attributable to noncontrolling interests

     —          —          6.7        —          6.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lear

   $ 121.4      $ 89.7      $ 53.2      $ (142.9   $ 121.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated comprehensive income

   $ 166.4      $ 104.8      $ 91.9      $ (188.8   $ 174.3   

Less: Comprehensive income attributable to noncontrolling interests

     —          —          7.9        —          7.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Lear

   $ 166.4      $ 104.8      $ 84.0      $ (188.8   $ 166.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Three Months Ended October 1, 2011  
     Lear     Guarantors     Non-
guarantors
    Eliminations     Consolidated  
     (Unaudited; in millions)  

Net sales

   $ 93.1      $ 1,340.2      $ 3,058.9      $ (1,032.2   $ 3,460.0   

Cost of sales

     112.1        1,227.9        2,871.7        (1,032.2     3,179.5   

Selling, general and administrative expenses

     36.7        12.5        65.7        —          114.9   

Amortization of intangible assets

     0.3        0.1        6.7        —          7.1   

Intercompany charges

     0.5        0.3        (0.8     —          —     

Interest expense

     0.5        6.4        4.0        —          10.9   

Other intercompany (income) expense, net

     (78.3     46.9        31.4        —          —     

Other expense, net

     5.7        10.9        (6.5     —          10.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income before income taxes and equity in net income of affiliates and subsidiaries

     15.6        35.2        86.7        —          137.5   

Provision for income taxes

     4.1        (0.2     27.1        —          31.0   

Equity in net income of affiliates

     5.1        0.7        (7.4     —          (1.6

Equity in net income of subsidiaries

     (94.3     (15.7     —          110.0        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     100.7        50.4        67.0        (110.0     108.1   

Less: Net income attributable to noncontrolling interests

     —          —          7.4        —          7.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lear

   $ 100.7      $ 50.4      $ 59.6      $ (110.0   $ 100.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated comprehensive income

   $ (69.1   $ 5.5      $ (57.6   $ 59.9      $ (61.3

Less: Comprehensive income attributable to noncontrolling interests

     —          —          7.8        —          7.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Lear

   $ (69.1   $ 5.5      $ (65.4   $ 59.9      $ (69.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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

 

 

     For the Nine Months Ended September 29, 2012  
     Lear     Guarantors     Non-
guarantors
    Eliminations     Consolidated  
     (Unaudited; in millions)  

Net sales

   $ 379.9      $ 4,294.9      $ 9,365.9      $ (3,193.1   $ 10,847.6   

Cost of sales

     434.5        3,899.2        8,791.3        (3,193.1     9,931.9   

Selling, general and administrative expenses

     102.8        70.3        173.7        —          346.8   

Amortization of intangible assets

     0.9        1.4        20.2        —          22.5   

Intercompany charges

     3.6        1.3        (4.9     —          —     

Interest expense

     3.0        15.9        21.3        —          40.2   

Other intercompany (income) expense, net

     (255.3     168.9        86.4        —          —     

Other expense, net

     2.6        0.4        9.0        —          12.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income before income taxes and equity in net income of affiliates and subsidiaries

     87.8        137.5        268.9        —          494.2   

Provision for income taxes

     8.4        0.3        91.7        —          100.4   

Equity in net income of affiliates

     (13.1     (2.0     (18.2     —          (33.3

Equity in net income of subsidiaries

     (308.4     (143.3     —          451.7        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     400.9        282.5        195.4        (451.7     427.1   

Less: Net income attributable to noncontrolling interests

     —          —          26.2        —          26.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lear

   $ 400.9      $ 282.5      $ 169.2      $ (451.7   $ 400.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          

Consolidated comprehensive income

   $ 434.6      $ 324.6      $ 186.7      $ (484.8   $ 461.1   

Less: Comprehensive income attributable to noncontrolling interests

     —          —          26.5        —          26.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Lear

