Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2011.

 

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

For the transition period from             to             .

Commission file number: 1-11311

 

 

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)

Registrant’s telephone number, including area code: (248) 447-1500

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Warrants to purchase Common Stock, par value $0.01 per share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No   x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (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 Act).     Yes  ¨    No  x

As of July 2, 2011, the aggregate market value of the registrant’s common stock, par value $0.01 per share, held by non-affiliates of the registrant was $5,590,515,833. The closing price of the common stock on July 2, 2011, as reported on the New York Stock Exchange, was $53.85 per share.

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

As of February 15, 2012, the number of shares outstanding of the registrant’s common stock was 100,450,454 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held in May 2012, as described in the Cross-Reference Sheet and Table of Contents included herewith, are incorporated by reference into Part III of this Report.

 

 

 


Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

CROSS REFERENCE SHEET AND TABLE OF CONTENTS

 

              

Page Number
or Reference

      PART I   
ITEM    1.    Business    3
ITEM    1A.    Risk factors    14
ITEM    1B.    Unresolved staff comments    19
ITEM    2.    Properties    20
ITEM    3.    Legal proceedings    21
ITEM    4.    Mine safety disclosures    21
SUPPLEMENTARY ITEM.         Executive officers of the Company    21
      PART II   
ITEM    5.    Market for the Company’s common equity, related stockholder matters and issuer purchases of equity securities    23
ITEM    6.    Selected financial data    26
ITEM    7.    Management’s discussion and analysis of financial condition and results of operations    29
ITEM    7A.    Quantitative and qualitative disclosures about market risk (included in Item 7)   
ITEM    8.    Consolidated financial statements and supplementary data    50
ITEM    9.    Changes in and disagreements with accountants on accounting and financial disclosure    114
ITEM    9A.    Controls and procedures    114
ITEM    9B.    Other information    114
      PART III (1)   
ITEM    10.    Directors, executive officers and corporate governance (2)    115
ITEM    11.    Executive compensation (3)    115
ITEM    12.    Security ownership of certain beneficial owners and management and related stockholder matters (4)    115
ITEM    13.    Certain relationships and related transactions, and director independence (5)    116
ITEM    14.    Principal accountant fees and services (6)    116
      PART IV   
ITEM    15.    Exhibits and financial statement schedule    116

 

(1) Certain information is incorporated by reference, as indicated below, to the registrant’s Notice of Annual Meeting of Stockholders and Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders to be held in May 2012 (the “Proxy Statement”).
(2) A portion of the information required is incorporated by reference to the Proxy Statement sections entitled “Election of Directors” and “Directors and Corporate Governance.”
(3) Incorporated by reference to the Proxy Statement sections entitled “Directors and Corporate Governance — Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.”
(4) A portion of the information required is incorporated by reference to the Proxy Statement section entitled “Directors and Corporate Governance — Security Ownership of Certain Beneficial Owners, Directors and Management.”
(5) Incorporated by reference to the Proxy Statement sections entitled “Certain Relationships and Related Party Transactions” and “Directors and Corporate Governance — Independence of Directors.”
(6) Incorporated by reference to the Proxy Statement section entitled “Fees of Independent Accountants.”


Table of Contents

PART I

ITEM 1 – BUSINESS

In this Report, when we use the terms the “Company,” “Lear,” “we,” “us” and “our,” unless otherwise indicated or the context otherwise requires, we are referring to Lear Corporation and its consolidated subsidiaries. A substantial portion of the Company’s operations are conducted through subsidiaries controlled by Lear Corporation. The Company is also a party to various joint venture arrangements. Certain disclosures included in this Report constitute forward-looking statements that are subject to risks and uncertainties. See Item 1A, “Risk Factors,” and Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.”

BUSINESS OF THE COMPANY

General

Lear Corporation is a leading tier 1 supplier to the global automotive industry. Our business spans all major automotive markets, and we supply our products to virtually every major automotive manufacturer in the world. With manufacturing, engineering and administrative capabilities spanning 35 countries and 207 locations, we are continuing to grow our business globally, including expansion into emerging markets as opportunities develop.

We conduct our business in two operating segments: seating and electrical power management systems (“EPMS”). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. Key components that allow us to route electrical signals and manage electrical power within a vehicle include: wiring harnesses, terminals and connectors, junction boxes, electronic control modules and wireless remote control devices, such as key fobs.

In recent years, we have implemented a number of strategic actions to better position our business to deliver superior long-term shareholder value while maintaining a strong and flexible balance sheet. We are focused on growing and improving the competitiveness of our two core businesses: seating and EPMS. As a result, we have divested our automotive interiors business and exited certain non-core product lines in our EPMS segment. These strategic actions allowed our global business units to better leverage their scale and low-cost capabilities to improve overall operating efficiency and align our product offerings with the increasing customer trend toward global platforms.

We believe that the initiatives implemented over the last few years will continue to add value for our stakeholders. Specific elements of the strategy to date have been:

 

   

Focus on Core Capabilities, Selective Vertical Integration and Investments in Technology

 

   

Leverage Global Presence/Scale and Expand Low-Cost Capabilities

 

   

Enhance and Diversify Strong Customer Relationships, Primarily through Global Engineering, Program Development and Manufacturing Capabilities

We believe that it is important to have capabilities that are aligned with our major customers’ global product strategy and to leverage our expanding design, engineering and manufacturing capabilities in low-cost regions. We are one of the few suppliers in each of our product segments that are able to serve customers with design, development, engineering, integration and production capabilities in all automotive-producing regions of the world and in every major market, including North America, South America, Europe and Asia. We currently support our global operations with more than 100 manufacturing and engineering facilities located in the following low-cost countries:

 

Argentina

   Malaysia    Russia

Brazil

   Mexico    Slovakia

China

   Moldova    South Africa

Czech Republic

   Morocco    Thailand

Honduras

   Philippines    Tunisia

Hungary

   Poland    Turkey

India

   Romania    Vietnam

 

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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 expected growth in long-term demand in this region. Our expansion in Asia has been accomplished through wholly owned subsidiaries, as well as a number of joint ventures with our customers and/or local suppliers. As of December 31, 2011, we had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and one with operations in all three regions. In addition to helping us grow our business in new markets, these joint ventures have helped us to expand our product offerings and broaden our customer base.

Key trends affecting our business include:

 

   

Global growth in automotive demand, including sustained recovery in North America (based on recent industry sales rates below historical market replacement rates), expected long-term growth in Europe and continued growth in emerging markets;

 

   

Globalization of the automotive industry, including automotive manufacturers’ increasing utilization of global vehicle platforms;

 

   

Growth in the compact car segment, with 75% of projected growth in industry production over the next five years coming from these vehicles, reflecting increasing fuel economy and affordability concerns;

 

   

Increasing demand for more features and functionality in vehicles, driving an increase in traditional electrical distribution systems; and

 

   

Emergence of alternative powertrains, including electric, hybrid-electric and other technologies, driving growth in high-power electrical systems and components.

We believe that our global market presence and strong financial resources will allow us to capitalize on global growth in automotive production, while our engineering and manufacturing capabilities will provide customers with options to support global vehicle platforms.

As a part of our focus on investing in technology, we have developed independent brand and marketing strategies for our product segments and focused our efforts in three principal areas: (i) where we have a competitive advantage, such as our flexible seat architectures, our industry-leading ProTec® products, including our self-aligning head restraints, and our leading electrical technology, including our solid state junction boxes, (ii) where we perceive that there is a significant market opportunity, such as electrical products for the hybrid and electric vehicle market, and (iii) where we can enhance the next generation of more fuel efficient and environmentally friendly vehicles, such as our lightweight, low-mass alternative materials and products, including SoyFoamTM and Dynamic Environmental Comfort SystemTM.

History

Lear was founded in Detroit in 1917 as American Metal Products, a manufacturer of seating assemblies and other components for the automotive and aircraft industries. Through a management-led buyout in 1988, Lear Corporation established itself as a privately-held seat assembly operation for the North American automobile market with annual sales of approximately $900 million. We completed an initial public offering in 1994 and developed into a global supplier through organic growth and a series of acquisitions.

In 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. Through the end of 2011, we incurred pretax costs of $880 million, including related manufacturing inefficiency charges of $76 million, in connection with these activities. This 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 21 low-cost countries. Our just-in-time (“JIT”) seat assembly facilities are necessarily located near our customers’ assembly plants. We currently expect annual restructuring actions to moderate in 2012 and thereafter. For further information, see Note 5, “Restructuring,” to the consolidated financial statements included in this Report.

 

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In recent years, the global automotive industry has undergone major restructuring and consolidation in response to overcapacity, narrow profit margins, excess debt and the necessary realignment of resources from mature markets to emerging markets. In 2008 and continuing into 2009, the global economic downturn and associated decline in automotive production (particularly in North America and Europe) represented a turning point for the industry.

During this period, industry production in North America and Europe experienced the steepest peak-to-trough declines in history. In North America, industry production declined over 40% — from a peak of 15.0 million units in 2007 to a trough of 8.6 million units in 2009. In Europe, industry production declined over 20% — from a peak of 20.2 million units in 2007 to a trough of 15.6 million units in 2009.

In 2009, following a comprehensive evaluation of our strategic and financial options, we concluded that voluntarily filing for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) was necessary in order to re-align our capital structure and position our business for long-term success. On July 7, 2009, Lear and certain of its U.S. and Canadian subsidiaries filed petitions for relief under Chapter 11 with the bankruptcy court. On November 9, 2009, our plan of reorganization became effective, and we emerged from Chapter 11 bankruptcy proceedings. For further information on the bankruptcy proceedings, see Note 2, “Reorganization under Chapter 11,” to the consolidated financial statements included in this Report. As a result of our financial restructuring, we finished 2009 with approximately $1.6 billion of cash and $972 million of total debt on our balance sheet, providing us with financial flexibility to invest in our business and execute our strategic objectives going forward.

Since our emergence from Chapter 11 bankruptcy proceedings, our corporate credit rating has continued to improve as judged by credit industry professionals.

Recent Developments

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 that we manufacture internally. In 2011, our average content per vehicle produced in North America and Europe was $381 and $317, respectively. In Asia, where we are pursuing a strategy of aggressive expansion of our sales and operations, we had net sales of $2.3 billion in 2011, as compared to $1.9 billion in 2010. Our sales are well diversified geographically. In 2011, approximately 40% of our sales were generated in Europe, 35% in North America, 16% in Asia and 9% in the rest of the world. Ford, General Motors, and BMW are our three largest customers globally. In addition, Daimler, Fiat-Chrysler, Hyundai, Jaguar Land Rover, PSA, Renault-Nissan and VW each represented 3% or more of our 2011 net sales. We supply and have expertise in all vehicle segments of the automotive market. Our sales content tends to be higher on those vehicle platforms and segments which offer more features and functionality. The popularity of particular vehicle platforms and segments varies over time and by regional market. We expect to continue to win new business on vehicle platforms and segments in line with market trends. We believe that there are opportunities in the trends toward hybrid and electric vehicles and increasing consumer demand for additional features and functionality in vehicles.

Our customers typically award contracts several years before actual production is scheduled to start. Each year, the automotive manufacturers introduce new vehicles, update existing models and discontinue certain models and, recently, even complete brands. In this process, we may be selected as the supplier on a new model, we may continue as the supplier on an updated model or we may lose a new or updated model to a competitor. Our sales backlog reflects anticipated net sales from formally awarded new programs, less lost and discontinued programs. We measure our sales backlog based on contracts to be executed in the next three years. This measure excludes sales at our non-consolidated joint ventures and does not reflect customer-imposed price reductions on newly awarded or existing programs. As of January 2012, our 2012 to 2014 sales backlog is $1.8 billion, of which $800 million relates to programs starting in 2012. Our current sales backlog assumes volumes based on the independent industry projections of IHS Automotive as of December 2011, and a Euro exchange rate $1.30 / Euro. This sales backlog is generally subject to a number of risks and uncertainties, including vehicle production volumes on new and replacement programs and foreign exchange rates, as well as the timing of production launches and changes in customer development plans. For additional information regarding risks that may affect our sales backlog, see Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”

Details on light vehicle production in certain key regions for 2011 and 2010 are provided below. Actual results are impacted by the specific mix of products within each market.

 

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(In thousands of units)

   2011 (1)      2010 (1, 2)      % Change

North America

     13,125.8         11,932.4           10%

Europe

     17,975.9         17,501.6         3

Brazil

     3,142.0         3,154.2       —  

Russia

     1,810.2         1,331.6       36

India

     3,494.9         3,166.2       10

China

     16,012.7         15,504.3         3

Japan

     7,678.3         8,915.2       (14)

Rest of world

     11,605.3         11,114.6         4
  

 

 

    

 

 

    

Total

     74,845.1         72,620.1             3%
  

 

 

    

 

 

    

 

(1) Production data based on IHS Automotive and Ward’s Automotive.
(2) Production data for 2010 has been updated to reflect actual production levels.

Available Information on our Website

Our website address is http://www.lear.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission (“SEC”), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also make available on our website or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics (which includes specific provisions for our executive officers), charters for the standing committees of our Board of Directors and other information related to the Company. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information related to issuers that file electronically with the SEC.

Seating Segment

Lear is a recognized global leader in complete automotive seat systems, as well as in certain individual component parts. The seating segment consists of the design, manufacture, assembly and supply of vehicle seating requirements. We produce seat systems that are fully assembled and ready for installation in automobiles and light trucks. In all cases, seat systems are designed and engineered for specific vehicle models or platforms. We have developed modular seat architectures for both front and rear seats, whereby we utilize pre-developed, modular design concepts to build a program-specific seat, incorporating the latest performance requirements and safety technology, in a shorter period of time, thereby assisting our customers in achieving a faster time-to-market and lower cost. Our seat systems can be designed to achieve maximum passenger comfort by adding a wide range of manual and power features, such as lumbar supports, cushion and back bolsters and leg supports.

We have been pursuing a selective vertical integration strategy to enhance growth, improve quality, increase profitability and defend our current market position in JIT seat assembly. We produce components for seat assemblies, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. In this regard, we have expanded our cut and sew operations in low-cost markets, entered the fabric business (acquisition of New Trend™), developed leather finishing and marketing capability (introduction of Aventino™ premium leather), expanded our precision engineered seat mechanism expertise and increased our foam capability through global expansion.

Our product strategy is to develop standardized seat structures and mechanisms that can be adapted to multiple segments to minimize investment costs. We have improved our basic seat structure and mechanism designs, allowing us to provide cost competitive, lighter weight entry level seats with complete functionality. These seats meet performance and safety standards for mature markets, as well as support our customers’ efforts to export from emerging markets to North America and Europe.

As a result of our innovative product design and technology capabilities, we are a leader in the design of seats with enhanced safety and convenience features. For example, our ProTec® PLuS Self-Aligning Head Restraint is an advancement in seat safety features. By integrating the head restraint with the lumbar support, the occupant’s head is supported earlier and for a longer period of time in a rear-impact collision, potentially reducing the risk of injury. We also supply ECO and EVO lightweight seat structures, which have been designed to accommodate our customers’ needs for all market segments, from emerging to mature. These seat structures incorporate our ultra lightweight EVO seat adjustment mechanisms, which are 25% lighter than previous models, and our next-generation recliners, which are 35% lighter and 50% smaller than today’s standard market technology. Our lightweight seat structures support our customers’ efforts to

 

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reduce the overall weight of the vehicle in order to meet fuel efficiency standards. We are also satisfying our customers’ growing demand for reconfigurable and lightweight seats with our thin profile rear seat technology. Additionally, our Dynamic Environmental Comfort System TM can offer weight reductions of 30% – 40%, as compared to current foam seat designs, and utilizes environmentally friendly materials, which reduce carbon dioxide emissions. Our seating products also reflect our environmental focus. For example, in addition to our Dynamic Environmental Comfort SystemTM, our SoyFoamTM seats, which are used by multiple global customers, are up to 24% renewable, as compared to non-renewable, petroleum-based foam seats.

Superior quality and customer service continue to be areas of competitive advantage for our seating business. Lear presently ranks as the highest quality major seat manufacturer in the 2011 J.D. Power and Associates Seat Quality and Satisfaction StudySM and has held that distinction for ten out of the last eleven years.

Our seat assembly facilities use lean manufacturing techniques, and our finished products are delivered to the automotive manufacturers on a JIT basis, matching our customers’ exact build specifications for a particular day and shift, thereby reducing inventory levels. These facilities are typically located adjacent to or near our customers’ manufacturing and assembly sites. We have modular seat designs that allow for sub-assemblies to be produced in any region of the world. Our seat components, including recliner mechanisms, seat tracks and seat trim covers, are manufactured in batches, typically utilizing facilities in low-cost regions. The principal raw materials used in our seat systems, including steel, foam chemicals and leather hides, are generally available and obtained from multiple suppliers under various types of supply agreements. Fabric, foam, seat frames, recliner mechanisms, seat tracks and certain other components are either manufactured by us internally or purchased from multiple suppliers under various types of supply agreements. The majority of the steel used in our products is comprised of fabricated components that are integrated into a seat system, such as seat frames, recliner mechanisms, seat tracks and other mechanical components. Therefore, our exposure to changes in steel prices is primarily indirect, through these purchased components. We utilize a combination of short-term and long-term supply contracts to purchase key components. We generally retain the right to terminate these agreements if our supplier does not remain competitive in terms of cost, quality, delivery, technology or customer support.

Financial Summary

A summary of revenues from external customers and other financial information for our seating segment is shown below. For additional information regarding the operating results of our seating segment, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” For additional information regarding Lear’s total sales and long-lived assets by geographic area, as well as customer concentrations, see Note 14, “Segment Reporting,” to the consolidated financial statements included in this Report. The top five customers of this segment are: General Motors, Ford, BMW, Fiat-Chrysler and Volkswagen.

 

     Successor (1)           Predecessor  
(In millions)    2011      2010      2009           2009  

Revenues from external customers

   $  10,943.0       $  9,395.3       $  1,251.1           $  6,561.8   

Segment earnings (2) 

     703.7         655.0         52.4             184.9   

Depreciation and amortization

     146.5         145.7         24.9             131.6   

Capital expenditures

     184.0         114.2         19.0             46.5   

Total assets

     3,697.9         3,491.1         3,182.9             N/A   

 

(1) As discussed in Note 1, “Basis of Presentation,” to the consolidated financial statements included in this Report, in connection with the Company’s emergence from Chapter 11 bankruptcy proceedings on November 9, 2009, the Company adopted fresh-start accounting on November 7, 2009. As a result, financial data presented for periods prior to November 7, 2009, is identified as “Predecessor” information, and financial data presented for periods subsequent to November 7, 2009, is identified as “Successor” information.
(2) As discussed in Note 14, “Segment Reporting,” segment earnings represents pretax income (loss) before goodwill impairment charges, interest expense, other (income) expense, reorganization items and fresh-start accounting adjustments and equity in net (income) loss of affiliates.

Competition

We are one of only two primary independent suppliers with global scale and the capability to design, develop, manufacture and deliver complete seat systems and components to every automotive market in the world. Based on independent market studies and management estimates, we believe that we hold a #2 position globally on the basis of revenue with strong positions in all major markets. We estimate the global seat systems market to be approximately $50 billion in 2011. We believe that we are also among the leading suppliers of various components produced for complete seat systems.

