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Article by DailyStocks_admin    (02-21-13 01:47 AM)

Description

Filed with the SEC from Feb 7 to Feb 13:

Lear Corp. (LEA)
Marcato Capital Management called shares undervalued and said it has had discussions with senior management. Marcato also disclosed that on Feb. 7 it entered into an agreement with Oskie Capital Management to file as a group.
BUSINESS OVERVIEW

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 every major automotive manufacturer in the world. We have manufacturing, engineering and administrative capabilities in 36 countries with 221 locations and are continuing to grow our business in all automotive producing regions of the world.
We organize our business in two global product segments: seating and electrical power management systems (“EPMS”). The seating segment includes seat systems and related components, such as seat structures and mechanisms, seat covers, headrests and seat foam. The EPMS segment includes electrical distribution systems that route electrical signals and manage electrical power within a vehicle for both traditional powertrain vehicles, as well as for hybrid and electric vehicles. Key components of electrical distribution systems 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 the Company 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 both our seating and electrical distribution businesses. From 2010 to 2012, we invested $300 million across both product segments to expand our component manufacturing capabilities in emerging markets and low-cost countries. We continue to pursue niche acquisitions that will complement our present product offerings, and in 2012, we acquired Guilford Performance Textiles to enhance our capabilities in seat covers. In EPMS, we have narrowed our primary focus to providing complete electrical distribution systems. These strategic actions allowed our 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 trends toward global platforms, directed component sourcing and increased content in electrical distribution systems.

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. Through the end of 2012, we incurred pretax costs of $935 million in connection with these activities. These costs included employee termination benefits, fixed asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions and manufacturing inefficiency costs at the operating locations impacted by the restructuring actions. These actions resulted in the closure of 50 manufacturing and 11 administrative facilities and a current footprint with more than 80% of our component facilities and more than 90% of our related employment in 22 low-cost countries. Any future restructuring actions will depend upon market conditions, customer actions and other factors. For further information, see Item 1A, “Risk Factors,” and Note 4, “Restructuring,” to the consolidated financial statements included in this Report.

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 2009, the global economic downturn and associated decline in automotive production (particularly in North America and Europe) resulted in financial distress and a significant restructuring of 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 15.6 million units in 2009.
On July 7, 2009, in order to re-align our capital structure and position our business for long-term success, Lear and certain of its U.S. and Canadian subsidiaries filed petitions for relief under Chapter 11 with the bankruptcy court, following a comprehensive evaluation of our strategic and financial options. On November 9, 2009, our plan of reorganization became effective, and we emerged from Chapter 11 bankruptcy proceedings. As a result of our financial restructuring, we ended 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.
Recent Developments
In 2011 and 2012, global industry production volumes improved significantly, up 3% in 2011 from the prior year and another 7% in 2012 to 79.7 million units. North American, industry production increased 10% in 2011 from the prior year and another 17% in 2012 to 15.4 million units. Business conditions in Europe, however, remain challenging. Although European industry production increased 3% in 2011 from the prior year, it declined 6% in 2012 to 16.8 million units.
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles and our content per vehicle. Our sales are well diversified geographically, by customer and by vehicle segment. In 2012, approximately 39% of our sales were generated in North America, 35% in Europe, 17% in Asia and 9% in the rest of the world. In Asia, where we are pursuing a strategy of aggressive expansion of our sales and operations, we had net sales of $2.5 billion in 2012, as compared to $1.1 billion in 2008. General Motors, Ford and BMW are our three largest customers globally. In addition, Daimler, Fiat-Chrysler, Hyundai, Jaguar-Land Rover, PSA, Renault-Nissan and Volkswagen each represented 3% or more of our 2012 net sales. We supply and have expertise in all vehicle segments of the automotive market, and it is common to have content on multiple platforms with a single customer. 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 at a greater rate than the growth rate of the industry overall. We believe that future sales growth in our seating business will be supported by our global footprint and engineering and component capabilities, which will allow us to penetrate our customers’ global platforms. We believe that future sales growth in our EPMS business will be supported by increased consumer demand for additional features and functionality in vehicles, which require more signals to be routed throughout the vehicle, as well as increased penetration of hybrid and electric vehicles, which have significantly higher electrical content.
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. As of January 2013, our 2013 to 2015 sales backlog is $1.8 billion, of which $850 million relates to 2013. Our current sales backlog assumes volumes based on the independent industry projections of IHS Automotive as of November 2012 and a Euro exchange rate $1.28 / Euro. This sales backlog is generally subject to a number of risks and uncertainties, including vehicle production volumes on new and replacement programs and foreign exchange rates, as well as the timing of production launches and changes in customer development plans. For additional information regarding risks that may affect our sales backlog, see Item 1A, “Risk Factors,” and Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”