   $ 434.6      $ 324.6      $ 160.2      $ (484.8   $ 434.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Nine Months Ended October 1, 2011  
     Lear     Guarantors     Non-
guarantors
    Eliminations     Consolidated  
     (Unaudited; in millions)  

Net sales

   $ 272.1      $ 3,918.1      $ 9,546.8      $ (3,089.0   $ 10,648.0   

Cost of sales

     342.0        3,572.1        8,872.4        (3,089.0     9,697.5   

Selling, general and administrative expenses

     116.6        35.9        199.1        —          351.6   

Amortization of intangible assets

     0.9        0.3        19.9        —          21.1   

Intercompany charges

     3.2        1.2        (4.4     —          —     

Interest expense

     (0.5     18.0        7.4        —          24.9   

Other intercompany (income) expense, net

     (252.9     137.3        115.6        —          —     

Other expense, net

     (2.8     14.2        3.9        —          15.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated income before income taxes and equity in net income of affiliates and subsidiaries

     65.6        139.1        332.9        —          537.6   

Provision for income taxes

     12.6        2.4        75.7        —          90.7   

Equity in net income of affiliates

     8.3        (0.8     (17.1     —          (9.6

Equity in net income of subsidiaries

     (389.5     (184.1     —          573.6        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     434.2        321.6        274.3        (573.6     456.5   

Less: Net income attributable to noncontrolling interests

     —          —          22.3        —          22.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lear

   $ 434.2      $ 321.6      $ 252.0      $ (573.6   $ 434.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated comprehensive income

   $ 374.7      $ 284.2      $ 254.1      $ (514.1   $ 398.9   

Less: Comprehensive income attributable to noncontrolling interests

     —          —          24.2        —          24.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Lear

   $ 374.7      $ 284.2      $ 229.9      $ (514.1   $ 374.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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

 

 

     For the Nine Months Ended September 29, 2012  
     Lear     Guarantors     Non-
guarantors
    Eliminations      Consolidated  
     (Unaudited; in millions)  

Net cash provided by operating activities

   $ 91.6      $ 180.2      $ 88.9      $ —         $ 360.7   

Cash Flows from Investing Activities:

           

Additions to property, plant and equipment

     (7.6     (74.5     (218.4     —           (300.5

Insurance proceeds

     —          —          11.4        —           11.4   

Cash paid for acquisitions, net of cash acquired

     (246.1     —          —          —           (246.1

Other, net

     0.5        3.8        (5.2     —           (0.9
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (253.2     (70.7     (212.2     —           (536.1
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Financing Activities:

           

Repurchase of senior notes

     (72.1     —          —          —           (72.1

Repurchase of common stock

     (172.6     —          —          —           (172.6

Dividends paid to Lear Corporation stockholders

     (40.9     —          —          —           (40.9

Dividends paid to noncontrolling interests

     —          —          (4.3     —           (4.3

Other

     2.2        —          (17.6     —           (15.4

Change in intercompany accounts

     26.8        (110.4     83.6        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (256.6     (110.4     61.7        —           (305.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency translation

     —          —          (4.0     —           (4.0
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Change in Cash and Cash Equivalents

     (418.2     (0.9     (65.6     —           (484.7

Cash and Cash Equivalents as of Beginning of Period

     820.3        1.4        932.6        —           1,754.3   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents as of End of Period

   $ 402.1      $ 0.5      $ 867.0      $ —         $ 1,269.6   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     For the Nine Months Ended October 1, 2011  
     Lear     Guarantors     Non-
guarantors
    Eliminations      Consolidated  
     (Unaudited; in millions)  

Net cash provided by operating activities

   $ 132.7      $ 115.6      $ 268.2      $ —         $ 516.5   

Cash Flows from Investing Activities:

           

Additions to property, plant and equipment

     (7.5     (48.5     (191.7     —           (247.7

Cash paid for acquisitions, net of cash acquired

     —          —          (8.4        (8.4

Other, net

     23.6        2.2        5.5        —           31.3   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     16.1        (46.3     (194.6     —           (224.8
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from Financing Activities:

           

Other long-term debt repayments, net

     —          —          (1.1     —           (1.1

Short-term debt repayments, net

     —          —          (4.2     —           (4.2

Payment of debt issuance costs

     (4.8     —          —          —           (4.8

Repurchase of common stock

     (194.2     —          —          —           (194.2

Dividends paid to Lear Corporation stockholders

     (38.3     —          —          —           (38.3

Dividends paid to noncontrolling interests

     —          —          (18.5     —           (18.5

Other

     (3.5     —          0.1        —           (3.4

Change in intercompany accounts

     84.0        (69.5     (14.5     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (156.8     (69.5     (38.2     —           (264.5
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency translation

     —          —          (4.8     —           (4.8
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Change in Cash and Cash Equivalents

     (8.0     (0.2     30.6        —           22.4   

Cash and Cash Equivalents as of Beginning of Period

     808.8        0.4        844.9        —           1,654.1   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents as of End of Period

   $ 800.8      $ 0.2      $ 875.5      $ —         $ 1,676.5   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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LEAR CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

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

 

Basis of Presentation — Certain of Lear’s domestic 100% owned subsidiaries (the “Guarantors”) have jointly and severally unconditionally guaranteed, on a senior unsecured basis, the performance and the full and punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Company’s obligations under its revolving credit facility and the indenture governing the Notes, including the Company’s obligations to pay principal, premium, if any, and interest with respect to the Notes. The Notes consist of $315 million in aggregate principal amount at maturity of 7.875% senior unsecured notes due 2018 and $315 million in aggregate principal amount at maturity of 8.125% senior unsecured notes due 2020. The Guarantors include Lear Corporation EEDS and Interiors, Lear European Operations Corporation, Lear Mexican Seating Corporation and Lear Operations Corporation. In addition, Guilford Mills, Inc. and GMI Holding Corporation were added as guarantors in August 2012. In lieu of providing separate financial statements for the Guarantors, the Company has included the supplemental guarantor condensed consolidating financial statements above. These financial statements reflect the Guarantors listed above for all periods presented. Management does not believe that separate financial statements of the Guarantors are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantors are not presented.

The 2011 supplemental guarantor condensed consolidating financial statements have been restated to reflect certain changes to the equity investments of the Guarantors.

Distributions — There are no significant restrictions on the ability of the Guarantors to make distributions to the Company.

Selling, General and Administrative Expenses — Corporate and division selling, general and administrative expenses are allocated to the operating subsidiaries based on various factors, which estimate usage of particular corporate and division functions, and in certain instances, other relevant factors, such as the revenues or the number of employees of the Company’s subsidiaries. During the three months ended September 29, 2012 and October 1, 2011, $11.1 million and $5.4 million, respectively, of selling, general and administrative expenses were allocated from Lear. During the nine months ended September 29, 2012 and October 1, 2011, $30.9 million and $15.6 million, respectively, of selling, general and administrative expenses were allocated from Lear.

Long-Term Debt of Lear and the Guarantors — A summary of long-term debt of Lear and the Guarantors on a combined basis is shown below (in millions):

 

     September 29,
2012
     December 31,
2011
 

Senior notes

   $ 626.2       $ 695.4   
  

 

 

    

 

 

 

 

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LEAR CORPORATION

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

We were incorporated in Delaware in 1987 and are a leading tier 1 supplier to the global automotive industry. We supply our products to virtually every major automotive manufacturer in the world.

We supply automotive manufacturers with complete automotive seat systems and related components, as well as electrical distribution systems and related components. Our strategy is to focus on our core capabilities, selective vertical integration and investments in technology; leverage our global presence and expand our low-cost footprint; and enhance and diversify our strong customer relationships through our operational performance.

Industry Overview

Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer and fleet demand for automotive vehicles, and our level of content on specific vehicle platforms, as well as the portion of such content manufactured internally. Automotive sales and production can be affected by general economic or industry conditions, 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 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. In addition, it is possible that our customers could elect to manufacture our products internally. 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 have a material adverse impact on 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.