Our primary independent competitor globally is Johnson Controls, Inc. Other competitors in this segment include Faurecia S.A., Toyota Boshoku Corporation, TS Tech Co., Ltd. and Magna International Inc., which have varying market presence depending on the region, country or automotive manufacturer. Peugeot S.A., Toyota Motor Corporation and

 

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Honda Motor Co. Ltd. hold equity ownership positions in Faurecia S.A., Toyota Boshoku Corporation and TS Tech Co., Ltd., respectively. Other automotive manufacturers maintain a presence in the seat systems market through wholly owned subsidiaries or in-house operations. In seat components, we compete with the seat systems suppliers identified above, as well as certain regional suppliers that specialize in particular components.

Technology

We maintain state-of-the-art testing, instrumentation and data analysis capabilities. We own industry-leading seat validation test centers featuring crashworthiness, durability and full acoustic and sound quality testing capabilities. Together with computer-controlled data acquisition and analysis capabilities, these centers provide precisely controlled laboratory conditions for sophisticated testing of parts, materials and systems.

In addition, we incorporate many convenience, comfort and safety features into our designs, including advanced whiplash prevention concepts, integrated restraint seat systems and side impact airbags. We also invest in our computer-aided engineering design and computer-aided manufacturing systems. Recent enhancements to these systems include advanced acoustic modeling and analysis capabilities and the enhancement of our research and design website, which is used for global customer telecommunications, technology communications, collaboration and the direct exchange of digital information.

For additional factors that may impact our seating segment’s business, financial condition, operating results and/or cash flows, see Item 1A, “Risk Factors.”

EPMS Segment

The EPMS segment consists of the design, manufacture, assembly and supply of electrical distribution systems and components for traditional powertrain vehicles, as well as for hybrid and electric vehicles. With the increase in the number of electrical features and electronically controlled functions on the vehicle, there is an increasing focus on improving the functionality of the vehicle’s electrical architecture. We are able to provide our customers with design and engineering solutions and manufactured systems, modules and components that optimally integrate the entire electrical distribution system, consisting of wiring, terminals and connectors, junction boxes and electronic modules, within the overall architecture of the vehicle. This integration can reduce the overall system cost and weight and improve the reliability and packaging by reducing the number of wires and terminals and connectors normally required to manage electrical power and signal distribution within a vehicle For example, our solid state smart junction box product line enables increased functionality, while delivering up to a 70% reduction in packaging size and weight and up to a 35% reduction in wire gauge due to increased circuit protection reliability. To achieve these results, our solid state junction box integrates advancements in terminal and connector technology, electronics capability and complete electrical distribution systems expertise.

We have structured our business globally to achieve engineering synergies and to take advantage of the industry shift toward global vehicle platforms. We have focused and aligned our product offerings to provide the complete electrical distribution system of the vehicle and have substantially exited non-core product lines, such as switches and certain other electronic products.

Technology centers of excellence have been developed for each of our major product lines and are located in Germany, Spain and the United States.

Our Advanced Efficiency Systems Global Center of Excellence, in Southfield, Michigan, is dedicated to the development of high-power wiring, terminals and connectors and power electronics. We are supplying, or will supply, high voltage wire harnesses, battery monitoring systems, high voltage terminals and connectors, battery chargers, DC/DC converters and traction inverters for new models from Daimler, Renault-Nissan, General Motors (including the Chevrolet Volt extended range electric vehicle), BMW, Land Rover, Fiat-Chrysler and Fisker.

Electrical distribution systems are comprised primarily of wire harness assemblies, terminals and connectors and control modules, including junction boxes and fuse boxes. Wire harness assemblies consist of a collection of wiring and terminals and connectors that link all of the various electrical and electronic devices within the vehicle to each other and/or to a power source. Fuse boxes are centrally located boxes within the vehicle that contain fuses and/or relays for circuit and device protection, as well as for power distribution. Junction boxes serve as a connection point for multiple wire harness assemblies. They may also contain fuses and/or relays for circuit and device protection.

Smart junction boxes are junction boxes with integrated electronic functionality often contained in other body control modules. Smart junction boxes eliminate interconnections, increase overall system reliability and can reduce the number

 

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of electronic modules within the vehicle. Certain vehicles may have two or three smart junction boxes networked together as an intelligent system. Key advantages of smart junction boxes include reduced weight, cost and complexity. Body control modules control various interior comfort and convenience features. These body control modules may consolidate multiple functions into a single module or may focus on a specific function or part of the car interior, such as the door zone control module which controls features such as window lift, door lock and power mirrors. However, these modules are increasingly being centralized into integrated body control modules or smart junction boxes.

Wireless products send and receive signals using radio frequency technology. Our wireless systems include passive entry systems, remote keyless entry and dual range/dual function remote keyless entry systems. Passive entry systems allow the vehicle operator to unlock the door without using a key or physically activating a remote keyless fob. Dual range/dual function remote keyless entry systems allow a single transmitter to perform multiple functions. We are also developing 2-way remote keyless entry systems that enable the vehicle to provide information to the user, such as verification that the doors have locked or that the engine has started, as well as other operational information.

Our lighting control module integrates electronic control logic and diagnostics with the headlamp switch. We supply LED lighting control systems for the vehicle interior and exterior. The audio segment includes amplifiers and complete vehicle sound system development capability.

Electrical distribution systems are networks of wiring and associated control devices that route electrical signals and manage electrical power within a vehicle. Wire harness assemblies consist of raw, coiled wire, which is automatically cut to length and terminated. Individual circuits are assembled together on a jig or table, inserted into connectors and wrapped or taped to form wire harness assemblies. Substantially all of our materials are purchased from suppliers, with the exception of a portion of the terminals and connectors that are produced internally. The majority of our copper purchases are comprised of extruded wire that is integrated into electrical wire. Certain materials, particularly circuit boards, are available from a limited number of suppliers. Supply agreements typically last for up to one year, and our copper wire contracts for our wire harness business are generally subject to price index agreements. The assembly process is labor intensive, and as a result, production is generally performed in low-cost labor sites in Mexico, Honduras, Eastern Europe, Africa, China, the Philippines, Brazil and Thailand.

Some of the principal components attached to the wire harness assemblies that we manufacture include junction boxes and electronic control modules. Junction boxes are manufactured in North America, Europe and the Philippines with a proprietary, capital-intensive assembly process, using printed circuit boards, a portion of which are purchased from third-party suppliers. Terminals and connectors are currently manufactured in Germany, Eastern Europe and the United States and will be manufactured in China beginning in 2012. Proprietary features have been developed to improve the function of these junction boxes in harsh environments, including high temperatures and humidity. Electronic control modules are assembled using high-speed surface mount placement equipment in Mexico, China, the Philippines, Morocco, Spain and Germany.

Increasing demand for more features and functionality in vehicles is driving an increase in traditional electrical distribution systems. In addition, the emergence of alternative powertrains, including electric, hybrid-electric and other technologies is driving growth in high-power electrical systems and components. Hybrid and electric vehicles offer a significant content opportunity with the potential to more than double the electrical content per vehicle. The EPMS segment is technology driven and typically has higher investment requirements as a percentage of sales than our seating segment. Our complete electrical distribution system design capabilities, coupled with certain market-leading component technologies, allow access to our customers’ development teams, which provides an early indication of our customers’ product needs. We also believe that our capabilities in terminals and connectors can be leveraged to a great extent to capture not only additional market share and margins in wire harnesses but also provide the longer term potential for non-automotive applications. As mentioned above, our products are very cost sensitive because of their labor intensity and batch processing nature. Our manufacturing strategy is to produce all components in low-cost or emerging markets leveraging our existing capabilities.

Financial Summary

A summary of revenues from external customers and other financial information for our EPMS segment is shown below. For additional information regarding the operating results of our EPMS segment, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” For additional information regarding Lear’s total sales and long-lived assets by geographic area, as well as customer concentrations, see Note 14, “Segment Reporting,” to the consolidated financial statements included in this Report. The top five customers of this segment are: Ford, BMW, Renault-Nissan, PSA and Volvo.

 

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     Successor (1)           Predecessor  
(In millions)    2011      2010      2009           2009  

Revenues from external customers

   $ 3,213.5       $ 2,559.3       $ 329.8           $ 1,596.9   

Segment earnings (2)

     185.1         100.5         (24.5          (131.3

Depreciation and amortization

     92.3         83.9         14.0             80.2   

Capital expenditures

     139.4         71.1         16.9             27.9   

Total assets

     1,255.0         1,052.2         966.5             N/A   

 

(1) As discussed in Note 1, “Basis of Presentation,” to the consolidated financial statements included in this Report, in connection with the Company’s emergence from Chapter 11 bankruptcy proceedings on November 9, 2009, the Company adopted fresh-start accounting on November 7, 2009. As a result, financial data presented for periods prior to November 7, 2009, is identified as “Predecessor” information, and financial data presented for periods subsequent to November 7, 2009, is identified as “Successor” information.
(2) As discussed in Note 14, “Segment Reporting,” segment earnings represents pretax income (loss) before goodwill impairment charges, interest expense, other (income) expense, reorganization items and fresh-start accounting adjustments and equity in net (income) loss of affiliates.

Competition

We estimate our global target market for electrical distribution systems to be approximately $40 billion. We are one of only four suppliers with complete electrical distribution and manufacturing capabilities for both traditional and high-power systems and components in every automotive market in the world. Our major competitors vary by our four product areas. In wire harnesses, our major competitors include Yazaki Corporation, Sumitomo Corporation, Delphi Automotive PLC, Leoni AG and Furukawa Electric Co., Ltd., as well as certain regional suppliers. In terminals and connectors, our major competitors include TE Connectivity, Ltd., Yazaki Corporation, Sumitomo Corporation and Delphi Automotive PLC. In electronics, our major competitors include Continental AG, Delphi Automotive PLC, Hella, Inc. and Robert Bosch LLC. In advanced efficiency systems, our major competitors include Magna E-Car Systems GmbH & Co OG, Delphi Automotive PLC, Robert Bosch LLC and Hitachi, Ltd.

Technology

EPMS technology spans each of our four product areas: wire harnesses, terminals and connectors, electronics and advanced efficiency systems. We are able to supply complete electrical distribution systems across our entire product offering by leveraging the expertise in each of these four product areas. Our expertise is developed and delivered by over 1,900 engineers across 14 countries and is led by four global centers of excellence.

 

   

Wire harnesses – In addition to industry leading capability in the delivery of wire harnesses, our technology includes expertise in alternative conductor materials, such as copper clad steel, copper clad aluminum and other hybrid alloys, as well as systems expertise in our ability to design vehicle harness applications utilizing these alternative conductor materials. Alternative conductor materials enable ultra small gauge conductors that can reduce the weight and packaging size of electrical distribution systems. Reductions in weight and size support our customers’ efforts to reduce the overall weight of the vehicle in order to meet fuel efficiency standards. These ultra small gauge conductors are enabled by a synergistic relationship with our terminals and connectors technology expertise.

 

   

Terminals and connectors – We provide a broad set of terminals and connectors to the market and are developing advanced capabilities in aluminum terminals and aluminum wire termination, ultra small gauge termination and high voltage terminals and connectors. Our high voltage terminals and connectors are a part of our advanced efficiency systems capabilities, and we have established a leading capability in power density (power per packaging size).

Our expertise in terminals and connectors has also made a direct contribution to our smart junction box technology with the development of surface mount connectors being a key technology to reduce package size and weight through integrated thermal management.

 

   

Electronics – We have a leading position in smart junction boxes and continue to develop solid state smart junction box technology, which reduces size and weight, enables wire gauge reduction and eliminates fuses by using resettable smart drivers. We continue to advance with the development of aluminum printed circuit boards for reduced copper usage and reduced weight products. Importantly, this technology also enables the integration of additional feature content into the smart junction box with a sizable cost reduction for the electrical system.

Wireless capability includes expertise in the development of radio frequency systems. We offer the longest range wireless products in the industry and are developing higher frequency passive entry systems for improved security and 2-way remote keyless entry systems that enable the vehicle to provide feedback to the consumer, such as verification that the doors have locked or that the engine has started.

 

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LED lighting control expertise includes interior and exterior applications and is being advanced with the development of pixel light control capabilities.

Additionally, we have developed a number of innovative products and features focused on increasing value to our customers, such as interior function control and infotainment products, including audio amplifiers and satellite receivers.

We also maintain validation and electromagnetic compatibility labs at several of our electrical facilities, where we develop and test electronic products for compliance with government requirements and customer specifications.

 

   

Advanced efficiency systems – Increased vehicle efficiency trends and the hybrid and electric vehicle market represents a significant advancement in emerging technology for electrical distribution systems and components. We offer a product portfolio of stand-alone and fully integrated solutions for our customers’ existing and future hybrid and electric vehicles. Our systems and components have achieved industry leading efficiency, packaging and reliability. We have over 130 patents and patents pending in our high-power product segment, and our product portfolio includes the following:

 

   

High-power charging systems comprised of on/off board chargers, a family of charge cord sets, fast charge stations and charge receptacles and couplers.

 

   

High-power distribution systems including high voltage wire harnesses found throughout the vehicle and battery pack, high-power terminals and connectors (designed to carry high amounts of electric current, to be packaged tightly and to provide proper sealing, high-use reliability and ease of use for the consumer) and battery disconnect units, as well as manual service disconnects.

 

   

Energy management systems including battery monitoring systems, DC/DC converters, traction inverters and our patented integrated power module, which integrates the functionality of charging and energy management for an efficient solution for hybrid and electric vehicles.

Our Advanced Efficiency Systems Global Center of Excellence, in Southfield, Michigan, supports growth opportunities globally in the hybrid and electric vehicle market through the development of high-power and hybrid electrical systems and components. A high power application center with full development capabilities is also located in Valls, Spain.

For additional factors that may impact our EPMS segment’s business, financial condition, operating results and/or cash flows, see Item 1A, “Risk Factors.”

Seasonality

Our principal operations are directly related to the automotive industry. Consequently, we may experience seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants close for model year changeovers, in December when many customer plants close for the holidays and during periods of high vehicle inventory. See Note 16, “Quarterly Financial Data,” to the consolidated financial statements included in this Report.

Customers

We serve the worldwide automotive and light truck market, which produced approximately 75 million vehicles in 2011. We have automotive content on over 300 vehicle nameplates worldwide and serve all of the world’s major automotive manufacturers.

In 2011, Ford and General Motors, two of the largest automotive and light truck manufacturers in the world, each accounted for 19% of our net sales. In addition, BMW accounted for approximately 12% of our net sales. For further information related to our customers and domestic and foreign sales and operations, see Note 14, “Segment Reporting,” to the consolidated financial statements included in this Report.

We receive purchase orders from our customers that generally provide for the supply of a customer’s annual requirements for a particular vehicle model and assembly plant, or in some cases, for the supply of a customer’s requirements for the life of a particular vehicle model, rather than for the purchase of a specified quantity of products. Although most purchase orders may be terminated by our customers at any time, such terminations have been minimal and have not had a material

 

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impact on our operating results. We are subject to risks that an automotive manufacturer will produce fewer units of a vehicle model than anticipated or that an automotive manufacturer will not award us a replacement program following the life of a vehicle model. To reduce our reliance on any one vehicle model, we produce automotive systems and components for a broad cross-section of both new and established models. However, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating performance. Our net sales for the year ended December 31, 2011, were comprised of the following vehicle categories: 65% cars, including 23% compact, 22% mid-size, 15% luxury/sport and 5% full-size, and 35% light truck, including 23% sport utility/crossover and 12% pickup and other light truck.

Our seating customers award business to their suppliers in a number of ways, including the award of complete automotive seat systems, allowing the suppliers to either manufacture the components themselves or to purchase them from other suppliers at their discretion. Increasingly, certain of our customers are electing to award certain seat components directly to component suppliers and independent of the complete seat system award. We have been investing in and expanding our component capacity in low-cost regions in order to maximize our participation in this sourcing trend.

Our agreements with our major customers generally provide for an annual productivity price reduction. Historically, cost reductions through product design changes, increased manufacturing productivity and similar programs with our suppliers have generally offset these customer-imposed price reduction requirements. However, raw material, energy and commodity costs have been volatile over the past several years. Although we have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. These costs remain volatile and could have an impact on our operating results in the foreseeable future. In addition, we are exposed to increasing market risk associated with fluctuations in foreign exchange as a result of our low-cost footprint and vertical integration strategies. We use derivative financial instruments to reduce our exposure to fluctuations in foreign exchange rates. For additional information regarding our foreign exchange and commodity price risk, see Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Financial Condition — Foreign Exchange” and “— Commodity Prices.”

Employees

As of December 31, 2011 and 2010, our employment levels worldwide were approximately as follows:

 

Region

   2011      2010  

United States and Canada

     7,400         6,700   

Mexico

     34,100         26,800   

Central and South America

     8,000         7,100   

Europe and Africa

     31,700         28,800   

Asia

     16,600         14,000   
  

 

 

    

 

 

 

Total

     97,800         83,400   
  

 

 

    

 

 

 

A substantial number of our employees are members of unions or national trade organizations. We have collective bargaining agreements with several unions, including the United Auto Workers, the Canadian Auto Workers and the International Brotherhood of Electrical Workers. Each of our unionized facilities in the United States and Canada has a separate collective bargaining agreement with the union that represents the workers at such facility, with each such agreement having an expiration date that is independent of the other agreements. The majority of our employees in Mexico and Europe are members of industrial trade union organizations or confederations within their respective countries. Many of these organizations and confederations operate under national contracts, which are not specific to any one employer. We have occasionally experienced labor disputes at our plants. We have been able to resolve all such labor disputes and believe our relations with our employees are generally good.

See Item 1A, “Risk Factors — A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could adversely affect our financial performance,” and Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”

Technology

Worldwide, we hold many patents and have many patent applications pending. While we believe that our patent portfolio is a valuable asset, no individual patent or group of patents is critical to the success of our business. We also license selected technologies to automotive manufacturers and to other automotive suppliers. We continually strive to identify and implement new technologies for use in the design and development of our products.

 

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Advanced technology development is conducted worldwide at our six advanced technology centers and at our product engineering centers. At these centers, we engineer our products to comply with applicable safety standards, meet quality and durability standards, respond to environmental conditions and conform to customer and consumer requirements. Our global innovation and technology center located in Southfield, Michigan, develops and integrates new concepts and is our central location for consumer research, benchmarking, craftsmanship and industrial design activity.

We have numerous registered trademarks in the United States and in many foreign countries. The most important of these marks include “LEAR CORPORATION” (including a stylized version thereof) and “LEAR.” These marks are widely used in connection with our product lines and services. The trademarks and service marks “ADVANCE RELENTLESSLY,” “PROTEC,” “PROTEC PLUS” and others are used in connection with certain of our product lines and services.

We will continue to dedicate resources to engineering and development. Engineering and development costs incurred in connection with the development of new products and manufacturing methods within one year of launch, to the extent not recoverable from our customers, are charged to cost of sales as incurred. Such costs are charged to selling, general and administrative expenses when incurred more than one year prior to launch. Engineering and development costs charged to selling, general and administrative expenses totaled approximately $111 million, $81 million and $83 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Environmental Matters

We are subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. For a description of our outstanding environmental matters and other legal proceedings, see Note 13, “Commitments and Contingencies,” to the consolidated financial statements included in this Report.