Seating Segment
Lear is a recognized global leader in complete automotive seat systems and in certain key 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. Lear develops seat systems and components for all vehicle segments from compact cars to full-size sport utility vehicles and is the world leader in luxury and performance automotive seating. No other seating manufacturer provides the level of craftsmanship, elegance in design, use of innovative materials and industry-leading technology required by the premium automakers.
We also produce components that comprise the seat assemblies, such as seat structures and mechanisms, seat trim covers, headrests and seat foam. We have been pursuing a selective vertical integration strategy to enhance growth, improve quality, increase profitability and defend our current market position in just-in-time (“JIT”) seat assembly. In this regard, we have expanded our seat cover operations, including precision cutting, assembly, sewing and lamination of seat fabric, in low-cost markets, entered the fabric business (through our acquisitions of New Trend™ and Guilford Performance Textiles), developed leather finishing and marketing capability (through the 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. By incorporating these key components into our fully assembled seat systems, we are able to provide a higher quality product at a lower total cost.
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 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 offers 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 System TM , our SoyFoam TM 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 independent seat manufacturer in the 2012 J.D. Power and Associates Seat Quality and Satisfaction Study SM and has held that distinction for eleven out of the last twelve 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. 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 structures and mechanisms 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.

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 a 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 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, tire pressure monitoring systems and certain other electronic products.
Electrical distribution systems are networks of wiring and associated control devices that route electrical signals and manage electrical power within a vehicle. 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 are a collection of wiring and terminals and connectors that link all of the various electrical and electronic devices within the vehicle to each other and/or to a power source. 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.
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, Jaguar-Land Rover, Fiat-Chrysler and Fisker.
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 the 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.

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 15.6 million units in 2009.
On July 7, 2009, in order to re-align our capital structure and position our business for long-term success, Lear and certain of its U.S. and Canadian subsidiaries filed petitions for relief under Chapter 11 with the bankruptcy court, following a comprehensive evaluation of our strategic and financial options. On November 9, 2009, our plan of reorganization became effective, and we emerged from Chapter 11 bankruptcy proceedings. As a result of our financial restructuring, we ended 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.
Recent Developments
In 2011 and 2012, global industry production volumes improved significantly, up 3% in 2011 from the prior year and another 7% in 2012 to 79.7 million units. North American, industry production increased 10% in 2011 from the prior year and another 17% in 2012 to 15.4 million units. Business conditions in Europe, however, remain challenging. Although European industry production increased 3% in 2011 from the prior year, it declined 6% in 2012 to 16.8 million units.
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer demand for automotive vehicles and our content per vehicle. Our sales are well diversified geographically, by customer and by vehicle segment. In 2012, approximately 39% of our sales were generated in North America, 35% in Europe, 17% in Asia and 9% in the rest of the world. In Asia, where we are pursuing a strategy of aggressive expansion of our sales and operations, we had net sales of $2.5 billion in 2012, as compared to $1.1 billion in 2008. General Motors, Ford and BMW are our three largest customers globally. In addition, Daimler, Fiat-Chrysler, Hyundai, Jaguar-Land Rover, PSA, Renault-Nissan and Volkswagen each represented 3% or more of our 2012 net sales. We supply and have expertise in all vehicle segments of the automotive market, and it is common to have content on multiple platforms with a single customer. 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 at a greater rate than the growth rate of the industry overall. We believe that future sales growth in our seating business will be supported by our global footprint and engineering and component capabilities, which will allow us to penetrate our customers’ global platforms. We believe that future sales growth in our EPMS business will be supported by increased consumer demand for additional features and functionality in vehicles, which require more signals to be routed throughout the vehicle, as well as increased penetration of hybrid and electric vehicles, which have significantly higher electrical content.
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. As of January 2013, our 2013 to 2015 sales backlog is $1.8 billion, of which $850 million relates to 2013. Our current sales backlog assumes volumes based on the independent industry projections of IHS Automotive as of November 2012 and a Euro exchange rate $1.28 / Euro. This sales backlog is generally subject to a number of risks and uncertainties, including vehicle production volumes on new and replacement programs and foreign exchange rates, as well as the timing of production launches and changes in customer development plans. For additional information regarding risks that may affect our sales backlog, see Item 1A, “Risk Factors,” and Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”