Global industry production volumes have improved significantly in recent years from the decline experienced in 2008 and 2009 as a result of the global economic downturn. In the first nine months of 2012, global vehicle production increased by approximately 8% from a year ago levels to 59.5 million units. North American industry production increased by approximately 20% from a year ago levels to 11.6 million units. Business conditions in Europe, however, were challenging, and European industry production decreased by approximately 6% from a year ago levels to 12.8 million units.

The majority of our sales continue to be derived from automotive manufacturers based in North America and Europe. Sales in North America and Europe accounted for approximately 39% and 36%, respectively, of our net sales in the first nine months of 2012. 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.

Our customers 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 design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to align our business with the changing needs of our customers and improve our business structure by investing in vertical integration opportunities.

Our material cost as a percentage of net sales was 68.1% in the first nine months of 2012, as compared to 68.6% in 2011. Raw material, energy and commodity costs have been volatile over the past several years. 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, financial hedges for certain commodities 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. These costs remain volatile and could have an adverse impact on our operating results in the foreseeable future.

See “— Forward-Looking Statements” below and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011, as supplemented and updated by Part II — Item 1A, “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

 

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Financial Measures

In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. In addition to maintaining and expanding our business with our existing customers in our more established markets, our expansion plans are focused primarily on emerging markets. Asia, in particular, continues to present significant growth opportunities, as major global automotive manufacturers implement production expansion plans and local automotive manufacturers aggressively expand their operations to meet demand in this region. We currently have 20 joint ventures with operations in Asia, as well as an additional three joint ventures in North America and Europe dedicated to serving Asian automotive manufacturers. In addition, we have aggressively pursued this strategy by selectively increasing our vertical integration capabilities globally, as well as expanding our component manufacturing capacity in Mexico, Eastern Europe, Africa and Asia. Furthermore, we have expanded our low-cost engineering capabilities in China, 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 have generally been successful in aligning our vendor payment terms with our customer payment terms. However, our ability to continue to do so may be adversely impacted by the unfavorable financial results of our suppliers and adverse automotive industry conditions, as well as our financial results. 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 assets are deployed to increase our earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.

Acquisition

On May 31, 2012, we completed the acquisition of Guilford Mills (“Guilford”), a privately-held portfolio company of Cerberus Capital Management, L.P., which manufactures fabrics for the automotive and specialty markets, for approximately $246 million, net of cash acquired and excluding purchase price adjustments of approximately $4 million. Amounts payable to Guilford of approximately $9 million related to purchases of raw materials were also settled as of the acquisition date. Guilford is headquartered in Wilmington, North Carolina and has annual sales of approximately $400 million with operations in North America, Europe and Asia. In the first nine months of 2012, we incurred transaction costs of approximately $6 million, primarily related to advisory services. The integration of Guilford is proceeding as planned.

Operational Restructuring

In 2005, we initiated a multi-year operational restructuring strategy to (i) eliminate excess capacity and lower our operating costs, (ii) streamline our organizational structure and reposition our business for improved long-term profitability and (iii) better align our manufacturing capabilities with the changing needs of our customers. In light of industry conditions and customer announcements, we expanded this strategy in 2008. Through the end of 2011, we incurred pretax restructuring costs of approximately $804 million and related manufacturing inefficiency charges of $76 million.

In the first nine months of 2012, we incurred additional restructuring costs of approximately $11 million as we continued to restructure our global operations and aggressively reduce our costs. Cash expenditures related to our restructuring actions, which primarily consisted of employee termination benefit payments, totaled $62 million in the first nine months of 2012. Our restructuring strategy has resulted in the closure of 48 manufacturing and 11 administrative facilities and a current footprint with more than 80% of our component facilities and more than 90% of our related employment in 22 low-cost countries. Our current restructuring initiatives are substantially complete. Any future restructuring actions will depend upon market conditions, customer actions and other factors.