In addition, our customers are subject to significant environmentally focused state, federal and foreign laws and regulations that regulate vehicle emissions, fuel economy and other matters related to the environmental impact of vehicles. To the extent that such laws and regulations ultimately increase or decrease automotive vehicle production, such laws and regulations would likely impact our business. See Item 1A, “Risk Factors — Risk Related to Our Business.”

Furthermore, we currently offer products with environmentally friendly features, and our expertise and capabilities are allowing us to expand our product offerings in this area. We will continue to monitor emerging developments in this area.

Joint Ventures and Noncontrolling Interests

We form joint ventures in order to gain entry into new markets, expand our product offerings and broaden our customer base. In particular, we believe that certain joint ventures have provided us, and will continue to provide us, with the opportunity to expand our business relationships with Asian automotive manufacturers, particularly in emerging markets. We also partner with companies having significant local experience in commerce, customs and capacity to reduce our financial risk and enhance our potential for achieving expected financial returns. In some cases, these joint ventures may be located in North America or Europe and used to expand our customer relationships.

As of December 31, 2011, we had 28 operating joint ventures located in 20 countries. Of these joint ventures, 13 are consolidated and 15 are accounted for using the equity method of accounting. Twenty of the joint ventures operate in Asia, five operate in North America (including two that are dedicated to serving Asian automotive manufacturers), two operate in Europe (including one that is dedicated to serving Asian automotive manufacturers) and one operates in all three regions. With the exception of International Automotive Components Group North America, LLC and Industrias Cousin Freres, S.L., which we intend to monetize or discontinue, all of our joint ventures are core to our business. Net sales of our consolidated joint ventures accounted for approximately 11% of our net sales in 2011. As of December 31, 2011, our investments in non-consolidated joint ventures totaled $148 million. A summary of our non-consolidated operating joint ventures, including ownership percentages, is shown below. For further information related to our joint ventures, see Note 6, “Investments in Affiliates and Other Related Party Transactions,” to the consolidated financial statements included in this Report.

 

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Country

  

Name

   Ownership
Percentage

China

   Shanghai Lear STEC Automotive Parts Co., Ltd.        55%

China

   Lear Dongfeng Automotive Seating Co., Ltd.    50

China

   Jiangxi Jiangling Lear Interior Systems Co., Ltd.    50

China

   Beijing BAI Lear Automotive Systems Co., Ltd.    50

China

   Beijing Lear Automotive Electronics and Electrical Products Co., Ltd.    50

China

   Changchun Lear FAW Sihuan Automotive Electrical and Electronics Co., Ltd.    49

China

   Changchun Lear FAW Sihuan Automotive Seat Systems Co., Ltd.    49

China

   Beijing Lear Dymos Automotive Systems Co., Ltd.    40

Honduras

   Honduras Electrical Distribution Systems S. de R.L. de C.V.    49

India

   Dymos Lear Automotive India Private Limited    35

Korea

   Dong Kwang Lear Yuhan Hoesa    50

Spain

   Industrias Cousin Freres, S.L.    50

United States

   Kyungshin-Lear Sales and Engineering LLC    49

United States

   Tacle Seating USA, LLC    49

United States

   International Automotive Components Group North America, LLC    23

ITEM 1A – RISK FACTORS

Our business, financial condition, operating results and cash flows may be impacted by a number of factors. In addition to the factors affecting our business identified elsewhere in this Report, the most significant factors affecting our operations include the following:

Risks Related to Our Business

 

   

A decline in the production levels of our major customers, particularly with respect to models for which we are a significant supplier, could adversely affect our financial performance.

Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer 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 to our customers and suppliers of critical components needed to complete the production of vehicles and other factors.

Our ability to reduce the risks inherent in certain concentrations of business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall. While we are pursuing a strategy of aggressively expanding our sales and operations in Asia, no assurances can be given as to how successful we will be in doing so. As a result, a decline in the production levels of our major customers, particularly with respect to models for which we are a significant supplier, could reduce our sales and thereby adversely affect our financial condition, operating results and cash flows.

 

   

The loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier could adversely affect our financial performance.

Although we receive purchase orders from our customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular vehicle model and assembly plant, or in some cases, for the supply of a customer’s requirements for the life of a particular vehicle model, rather than for the purchase of a specific quantity of products. In addition, it is possible that customers could elect to manufacture our products internally. The loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier could reduce our sales and thereby adversely affect our financial condition, operating results and cash flows.

 

   

Our industry is cyclical and our financial performance could be adversely affected by industry downturns.

The automotive industry is cyclical and sensitive to general economic conditions and other factors, including the global credit markets, interest rates, consumer credit and consumer spending and preferences. An economic downturn that results in a reduction in vehicle production levels could adversely affect our financial condition, operating results and cash flows.

 

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Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial performance.

We regularly negotiate contracts and sales prices with our customers. These contracts require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through restructuring actions, manufacturing efficiencies, product design enhancement and supply chain management. 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, improve our business structure and lower our operating costs. Our inability to achieve product cost reductions which offset customer-imposed price reductions could adversely affect our financial condition, operating results and cash flows.

 

   

Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance.

Raw material, energy and commodity costs have been volatile over the past several years and remained so in 2011. Although we have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. In addition, the availability of raw materials, commodities and product components fluctuates from time to time due to factors outside of our control. If the costs of raw materials, energy, commodities and product components increase or the availability thereof is restricted, it could adversely affect our financial condition, operating results and cash flows.

 

   

Adverse developments affecting or the financial distress of one or more of our suppliers could adversely affect our financial performance.

We obtain components and other products and services from numerous tier 2 automotive suppliers and other vendors throughout the world. We are responsible for managing our supply chain, including suppliers who may be the sole-sources of products that we require, who our customers direct us to use or who have unique capabilities that would make it difficult and/or expensive to re-source. In certain instances, entire industries may experience short-term capacity constraints. Additionally, our production capacity and that of our customers and suppliers may be adversely affected by natural disasters. Any such significant disruption could adversely affect our financial performance. In addition, unfavorable industry conditions could result in financial distress within our supply base, thereby increasing the risk of supply disruption. Although market conditions have improved in recent years, uncertainty remains and another economic downturn or other unfavorable industry conditions in one or more of the regions in which we operate could cause a supply disruption and thereby adversely affect our financial condition, operating results and cash flows.

 

   

Our substantial international operations make us vulnerable to risks associated with doing business in foreign countries.

As a result of our global presence, a significant portion of our revenues and expenses are denominated in currencies other than the U.S. dollar. We have substantial manufacturing and distribution facilities in many foreign countries, including Mexico and countries in Europe, Central and South America, Africa and Asia. In addition, international operations are subject to certain risks inherent in doing business abroad, including:

 

   

exposure to local economic conditions;

 

   

political, economic and civil instability (including acts of terrorism, civil unrest, drug-cartel related and other forms of violence and outbreaks of war);

 

   

expropriation and nationalization;

 

   

currency exchange rate fluctuations and currency controls;

 

   

withholding and other taxes on remittances and other payments by subsidiaries;

 

   

investment restrictions or requirements;

 

   

repatriation restrictions or requirements;

 

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export and import restrictions;

 

   

increases in working capital requirements related to long supply chains; and

 

   

global sovereign fiscal matters and creditworthiness, including potential defaults and the related impacts on economic activity, including the possible effects on credit markets, currency values, monetary unions, international treaties and fiscal policies.

Expanding our sales and operations in Asia is an important element of our strategy. In addition, our strategy includes increasing our European market share and expanding our manufacturing operations in lower-cost regions. As a result, our exposure to the risks described above is substantial. The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. However, any such occurrences could adversely affect our financial condition, operating results and cash flows.

 

   

Certain of our operations are conducted through joint ventures which have unique risks.

Certain of our operations, particularly in emerging markets, are conducted through joint ventures. With respect to our joint ventures, we may share ownership and management responsibilities with one or more partners who may not share our goals and objectives. Operating a joint venture requires us to operate the business pursuant to the terms of the agreement that we entered into with our partners, including additional organizational formalities, as well as to share information and decision making. Additional risks associated with joint ventures include one or more partners failing to satisfy contractual obligations, conflicts arising between us and any of our partners and a change in the ownership of any of our partners. Additionally, our ability to sell our interest in a joint venture may be subject to contractual and other limitations.

 

   

We operate in a highly competitive industry and efforts by our competitors to gain market share could adversely affect our financial performance.

We operate in a highly competitive industry. We and most of our competitors are seeking to expand market share with new and existing customers, including in Asia and other high growth regions. Our customers award business based on, among other things, price, quality, service and technology. Our competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. If we are unable to differentiate our products or maintain a low-cost footprint, we may lose market share or be forced to reduce prices, thereby lowering our margins. Any such occurrences could adversely affect our financial condition, operating results and cash flows.

 

   

Our inability to effectively manage the timing, quality and costs of new program launches could adversely affect our financial performance.

In connection with the award of new business, we obligate ourselves to deliver new products and services that are subject to our customers’ timing, performance and quality standards. Additionally, as a tier 1 supplier, we must effectively coordinate the activities of numerous suppliers in order for the program launches of our products to be successful. Given the complexity of new program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp up of costs; however, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could adversely affect our financial condition, operating results and cash flows.

 

   

A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could adversely affect our financial performance.

A substantial number of our employees and the employees of our largest customers and suppliers are members of industrial trade unions and are employed under the terms of collective bargaining agreements. Each of our unionized facilities in the United States and Canada has a separate collective bargaining agreement with the union that represents the workers at such facility, with each such agreement having an expiration date that is independent of the other agreements. We have collective bargaining agreements covering approximately 58,000 employees globally. In the United States and Canada, contracts covering approximately 40% of our unionized workforce are scheduled to expire during 2012. A labor dispute involving us, any of our customers or suppliers or any other suppliers to our customers or that otherwise affects our operations, or the inability by us, any of our customers or suppliers or any other suppliers to our customers to negotiate, upon the expiration of a collective bargaining agreement, an extension of such agreement or a new agreement on satisfactory terms could adversely affect our financial condition, operating results and cash flows.

 

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Our existing indebtedness and the inability to access capital markets could restrict our business activities or adversely affect our financial performance.

As of December 31, 2011, we had approximately $695 million of outstanding indebtedness. The debt instruments governing our indebtedness contain covenants that may restrict our business activities, and our failure to comply with these covenants could result in a default under our indebtedness. Our inability to generate sufficient cash flow to satisfy our debt obligations, to refinance our debt obligations or to access capital markets on commercially reasonable terms could adversely affect our financial condition, operating results and cash flows.

 

   

Significant changes in discount rates, the actual return on pension assets and other factors could adversely affect our financial performance.

Our earnings may be positively or negatively impacted by the amount of income or expense recorded related to our defined benefit plans. Accounting principles generally accepted in the United States (“GAAP”) require that income or expense related to the defined benefit plans be calculated at the annual measurement date using actuarial calculations, which reflect certain assumptions. The most significant of these assumptions relate to interest rates, the capital markets and other economic conditions. These assumptions, as well as the actual value of pension assets at the measurement date, will impact the calculation of pension and other postretirement benefit expense for the year. Although pension expense and pension contributions are not directly related, the key economic indicators that affect pension expense also affect the amount of cash that we will contribute to our pension plans. Because interest rates and the values of these pension assets have fluctuated and will continue to fluctuate in response to changing market conditions, pension and other postretirement benefit expense in subsequent periods, the funded status of our pension plans and the future minimum required pension contributions, if any, could adversely affect our financial condition, operating results and cash flows.

 

   

Impairment charges relating to our goodwill and long-lived assets could adversely affect our financial performance.

We regularly monitor our goodwill and long-lived assets for impairment indicators. In conducting our goodwill impairment testing, we perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, we compare the fair value of each of our reporting units to the related net book value. In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings that could adversely affect our financial condition and operating results.

 

   

Our failure to execute our strategic objectives could adversely affect our financial performance.

Our financial performance depends, in part, on our ability to successfully execute our strategic objectives. Our corporate strategy involves, among other things, leveraging our global presence and expanding our low-cost footprint, focusing on our core capabilities, selective vertical integration and investments in technology, and enhancing and diversifying our strong customer relationships through operating performance. Various factors, including the industry environment and the other matters described in Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “— Forward-Looking Statements,” could adversely affect our ability to execute our corporate strategy. Our failure to execute our strategic objectives could adversely affect our financial condition, operating results and cash flows. Moreover, there can be no assurances that, even if implemented, our strategic objectives will be successful.

 

   

A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers could adversely affect our financial performance.

In the event that our products fail to perform as expected, whether allegedly due to our fault or that of one of our sub-suppliers, and such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims. In addition, we are a party to warranty-sharing and other agreements with certain of our customers related to our products. These customers may pursue claims against us

 

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for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims, recalls or other corrective actions involving our products. We carry insurance for certain product liability claims, but such coverage may be limited. We do not maintain insurance for product warranty or recall matters. In addition, we may not be successful in recovering amounts from third parties, including sub-suppliers, in connection with these claims. These types of claims could adversely affect our financial condition, operating results and cash flows.

 

   

We are involved from time to time in various legal and regulatory proceedings and claims, which could adversely affect our financial performance.

We are involved in various legal and regulatory proceedings and claims that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our customers, suppliers or competitors, intellectual property matters, personal injury claims, environmental matters, tax matters, employment matters and antitrust matters. No assurances can be given that such proceedings and claims will not adversely affect our financial condition, operating results and cash flows.

 

   

New laws or regulations or changes in existing laws or regulations could adversely affect our financial performance.

We and the automotive industry are subject to a variety of federal, state, local and foreign laws and regulations, including those related to health, safety and environmental matters. Governmental regulations also affect taxes and levies, capital markets, healthcare costs, energy usage, international trade and immigration and other labor issues, all of which may have a direct or indirect effect on our business and the businesses of our customers and suppliers. We cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof. The introduction of new laws or regulations or changes in existing laws or regulations, or the interpretation thereof, could increase the costs of doing business for us or our customers or suppliers or restrict our actions and adversely affect our financial condition, operating results and cash flows.

 

   

We are required to comply with environmental laws and regulations that could cause us to incur significant costs.

Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future. Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. If we fail to comply with present and future environmental laws and regulations, we could be subject to future liabilities, which could adversely affect our financial condition, operating results and cash flows.

 

   

Developments or assertions by or against us relating to intellectual property rights could adversely affect our financial performance.

We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and we are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Developments or assertions by or against us relating to intellectual property rights could adversely affect our financial condition, operating results and cash flows.

 

   

Our U.S. net operating loss, capital loss and tax credit carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

We have significant U.S. net operating loss, capital loss and tax credit carryforwards (collectively, the “Tax Attributes”). Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code, as amended (the “IRC”). Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership, as defined under the IRC. Our emergence from Chapter 11 bankruptcy proceedings in November 2009 is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the Company as of the emergence date. As a result, our future U.S. taxable income may not be fully offset by the Tax Attributes if such income exceeds our annual limitation, and we may incur a

 

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tax liability with respect to such income. In addition, we may experience a change in ownership in the future as a result of changes in our stock ownership that are beyond our control, and any such subsequent changes in ownership for purposes of the IRC could further limit our ability to use our Tax Attributes.

 

   

Because of the adoption of fresh-start accounting and the effects of the transactions contemplated by the Plan, financial information subsequent to November 7, 2009, is not comparable to financial information prior to November 7, 2009.

Upon our emergence from Chapter 11 bankruptcy proceedings, we adopted fresh-start accounting in accordance with the provisions of ASC 852, pursuant to which our reorganization value was allocated to our assets in conformity with the procedures specified by ASC 805, “Business Combinations.” Accordingly, our consolidated statements of financial position and consolidated statements of operations subsequent to November 7, 2009, are not comparable in many respects to our consolidated statements of financial position and consolidated statements of operations prior to November 7, 2009. The lack of comparable historical financial information may discourage investors from purchasing our capital stock.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2 – PROPERTIES

As of December 31, 2011, our operations were conducted through 207 facilities, some of which are used for multiple purposes, including 79 just-in-time manufacturing facilities, 88 dedicated component manufacturing facilities, ten sequencing and distribution sites, 24 administrative/technical support facilities and six advanced technology centers, in 35 countries. Our corporate headquarters is located in Southfield, Michigan.

Of our 207 total facilities, which include facilities owned or leased by our consolidated subsidiaries, 80 are owned and 127 are leased with expiration dates ranging from 2012 through 2051. We believe that substantially all of our property and equipment is in good condition and that we have sufficient capacity to meet our current and expected manufacturing and distribution needs. See Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Financial Condition.”

 

 

SEATING

Argentina

   Czech Republic    India (continued)    Mexico (continued)    South Africa    United States

    Escobar, BA

  

    Kolin

       Halol        Panzacola, TL        East London        Arlington, TX

    Ferreyra, CBA

       Stribro        Maraimalai Nagar        Piedras Negras, CO        Port Elizabeth        Brownstown

Belgium

   France        Nasik        Ramos Arizpe, CO        Rosslyn            Township, MI

    Genk

       Cergy        Pune        Saltillo, CO    South Korea        Columbia City, IN

Brazil

       Feignies    Italy        San Felipe, GU        Gyeongju        Detroit, MI

    Betim

       Guipry        Caivano, NA        San Luis Potosi, SL    Spain        Duncan, SC

    Caçapava

   Germany        Cassino, FR        Silao, GO        Epila        Farwell, MI

    Camaçari

       Besigheim        Grugliasco, TO        Toluca, MX        Valdemoro        Hammond, IN

    Gravatai

       Boeblingen        Melfi, PZ        Villa Ahumada, CH    Sweden        Hebron, OH

Canada

       Bremen        Pozzo d’Adda, MI    Moldova        Trollhattan        Louisville, KY

    Ajax, ON

       Eisenach    Malaysia        Ungheni    Thailand        Mason, MI

    Kitchener, ON

       Garching-Hochbrueck        Behrang Stesen    Morocco        Mueang Nakhon        Montgomery, AL

    Whitby, ON

       Ginsheim-Gustavsburg        Klang        Tangier            Ratchasima        Morristown, TN

China

       Munich    Mexico    Poland        Rayong        Rochester Hills, MI

    Changchun

       Rietberg        Aguascalientes, AG        Jaroslaw        Samuprakarn        Roscommon, MI

    Chongqing

       Wackersdorf        Cuautlancingo, PU        Tychy    Turkey        Selma, AL

    Liuzhou

   Hungary        Hermosillo, SO    Russia        Gemlik        Wentzville, MO

    Nanjing

       Györ        Juarez, CH        Kaluga    United Kingdom    Vietnam

    Rui’an

       Mór        Mexico City, DF        Nizhny Novgorod        Coventry        Hai Phong City

    Shanghai

   India        Monclova, CO        St. Petersburg        Redditch   

    Shenyang

       Chakan        Nuevo Casas    Slovak Republic        Sunderland   

    Wuhan

       Chennai            Grandes, CH        Presov      

    Wuhu

             Senec      

 

ELECTRICAL POWER MANAGEMENT SYSTEMS

Argentina

   Czech Republic    Honduras    Morocco    Romania    Thailand

    Pacheco, BA

       Vyskov        Naco        Salé Al-Jadida        Campulung        Kabin Buri

Brazil

   France    Hungary        Tangier        Pitesti    Tunisia

    Navegantes

       Hordain        Gödöllö    Philippines    Russia        Bir El Bey

China

       Sandouville        Gyöngyös        LapuLapu City        Volokolamsk    United States

    Chongqing

   Germany    India    Poland    South Africa        Plymouth, IN

    Nanjing

       Bersenbrueck        Pune        Mielec        Port Elizabeth        Taylor, MI

    Shanghai

       Kronach    Mexico       Spain        Traverse City, MI

    Wuhan

       Saarlouis        Apodaca, NL           Almussafes   
       Wismar        Chihuahua, CH           Valls   
     

    Juarez, CH

        

 

ADMINISTRATIVE/TECHNICAL

Australia

   Germany    Germany (continued)    Japan    South Korea    United Kingdom

    Flemington

       Allershausen-        Schwaig - Oberding        Hiroshima        Seoul        Coventry

Brazil

           Leonhardsbuch        Wolfsburg        Kariya    Spain    United States

    São Paulo

       Boeblingen    India        Yokohama        Valls        El Paso, TX

China

       Cologne        Pune    Netherlands    Sweden        Southfield, MI

    Shanghai

       Ginsheim -        Thane        Hilversum        Gothenburg   

Czech Republic

           Gustavsburg    Italy    Philippines    Thailand   

    Brno

       Kranzberg        Grugliasco, TO        LapuLapu City        Bangkok   

France

       Munich       Singapore      

    Vélizy-Villacoublay

  

    Remscheid

 

 

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ITEM 3 – LEGAL PROCEEDINGS

Legal and Environmental Matters

We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial or contractual disputes, product liability claims and environmental and other matters. For a description of risks related to various legal proceedings and claims, see Item 1A, “Risk Factors.” For a description of our outstanding material legal proceedings, see Note 13, “Commitments and Contingencies,” to the consolidated financial statements included in this Report.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

SUPPLEMENTARY ITEM – EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, ages and positions of our executive officers. Executive officers are appointed annually by our Board of Directors and serve at the pleasure of our Board.