CEO BACKGROUND

Thomas P. Capo


Biography

Mr. Capo has been a director of Lear since November 2009. Mr. Capo was Chairman of Dollar Thrifty Automotive Group, Inc. from October 2003 until November 2010. Mr. Capo was a Senior Vice President and the Treasurer of DaimlerChrysler Corporation from November 1998 to August 2000, Vice President and Treasurer of Chrysler Corporation from 1993 to 1998, and Treasurer of Chrysler Corporation from 1991 to 1993. Prior to holding these positions, Mr. Capo served as Vice President and Controller of Chrysler Financial Corporation. Mr. Capo also serves as a director of Dollar Thrifty Automotive Group Inc. and Cooper Tire & Rubber Company. Previously, Mr. Capo also served as a director of JLG Industries, Inc., Sonic Automotive, Inc. and MicroHeat, Inc.

Qualifications

• Executive management and leadership experience, including in the automotive industry

• Extensive experience in finance, treasury, financial reporting, investment analysis and management and compliance and internal controls

• Public company directorship and committee experience, including in the automotive industry and at board chairman level — former chairman of the board of an automotive company

• Core leadership and management skills

• Independent of management



Jonathan F. Foster


Biography

Mr. Foster has been a director of Lear since November 2009. Mr. Foster is Managing Director of Current Capital LLC, a private equity and portfolio company management firm. Previously, from 2007 until 2008, Mr. Foster served as a Managing Director and Co-Head of Diversified Industrials and Services at Wachovia Securities. From 2005 until 2007, he served as Executive Vice President — Finance and Business Development of Revolution LLC. From 2002 until 2004, Mr. Foster was a Managing Director of The Cypress Group, a private equity investment firm and from 2001 until 2002, he served as a Senior Managing Director of Bear Stearns & Co. From 1999 until 2000, Mr. Foster served as the Executive Vice President, Chief Operating Officer and Chief Financial Officer of Toysrus.com, Inc. Previously, Mr. Foster was with Lazard Frères & Company LLC for over ten years in various positions, including as a Managing Director. Mr. Foster also is a director of Masonite Inc. and Chemtura Corporation; he also serves as a Trustee of the New York Power Authority.


Qualifications

• Extensive experience as an investment banker, private equity investor and director with industrial companies, including those in the automotive sector

• Executive management experience

• Experience in financial statement preparation and accounting, financial reporting and compliance and internal controls

• Extensive transactional experience in mergers and acquisitions, debt financings and equity offerings

• Public company directorship and committee experience, including with global manufacturing companies

• Independent of management

Conrad L. Mallett, Jr .


Biography

Justice Mallett, who has been a director of Lear since August 2002, was reappointed Chief Administrative Officer of the Detroit Medical Center in January 2012 after serving as President and CEO of the Detroit Medical Center’s Sinai-Grace Hospital from August 2003 until December 2011. Prior to that, Justice Mallett served as the Chief Legal and Administrative Officer of the Detroit Medical Center beginning in March 2003. Previously, he served as President and General Counsel of La-Van Hawkins Food Group LLC from April 2002 to March 2003, and Chief Operating Officer for the City of Detroit from January 2002 to April 2002. From August 1999 to April 2002, Justice Mallett was General Counsel and Chief Administrative Officer of the Detroit Medical Center. Justice Mallett was also a Partner in the law firm of Miller, Canfield, Paddock & Stone from January 1999 to August 1999. Justice Mallett was a Justice of the Michigan Supreme Court from December 1990 to January 1999 and served a two-year term as Chief Justice beginning in 1997. Justice Mallett is a director of Kelly Services, Inc.