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. Although each restructuring action is unique, based upon the nature of our operations, we expect that the components of future restructuring costs will be consistent with our historical experience. We also incur incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are recognized in our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). Generally, charges are recorded as restructuring actions are approved and/or implemented. Actual costs recorded in our consolidated financial statements may vary from current estimates.

For further information, see Note 3, “Restructuring,” to the condensed consolidated financial statements included in this Report.

 

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Senior Notes

In August 2012, we paid $72 million to redeem 10% of the original aggregate principal amount of our outstanding senior notes. In connection with this transaction, we recognized a loss of approximately $4 million on the partial extinguishment of debt.

Share Repurchase Program and Quarterly Cash Dividend

Our Board of Directors has authorized a three year, $700 million common stock share repurchase program, which expires in February 2014. In February, May and August 2012, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock. For further information, see “— Liquidity and Capital Resources” below and Note 13, “Comprehensive Income and Equity,” to the condensed consolidated financial statements included in this Report.

Other Matters

We have incurred losses and incremental costs related to the destruction of assets caused by a fire at one of our European production facilities in the third quarter of 2011 and are pursuing, and will continue to pursue, recovery of such costs under applicable insurance policies. In the three and nine months ended September 29, 2012, we recognized losses and incremental costs of $10 million and $27 million, respectively, and loss recoveries and insurance gain contingencies of $13 million and $38 million, respectively.

In the three and nine months ended September 29, 2012, we recognized income of $2 million and $17 million, respectively, related to our portion of an affiliate’s reversal of a valuation allowance with respect to its deferred tax assets.

In the three and nine months ended October 1, 2011, we recognized gains of $2 million and $6 million, respectively, related to affiliate transactions. In the three and nine months ended October 1, 2011, we recognized tax benefits of $3 million and $23 million, respectively, primarily related to the reversal of full valuation allowances on the deferred tax assets of two foreign subsidiaries.

As discussed above, our results for the three and nine months ended September 29, 2012 and October 1, 2011, reflect the following items (in millions):

 

     Three months ended     Nine months ended  
     September 29,
2012
    October 1,
2011
    September 29,
2012
    October 1,
2011
 

Costs related to restructuring actions, including manufacturing inefficiencies of $1 million in the nine months ended October 1, 2011

   $ 3      $ 9      $ 11      $ 14   

Acquisition and other related transaction costs

     1        —          6        —     

Insurance recoveries, net of losses and incremental costs related to the destruction of assets (1)

     (3     —          (11     —     

Loss on extinguishment of debt

     4        —          4        —     

Gains related to affiliates

     (2     (2     (17     (6

Tax benefits, net

     —          (3     —          (23

 

  (1) 

$4 million recognized in cost of sales and ($7) million recognized in other expense, net in the three months ended September 29, 2012, and $1 million recognized in cost of sales and ($12) million recognized in other expense, net in the nine months ended September 29, 2012.

For further information regarding these items, see Note 3, “Restructuring,” Note 8, “Long-Term Debt,” Note 10, “Other Expense, Net,” and Note 11, “Income Taxes,” to the condensed consolidated financial statements included in this Report.

This section includes forward-looking statements that are subject to risks and uncertainties. For further information regarding other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see “— Forward-Looking Statements” below and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011, as supplemented and updated by Part II — Item 1A, “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

 

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RESULTS OF OPERATIONS

A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:

 

     Three Months Ended     Nine Months Ended  
     September 29,
2012
    October 1,
2011
    September 29,
2012
    October 1,
2011
 

Net sales

                

Seating systems

   $ 2,661.6        75.2   $ 2,687.8        77.7   $ 8,268.8        76.2   $ 8,272.7        77.7

Electrical power management systems

     877.0        24.8        772.2        22.3        2,578.8        23.8        2,375.3        22.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     3,538.6        100.0        3,460.0        100.0        10,847.6        100.0        10,648.0        100.0   

Cost of sales

     3,247.3        91.8        3,179.5        91.9        9,931.9        91.6        9,697.5        91.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     291.3        8.2        280.5        8.1        915.7        8.4        950.5        8.9   