 

Name

   Age        

Position

    
Shari L. Burgess    53       Vice President and Treasurer
Jason M. Cardew    41       Vice President and Interim Chief Financial Officer
Wendy L. Foss    54       Vice President, Corporate Controller and Chief Accounting Officer
Terrence B. Larkin    57       Executive Vice President, Business Development, General Counsel and Corporate Secretary
Frank C. Orsini    39       Vice President and Interim President, Electrical Power Management Systems
Raymond E. Scott    46       Executive Vice President and President, Seating
Matthew J. Simoncini    51       President and Chief Executive Officer
Melvin L. Stephens    56       Senior Vice President, Communications, Human Resources and Investor Relations

Set forth below is a description of the business experience of each of our executive officers.

 

Shari L. Burgess

   Ms. Burgess is the Company’s Vice President and Treasurer, a position she has held since August 2002. Ms. Burgess previously served in various financial roles since joining Lear in 1992. Prior to joining Lear, Ms. Burgess served as the corporate controller for Victor International Corporation and as an audit manager for Ernst & Young LLP.

Jason M. Cardew

   Mr. Cardew is the Company’s Vice President and Interim Chief Financial Officer, a position he has held since September 2011. Mr. Cardew most recently served as the Company’s Vice President, Financial Planning & Analysis since May 2010. Previously, he served as the Company’s Vice President, Finance, Seating since August 2003 and prior to 2003, in various financial management positions at the Company.

Wendy L. Foss

   Ms. Foss is the Company’s Vice President, Corporate Controller and Chief Accounting Officer, a position she has held since September 2011. Ms. Foss most recently served as the Company’s Vice President and Corporate Controller since November 2007. Previously, she served as the Company’s Vice President and Chief Compliance Officer from January 2007 until February 2009, Vice President, Audit Services since September 2007, Vice President, Finance and Administration and Corporate Secretary since May 2007, Vice President, Finance and Administration and Deputy Corporate Secretary since September 2006, Vice President, Accounting since July 2006, Assistant Corporate Controller since June 2003 and prior to 2003, in various financial management positions for both the Company and UT Automotive, Inc., which was acquired by the Company in 1999.

Terrence B. Larkin

   Mr. Larkin is the Company’s Executive Vice President, Business Development, General Counsel and Corporate Secretary, a position he has held since November 2011. Mr. Larkin previously served as the Company’s Senior Vice President, General Counsel and Corporate

 

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   Secretary since January 2008. Prior to joining the Company, Mr. Larkin was a partner since 1986 of Bodman PLC, a Detroit-based law firm. Mr. Larkin served on the executive committee of Bodman PLC and was the chairman of its business law practice group. Mr. Larkin’s practice was focused on general corporate, commercial transactions and mergers and acquisitions.

Frank C. Orsini

   Mr. Orsini is the Company’s Vice President and Interim President, Electrical Power Management Systems (“EPMS”), a position he has held since October 2011. Mr. Orsini most recently served as the Company’s Vice President, Operations, EPMS since 2009. Previously, he served as the Company’s Vice President, Sales, Program Management & Manufacturing, EPMS since 2008, Vice President, North America Seating Operations since 2005 and prior to 2005, in various management positions for the Company since 1994.

Raymond E. Scott

   Mr. Scott is the Company’s Executive Vice President and President, Seating, a position he has held since November 2011. Mr. Scott most recently served as the Company’s Senior Vice President and President, EPMS since February 2008. Previously, he served as the Company’s Senior Vice President and President, North American Seating Systems Group since August 2006, Senior Vice President and President, North American Customer Group since June 2005, President, European Customer Focused Division since June 2004 and President, General Motors Division since November 2000.

Matthew J. Simoncini

   Mr. Simoncini is the Company’s President and Chief Executive Officer, a position he has held since September 2011. Mr. Simoncini most recently served as the Company’s Senior Vice President and Chief Financial Officer since October 2007. Previously, he served as the Company’s Senior Vice President, Finance and Chief Accounting Officer since August 2006, Vice President, Global Finance since February 2006, Vice President of Operational Finance since June 2004, Vice President of Finance — Europe since 2001 and prior to 2001, in various senior financial management positions for both the Company and UT Automotive, Inc.

Melvin L. Stephens

   Mr. Stephens is the Company’s Senior Vice President, Communications, Human Resources and Investor Relations, a position he has held since September 2009. Previously, he served as Vice President of Corporate Communications and Investor Relations since January 2002. Prior to joining the Company, Mr. Stephens worked for Ford Motor Company and held various leadership positions in finance, business planning, corporate strategy, communications, sales and marketing and investor relations.

 

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PART II

ITEM 5 – MARKET FOR THE COMPANY’S COMMON EQUITY,

RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the New York Stock Exchange under the symbol “LEA.”

The high and low sales prices per share of our common stock, based on the daily closing price as reported on the New York Stock Exchange, and the amount of our dividend declarations for 2011 and 2010 are shown below:

 

2011:

   Price Range of
Common Stock
     Cash
Dividend

Per  Share
 
     High      Low     

4th Quarter

   $ 49.69       $ 36.03       $ 0.125   

3rd Quarter

     54.61         39.33         0.125   

2nd Quarter

     53.85         45.80         0.125   

1st Quarter (1)

     55.96         47.50         0.125   

 

2010:

   Price Range of
Common Stock (1)
     Cash
Dividend

Per  Share
 
     High      Low     

4th Quarter

   $ 49.88       $ 39.42       $ —     

3rd Quarter

     40.65         31.81         —     

2nd Quarter

     41.95         31.99         —     

1st Quarter

     40.93         34.33         —     

 

(1)

2011 and 2010 common stock prices and cash dividends have been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.

Dividends

On February 9, 2012, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock, payable on March 21, 2012, to shareholders of record at the close of business on March 2, 2012. In addition, our Board of Directors declared quarterly cash dividends of $0.125 per share of common stock in 2011. We did not pay cash dividends on our common stock in 2010.

We currently expect to pay quarterly cash dividends in the future, although such payments are at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors that our Board of Directors may consider at its discretion. See Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.” In addition, our amended and restated credit facility and indentures governing our senior notes place certain limitations on the payment of cash dividends. See Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report.

Holders of Common Stock

The Transfer Agent and Registrar for our common stock is BNY Mellon, located in New York, New York. On February 15, 2012, there were 63 registered holders of record of our common stock.

For certain information regarding our equity compensation plans, see Part III — Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plan Information.”

Common Stock Share Repurchase Program

On February 16, 2011, our Board of Directors authorized a three year, $400 million common stock share repurchase program, which expires on February 16, 2014. Under this program, we may repurchase shares of our outstanding common stock from time to time in open market or privately negotiated transactions at prices, times and amounts to be determined by us. On January 11, 2012, our Board of Directors authorized a $300 million increase to the existing common stock share repurchase program, bringing the total value of shares of outstanding common stock that may be repurchased under the program to $700 million. All other terms of the program, including the expiration date, remain

 

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unchanged. In 2011, we repurchased 6,182,429 shares of our outstanding common stock at an average purchase price of $45.15 per share, excluding commissions, for an aggregate purchase price of $279 million, and may repurchase an additional $421 million in shares of our outstanding common stock under this program. Shares and price per share have been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report. The extent to which we will repurchase our outstanding common stock and the timing of such repurchases will depend upon our financial condition, prevailing market conditions, alternative uses of capital and other factors. See Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.” In addition, our amended and restated credit facility and indentures governing our senior notes place certain limitations on the repurchase of common shares. See Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report. A summary of the shares of our common stock repurchased during the fiscal quarter ended December 31, 2011, is shown below:

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid
per Share (1)
     Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
     Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Program

(in millions) (2)
 

October 2, 2011 through October 27, 2011

     —           N/A         N/A       $ 505.8   

October 28, 2011 through November 24, 2011

     712,546       $ 42.45         712,546       $ 475.6   

November 25, 2011 through December 31, 2011

     1,387,360       $ 39.42         1,387,360       $ 420.9   
  

 

 

       

 

 

    

Total

     2,099,906       $ 40.45         2,099,906       $ 420.9   
  

 

 

       

 

 

    

 

(1) Excluding commissions.
(2) Includes the $300 million increase in the total dollar value of shares that may be repurchased pursuant to our common stock share repurchase program which took effect in January 2012.

 

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Performance Graph

The following graph compares the cumulative total stockholder return from November 9, 2009, the date of our emergence from Chapter 11 bankruptcy proceedings, through December 31, 2011, for our existing common stock, the S&P 500 Index and peer groups (1)  of companies that we have selected for purposes of this comparison. Because the value of our old common stock bears no relation to the value of our existing common stock, the graph below reflects only our existing common stock. We have assumed that dividends have been reinvested, and the returns of each company in the S&P 500 Index and the peer groups have been weighted to reflect relative stock market capitalization. The graph below assumes that $100 was invested on November 9, 2009, in each of our existing common stock, the stocks comprising the S&P 500 Index and the stocks comprising each of the peer groups.

 

LOGO

 

     November 9, 2009      December 31, 2009      December 31, 2010      December 31, 2011  

Lear Corporation

   $ 100.00       $ 133.94       $ 195.47       $ 159.60   

S&P 500

   $ 100.00       $ 104.63       $ 120.14       $ 122.66   

Current Peer Group (1)

   $ 100.00       $ 107.93       $ 182.39       $ 141.85   

Previous Peer Group (1)

   $ 100.00       $ 104.48       $ 169.16       $ 137.04   

 

(1) We do not believe that there is a single published industry or line of business index that is appropriate for comparing stockholder returns. As a result, we have selected a peer group comprised of representative independent automotive suppliers whose common stock is publicly traded. Our current peer group, referenced in the graph above, consists of American Axle & Manufacturing Holdings Inc., BorgWarner Inc., Dana Holding Corporation, Delphi Automotive PLC, Federal-Mogul Corporation, Gentex Corp., Johnson Controls, Inc., Magna International, Inc., Superior Industries International, Inc., Tenneco Inc., TRW Automotive Holdings Corp. and Visteon Corporation, which we believe provides a more meaningful comparison of stock performance than our previous peer group. Our previous peer group, referenced in the graph above, consisted of Meritor, Inc., BorgWarner Inc., Cooper Tire & Rubber Company, Eaton Corp., Gentex Corp., Goodyear Tire & Rubber Company, Johnson Controls, Inc., Magna International, Inc., Superior Industries International, Inc. and TRW Automotive Holdings Corp.

 

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ITEM 6 – SELECTED FINANCIAL DATA

The following statement of operations, statement of cash flow and balance sheet data were derived from our consolidated financial statements. Our consolidated financial statements for the years ended December 31, 2011 and 2010, the two month period ended December 31, 2009, the ten month period ended November 7, 2009, and the years ended December 31, 2008 and 2007, have been audited by Ernst & Young LLP. The selected financial data below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes thereto included in this Report.

 

     Successor           Predecessor  
     Year Ended     Two Month
Period Ended
December 31,
2009 (3)
          Ten Month
Period Ended
November 7,
2009 (4)
    Year Ended  
           
     December 31,
2011 (1)
    December 31,
2010 (2)
           December 31,
2008 (5)
    December 31,
2007 (6)
 

Statement of Operations Data: (in millions)

                 

Net sales

   $ 14,156.5      $ 11,954.6      $ 1,580.9           $ 8,158.7      $ 13,570.5      $ 15,995.0   

Gross profit

     1,193.2        1,018.3        72.8             287.4        747.6        1,151.8   

Selling, general and administrative expenses

     485.6        452.7        71.2             376.7        511.5        572.8   

Amortization of intangible assets

     28.0        27.2        4.5             4.1        5.3        5.2   

Goodwill impairment charges

     —          —          —               319.0        530.0        —     

Divestiture of Interior business

     —          —          —               —          —          10.7   

Interest expense

     39.7        55.4        11.1             151.4        190.3        199.2   

Other (income) expense, net (7)

     24.2        34.2        19.8             (16.6     51.9        40.7   

Reorganization items and fresh-start accounting adjustments, net

     —          —          —               (270.7     —          —     
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Consolidated income (loss) before provision (benefit) for income taxes and equity in net (income) loss of affiliates

     615.7        448.8        (33.8          (276.5     (541.4     323.2   

Provision (benefit) for income taxes

     68.8        24.6        (24.2          29.2        85.8        89.9   

Equity in net (income) loss of affiliates

     (23.5     (37.2     (1.9          64.0        37.2        (33.8
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     570.4        461.4        (7.7          (369.7     (664.4     267.1   

Net income (loss) attributable to noncontrolling interests

     29.7        23.1        (3.9          16.2        25.5        25.6   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Lear

   $ 540.7      $ 438.3      $ (3.8        $ (385.9   $ (689.9   $ 241.5   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

 

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     Successor           Predecessor  
     Year Ended     Two Month
Period Ended
December 31,
2009 (3)
          Ten Month
Period Ended
November 7,
2009 (4)
    Year Ended  
           
     December 31,
2011 (1)
    December 31,
2010 (2)
           December 31,
2008 (5)
    December 31,
2007 (6)
 

Statement of Operations Data:

                 

Basic net income (loss) per share attributable to Lear

   $ 5.21      $ 4.30      $ (0.06        $ (4.98   $ (8.93   $ 3.14   

Diluted net income (loss) per share attributable to Lear

   $ 5.08      $ 4.05      $ (0.06        $ (4.98   $ (8.93   $ 3.09   

Weighted average shares outstanding – basic

     103,750,223        94,814,044        69,050,374             77,499,860        77,242,360        76,826,765   

Weighted average shares outstanding – diluted

     106,344,367        108,122,150        69,050,374             77,499,860        77,242,360        78,214,248   

Dividends per share

   $ 0.50      $ —        $ —             $ —        $ —        $ —     

Statement of Cash Flow Data: (in millions)

                 

Cash flows from operating activities

   $ 790.3      $ 621.9      $ 324.0           $ (499.2   $ 163.6      $ 487.5   

Cash flows from investing activities

     (303.2     (192.1     (39.5          (52.7     (144.4     (340.0

Cash flows from financing activities

     (372.3     (320.7     30.2             165.0        987.3        (70.4

Capital expenditures

     329.5        193.3        41.3             77.5        167.7        202.2   

Other Data (unaudited):

                 

Ratio of earnings to fixed charges (8)

     10.1x        6.6x        —               —          —          2.4x   

 

     Successor     

 

          Predecessor  

As of or Year Ended

   December 31,
2011
     December 31,
2010
     December 31,
2009
          December 31,
2008
     December 31,
2007
 

Balance Sheet Data: (in millions)

                  

Current assets

   $ 4,761.5       $ 4,385.5       $ 3,787.0           $ 3,674.2       $ 3,718.0   

Total assets

     7,010.9         6,621.1         6,073.3             6,872.9         7,800.4   

Current liabilities

     3,063.5         2,818.5         2,400.8             4,609.8         3,603.9   

Long-term debt

     695.4         694.9         927.1             1,303.0         2,344.6   

Equity

     2,561.1         2,568.8         2,181.8             247.7         1,117.5   

Other Data (unaudited):

                  

Employees at year end

     97,830         83,393         70,397             74,319         84,441   

North American content per vehicle (9)

   $ 381       $ 339       $ 344           $ 391       $ 483   

North American vehicle production (in millions) (10)

     13.1         11.9         8.6             12.6         15.0   

European content per vehicle (11)

   $ 317       $ 284       $ 294           $ 350       $ 342   

European vehicle production (in millions) (12)

     18.0         17.5         15.6             18.8         20.2   

 

(1) Results include $70.9 million of restructuring and related manufacturing inefficiency charges (including $1.0 million of fixed asset impairment charges), $19.3 million of fees and expenses related to our capital restructuring and other related matters, $10.6 million of losses and incremental costs, net of insurance recoveries, related to the destruction of assets caused by a fire at one of our European production facilities, $5.8 million of gains related to affiliate transactions and $70.4 million of tax benefits primarily related to the reversal of full valuation allowances on the deferred tax assets of three foreign subsidiaries, restructuring and various other items.
(2) Results include $69.0 million of restructuring and related manufacturing inefficiency charges (including $3.6 million of fixed asset impairment charges), $21.7 million of fees and expenses related to our capital restructuring and other related matters, an $11.8 million loss on the extinguishment of debt resulting from the write-off of unamortized debt issuance costs and $51.6 million of tax benefits related to reductions in recorded tax reserves and various other items. Share and per share data has been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.