Qualifications

• Extensive legal and governmental experience, including significant involvement in state and municipal improvement activities

• Executive management experience

• Leadership experience gained as Chief Justice of the Michigan Supreme Court

• Public company directorship and committee experience

• Independent of management


Donald L. Runkle


Biography

Mr. Runkle has been a director of Lear since November 2009. Mr. Runkle currently serves as Chief Executive Officer of EcoMotors International and has held this position since 2009. Since 2005, Mr. Runkle has provided consulting services in business and technical strategy, and, from 2006 to 2007, he also was a consultant for Solectron Corporation. Mr. Runkle also serves as an Operating Executive Advisor for Tennenbaum Capital Partners LLC and has held this position since 2005. From 1999 until 2005, Mr. Runkle held various executive-level positions at Delphi Corporation, including Vice Chairman and Chief Technology Officer from 2003 until 2005, President, Delphi Dynamics and Propulsion Sector, and Executive Vice President from 2000 to 2003 and President, Delphi Energy and Engine Management Systems, and Vice President, Delphi Automotive Systems, from 1999 to 2000. Previously, Mr. Runkle was employed by General Motors Corporation for over 30 years in various management and executive-level positions, most recently Vice President and General Manager of Delphi Energy and Engine Management and Automotive Systems from 1996 until 1999. Mr. Runkle also serves as a director of Environmental Systems Products Company, WinCup Corporation, Transonic Combustion Inc., EcoMotors International and the Lean Enterprise Institute. Mr. Runkle previously served as Chairman of Autocam and EP Management.

Qualifications

• Executive management experience, including in the automotive industry

• Directorship experience, including in the automotive industry, at board chairman level and with a public company

• Independent of management
Matthew J. Simoncini


Biography

Mr. Simoncini has been a director of Lear since September 2011. 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, a position he held from October 2007 until September 2011. Previously, he served in other positions at the Company, including as 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.

Qualifications

• Executive management experience with Lear, current President and Chief Executive Officer, former Senior Vice President and Chief Financial Officer

• Extensive international experience with Lear

• Record of leadership, achievement and execution of our business and global strategy


Gregory C. Smith


Biography

Mr. Smith has been a director of Lear since November 2009. Mr. Smith, a retired Vice Chairman of Ford Motor Company, currently serves as Principal of Greg C. Smith LLC, a private management consulting firm, a position he has held since 2007. Previously, Mr. Smith was employed by Ford Motor Company for over 30 years until 2006. Mr. Smith held various executive-level management positions at Ford Motor Company, most recently serving as Vice Chairman from 2005 until 2006, Executive Vice President and President — Americas from 2004 until 2005, Group Vice President — Ford Motor Company and Chairman and Chief Executive Officer — Ford Motor Credit Company from 2002 to 2004, Vice President, Ford Motor Company, and President and Chief Operating Officer, Ford Motor Credit Company, from 2001 to 2002. Mr. Smith served as a director of Fannie Mae from 2005 until 2008. Currently, Mr. Smith serves as a director of Penske Corporation and Solutia Inc.

Qualifications

• Executive management experience, including in the automotive industry

• Experience and knowledge of automotive company operations, including engineering, manufacturing and finance

• Extensive experience and knowledge of automotive industry

• Public company directorship and committee experience

• Independent of management
Henry D.G. Wallace


Biography

Mr. Wallace has served as the Company’s Non-Executive Chairman since August 2010 and has been a director of Lear since February 2005. Mr. Wallace worked for 30 years at Ford Motor Company until his retirement in 2001 and held several executive-level operations and financial oversight positions while at Ford, most recently as Group Vice President, Mazda and Asia Pacific Operations in 2001, Chief Financial Officer in 2000 and Group Vice President, Asia Pacific Operations in 1999. Mr. Wallace served as President and CEO of Mazda Motor Corporation in 1996 and 1997. Mr. Wallace also serves as a director of AMBAC Financial Group, Inc. and Diebold, Inc. Mr. Wallace formerly served as a director of Hayes Lemmerz International, Inc. (“Hayes Lemmerz”).

Qualifications

• Executive management experience, including in the automotive industry

• Experience and leadership with a global manufacturing company

• Experience in finance, financial statement preparation and accounting, financial reporting and compliance and internal controls