Selling, general and administrative expenses

     113.4        3.2        114.9        3.3        346.8        3.2        351.6        3.3   

Amortization of intangible assets

     8.3        0.2        7.1        0.2        22.5        0.2        21.1        0.2   

Interest expense

     13.7        0.4        10.9        0.3        40.2        0.4        24.9        0.2   

Other expense, net

     1.5        0.1        10.1        0.3        12.0        0.1        15.3        0.1   

Provision for income taxes

     29.3        0.8        31.0        0.9        100.4        0.9        90.7        0.9   

Equity in net income of affiliates

     (3.0     (0.1     (1.6     —          (33.3     (0.3     (9.6     (0.1

Net income attributable to noncontrolling interests

     6.7        0.2        7.4        0.2        26.2        0.2        22.3        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lear

   $ 121.4        3.4   $ 100.7        2.9   $ 400.9        3.7   $ 434.2        4.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 29, 2012 vs. Three Months Ended October 1, 2011

Net sales in the third quarter of 2012 and 2011 were $3.5 billion. New business and the acquisition of Guilford positively impacted net sales by $163 million and $85 million, respectively. These increases were largely offset by net foreign exchange rate fluctuations of $217 million.

Cost of sales in the third quarter of 2012 and 2011 was $3.2 billion. The impact of new business and the acquisition of Guilford were offset by net foreign exchange rate fluctuations.

Gross profit and gross margin were $291 million and 8.2%, respectively, in the quarter ended September 29, 2012, as compared to $281 million and 8.1%, respectively, in the quarter ended October 1, 2011. The impact of new business and the acquisition of Guilford were partially offset by higher product and facility launch costs and program development costs. The impact of selling price reductions was partially offset by favorable operating performance and the benefit of operational restructuring actions.

Selling, general and administrative expenses, including engineering and development expenses, were $113 million in the three months ended September 29, 2012, as compared to $115 million in the three months ended October 1, 2011. As a percentage of net sales, selling, general and administrative expenses were 3.2% in the third quarter of 2012, as compared to 3.3% in the third quarter of 2011.

Amortization of intangible assets was $8 million in the third quarter of 2012, as compared to $7 million in the third quarter of 2011, reflecting the amortization of intangible assets related to the acquisition of Guilford.

Interest expense was $14 million in the third quarter of 2012, as compared to $11 million in the third quarter of 2011. This increase includes the settlement of various indirect tax and other matters in foreign jurisdictions.

Other expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $2 million in the third quarter of 2012, as compared to $10 million in the third quarter of 2011. In the third quarter of 2012, we recognized a gain of $7 million related to insurance recoveries and a loss of $4 million related to the redemption of 10% of the original aggregate principal amount of our outstanding senior notes. In the third quarter of 2011, we recognized a gain of $2 million related to a transaction with an affiliate. In addition, other expense was favorably impacted by a decrease in foreign exchange losses in the current quarter.

 

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The provision for income taxes was $29 million for the third quarter of 2012, representing an effective tax rate of 19.0% on pretax income before equity in net income of affiliates of $154 million, as compared to $31 million for the third quarter of 2011, representing an effective tax rate of 22.5% on pretax income before equity in net income of affiliates of $138 million. In the third quarter of 2012 and 2011, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of 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 the third quarter of 2011, we recognized a tax benefit of $3 million related to the reversal of a full valuation allowance on the deferred tax assets of a foreign subsidiary and an increase in tax expense related to the phase out of preferential tax holiday rates in several Chinese subsidiaries. Excluding these items, the effective tax rate in the third quarter of 2012 and 2011 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items.

Our current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances in certain countries, particularly the United States. 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 no tax expense with respect to income generated in these countries until the respective valuation allowances are eliminated. Accordingly, income taxes are impacted by the U.S. and foreign valuation allowances and the mix of earnings among jurisdictions.

As of December 31, 2011, we had a valuation allowanc