 

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(3) Results include $44.5 million of restructuring and related manufacturing inefficiency charges, a $1.9 million loss related to a transaction with an affiliate, $15.1 million of charges as a result of the bankruptcy proceedings and the application of fresh-start accounting and a $27.6 million tax benefit primarily related to the settlement of a tax matter in a foreign jurisdiction. Share and per share data has been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.
(4) Results include $319.0 million of goodwill impairment charges, a gain of $270.7 million related to reorganization items and fresh-start accounting adjustments, $23.9 million of fees and expenses related to our capital restructuring, $115.5 million of restructuring and related manufacturing inefficiency charges (including $5.6 million of fixed asset impairment charges), $42.0 million of impairment charges related to our investments in two equity affiliates, a $9.9 million loss related to a transaction with an affiliate and a $23.1 million tax benefit related to reorganization items and fresh-start accounting adjustments.
(5) Results include $530.0 million of goodwill impairment charges, $193.9 million of restructuring and related manufacturing inefficiency charges (including $17.5 million of fixed asset impairment charges), $7.5 million of gains related to the extinguishment of debt, a $34.2 million impairment charge related to an investment in an affiliate, $22.2 million of gains related to the sales of our interests in two affiliates and $8.5 million of net tax benefits related to a reduction in recorded tax reserves, the reversal of a valuation allowance in a European subsidiary and the establishment of a valuation allowance in another European subsidiary.
(6) Results include $20.7 million of charges related to the divestiture of our automotive interiors business, $181.8 million of restructuring and related manufacturing inefficiency charges (including $16.8 million of fixed asset impairment charges), $36.4 million of a curtailment gain related to the freeze of the U.S. salaried pension plan, $34.9 million of merger transaction costs, $3.9 million of losses related to the acquisition of the noncontrolling interest in an affiliate and $24.8 million of net tax benefits related to changes in valuation allowances in several foreign jurisdictions, tax rates and various other tax items.
(7) Includes non-income related taxes, foreign exchange gains and losses, discounts and expenses associated with our asset-backed securitization and factoring facilities, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the extinguishment of debt, gains and losses on the sales of fixed assets and other miscellaneous income and expense.
(8) “Fixed charges” consist of interest on debt, amortization of deferred financing fees and that portion of rental expenses representative of interest. “Earnings” consist of consolidated income (loss) before provision (benefit) for income taxes and equity in the undistributed net (income) loss of affiliates and fixed charges. Earnings in the two month period ended December 31, 2009, the ten month period ended November 7, 2009, and the year ended December 31, 2008, were insufficient to cover fixed charges by $33.2 million, $271.8 million and $537.3 million, respectively. Accordingly, such ratio is not presented for these periods.
(9) “North American content per vehicle” is our net sales in North America divided by estimated total North American vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for 2010 has been updated to reflect actual production levels.
(10) “North American vehicle production” includes car and light truck production in the United States, Canada and Mexico as provided by IHS Automotive for 2011 and Ward’s Automotive for all other periods presented. Production data for 2010 has been updated to reflect actual production levels.
(11) “European content per vehicle” is our net sales in Europe divided by estimated total European vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for 2010 has been updated to reflect actual production levels.
(12) “European vehicle production” includes car and light truck production in Austria, Belarus, Belgium, Bosnia, Czech Republic, Finland, France, Germany, Hungary, Italy, Netherlands, Norway, Poland, Portugal, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Turkey, Ukraine and the United Kingdom as provided by IHS Automotive. Production data for 2010 has been updated to reflect actual production levels.

 

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Executive Overview

We 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 to our customers and suppliers 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 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.

In recent years, the global automotive industry has undergone major restructuring and consolidation in response to overcapacity, narrow profit margins, excess debt and the necessary realignment of resources from mature markets to emerging markets. In 2008 and continuing into 2009, the global economic downturn and associated decline in automotive production (particularly in North America and Europe) represented a turning point for the industry.

During this period, industry production in North America and Europe experienced the steepest peak-to-trough declines in history. In North America, industry production declined over 40% — from a peak of 15.0 million units in 2007 to a trough of 8.6 million units in 2009. In Europe, industry production declined over 20% — from a peak of 20.2 million units in 2007 to a trough of 15.6 million units in 2009.

The year ended December 31, 2010 saw a significant improvement in industry production volumes globally. This trend continued in 2011. Global vehicle production in 2011 increased approximately 3% to 74.8 million units and exceeded the previous record of 72.6 million units in 2010. North American industry production increased by approximately 10% from a year ago levels to 13.1 million units. European industry production increased by approximately 3% from a year ago levels to 18.0 million units.

The majority of our sales continue to be derived from automotive manufacturers based in North America and Europe. Our financial results are impacted by changes in our customers’ market share. 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, improve our business structure and lower our operating costs.

Our material cost as a percentage of net sales was 68.6% in 2011, as compared to 67.9% in 2010 and 69.0% in 2009. Raw material, energy and commodity costs have been volatile over the past several years. Unfavorable industry conditions

 

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over the last several years have also resulted in financial distress within our supply base and an increase in the risk of supply disruption. 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 Part I — Item 1A, “Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance,” and “— Forward-Looking Statements.”

We have assessed the impact on our business of the earthquake and tsunami in Japan and the flooding in Thailand that occurred in 2011. We do not have any production facilities in Japan, and our sales in Japan and Thailand have not been significant historically, with sales in Japan and Thailand representing only 1.4% and 1.2%, respectively, of total sales in 2011. These natural disasters, however, have adversely impacted portions of the automotive industry outside of Japan and Thailand, leading to intermittent customer production downtime and continued shortages of certain electronic components. The impact of these events on our consolidated 2011 results of operations was not material.

Financial Measures

In evaluating our financial condition and operating performance, we focus primarily on earnings, 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. As of December 31, 2011, we had 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 and 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.

Operational and Financial 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. Through the end of 2010, we incurred pretax restructuring costs of approximately $736 million and related manufacturing inefficiency charges of $73 million.

In 2011, we incurred additional restructuring costs of approximately $68 million and related manufacturing inefficiency charges of approximately $3 million as we continued to restructure our global operations and aggressively reduce our costs. Cash expenditures related to our restructuring actions totaled $48 million in 2011. We currently expect annual restructuring actions and related investments to moderate in 2012 and thereafter. 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 21 low-cost countries.

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 allocation 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

 

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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 5, “Restructuring,” to the consolidated financial statements included in this Report.

In 2009, following a comprehensive evaluation of our strategic and financial options, we concluded that voluntarily filing for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) was necessary in order to re-align our capital structure and position our business for long-term success. On July 7, 2009, Lear and certain of its U.S. and Canadian subsidiaries filed petitions for relief under Chapter 11 with the bankruptcy court. On November 9, 2009, our plan of reorganization became effective, and we emerged from Chapter 11 bankruptcy proceedings. For further information on the bankruptcy proceedings, see Note 2, “Reorganization under Chapter 11,” to the consolidated financial statements included in this Report.

Goodwill

In 2009, we evaluated the carrying value of our goodwill and recorded impairment charges of $319 million related to our electrical power management systems (“EPMS”) segment. Our goodwill impairment analysis was based on our distributable value, which was approved by the bankruptcy court. For further information, see Note 4, “Summary of Significant Accounting Policies — Impairment of Goodwill,” to the consolidated financial statements included in this Report.

Revolving Credit Facility

In June 2011, we entered into an amended and restated credit agreement, which among other things, increased the amount available under our existing revolving credit facility to $500 million and extended its maturity to June 17, 2016. For further information, see “— Liquidity and Financial Condition — Capitalization” and Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report.

Share Repurchase Program, Stock Split and Quarterly Cash Dividend

In February 2011, our Board of Directors authorized a three year, $400 million common stock share repurchase program and declared a two-for-one stock split of our common stock. In January 2012, our Board of Directors authorized an increase in the amount of the common stock share repurchase program from $400 million to $700 million. In February, May, August and November 2011, our Board of Directors declared a quarterly cash dividend of $0.125 per share of common stock. For further information, see Item 5, “Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” “— Liquidity and Financial Condition — Capitalization” and Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.

Other Matters

In 2011, we recorded losses and incremental costs, net of insurance recoveries, of approximately $11 million, related to the destruction of assets caused by a fire at one of our European production facilities. In addition, we will incur incremental costs in 2012 due to the loss of this facility; however, we will pursue recovery of such costs under applicable insurance policies. Any insurance proceeds in excess of the book value of the destroyed assets will be recorded when all contingencies related to the insurance claim are resolved. In 2011, we recognized gains of $6 million related to affiliate transactions. In addition, we recognized tax benefits of $70 million, primarily related to the reversal of full valuation allowances on the deferred tax assets of three foreign subsidiaries, restructuring and various other items.

In 2010, we recognized a loss on the extinguishment of debt of approximately $12 million, resulting from the write-off of unamortized debt issuance costs in conjunction with our debt refinancing in March 2010. We also recognized tax benefits of $33 million related to reductions in recorded tax reserves, as well as net tax benefits of $19 million related to restructuring, a tax law change in Mexico, the reduction of a valuation allowance in a foreign subsidiary and various other items.

In 2009, we incurred fees and expenses of $24 million related to our capital restructuring efforts prior to our bankruptcy filing. In addition, we recognized impairment charges of $42 million related to our investments in two equity affiliates and a loss of $12 million related to a transaction with an affiliate. In 2009, we also recognized a tax benefit of $23 million related to reorganization items and fresh-start accounting adjustments, as well as a tax benefit of $28 million primarily related to the settlement of a tax matter in a foreign jurisdiction.

 

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For further information, see Note 4, “Summary of Significant Accounting Policies — Impairment of Investments in Affiliates,” Note 6, “Investments in Affiliates and Other Related Party Transactions,” Note 8, “Long-Term Debt,” and Note 9, “Income Taxes,” to the consolidated financial statements included in this Report.

As discussed above, our results for the years ended December 31, 2011 and 2010, the 2009 Successor Period and the 2009 Predecessor Period reflect the following items (in millions):

 

     Successor           Predecessor  
     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Two Month
Period Ended
December 31,
2009
          Ten Month
Period Ended
November 7,
2009
 
             
             

Goodwill impairment charges

   $ —        $ —        $ —             $ 319   

Reorganization items and fresh-start accounting adjustments, net

     —          —          —               (271

Costs of restructuring actions, including manufacturing inefficiencies of $3 million in 2011, $5 million in 2010, $1 million in the two month period ended December 31, 2009 and $15 million in the ten month period ended November 7, 2009

     71        69        44             116   

Fees and expenses related to capital restructuring

and other related matters

     19        22        15             24   

Losses and incremental costs related to the destruction of assets, net

     11        —          —               —     

Losses on the extinguishment of debt

     —          12        —               —     

Impairment of investment in affiliates

     —          —          —               42   

(Gains) losses related to affiliate transactions

     (6     —          2             10   

Tax benefits, net

     (70     (52     (28          (23

This section includes forward-looking statements that are subject to risks and uncertainties. For further information regarding these and other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see Part I — Item 1A, “Risk Factors,” and “— Forward-Looking Statements.”

 

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Results of Operations

In connection with our emergence from Chapter 11 bankruptcy proceedings and the adoption of fresh-start accounting, the results of operations for 2009 separately present the 2009 Successor Period and the 2009 Predecessor Period. Although the 2009 Successor Period and the 2009 Predecessor Period are distinct reporting periods, the effects of emergence and fresh-start accounting did not have a material impact on the comparability of our results of operations between these periods, except as discussed below. Accordingly, certain references to 2009 results of operations combine the two periods in order to enhance the comparability of such information to 2010. A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:

 

     Successor           Predecessor  
     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Two Month
Period Ended
December 31,
2009
          Ten Month
Period Ended
November 7,
2009
 

Net sales

                     

Seating

   $ 10,943.0        77.3   $ 9,395.3        78.6   $ 1,251.1        79.1        $ 6,561.8        80.4

Electrical power management systems

     3,213.5        22.7        2,559.3        21.4        329.8        20.9             1,596.9        19.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Net sales

     14,156.5        100.0        11,954.6        100.0        1,580.9        100.0             8,158.7        100.0   

Cost of sales

     12,963.3        91.6        10,936.3        91.5        1,508.1        95.4             7,871.3        96.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Gross profit

     1,193.2        8.4        1,018.3        8.5        72.8        4.6             287.4        3.5   

Selling, general and administrative expenses

     485.6        3.4        452.7        3.8        71.2        4.5             376.7        4.6   

Amortization of intangible assets

     28.0        0.2        27.2        0.2        4.5        0.3             4.1        —     

Goodwill impairment charges

     —          —          —          —          —          —               319.0        3.9   

Interest expense

     39.7        0.3        55.4        0.4        11.1        0.7             151.4        1.9   

Other (income) expense, net

     24.2        0.2        34.2        0.3        19.8        1.2             (16.6     (0.2

Reorganization items and fresh-start accounting adjustments, net

     —          —          —          —          —          —               (270.7     (3.3

Provision (benefit) for income taxes

     68.8        0.5        24.6        0.2        (24.2     (1.5          29.2        0.3   

Equity in net (income) loss of affiliates

     (23.5     (0.2     (37.2     (0.3     (1.9     (0.1          64.0        0.8   

Net income (loss) attributable to noncontrolling interests

     29.7        0.2        23.1        0.2        (3.9     (0.3          16.2        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Net income (loss) attributable to Lear

   $ 540.7        3.8   $ 438.3        3.7   $ (3.8     (0.2 )%         $ (385.9     (4.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Year Ended December 31, 2011, Compared With Year Ended December 31, 2010

Net sales for the year ended December 31, 2011 were $14.2 billion, as compared to $12.0 billion for the year ended December 31, 2010, an increase of $2.2 billion or 18%. New business and improved production volumes on Lear platforms positively impacted net sales by $945 million and $635 million, respectively. The impact of net foreign exchange rate fluctuations was partially offset by the impact of selling price reductions.

Cost of sales in 2011 was $13.0 billion, as compared to $10.9 billion in 2010. This increase is largely due to the impact of new business, improved production volumes on Lear platforms and net foreign exchange rate fluctuations and is consistent with the increase in net sales.

Gross profit and gross margin were $1.2 billion and 8.4% in 2011, as compared to $1.0 billion and 8.5% in 2010. Favorable operating performance and the benefit of operational restructuring actions, as well as improved production volumes on Lear platforms, positively impacted gross profit by $395 million. The impact of selling price reductions, as well as higher commodity and launch costs, was partially offset by the impact of new business. In addition, gross profit includes operational restructuring costs of $67 million in 2011, as compared to $62 million in 2010.

Selling, general and administrative expenses, including engineering and development expenses, were $486 million for the year ended December 31, 2011, as compared to $453 million for the year ended December 31, 2010. The increase in selling, general and administrative expenses was due primarily to higher engineering and development expenses to support new business and launch activity. In addition, selling, general and administrative expenses include operational restructuring costs of $4 million in 2011, as compared to $7 million in 2010. As a percentage of net sales, selling, general and administrative expenses declined to 3.4% for the year ended December 31, 2011, as compared to 3.8% for the year ended December 31, 2010, reflecting the increase in net sales.

Engineering and development costs incurred in connection with the development of new products and manufacturing methods more than one year prior to launch, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $111 million in 2011, as compared to $81 million in 2010, primarily as a result of our increased sales backlog. In certain situations, the reimbursement of pre-production engineering and design costs is contractually guaranteed by, and fully recoverable from, our customers and, therefore, is capitalized. For the years ended December 31, 2011 and 2010, we capitalized $177 million and $133 million, respectively, of such costs.

 

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Amortization of intangible assets was $28 million in 2011, as compared to $27 million in 2010.

Interest expense was $40 million in 2011, as compared to $55 million in 2010. This decrease was due primarily to the refund of interest related to a favorable settlement of an indirect tax matter in a foreign jurisdiction and lower overall debt levels.

Other (income) expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the extinguishment of debt, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $24 million in 2011, as compared to $34 million in 2010. In 2011, we recognized gains of $6 million, related to affiliate transactions. In 2010, we recognized a loss on the extinguishment of debt of $12 million, resulting from the write-off of unamortized debt issuance costs. These decreases were partially offset by unfavorable foreign exchange in 2011.

In 2011, the provision for income taxes was $69 million, representing an effective tax rate of 11.2% on pretax income of $616 million. In 2010, the provision for income taxes was $25 million, representing an effective tax rate of 5.5% on pretax income of $449 million. The provision for income taxes in 2011 and 2010 was impacted by the mix of earnings among tax jurisdictions, as well as 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 2011, the provision was also impacted by tax benefits of $70 million, primarily related to the reversal of full valuation allowances on the deferred tax assets of three foreign subsidiaries, restructuring and various other items. In 2010, the provision was also impacted by tax benefits of $33 million, including interest and penalties, related to reductions in recorded tax reserves, as well as net tax benefits of $19 million related to restructuring, a tax law change in Mexico, the reduction of a valuation allowance in a foreign subsidiary and various other items. Excluding these items, the effective tax rate in 2011 and 2010 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 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 further information related to our valuation allowances, see “Other Matters — Significant Accounting Policies and Critical Accounting Estimates — Income Taxes.”

Equity in net income of affiliates was $24 million for the year ended December 31, 2011, as compared to $37 million for the year ended December 31, 2010, reflecting deterioration in the operating performance of certain of our non-core equity affiliates.

Net income (loss) attributable to Lear was $541 million, or $5.08 per diluted share, in 2011, as compared to $438 million, or $4.05 per diluted share, in 2010, for the reasons discussed above. Net income per share data for 2010 has been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.

Reportable Operating Segments

We have 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 financial information presented below is for our two reportable operating segments and our other category for the periods presented. The other category includes unallocated costs related to corporate headquarters, regional headquarters and the elimination of intercompany activities, none of which meets the requirements for being classified as an operating segment. Corporate and regional headquarters costs include various support functions, such as information technology, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment’s income (loss) before goodwill impairment charges, interest expense, other (income) expense, reorganization items and fresh-start accounting

 

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adjustments and provision (benefit) for income taxes (“segment earnings”) and segment earnings divided by net sales (“margin”) are not measures of performance under GAAP. Segment earnings and the related margin are used by management to evaluate the performance of our reportable operating segments. Segment earnings should not be considered in isolation or as a substitute for net income (loss) attributable to Lear, net cash provided by (used in) operating activities or other statement of operations or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income (loss) before provision (benefit) for income taxes and equity in net (income) loss of affiliates, see Note 14, “Segment Reporting,” to the consolidated financial statements included in this Report.

Seating –

A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):

 

     Successor  
     Year Ended     Year Ended  
     December 31,     December 31,  
     2011     2010  

Net sales

   $ 10,943.0      $ 9,395.3   

Segment earnings (1)

     703.7        655.0   

Margin

     6.4     7.0

 

(1) See definition above.

Seating net sales were $10.9 billion for the year ended December 31, 2011, as compared to $9.4 billion for the year ended December 31, 2010, an increase of $1.5 billion or 16%. New business, improved production volumes on Lear platforms and net foreign exchange fluctuations positively impacted net sales by $823 million, $289 million and $280 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $704 million and 6.4% in 2011, as compared to $655 million and 7.0% in 2010. Favorable operating performance and the benefit of operational restructuring actions, as well as new business and improved production volumes on Lear platforms, positively impacted segment earnings by $333 million. These increases were largely offset by the impact of selling price reductions, as well as higher program development, launch and commodity costs. In addition, we incurred costs of $69 million related to our restructuring actions in the seating segment in 2011, as compared to $48 million in 2010.