• Extensive international experience in Asia, Europe and Latin America

• Leadership experience on boards of several public companies

• Independent of management

MANAGEMENT DISCUSSION FROM LATEST 10K

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 demand for automotive vehicles and our content per vehicle. Automotive sales and production can be affected by general economic or industry conditions, the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles, restructuring actions of our customers and suppliers and other factors. Our operating results are also significantly impacted by the overall commercial success of the vehicle platforms for which we supply particular products, as well as the profitability of the products that we supply for these platforms. In addition, it is possible that our customers could elect to manufacture our products internally. The loss of business with respect to any vehicle model for which we are a significant supplier, or a decrease in the production levels of any such models, could have a material adverse impact on our operating results. In addition, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating results.
Global industry production volumes improved 3% in 2011 from the prior year and another 7% in 2012 to 79.7 million units. North American industry production increased 10% in 2011 from the prior year and another 17% in 2012 to 15.4 million units. Business conditions in Europe, however, remain challenging. Although European industry production increased 3% in 2011 from the prior year, it declined 6% in 2012 to 16.8 million units.
Sales in North America and Europe accounted for approximately 39% and 35%, respectively, of our net sales in 2012. Our ability to reduce the risks inherent in certain concentrations of business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall.
Our customers typically require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through product design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to align our business with the changing needs of our customers and improve our business structure by investing in vertical integration opportunities.
Our material cost as a percentage of net sales was 67.8% in 2012, as compared to 68.6% in 2011 and 67.9% in 2010. Raw material, energy and commodity costs have been volatile over the past several years and remained so in 2012. 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. In addition, the availability of raw materials, commodities and product components fluctuates from time to time due to factors outside of our control. If these costs increase or availability is restricted, it could have an adverse impact on our operating results in the foreseeable future. See Part I — Item 1A, “Risk Factors — Increases in the costs and restrictions on the availability of raw materials, energy, commodities and product components could adversely affect our financial performance,” and “— Forward-Looking Statements.”

Financial Measures
In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. In addition to maintaining and expanding our business with our existing customers in our more established markets, our expansion plans are focused primarily on emerging markets. Asia, in particular, continues to present significant growth opportunities, as major global automotive manufacturers implement production expansion plans and local automotive manufacturers aggressively expand their operations to meet demand in this region. As of December 31, 2012, we had 19 joint ventures with operations in Asia, as well as three joint ventures in North America and Europe dedicated to serving Asian automotive manufacturers. In addition, we have aggressively pursued this strategy by selectively increasing our vertical integration capabilities globally, as well as expanding our component manufacturing capacity in Africa, Asia, Eastern Europe, Mexico and South America. Furthermore, we have expanded our low-cost engineering capabilities in India and the Philippines.
Our success in generating cash flow will depend, in part, on our ability to manage working capital effectively. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. Historically, we 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 impacted by adverse automotive industry conditions and the financial results of our suppliers, as well as our financial results. In addition, our cash flow is impacted by our ability to manage our inventory and capital spending effectively. We utilize return on invested capital as a measure of the efficiency with which assets are deployed to increase our earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.
Acquisition
On May 31, 2012, we completed the acquisition of Guilford Mills (“Guilford”), a privately-held portfolio company of Cerberus Capital Management, L.P., which manufactures fabrics for the automotive and specialty markets, for approximately $243 million, net of cash acquired. Amounts payable to Guilford of approximately $9 million related to purchases of raw materials were also settled as of the acquisition date. Guilford has annual sales of approximately $400 million with operations in North America, Europe and Asia. In 2012, we incurred transaction costs of approximately $6 million, primarily related to advisory services. The integration of Guilford is proceeding as planned.
Operational Restructuring
In 2012, we incurred pretax restructuring costs of approximately $55 million and related manufacturing inefficiency charges of approximately $1 million. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
For further information, see Note 4, “Restructuring,” to the consolidated financial statements included in this Report.
Financing Transactions
Senior Notes
On January 17, 2013, we issued $500 million in aggregate principal amount of 4.75% senior notes due 2023. For further information, see “— Liquidity and Financial Condition — Capitalization — Senior Notes” and Note 7, “Long-Term Debt,” to the consolidated financial statements included in this Report.
In August 2012, we paid $72 million to redeem 10% of the original aggregate principal amount of our outstanding senior notes. In connection with this transaction, we recognized a loss of approximately $4 million on the partial extinguishment of debt.
Revolving Credit Facility
On January 30, 2013, we amended and restated our revolving credit facility to, among other things, increase the borrowing capacity from $500 million to $1.0 billion, extend the maturity date to January 2018 and reduce interest rates payable on outstanding borrowings under the facility. For further information, see “— Liquidity and Financial Condition — Capitalization” and Note 7, “Long-Term Debt,” to the consolidated financial statements included in this Report.
Share Repurchase Program, Quarterly Cash Dividend and Stock Split
In January 2013, our Board of Directors authorized an increase of $800 million to our existing common stock share repurchase program, which permits the discretionary repurchase of our common stock, to provide for aggregate repurchases of $1.5 billion and extended the term of the program to January 10, 2016. In February 2013, our Board of Directors authorized an acceleration of the pace of our common stock share repurchase program to $600 million during 2013. With the increased pace of share repurchases, we anticipate that the current common stock share repurchase program will be completed no later than 2014. In 2012, our Board of Directors declared quarterly cash dividends of $0.14 per share of common stock. In February 2011, our Board of Directors declared a two-for-one stock split. 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 10, “Capital Stock and Equity,” to the consolidated financial statements included in this Report.