EPMS –

A summary of the financial measures for our EPMS segment is shown below (dollar amounts in millions):

 

     Successor  
     Year Ended     Year Ended  
     December 31,     December 31,  
     2011     2010  

Net sales

   $ 3,213.5      $ 2,559.3   

Segment earnings (1)

     185.1        100.5   

Margin

     5.8     3.9

 

(1) See definition above.

EPMS net sales were $3.2 billion for the year ended December 31, 2011, as compared to $2.6 billion for the year ended December 31, 2010, an increase of $654 million or 26%. Improved production volumes on Lear platforms, new business and net foreign exchange rate fluctuations positively impacted net sales by $346 million, $122 million and $97 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $185 million and 5.8% in 2011, as compared to $101 million and 3.9% in 2010. Favorable operating performance and the benefit of operational restructuring actions, as well as improved production volumes on Lear platforms and new business, positively impacted segment earnings by $165 million. These increases were partially offset by the impact of selling price reductions, as well as higher launch and commodity costs. In addition, we incurred costs of $3 million related to our restructuring actions in the EPMS segment in 2011, as compared to $19 million in 2010.

 

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Other –

A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):

 

     Successor  
     Year Ended     Year Ended  
     December 31,     December 31,  
     2011     2010  

Net sales

   $ —        $ —     

Segment earnings (1)

     (209.2     (217.1

Margin

     N/A        N/A   

 

(1) See definition above.

Our other category includes unallocated corporate and regional headquarters costs, as well as the elimination of intercompany activity. Corporate and regional headquarters costs include various support functions, such as information technology, corporate finance, legal, executive administration and human resources. Segment earnings related to our other category were ($209) million in 2011, as compared to ($217) million in 2010, primarily due to a decrease in compensation-related costs in 2011. In addition, we incurred costs of $2 million related to our restructuring actions in 2010.

Year Ended December 31, 2010, Compared With Year Ended December 31, 2009

Net sales for the year ended December 31, 2010 were $12.0 billion, reflecting an increase of $2.2 billion or 23% as compared to the year ended December 31, 2009. Improved production volumes on Lear platforms positively impacted net sales by $1.9 billion. The impact of new business was largely offset by the impact of selling price reductions.

Cost of sales in 2010 was $10.9 billion, reflecting an increase of $1.6 billion as compared to 2009. This increase is largely due to the impact of improved production volumes on Lear platforms and new business and is consistent with the increase in net sales.

Gross profit and gross margin were $1.0 billion and 8.5% in 2010, reflecting an increase of $658 million as compared to 2009. Improved production volumes on Lear platforms, as well as favorable operating performance and the benefit of operational restructuring actions, positively impacted gross profit by $727 million. Gross profit also benefited from the impact of new business. These increases were partially offset by the impact of selling price reductions. In addition, gross profit includes operational restructuring costs of $62 million in 2010, reflecting a decrease of $87 million as compared to 2009. Gross profit in the 2009 Successor Period was negatively impacted by the adoption of fresh-start accounting, which requires inventory to be recorded at fair value upon emergence. An inventory adjustment of $9 million was recognized in cost of sales in the 2009 Successor Period as the inventory was sold. The impact of other fresh start accounting adjustments on gross margin was limited to changes in depreciation expense which were not material.

Selling, general and administrative expenses, including engineering and development expenses, were $453 million for the year ended December 31, 2010, reflecting an increase of $5 million as compared to the year ended December 31, 2009. An increase in compensation-related costs in 2010 was partially offset by fees and expenses related to our capital restructuring incurred in the 2009 Predecessor Period. In addition, selling, general and administrative expenses include operational restructuring costs of $7 million in 2010, reflecting a decrease of $8 million as compared to 2009. As a percentage of net sales, selling, general and administrative expenses were 3.8% for the year ended December 31, 2010, reflecting a decrease of 0.8% as compared to the year ended December 31, 2009, due to the increase in net sales.

Engineering and development costs incurred in connection with the development of new products and manufacturing methods more than one year prior to launch, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $81 million in 2010, reflecting a decrease of $2 million as compared to 2009. In certain situations, the reimbursement of pre-production engineering and design costs is contractually guaranteed by, and fully recoverable from, our customers and, therefore, is capitalized. For the year ended December 31, 2010, we capitalized $133 million of such costs, reflecting an increase of $16 million as compared to the year ended December 31, 2009.

Amortization of intangible assets was $27 million in 2010, as compared to $5 million in the 2009 Successor Period and $4 million in the 2009 Predecessor Period, as a result of intangible assets recognized in connection with the adoption of fresh start accounting in 2009.

In the 2009 Predecessor Period, we recorded goodwill impairment charges of $319 million, related to our EPMS segment. Our goodwill impairment analysis was based on our distributable value, which was approved by the bankruptcy court.

 

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Interest expense was $55 million in 2010, reflecting a decrease of $108 million as compared to 2009. Interest expense in 2010 reflects lower borrowing levels, as well as lower overall borrowing costs, related to our new capital structure and the results of our March 2010 refinancing. Interest expense in the 2009 Predecessor Period properly excludes $70 million of contractual interest for certain of our pre-petition debt obligations subsequent to filing for bankruptcy protection under Chapter 11, in accordance with GAAP. The benefit of this exclusion was partially offset by interest and fees associated with our debtor-in-possession financing, as well as fees associated with our pre-petition primary credit facility amendments and waivers, in the 2009 Predecessor Period, and interest and fees associated with our first and second lien credit agreements in the 2009 Successor Period.

Other (income) expense, net, which includes non-income related taxes, foreign exchange gains and losses, discounts and expenses associated with our factoring facilities, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the extinguishment of debt, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $34 million in 2010, reflecting an increase of $31 million as compared to 2009. The increase in other expense was largely the result of unfavorable foreign exchange in 2010. In addition, we recognized a loss on the extinguishment of debt of $12 million, resulting from the write-off of unamortized debt issuance costs in the first quarter of 2010. In the 2009 Successor Period and 2009 Predecessor Period, we recognized losses of $2 million and $10 million, respectively, related to a transaction with an affiliate.

In the 2009 Predecessor Period, we recognized a gain of approximately $797 million for reorganization items as a result of the bankruptcy proceedings. This gain reflects the cancellation of our pre-petition debt and certain of our other obligations, partially offset by the recognition of certain of our new debt obligations, as well as professional fees incurred as a direct result of the bankruptcy proceedings. In addition, we recognized a charge of approximately $526 million related to the valuation of our net assets upon emergence from Chapter 11 bankruptcy proceedings pursuant to the provisions of fresh-start accounting.

In 2010, the provision for income taxes was $25 million, representing an effective tax rate of 5.5% on a pretax income of $449 million. In the 2009 Successor Period, the benefit for income taxes was $24 million, representing an effective tax rate of 71.6% on a pretax loss of $34 million. In the 2009 Predecessor Period, the provision for income taxes was $29 million, representing an effective tax rate of negative 10.6% on a pretax loss of $277 million. The provision for income taxes in 2010 was impacted by the mix of earnings among tax jurisdictions, as well as 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. Additionally, the provision was impacted by tax benefits of $33 million, including interest and penalties, related to reductions in recorded tax reserves, as well as net tax benefits of $19 million related to restructuring, a tax law change in Mexico, the reduction of a valuation allowance in a foreign subsidiary and various other items. The provision for income taxes in 2009 primarily relates to profitable foreign operations, as well as withholding taxes on royalties and dividends paid by our foreign subsidiaries. In addition, we incurred losses in several countries that provided no tax benefits due to valuation allowances on our deferred tax assets in those countries. The provision was also impacted by a portion of our restructuring charges, 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. Additionally, the benefit in the 2009 Successor Period was impacted by a tax benefit of $28 million primarily related to the settlement of a tax matter in a foreign jurisdiction. The provision in the 2009 Predecessor Period was impacted by a tax benefit of $23 million related to reorganization items and fresh-start accounting adjustments, as well as $319 million of goodwill impairment charges, which were not deductible. Excluding these items, the effective tax rate in 2010 and 2009 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 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.

Equity in net income of affiliates was $37 million for the year ended December 31, 2010, as compared to equity in net income of affiliates of $2 million in the 2009 Successor Period and equity in net loss of affiliates of $64 million in the 2009 Predecessor Period, reflecting the improved operating performance of our equity affiliates in 2010. In addition, we recognized impairment charges of $42 million related to our investments in two equity affiliates in the 2009 Predecessor Period.

 

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Net income attributable to Lear was $438 million in 2010, as compared to a net loss of $4 million and $386 million in the 2009 Successor Period and the 2009 Predecessor Period, respectively, for the reasons discussed above.

Reportable Operating Segments

For a description of our reportable operating segments, see “Year Ended December 31, 2011, Compared With Year Ended December 31, 2010 — Reportable Operating Segments” above.

Seating –

A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):

 

     Successor           Predecessor  
     Year Ended
December 31,
2010
    Two Month
Period Ended
December 31,
2009
          Ten Month
Period Ended
November 7,
2009
 
           
           
           

Net sales

   $ 9,395.3      $ 1,251.1           $ 6,561.8   

Segment earnings (1)

     655.0        52.4             184.9   

Margin

     7.0     4.2          2.8

 

(1) See definition above.

Seating net sales were $9.4 billion for the year ended December 31, 2010, reflecting an increase of $1.6 billion or 20% as compared to the year ended December 31, 2009. Improved production volumes on Lear platforms positively impacted net sales by $1.5 billion. Segment earnings, including restructuring costs, and the related margin on net sales were $655 million and 7.0% in 2010, reflecting an increase of $418 million as compared to 2009. Improved production volumes on Lear platforms and favorable operating performance and the benefit of operational restructuring actions positively impacted segment earnings by $549 million collectively. These increases were partially offset by the impact of selling price reductions and an increase in amortization expense as a result of intangible assets recognized in connection with the adoption of fresh-start accounting in 2009. In 2010, we incurred costs of $48 million related to our restructuring actions in the seating segment, reflecting a decrease of $31 million as compared to 2009. Segment earnings were negatively impacted in the 2009 Predecessor Period by fees and expenses of $3 million related to our capital restructuring and in the 2009 Successor Period by the adoption of fresh-start accounting, which requires inventory to be recorded at fair value upon emergence. An inventory adjustment of $3 million was recognized in cost of sales in the 2009 Successor Period as the inventory was sold. The impact of other fresh start accounting adjustments on segment earnings was limited to changes in depreciation expense which were not material.

EPMS –

A summary of the financial measures for our EPMS segment is shown below (dollar amounts in millions):

 

     Successor           Predecessor  
     Year Ended
December 31,
2010
    Two Month
Period Ended
December 31,
2009
          Ten Month
Period Ended
November 7,
2009
 
           
           
           

Net sales

   $ 2,559.3      $ 329.8           $ 1,596.9   

Segment earnings (1)

     100.5        (24.5          (131.3

Margin

     3.9     (7.4 )%           (8.2 )% 

 

(1) See definition above.

EPMS net sales were $2.6 billion for the year ended December 31, 2010, reflecting an increase of $633 million or 33% as compared to the year ended December 31, 2009. Improved production volumes on Lear platforms and new business positively impacted net sales by $393 million and $276 million, respectively. Segment earnings, including restructuring costs, and the related margin on net sales were $101 million and 3.9% in 2010, reflecting an increase of $256 million as compared to 2009. Improved production volumes on Lear platforms, favorable operating performance and the benefit of operational restructuring actions and new business positively impacted segment earnings by $242 million collectively. These increases were partially offset by the impact of selling price reductions. In 2010, we incurred costs of $19 million

 

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related to our restructuring actions in the EPMS segment, reflecting a decrease of $60 million as compared to 2009. Segment earnings were negatively impacted in the 2009 Successor Period by the adoption of fresh-start accounting, which requires inventory to be recorded at fair value upon emergence. An inventory adjustment of $6 million was recognized in cost of sales in the 2009 Successor Period as the inventory was sold. The impact of other fresh start accounting adjustments on segment earnings was limited to changes in depreciation and amortization expense which were not material.

Other –

A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):

 

     Successor           Predecessor  
     Year Ended
December 31,
2010
    Two Month
Period Ended
December 31,
2009
          Ten Month
Period Ended
November 7,
2009
 
         
         
         

Net sales

   $ —        $ —             $ —     

Segment earnings (1)

     (217.1     (30.8          (147.0

Margin

     N/A        N/A             N/A   

 

(1) See definition above.

Our other category includes unallocated corporate and regional headquarters costs, as well as the elimination of intercompany activity. Corporate and regional headquarters costs include various support functions, such as information technology, corporate finance, legal, executive administration and human resources. Segment earnings related to our other category were ($217) million in 2010, reflecting an increase in expenses of $39 million as compared to 2009, primarily due to an increase in compensation-related costs in 2010. In 2010, we incurred costs of $2 million related to our restructuring actions, reflecting a decrease of $4 million as compared to 2009. Segment earnings were negatively impacted in the 2009 Predecessor Period by fees and expenses of $21 million related to our capital restructuring.

Liquidity and Financial Condition

Our primary liquidity needs are to fund general business requirements, including working capital requirements, capital expenditures, operational restructuring actions and debt service requirements. Our principal sources of liquidity are cash flows from operating activities, borrowings under available credit facilities and our existing cash balance. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties, intercompany loan repayments and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from our non-U.S. subsidiaries, see Note 9, “Income Taxes,” to the consolidated financial statements included in this Report.

Cash Flows

Year Ended December 31, 2011, Compared with Year Ended December 31, 2010

Net cash provided by operating activities was $790 million in 2011, as compared to $622 million in 2010. The increase primarily reflects higher earnings in 2011. The net change in working capital resulted in a decrease in operating cash flow of $55 million between periods. This decrease was partially offset by the net change in recoverable customer engineering, development and tooling, which resulted in an increase in operating cash flow of $29 million between years. In the year ended December 31, 2011, increases in accounts receivable and accounts payable resulted in a use of cash of $166 million and a source of cash of $217 million, respectively, primarily reflecting the impact of improved production volumes on Lear platforms. The impact of increases in inventories was partially offset by the net impact of changes in other current assets and accrued liabilities.

Net cash used in investing activities was $303 million in 2011, as compared to $192 million in 2010, primarily reflecting an increase in capital expenditures of $136 million between periods. Capital spending in 2012 is estimated at approximately $425 million.

Net cash used in financing activities was $372 million in 2011, as compared to $321 million in 2010. In 2011, we repurchased $279 million of our outstanding common stock and paid $51 million in dividends to our stockholders. In 2010, the repayment of $925 million of term loans under our first and second lien credit agreements and $43 million of other debt outstanding was largely offset by $680 million of net proceeds related to the issuance of our senior unsecured notes. For further information regarding our 2011 and 2010 financing transactions, see “— Capitalization” below.

 

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Year Ended December 31, 2010, Compared with Year Ended December 31, 2009

Net cash provided by operating activities was $622 million in 2010, an increase of $797 million from 2009. The increase primarily reflects higher earnings before the impact of reorganization items and fresh-start accounting adjustments and goodwill impairment charges recorded in 2009. The net change in sold accounts receivable, which reflects the termination of our European accounts receivable factoring facility in 2009, and the net change in working capital benefited operating cash flow between years by $139 million and $54 million, respectively. This benefit was partially offset by the net change in recoverable customer engineering, development and tooling, which resulted in a decrease in operating cash flow between years of $42 million. In the year ended December 31, 2010, increases in accounts receivable and accounts payable resulted in a use of cash of $291 million and a source of cash of $318 million, respectively, primarily reflecting the impact of improved production volumes on Lear platforms. The impact of increases in inventories, other current assets and accrued liabilities were largely offsetting.

Net cash used in investing activities was $192 million in 2010, an increase of $100 million from 2009, reflecting higher capital expenditures of $75 million between years.

Net cash used in financing activities was $321 million in 2010, an increase of $516 million from 2009. In 2010, the repayment of $925 million of term loans under our first and second lien credit agreements and $43 million of other debt outstanding was largely offset by $680 million of net proceeds related to the issuance of our senior unsecured notes. In 2009, we borrowed $375 million under the first lien credit agreement and prepaid $50 million under the second lien credit agreement. In addition, we paid $71 million in debt issuance costs related to our pre-petition primary credit facility, our debtor-in-possession financing and our first and second lien credit agreements. We also prepaid $50 million of Series A preferred stock. For further information regarding our 2010 and 2009 financing transactions, see “— Capitalization” below.

Capitalization

From time to time, we utilize uncommitted credit facilities to fund our capital expenditures and working capital requirements at certain of our foreign subsidiaries, as well as uncommitted lines of credit for our short-term working capital fluctuations, in addition to cash provided by operating activities. As of December 31, 2011, there were no short-term debt balances outstanding. As of December 31, 2010 and 2009, our outstanding short-term debt balance was $4 million and $37 million, respectively. The weighted average short-term interest rate on our short-term debt balances was 7.1%, 2.6% and 3.8% for the years ended December 31, 2011, 2010 and 2009, respectively. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors.

Senior Notes

On March 26, 2010, we issued $350 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 $350 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%. The net proceeds from the issuance of the Notes, together with existing cash on hand, were used to repay in full an aggregate amount of $925 million of term loans provided under our first and second lien credit agreements (described below).

Interest is payable on the Notes 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. As of December 31, 2011 and 2010, we had $695 million of Notes outstanding. The indenture governing the Notes contains certain restrictive covenants and customary events of default. As of December 31, 2011, we were in compliance with all covenants under the indenture governing the Notes.

The Notes are senior unsecured obligations. Our obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain domestic subsidiaries, which are directly or indirectly 100% owned by Lear.

For further information related to the Notes, including information on early redemption, covenants and events of default, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report and the indenture (as amended and supplemented) governing the Notes, which has been incorporated by reference as an exhibit to this Report.

 

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Revolving Credit Facility

On June 17, 2011, we entered into an amended and restated credit agreement, under which we have a $500 million revolving credit facility (the “Revolving Credit Facility”), which 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 December 31, 2011, there were no borrowings outstanding under the Revolving Credit Facility, and we were in compliance with all covenants under the agreement governing the Revolving Credit Facility.

For further information related to the Revolving Credit Facility, including information on pricing, covenants and events of default, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report and the amended and restated credit agreement, which has been incorporated by reference as an exhibit to this Report.

First and Second Lien Credit Agreements

In connection with our emergence from Chapter 11 bankruptcy proceedings, we entered into a first lien credit agreement and a second lien credit agreement in the fourth quarter of 2009. The first lien credit agreement provided for the issuance of $375 million of term loans, and the second lien credit agreement provided for the issuance of $550 million of term loans. As described above, in March 2010, we repaid in full amounts outstanding under the first and second lien credit agreements.

For further information related to the first and second lien credit agreements, including information on pricing, covenants and events of default, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report.

Contractual Obligations

Our scheduled maturities of long-term debt, our scheduled interest payments on the Notes and our lease commitments under non-cancelable operating leases as of December 31, 2011, are shown below (in millions):

 

     2012      2013      2014      2015      2016      Thereafter      Total  

Long-term debt maturities (1)

   $ —         $ —         $ —         $ —         $ —         $ 700.0       $ 700.0   

Scheduled interest payments

     56.0         56.0         56.0         56.0         56.0         140.9         420.9   

Lease commitments

     78.3         59.8         47.4         32.9         27.4         30.8         276.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 134.3       $ 115.8       $ 103.4       $ 88.9       $ 83.4       $ 871.7       $ 1,397.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents aggregate principal amounts at maturity.