Year Ended December 31, 2012, Compared With Year Ended December 31, 2011
Net sales for the year ended December 31, 2012 were $14.6 billion, as compared to $14.2 billion for the year ended December 31, 2011, an increase of $411 million or 3%. New business and the acquisition of Guilford positively impacted net sales by $715 million and $197 million, respectively. These increases were partially offset by net foreign exchange rate fluctuations of $553 million.
Cost of sales in 2012 was $13.3 billion, as compared to $13.0 billion in 2011. The impact of new business and the acquisition of Guilford were partially offset by net foreign exchange rate fluctuations.
Gross profit and gross margin were $1.2 billion and 8.4% in 2012 and 2011. The impact of new business and the acquisition of Guilford were partially offset by higher product and facility launch costs, primarily in South America, and program development costs to support new business. The impact of selling price reductions was largely offset by favorable operating performance and the benefit of operational restructuring actions.
Selling, general and administrative expenses, including engineering and development expenses, were $479 million for the year ended December 31, 2012, as compared to $486 million for the year ended December 31, 2011. The acquisition of Guilford was largely offset by net foreign exchange rate fluctuations. As a percentage of net sales, selling, general and administrative expenses declined to 3.3% for the year ended December 31, 2012, as compared to 3.4% for the year ended December 31, 2011.
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 $104 million in 2012, as compared to $111 million in 2011. 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, 2012 and 2011, we capitalized $202 million and $177 million, respectively, of such costs.
Amortization of intangible assets was $33 million in 2012, as compared to $28 million in 2011, reflecting the amortization of intangible assets related to the acquisition of Guilford.
Interest expense was $50 million in 2012, as compared to $40 million in 2011, primarily reflecting the refund of interest related to a favorable settlement of an indirect tax matter in a foreign jurisdiction in 2011.
Other expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the extinguishment of debt, gains and losses on the disposal of fixed assets and other miscellaneous income and expense, was $6 million in 2012, as compared to $24 million in 2011. In 2012, we recognized a gain of $27 million related to insurance recoveries and a loss of $4 million related to the redemption of 10% of the original aggregate principal amount of our outstanding senior notes. In 2011, we recognized gains of $6 million related to affiliate transactions.

In 2012, the benefit for income taxes was $638 million, representing an effective tax rate of (98.3%) on pretax income before equity in net income of affiliates of $649 million. In 2011, the provision for income taxes was $69 million, representing an effective tax rate of 11.2% on pretax income before equity in net income of affiliates of $616 million. In 2012, we recognized net tax benefits of $764 million, primarily related to the reversal of a valuation allowance on our deferred tax assets in the United States, as well as changes in valuation allowances in certain foreign countries, reductions in tax reserves due to audit settlements and various other items. In 2011, 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, as well as restructuring and various other items. The provision (benefit) for income taxes in 2012 and 2011 was impacted by the level and mix of earnings among tax jurisdictions. The provision (benefit) was also impacted by a portion of our restructuring charges and other expenses, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. Excluding these items, the effective tax rate in 2012 and 2011 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items.
Our current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our future 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 changes in 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 $30 million for the year ended December 31, 2012, as compared to $24 million for the year ended December 31, 2011. In 2012, we recognized income of $17 million related to our portion of an affiliate’s reversal of a valuation allowance with respect to its deferred tax assets and losses of $10 million and $2 million related to our portion of an affiliate’s impairment and restructuring charges and the impairment of our investment in an affiliate, respectively.
Net income attributable to Lear was $1.3 billion, or $12.85 per diluted share, in 2012, as compared to $541 million, or $5.08 per diluted share, in 2011, for the reasons discussed above.
Reportable Operating Segments
We have two reportable operating segments: seating, which includes seat systems and related components, such as seat structures and mechanisms, 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 pretax income before equity in net income of affiliates, interest expense and other expense (“segment earnings”) and segment earnings divided by net sales (“margin”) are not measures of performance under accounting principles generally accepted in the United States (“GAAP”). Segment earnings and the related margin are used by management to evaluate the performance of our reportable operating segments. Segment earnings should not be considered in isolation or as a substitute for net income attributable to Lear, net cash provided by operating activities or other statement of income or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income before provision (benefit) for income taxes and equity in net income of affiliates, see Note 13, “Segment Reporting,” to the consolidated financial statements included in this Report.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

EXECUTIVE OVERVIEW
We were incorporated in Delaware in 1987 and are a leading tier 1 supplier to the global automotive industry. We supply our products to virtually every major automotive manufacturer in the world.
We supply automotive manufacturers with complete automotive seat systems and related components, as well as electrical distribution systems and related components. Our strategy is to focus on our core capabilities, selective vertical integration and investments in technology; leverage our global presence and expand our low-cost footprint; and enhance and diversify our strong customer relationships through our operational performance.
Industry Overview
Our sales are driven by the number of vehicles produced by the automotive manufacturers, which is ultimately dependent on consumer and fleet demand for automotive vehicles, and our level of content on specific vehicle platforms, as well as the portion of such content manufactured internally. Automotive sales and production can be affected by general economic or industry conditions, the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability of critical components needed to complete the production of vehicles and other factors. Our operating results are also significantly impacted by the overall commercial success of the vehicle platforms for which we supply particular products, as well as the profitability of the products that we supply for these platforms. In addition, it is possible that our customers could elect to manufacture our products internally. The loss of business with respect to any vehicle model for which we are a significant supplier, or a decrease in the production levels of any such models, could have a material adverse impact on our operating results. In addition, larger cars and light trucks, as well as vehicle platforms that offer more features and functionality, such as luxury, sport utility and crossover vehicles, typically have more content and, therefore, tend to have a more significant impact on our operating results.
Global industry production volumes have improved significantly in recent years from the decline experienced in 2008 and 2009 as a result of the global economic downturn. In the first nine months of 2012, global vehicle production increased by approximately 8% from a year ago levels to 59.5 million units. North American industry production increased by approximately 20% from a year ago levels to 11.6 million units. Business conditions in Europe, however, were challenging, and European industry production decreased by approximately 6% from a year ago levels to 12.8 million units.
The majority of our sales continue to be derived from automotive manufacturers based in North America and Europe. Sales in North America and Europe accounted for approximately 39% and 36%, respectively, of our net sales in the first nine months of 2012. Our ability to reduce the risks inherent in certain concentrations of business, and thereby maintain our financial performance in the future, will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis to reflect the market overall.
Our customers require us to reduce our prices over the life of a vehicle model and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our financial performance is largely dependent on our ability to achieve product cost reductions through design enhancement and supply chain management, as well as manufacturing efficiencies and restructuring actions. We also seek to enhance our financial performance by investing in product development, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to align our business with the changing needs of our customers and improve our business structure by investing in vertical integration opportunities.
Our material cost as a percentage of net sales was 68.1% in the first nine months of 2012, as compared to 68.6% in 2011. Raw material, energy and commodity costs have been volatile over the past several years. We have developed and implemented strategies to mitigate the impact of higher raw material, energy and commodity costs, such as the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments, financial hedges for certain commodities and the selective expansion of low-cost country sourcing and engineering, as well as value engineering and product benchmarking. However, these strategies, together with commercial negotiations with our customers and suppliers, typically offset only a portion of the adverse impact. These costs remain volatile and could have an adverse impact on our operating results in the foreseeable future.
See “— Forward-Looking Statements” below and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011, as supplemented and updated by Part II — Item 1A, “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