In addition to the obligations set forth above, we have capital requirements with respect to new programs. We enter into agreements with our customers to produce products at the beginning of a vehicle’s life cycle. Although such agreements do not provide for a specified quantity of products, once we enter into such agreements, we are generally required to fulfill our customers’ purchasing requirements for the production life of the vehicle. Prior to being formally awarded a program, we typically work closely with our customers in the early stages of the design and engineering of a vehicle’s systems. Failure to complete the design and engineering work related to a vehicle’s systems, or to fulfill a customer’s contract, could have a material adverse impact on our business.

We also enter into agreements with suppliers to assist us in meeting our customers’ production needs. These agreements vary as to duration and quantity commitments. Historically, most have been short-term agreements, which do not provide for minimum purchases, or are requirements-based contracts.

We may be required to make significant cash outlays related to our unrecognized tax benefits, including interest and penalties. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits, including interest and penalties and federal tax benefits where applicable, of $59 million as of December 31, 2011, have been excluded from the contractual obligations table above. For further information related to our unrecognized tax benefits, see Note 9, “Income Taxes,” to the consolidated financial statements included in this Report.

We also have minimum funding requirements with respect to our pension obligation. We may elect to make contributions in excess of the minimum funding requirements in response to investment performance or changes in interest rates or when we believe that it is financially advantageous to do so and based on our other cash requirements. Our minimum funding requirements after 2012 will depend on several factors, including investment performance and interest rates. Our minimum funding requirements may also be affected by changes in applicable legal requirements. We expect contributions to our domestic and foreign pension plans, to be approximately $35 to $40 million in 2012. We also have payments due with respect to our postretirement benefit obligation. We do not fund our postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees. We expect payments related to our postretirement benefit obligation to be approximately $10 million in 2012.

 

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We also have a defined contribution retirement program for our salaried employees. Contributions to this program are determined as a percentage of each covered employee’s eligible compensation and are expected to be approximately $14 million in 2012. In addition, we expect distributions to participants in certain of our non-qualified defined benefit plans to be approximately $4 million in 2012.

For further information related to our pension and other postretirement benefit plans, see “— Other Matters — Pension and Other Postretirement Defined Benefit Plans” and Note 10, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.

Off-Balance Sheet Arrangements

Guarantees and Commitments –

We guarantee 49% of certain of the debt of Tacle Seating USA, LLC. As of December 31, 2011, the aggregate amount of debt guaranteed was approximately $1 million.

Common Stock Share Repurchase Program

See Item 5, “Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Stock Split

During the first quarter of 2011, we completed a two-for-one stock split of our common stock. For further information, see Note 11, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.

Dividends

See Item 5, “Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Adequacy of Liquidity Sources

As of December 31, 2011, we had approximately $1.8 billion of cash and cash equivalents on hand and $500 million in available borrowings under our Revolving Credit Facility. Together with cash provided by operating activities, we believe this will enable us to meet our liquidity needs to satisfy ordinary course business obligations. However, our ability to continue to meet such liquidity needs is subject to, and will be affected by, cash flows from operations, including the impact of restructuring activities, automotive industry conditions, the financial condition of our customers and suppliers and other related factors. Additionally, an economic downturn or reduction in production levels could negatively impact our financial condition. Furthermore, our future financial results will be affected by cash flows from operations, including the impact of restructuring activities, and will also be subject to certain factors outside of our control, including those described above. See Part I — Item 1A, “Risk Factors,” “— Executive Overview” above and “— Forward-Looking Statements” below for further discussion of the risks and uncertainties affecting our cash flows from operations and overall liquidity.

Market Risk Sensitivity

In the normal course of business, we are exposed to market risks associated with fluctuations in foreign exchange rates, interest rates and commodity prices. We manage a portion of these risks through the use of derivative financial instruments in accordance with management’s guidelines. We enter into all hedging transactions for periods consistent with the underlying exposures. We do not enter into derivative instruments for trading purposes.

Foreign Exchange

Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies (“transactional exposure”). We may mitigate a portion of this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred where appropriate and included in the measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions.

Currently, our most significant foreign currency transactional exposures relate to the Mexican peso, various European currencies and the Chinese renminbi. We have performed a quantitative analysis of our overall currency rate exposure as

 

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of December 31, 2011. The potential adverse earnings impact related to net transactional exposures from a hypothetical 10% strengthening of the U.S. dollar relative to all other currencies to which it is exposed for a twelve-month period is approximately ($21) million. The potential earnings benefit related to net transactional exposures from a similar strengthening of the Euro relative to all other currencies to which it is exposed for a twelve-month period is approximately $3 million.

As of December 31, 2011, foreign exchange contracts representing $734 million of notional amount were outstanding with maturities of less than 17 months. As of December 31, 2011, the fair value of these contracts was approximately ($45) million. A 10% change in the value of the U.S. dollar relative to all other currencies to which it is exposed would result in a $30 million change in the aggregate fair value of these contracts. A 10% change in the value of the Euro relative to all other currencies to which it is exposed would result in a $14 million change in the aggregate fair value of these contracts. As of December 31, 2010, foreign exchange contracts representing $315 million of notional amount were outstanding with maturities of less than twelve months. As of December 31, 2010, the fair value of these contracts was approximately ($1) million. A 10% change in the value of the U.S. dollar relative to all other currencies to which it is exposed would have resulted in a $7 million change in the aggregate fair value of these contracts. A 10% change in the value of the Euro relative to all other currencies to which it is exposed would have resulted in a $4 million change in the aggregate fair value of these contracts.

There are certain shortcomings inherent in the sensitivity analysis presented. The analysis assumes that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.

In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars (“translational exposure”). In 2011, net sales outside of the United States accounted for 82% of our consolidated net sales, although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate our translational exposure.

Interest Rates

Historically, we have used interest rate swap and other derivative contracts to manage our exposure to variable interest rates on outstanding variable rate debt instruments indexed to U.S. or European Monetary Union short-term money market rates. As of December 31, 2011 and 2010, there were no interest rate contracts outstanding. We will continue to evaluate, and may use, derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to manage our exposures to fluctuations in interest rates in the future.

Commodity Prices

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 Part I — Item 1A, “Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance,” and “— Forward-Looking Statements.”

We have commodity price risk with respect to purchases of certain raw materials, including steel, copper, diesel fuel, chemicals, resins and leather. Our main cost exposures relate to steel and copper. The majority of the steel used in our products is comprised of components that are integrated into a seat system, such as seat frames, recliner mechanisms, seat tracks and mechanical components. Therefore, our exposure to steel prices is primarily indirect, through these purchased components. Approximately 80% of our copper purchases are subject to price index agreements with our customers.

We use derivative instruments to reduce our exposure to fluctuations in copper prices. As of December 31, 2011, commodity swap contracts representing $3 million of notional amount were outstanding with maturities of ten months. As of December 31, 2011, the fair value of these contracts was less than ($1) million. The potential adverse earnings impact from a 10% parallel decline in the copper curve for a twelve-month period is less than ($1) million. As of December 31, 2010, there were no commodity swap contracts outstanding.

 

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For further information related to the financial instruments described above, see Note 15, “Financial Instruments,” to the consolidated financial statements included in this Report.

Other Matters

Legal and Environmental Matters

We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial and contractual disputes, product liability claims and environmental and other matters. As of December 31, 2011, we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $17 million. In addition, as of December 31, 2011, we had recorded reserves for product liability claims and environmental matters of $23 million and $3 million, respectively. Although these reserves were determined in accordance with GAAP, the ultimate outcomes of these matters are inherently uncertain, and actual results may differ significantly from current estimates. For a description of risks related to various legal proceedings and claims, see Part I — Item 1A, “Risk Factors.” For a more complete description of our outstanding material legal proceedings, see Note 13, “Commitments and Contingencies,” to the consolidated financial statements included in this Report.

Significant Accounting Policies and Critical Accounting Estimates

Our significant accounting policies are more fully described in Note 4, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in this Report. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, these estimates and assumptions are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates.

We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations.

Pre-Production Costs Related to Long-Term Supply Arrangements

We incur pre-production engineering and development (“E&D”) and tooling costs related to the products produced for our customers under long-term supply agreements. We expense all pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, we expense all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which we do not have a non-cancelable right to use the tooling.

A change in the commercial arrangements affecting any of our significant programs that would require us to expense E&D or tooling costs that we currently capitalize could have a material adverse impact on our operating results.

Impairment of Goodwill

As of December 31, 2011 and 2010, we had recorded goodwill of $629 million and $615 million, respectively. Recorded goodwill reflects the adoption of fresh-start accounting in 2009 (see Note 3, “Fresh-Start Accounting,” to the consolidated financial statements included in this Report). Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment is more likely than not to have occurred. In conducting our impairment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, we then compare the fair value of each of our 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. We conduct our annual impairment testing as of the first day of our fourth quarter.

We utilize an income approach to estimate the fair value of each of our reporting units and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally developed forecasts, as well as commercial, wage and benefit, inflation and discount rate

 

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assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted by reporting unit to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income approach provides a reasonable estimate of the fair value of our reporting units. The market valuation approach is used to further support our analysis and is based on recent transactions involving comparable companies.

In 2011, we performed a qualitative assessment, completed as of the first day of our fourth quarter, which indicated that it was more likely than not that the fair value of each of our reporting units exceeded its respective carrying value. Accordingly, no further goodwill impairment testing was required. We do not believe that any of our reporting units is at risk for impairment.

In the 2009 Predecessor Period, our annual goodwill impairment analysis, completed as of the first day of our fourth quarter, was based on our distributable value, which was approved by the Bankruptcy Court, and resulted in impairment charges of $319 million related to our EPMS segment. For further information on our distributable value, see Note 3, “Fresh-Start Accounting,” to the consolidated financial statements included in this Report.

Impairment of Long-Lived Assets

We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of our long-lived assets.

In the years ended December 31, 2011 and 2010, and the 2009 Predecessor Period, we recognized fixed asset impairment charges of $1 million, $4 million and $6 million, respectively, in conjunction with our restructuring actions, as well as an additional $1 million and $3 million of fixed asset impairment charges in 2011 and 2010, respectively. See Note 5, “Restructuring,” to the consolidated financial statements included in this Report.

Impairment of Investments in Affiliates

As of December 31, 2011 and 2010, we had aggregate investments in affiliates of $148 million and $173 million, respectively. We monitor our investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If we determine that an other-than-temporary decline in value has occurred, we recognize an impairment loss, which is measured as the difference between the recorded book value and the fair value of the investment. Fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values. A deterioration in industry conditions and decline in the operating results of our non-consolidated affiliates could result in the impairment of our investments.

In the 2009 Predecessor Period, we recorded impairment charges of $42 million related to certain of our investments in affiliates.

Restructuring

Accruals have been recorded in conjunction with our restructuring actions. These accruals include estimates primarily related to facility consolidations and closures, employment reductions and contract termination costs. Actual costs may vary from these estimates. Restructuring-related accruals are reviewed on a quarterly basis, and changes to restructuring actions are appropriately recognized when identified.

Legal and Other Contingencies

We are involved from time to time in various legal proceedings and claims, including commercial or contractual disputes, product liability claims and environmental and other matters, that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes related to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. We have accrued for estimated losses in accordance with GAAP for those matters where we believe that the

 

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likelihood that a loss has occurred is probable and the amount of the loss is reasonably estimable. The determination of the amount of such reserves is based on knowledge and experience with regard to past and current matters and consultation with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. The amount of such reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution. See Note 13, “Commitments and Contingencies,” to the consolidated financial statements included in this Report.

Pension and Other Postretirement Defined Benefit Plans

We provide certain pension and other postretirement benefits to our employees and retired employees, including pensions, postretirement health care benefits and other postretirement benefits.

Plan assets and obligations are measured using various actuarial assumptions, such as discount rates, rate of compensation increase, mortality rates, turnover rates and health care cost trend rates, which are determined as of the current year measurement date. The measurement of net periodic benefit cost is based on various actuarial assumptions, including discount rates, expected return on plan assets and rate of compensation increase, which are determined as of the prior year measurement date. We review our actuarial assumptions on an annual basis and modify these assumptions when appropriate. As required by GAAP, the effects of the modifications are recorded currently or are amortized over future periods.

Approximately 11% of our active workforce is covered by defined benefit pension plans. Approximately 2% of our active workforce is covered by other postretirement benefit plans. Pension plans provide benefits based on plan-specific benefit formulas as defined by the applicable plan documents. Postretirement benefit plans generally provide for the continuation of medical benefits for all eligible employees. We also have contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, our policy is to fund our pension benefit obligation based on legal requirements, tax and liquidity considerations and local practices. We do not fund our postretirement benefit obligation.

As of December 31, 2011, our projected benefit obligations related to our pension and other postretirement benefit plans were $950 million and $184 million, respectively, and our unfunded pension and other postretirement benefit obligations were $306 million and $184 million, respectively. These benefit obligations were valued using a weighted average discount rate of 4.5% and 4.0% for domestic pension and other postretirement benefit plans, respectively, and 4.6% and 4.5% for foreign pension and other postretirement benefit plans, respectively. The determination of the discount rate is based on the construction of a hypothetical bond portfolio consisting of high-quality fixed income securities with durations that match the timing of expected benefit payments. Changes in the selected discount rate could have a material impact on our projected benefit obligations and the unfunded status of our pension and other postretirement benefit plans. Decreasing the discount rate by 100 basis points would have increased the projected benefit obligations and unfunded status of our pension and other postretirement benefit plans by approximately $150 million and $25 million, respectively.

For the year ended December 31, 2011, net periodic pension benefit cost was $18 million and net periodic other postretirement benefit cost was $11 million. In 2011, net periodic pension benefit cost was calculated using a variety of assumptions, including a weighted average discount rate of 5.5% for domestic and 5.2% for foreign plans and an expected return on plan assets of 8.0% for domestic and 6.9% for foreign plans. The expected return on plan assets is determined based on several factors, including adjusted historical returns, historical risk premiums for various asset classes and target asset allocations within the portfolio. Adjustments made to the historical returns are based on recent return experience in the equity and fixed income markets and the belief that deviations from historical returns are likely over the relevant investment horizon. In 2011, net periodic other postretirement benefit cost was calculated using a discount rate of 5.0% for domestic and 5.7% for foreign plans.

Aggregate net periodic pension and other postretirement benefit cost is forecasted to be approximately $25 million in 2012. This estimate is based on a weighted average discount rate of 4.5% and 4.6% for domestic and foreign pension plans, respectively, and 4.0% and 4.5% for domestic and foreign other postretirement benefit plans, respectively. Actual cost is also dependent on various other factors related to the employees covered by these plans. Adjustments to our actuarial assumptions could have a material adverse impact on our operating results. Decreasing the discount rate by 100 basis points would increase net periodic pension and other postretirement benefit cost by approximately $6 million and $1 million, respectively, for the year ended December 31, 2012. Decreasing the expected return on plan assets by 100 basis points would increase net periodic pension benefit cost by approximately $6 million for the year ended December 31, 2012.

 

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For further information related to our pension and other postretirement benefit plans, see “— Liquidity and Financial Condition — Capitalization — Contractual Obligations” above and Note 10, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.

Revenue Recognition and Sales Commitments

We enter into agreements with our customers to produce products at the beginning of a vehicle’s life cycle. Although such agreements do not provide for a specified quantity of products, once we enter into such agreements, we are generally required to fulfill our customers’ purchasing requirements for the production life of the vehicle. These agreements generally may be terminated by our customers at any time. Historically, terminations of these agreements have been minimal. In certain instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses as they are incurred.

We receive purchase orders from our customers on an annual basis. Generally, each purchase order provides the annual terms, including pricing, related to a particular vehicle model. Purchase orders do not specify quantities. We recognize revenue based on the pricing terms included in our annual purchase orders as our products are shipped to our customers. We are asked to provide our customers with annual productivity price reductions as part of certain agreements. We accrue for such amounts as a reduction of revenue as our products are shipped to our customers. In addition, we have ongoing adjustments to our pricing arrangements with our customers based on the related content, the cost of our products and other commercial factors. Such pricing accruals are adjusted as they are settled with our customers.

Income Taxes

We account for income taxes in accordance with GAAP. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

In determining the provision for income taxes for financial statement purposes, we make certain estimates and judgments, which affect our evaluation of the carrying value of our deferred tax assets, as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available evidence in order to determine whether, based on the weight of the evidence, a valuation allowance for our deferred tax assets is necessary. Such evidence includes historical results, future reversals of existing taxable temporary differences and expectations for future taxable income (exclusive of the reversal of temporary differences and carryforwards), as well as the implementation of feasible and prudent tax planning strategies. If, based on the weight of the evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized, a valuation allowance is recorded.

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 allowance is eliminated.

As of December 31, 2011, we had a valuation allowance related to tax loss and credit carryforwards and other deferred tax assets of $880 million in the United States and $517 million in several international jurisdictions. If we generate pretax earnings in the United States in 2012 and our forecasted earnings thereafter remain favorable, it is likely that we may reverse a significant portion of the U.S. valuation allowance in the next twelve months. In addition, if we experience sustained levels of profitability in certain international jurisdictions in the future, our assessment of the need for a full valuation allowance with respect to the deferred tax assets in those jurisdictions could change. A reduction in our valuation allowance could have a significant impact on tax expense and net income in the period in which such reduction occurs.

The calculation of our tax benefits and liabilities includes uncertainties in the application of, and changes in, complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these liabilities based on changing facts and circumstances; however, due to the complexity of some of these uncertainties and the impact of any tax audits, the ultimate resolutions may differ significantly from our estimated liabilities.

 

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For further information, see “— Forward-Looking Statements,” and Note 9, “Income Taxes,” to the consolidated financial statements included in this Report.

Fair Value Measurements

We measure certain assets and liabilities at fair value on a non-recurring basis using unobservable inputs (Level 3 input based on the GAAP fair value hierarchy). For further information on these fair value measurements, see “— Impairment of Goodwill,” “— Impairment of Long-Lived Assets,” “— Restructuring” and “— Impairment of Investments in Affiliates” above and “—Adoption of Fresh-Start Accounting” below.

Adoption of Fresh-Start Accounting

Fresh-start accounting results in a new basis of accounting and reflects the allocation of our estimated fair value to our underlying assets and liabilities. Our estimates of fair value are inherently subject to significant uncertainties and contingencies beyond our reasonable control. Accordingly, there can be no assurances that the estimates, assumptions, valuations, appraisals and financial projections will be realized, and actual results could vary materially.

Our reorganization value was allocated to our assets in conformity with the procedures specified by Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”) 805, “Business Combinations.” The excess of reorganization value over the fair value of tangible and identifiable intangible assets was recorded as goodwill. Liabilities existing as of the date of our emergence from Chapter 11 bankruptcy proceedings, other than deferred taxes, were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with applicable income tax accounting standards. Predecessor accumulated depreciation, accumulated amortization, retained deficit, common stock and accumulated other comprehensive loss were eliminated.

For further information on fresh-start accounting, see Note 3, “Fresh-Start Accounting,” to the consolidated financial statements included in this Report.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. During 2011, there were no material changes in the methods or policies used to establish estimates and assumptions. The adoption of fresh-start accounting required significant estimation and judgment. See Note 3, “Fresh-Start Accounting,” to the consolidated financial statements included in this Report. Other matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of fixed and intangible assets, unsettled pricing discussions with customers and suppliers, restructuring accruals, deferred tax asset valuation allowances and income taxes, pension and other postretirement benefit plan assumptions, accruals related to litigation, warranty and environmental remediation costs and self-insurance accruals. Actual results may differ significantly from our estimates.

Recently Issued Accounting Pronouncements

For information on the impact of recently issued accounting pronouncements, see Note 17, “Accounting Pronouncements,” to the consolidated financial statements included in this Report.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words “will,” “may,” “designed to,” “outlook,” “believes,” “should,” “anticipates,” “plans,” “expects,” “intends,” “estimates,” “forecasts” and similar expressions identify certain of these forward-looking statements. We also may provide forward-looking statements in oral statements or other written materials released to the public. All such forward-looking statements contained or incorporated in this Report or in any other public statements which address operating performance, events or developments that we expect or anticipate may occur in the future, including, without limitation, statements related to business opportunities, awarded sales contracts, sales backlog and ongoing commercial arrangements, or statements expressing views about future operating results, are forward-looking statements. Actual results may differ materially from any or all forward-looking statements made by us. Important factors, risks and uncertainties that may cause actual results to differ materially from anticipated results include, but are not limited to:

 

   

general economic conditions in the markets in which we operate, including changes in interest rates or currency exchange rates;

 

   

the financial condition and restructuring actions of our customers and suppliers;

 

   

changes in actual industry vehicle production levels from our current estimates;

 

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fluctuations in the production of vehicles or the loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier;

 

   

disruptions in the relationships with our suppliers;

 

   

labor disputes involving us or our significant customers or suppliers or that otherwise affect us;

 

   

the outcome of customer negotiations and the impact of customer-imposed price reductions;

 

   

the impact and timing of program launch costs and our management of new program launches;

 

   

the costs, timing and success of restructuring actions;

 

   

increases in our warranty, product liability or recall costs;

 

   

risks associated with conducting business in foreign countries;

 

   

the operational and financial success of our joint ventures;

 

   

competitive conditions impacting us and our key customers and suppliers;

 

   

the cost and availability of raw materials, energy, commodities and product components and our ability to mitigate such costs;

 

   

the outcome of legal or regulatory proceedings to which we are or may become a party;

 

   

the impact of pending legislation and regulations or changes in existing federal, state, local or foreign laws or regulations;

 

   

unanticipated changes in cash flow, including our ability to align our vendor payment terms with those of our customers;

 

   

limitations imposed by our existing indebtedness and our ability to access capital markets on commercially reasonable terms;

 

   

impairment charges initiated by adverse industry or market developments;

 

   

our ability to execute our strategic objectives;

 

   

changes in discount rates and the actual return on pension assets;

 

   

costs associated with compliance with environmental laws and regulations;

 

   

developments or assertions by or against us relating to intellectual property rights;

 

   

our ability to utilize our net operating loss, capital loss and tax credit carryforwards;

 

   

global sovereign fiscal matters and creditworthiness, including potential defaults and the related impacts on economic activity, including the possible effects on credit markets, currency values, monetary unions, international treaties and fiscal policies; and

 

   

other risks, described in Part I — Item 1A, “Risk Factors,” and from time to time in our other Securities and Exchange Commission filings.

The forward-looking statements in this Report are made as of the date hereof, and we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.

 

49


Table of Contents

ITEM 8 – CONSOLIDATED FINANCIAL STATEMENTS AND

SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm

   51

Consolidated Balance Sheets as of December 31, 2011 and 2010

   53

Consolidated Statements of Operations for the years ended December  31, 2011 and 2010, the two month period ended December 31, 2009, and the ten month period ended November 7, 2009

   54

Consolidated Statements of Cash Flows for the years ended December  31, 2011 and 2010, the two month period ended December 31, 2009, and the ten month period ended November 7, 2009

   55

Consolidated Statements of Equity for the years ended December  31, 2011 and 2010, the two month period ended December 31, 2009, and the ten month period ended November 7, 2009

   56

Notes to Consolidated Financial Statements

   58

Schedule II – Valuation and Qualifying Accounts

   113

 

50


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Lear Corporation

We have audited the accompanying consolidated balance sheets of Lear Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, equity and cash flows for the years ended December 31, 2011 and 2010, the period from November 8, 2009 to December 31, 2009 (Successor) and the period from January 1, 2009 to November 7, 2009 (Predecessor). Our audits also included the financial statement schedule included in Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lear Corporation and subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and cash flows for the years ended December 31, 2011 and 2010, the period from November 8, 2009 to December 31, 2009 (Successor) and the period from January 1, 2009 to November 7, 2009 (Predecessor), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, on November 5, 2009, the United States Bankruptcy Court for the Southern District of New York entered an order confirming the Plan of Reorganization, which became effective on November 9, 2009. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with FASB Accounting Standards CodificationTM 852, “Reorganizations,” for the Successor as a new entity with assets, liabilities and a capital structure having carrying values that are not comparable to prior periods.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lear Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 17, 2012, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Detroit, Michigan

February 17, 2012

 

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Report of Independent Registered Public Accounting Firm on

Internal Control over Financial Reporting

The Board of Directors and Shareholders of Lear Corporation

We have audited Lear Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Lear Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Control Over Financial Reporting included in Item 9A(b). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Lear Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2011 consolidated financial statements of Lear Corporation and subsidiaries, and our report dated February 17, 2012, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Detroit, Michigan

February 17, 2012

 

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LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

     Successor  
December 31,    2011     2010  

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 1,754.3      $ 1,654.1   

Accounts receivable

     1,880.1        1,758.4   

Inventories

     637.8        554.2   

Other

     489.3        418.8   
  

 

 

   

 

 

 

Total current assets

     4,761.5        4,385.5   
  

 

 

   

 

 

 

Long-Term Assets:

    

Property, plant and equipment, net

     1,072.0        994.7   

Goodwill

     628.6        614.6   

Other

     548.8        626.3   
  

 

 

   

 

 

 

Total long-term assets

     2,249.4        2,235.6   
  

 

 

   

 

 

 
   $ 7,010.9      $ 6,621.1   
  

 

 

   

 

 

 

Liabilities and Equity

    

Current Liabilities:

    

Short-term borrowings

   $ —        $ 4.1   

Accounts payable and drafts

     2,014.3        1,838.4   

Accrued liabilities

     1,049.2        976.0   
  

 

 

   

 

 

 

Total current liabilities

     3,063.5        2,818.5   
  

 

 

   

 

 

 

Long-Term Liabilities:

    

Long-term debt

     695.4        694.9   

Other

     690.9        538.9   
  

 

 

   

 

 

 

Total long-term liabilities

     1,386.3        1,233.8   
  

 

 

   

 

 

 

Equity:

    

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

     —          —     

Common stock, $0.01 par value, 300,000,000 shares authorized; 107,486,539 and 105,498,880 shares issued as of December 31, 2011 and 2010, respectively (1)

     1.1        1.1   

Additional paid-in capital, including warrants to purchase common stock (1)

     2,150.6        2,116.0   

Common stock held in treasury, 6,799,597 and 322,130 shares as of December 31, 2011 and 2010, respectively, at cost (1)

     (305.6     (13.4

Retained earnings

     922.3        434.5   

Accumulated other comprehensive loss

     (332.0     (78.0
  

 

 

   

 

 

 

Lear Corporation stockholders’ equity

     2,436.4        2,460.2   

Noncontrolling interests

     124.7        108.6   
  

 

 

   

 

 

 

Equity

     2,561.1        2,568.8   
  

 

 

   

 

 

 
   $ 7,010.9      $ 6,621.1   
  

 

 

   

 

 

 

 

(1) Share data as of December 31, 2010, has been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to these consolidated financial statements.

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

 

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LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

     Successor           Predecessor  
     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Two Month
Period Ended
December 31,
2009
          Ten Month
Period Ended
November 7,
2009
 
             
             

Net sales

   $ 14,156.5      $ 11,954.6      $ 1,580.9           $ 8,158.7   

Cost of sales

     12,963.3        10,936.3        1,508.1             7,871.3   

Selling, general and administrative expenses

     485.6        452.7        71.2             376.7   

Amortization of intangible assets

     28.0        27.2        4.5             4.1   

Goodwill impairment charges

     —          —          —               319.0   

Interest expense ($221.1 million of contractual interest for the ten month period ended November 7, 2009)

     39.7        55.4        11.1             151.4   

Other (income) expense, net

     24.2        34.2        19.8             (16.6

Reorganization items and fresh-start accounting adjustments, net

     —          —          —               (270.7
  

 

 

   

 

 

   

 

 

        

 

 

 

Consolidated income (loss) before provision (benefit) for income taxes and equity in net (income) loss of affiliates

     615.7        448.8        (33.8          (276.5

Provision (benefit) for income taxes

     68.8        24.6        (24.2          29.2   

Equity in net (income) loss of affiliates

     (23.5     (37.2     (1.9          64.0   
  

 

 

   

 

 

   

 

 

        

 

 

 

Consolidated net income (loss)

     570.4        461.4        (7.7          (369.7

Less: Net income (loss) attributable to noncontrolling interests

     29.7        23.1        (3.9          16.2   
  

 

 

   

 

 

   

 

 

        

 

 

 

Net income (loss) attributable to Lear

   $ 540.7      $ 438.3      $ (3.8        $ (385.9
  

 

 

   

 

 

   

 

 

        

 

 

 

Basic net income (loss) per share attributable to Lear (1)

   $ 5.21      $ 4.30      $ (0.06        $ (4.98
  

 

 

   

 

 

   

 

 

        

 

 

 

Diluted net income (loss) per share attributable to Lear (1)

   $ 5.08      $ 4.05      $ (0.06        $ (4.98
  

 

 

   

 

 

   

 

 

        

 

 

 

 

(1) Per share data for the year ended December 31, 2010, and the 2009 Successor Period has been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to these consolidated financial statements.

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

 

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LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Successor           Predecessor  
     Year Ended
December 31, 2011
    Year Ended
December 31, 2010
    Two Month Period
Ended
December 31, 2009
          Ten Month Period
Ended
November 7, 2009
 

Cash Flows from Operating Activities:

             

Consolidated net income (loss)

   $ 570.4      $ 461.4      $ (7.7        $ (369.7

Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities –

             

Reorganization items and fresh start accounting adjustments, net

     —          —          —               (270.7

Goodwill impairment charges

     —          —          —               319.0   

Equity in net (income) loss of affiliates

     (23.5     (37.2     (1.9          64.0   

Loss on extinguishment of debt

     —          11.8        —               —     

Fixed asset impairment charges

     2.2        7.2        —               5.6   

Deferred tax provision (benefit)

     (55.8     (10.9     (2.4          32.2   

Depreciation and amortization

     246.3        235.9        39.8             223.9   

Stock-based compensation

     34.6        22.9        8.0             7.3   

Net change in recoverable customer engineering, development and tooling

     (11.4     (40.7     11.0             (9.6

Net change in working capital items (see below)

     (6.3     48.3        291.2             (297.0

Net change in sold accounts receivable

     —          —          —               (138.5

Changes in other long-term liabilities

     10.7        (53.4     (35.9          (75.0

Changes in other long-term assets

     21.3        (26.9     (1.7          (4.6

Other, net

     1.8        3.5        23.6             13.9   
  

 

 

   

 

 

   

 

 

        

 

 

 

Net cash provided by (used in) operating activities

     790.3        621.9        324.0             (499.2
  

 

 

   

 

 

   

 

 

        

 

 

 

Cash Flows from Investing Activities:

             

Additions to property, plant and equipment

     (329.5     (193.3     (41.3          (77.5

Cost of acquisitions, net of cash acquired

     (8.6     (12.3     —               (4.4

Net proceeds from disposition of businesses and other assets

     9.9        18.6        4.0             29.7   

Other, net

     25.0        (5.1     (2.2          (0.5
  

 

 

   

 

 

   

 

 

        

 

 

 

Net cash used in investing activities

     (303.2     (192.1     (39.5          (52.7
  

 

 

   

 

 

   

 

 

        

 

 

 

Cash Flows from Financing Activities:

             

Proceeds from the issuance of successor senior notes

     —          694.5        —               —     

Debtor-in-possession term loan borrowings

     —          —          —               500.0   

Debtor-in-possession term loan repayments

     —          —          —               (500.0

First lien credit agreement borrowings (repayments)

     —          (375.0     —               375.0   

Second lien credit agreement repayments

     —          (550.0     —               (50.0

Payment of debt issuance and other financing costs

     (4.8     (17.6     —               (70.6

Other long-term debt repayments, net

     (1.1     (9.3     (1.9          (0.5

Short-term borrowings (repayments), net

     (4.0     (34.0     6.6             (11.4

Prepayment of Series A preferred stock in connection with emergence from Chapter 11

     —          —          —               (50.0

Repurchase of common stock

     (279.1     —          —               —     

Dividends paid to Lear Corporation stockholders

     (51.1     —          —               —     

Dividends paid to noncontrolling interests

     (18.5     (16.2     (7.0          (16.8

Other, net

     (13.7     (13.1     32.5             (10.7
  

 

 

   

 

 

   

 

 

        

 

 

 

Net cash provided by (used in) financing activities

     (372.3     (320.7     30.2             165.0   
  

 

 

   

 

 

   

 

 

        

 

 

 

Effect of foreign currency translation

     (14.6     (9.0     (15.1          49.2   
  

 

 

   

 

 

   

 

 

        

 

 

 

Net Change in Cash and Cash Equivalents

     100.2        100.1        299.6             (337.7

Cash and Cash Equivalents at Beginning of Period

     1,654.1        1,554.0        1,254.4             1,592.1   
  

 

 

   

 

 

   

 

 

        

 

 

 

Cash and Cash Equivalents at End of Period

   $ 1,754.3      $ 1,654.1      $ 1,554.0           $ 1,254.4   
  

 

 

   

 

 

   

 

 

        

 

 

 

Changes in Working Capital:

             

Accounts receivable

   $ (165.8   $ (291.3   $ 337.0           $ (426.0

Inventories

     (101.0     (106.8     27.2             66.0   

Accounts payable

     216.7        318.4        10.2             50.3   

Accrued liabilities and other

     43.8        128.0        (83.2          12.7   
  

 

 

   

 

 

   

 

 

        

 

 

 

Net change in working capital items

   $ (6.3   $ 48.3      $ 291.2           $ (297.0
  

 

 

   

 

 

   

 

 

        

 

 

 

Supplementary Disclosure:

             

Cash paid for interest

   $ 59.9      $ 57.0      $ 0.5           $ 78.9   
  

 

 

   

 

 

   

 

 

        

 

 

 

Cash paid for income taxes, net of refunds received of $21.1 in 2011, $25.3 in 2010 and $26.9 in the ten month period ended November 7, 2009

   $ 79.8      $ 57.5      $ 4.3           $ 60.0   
  

 

 

   

 

 

   

 

 

        

 

 

 

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

 

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LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In millions, except share data)

 

     Preferred Stock     Common
Stock
    Additional Paid-
in Capital
    Treasury
Stock
    Retained
Earnings
(Deficit)
 

Balance at December 31, 2008 – Predecessor

   $ —        $ 0.8      $ 1,371.7      $ (176.1   $ (818.2

Comprehensive income (loss):

          

Net income (loss)

     —          —          —          —          (385.9

Other comprehensive income

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     —          —          —          —          (385.9

Stock-based compensation (includes issuances of
120,363 shares of common stock at an average
price of $50.56)

     —          —          1.6        6.1        —     

Dividends paid to noncontrolling interests

     —          —          —          —          —     

Cancellation of Predecessor Common Stock

     —          (0.8     (1,373.3     170.0        1,204.1   

Fresh-start accounting adjustments

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 7, 2009 – Predecessor

   $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of 10,896,250 shares of Series A
preferred stock, net of $50.0 million
prepayment in connection with emergence
from Chapter 11

     450.0        —          —          —          —     

Issuance of 68,234,772 shares of common stock
and 8,157,249 warrants in connection with
emergence from Chapter 11
(1)

     —          0.7        1,635.5        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 7, 2009 – Successor (1)

   $ 450.0      $ 0.7      $ 1,635.5      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

          

Net loss

     —          —          —          —          (3.8

Other comprehensive income (loss)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     —          —          —          —          (3.8

Conversion of 1,014,947 shares of Series A
preferred stock

     (41.9     —          41.9        —          —     

Issuance of 3,560,030 shares of common stock
related to exercises of warrants
(1)

     —          —          —          —          —     

Stock-based compensation

     —          —          8.0        —          —     

Dividends paid to noncontrolling interests

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009 – Successor (1)

   $ 408.1      $ 0.7      $ 1,685.4      $ —        $ (3.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

          

Net income

     —          —          —          —          438.3   

Other comprehensive income (loss)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     —          —          —          —          438.3   

Conversion of 9,881,303 shares of Series A
preferred stock

     (408.1     0.2        407.9        —          —     

Issuance of 10,869,802 shares of common stock
related to exercises of warrants
(1)

     —          0.1        (0.1     —          —     

Stock-based compensation

     —          0.1        22.8        (13.4     —     

Dividends paid to noncontrolling interests

     —          —          —          —          —     

Transaction with affiliates

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010 – Successor (1)

   $ —        $ 1.1      $ 2,116.0      $ (13.4   $ 434.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

          

Net income

     —          —          —          —          540.7   

Other comprehensive income (loss)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     —          —          —          —          540.7   

Issuance of 1,092,437 shares of common stock
related to exercises of warrants

     —          —          —          —          —     

Stock-based compensation

     —          —          34.6        (13.1     —     

Repurchases of 6,182,429 shares of common
stock at an average price of $45.15 per share

     —          —          —          (279.1     —     

Dividends declared to Lear Corporation
stockholders

     —          —          —          —          (52.9

Dividends paid to noncontrolling interests

     —          —          —          —          —     

Addition to noncontrolling interests

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011 – Successor

   $ —        $ 1.1      $ 2,150.6      $ (305.6   $ 922.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts for the year ended December 31, 2010, and the 2009 Successor Period, have been retroactively adjusted to reflect the two-for-one stock split described in Note 11, “Capital Stock and Equity,” to these consolidated financial statements.

 

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Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (continued)

(In millions, except share data)

 

     Accumulated Other Comprehensive Loss, net of tax        
     Defined
Benefit
Plans
    Derivative
Instruments and
Hedging Activities
    Cumulative
Translation
Adjustments
    Lear
Stockholders’
Equity
    Non-
controlling
Interests
    Equity  

Balance at December 31, 2008 – Predecessor

   $ (174.0   $ (88.8   $ 83.5      $ 198.9      $ 48.8      $ 247.7   

Comprehensive income (loss):

            

Net income (loss)

     —          —          —          (385.9     16.2        (369.7

Other comprehensive income

     14.9        47.7        55.9        118.5        1.0        119.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     14.9        47.7        55.9