Financial Measures
In evaluating our financial condition and operating performance, we focus primarily on earnings, operating margins, cash flows and return on invested capital. In addition to maintaining and expanding our business with our existing customers in our more established markets, our expansion plans are focused primarily on emerging markets. Asia, in particular, continues to present significant growth opportunities, as major global automotive manufacturers implement production expansion plans and local automotive manufacturers aggressively expand their operations to meet demand in this region. We currently have 20 joint ventures with operations in Asia, as well as an additional three joint ventures in North America and Europe dedicated to serving Asian automotive manufacturers. In addition, we have aggressively pursued this strategy by selectively increasing our vertical integration capabilities globally, as well as expanding our component manufacturing capacity in Mexico, Eastern Europe, Africa and Asia. Furthermore, we have expanded our low-cost engineering capabilities in China, India and the Philippines.
Our success in generating cash flow will depend, in part, on our ability to manage working capital effectively. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. Historically, we have generally been successful in aligning our vendor payment terms with our customer payment terms. However, our ability to continue to do so may be adversely impacted by the unfavorable financial results of our suppliers and adverse automotive industry conditions, as well as our financial results. In addition, our cash flow is impacted by our ability to manage our inventory and capital spending effectively. We utilize return on invested capital as a measure of the efficiency with which assets are deployed to increase our earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.
Acquisition
On May 31, 2012, we completed the acquisition of Guilford Mills (“Guilford”), a privately-held portfolio company of Cerberus Capital Management, L.P., which manufactures fabrics for the automotive and specialty markets, for approximately $246 million, net of cash acquired and excluding purchase price adjustments of approximately $4 million. Amounts payable to Guilford of approximately $9 million related to purchases of raw materials were also settled as of the acquisition date. Guilford is headquartered in Wilmington, North Carolina and has annual sales of approximately $400 million with operations in North America, Europe and Asia. In the first nine months of 2012, we incurred transaction costs of approximately $6 million, primarily related to advisory services. The integration of Guilford is proceeding as planned.
Operational Restructuring
In 2005, we initiated a multi-year operational restructuring strategy to (i) eliminate excess capacity and lower our operating costs, (ii) streamline our organizational structure and reposition our business for improved long-term profitability and (iii) better align our manufacturing capabilities with the changing needs of our customers. In light of industry conditions and customer announcements, we expanded this strategy in 2008. Through the end of 2011, we incurred pretax restructuring costs of approximately $804 million and related manufacturing inefficiency charges of $76 million.
In the first nine months of 2012, we incurred additional restructuring costs of approximately $11 million as we continued to restructure our global operations and aggressively reduce our costs. Cash expenditures related to our restructuring actions, which primarily consisted of employee termination benefit payments, totaled $62 million in the first nine months of 2012. Our restructuring strategy has resulted in the closure of 48 manufacturing and 11 administrative facilities and a current footprint with more than 80% of our component facilities and more than 90% of our related employment in 22 low-cost countries. Our current restructuring initiatives are substantially complete. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
Restructuring costs include employee termination benefits, fixed asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These incremental costs principally include equipment and personnel relocation costs. Although each restructuring action is unique, based upon the nature of our operations, we expect that the components of future restructuring costs will be consistent with our historical experience. We also incur incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs are recognized in our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). Generally, charges are recorded as restructuring actions are approved and/or implemented. Actual costs recorded in our consolidated financial statements may vary from current estimates.

Senior Notes
In August 2012, we paid $72 million to redeem 10% of the original aggregate principal amount of our outstanding senior notes. In connection with this transaction, we recognized a loss of approximately $4 million on the partial extinguishment of debt.
Share Repurchase Program and Quarterly Cash Dividend
Our Board of Directors has authorized a three year, $700 million common stock share repurchase program, which expires in February 2014. In February, May and August 2012, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock. For further information, see “— Liquidity and Capital Resources” below and Note 13, “Comprehensive Income and Equity,” to the condensed consolidated financial statements included in this Report.
Other Matters
We have incurred losses and incremental costs related to the destruction of assets caused by a fire at one of our European production facilities in the third quarter of 2011 and are pursuing, and will continue to pursue, recovery of such costs under applicable insurance policies. In the three and nine months ended September 29, 2012, we recognized losses and incremental costs of $10 million and $27 million, respectively, and loss recoveries and insurance gain contingencies of $13 million and $38 million, respectively.
In the three and nine months ended September 29, 2012, we recognized income of $2 million and $17 million, respectively, related to our portion of an affiliate’s reversal of a valuation allowance with respect to its deferred tax assets.
In the three and nine months ended October 1, 2011, we recognized gains of $2 million and $6 million, respectively, related to affiliate transactions. In the three and nine months ended October 1, 2011, we recognized tax benefits of $3 million and $23 million, respectively, primarily related to the reversal of full valuation allowances on the deferred tax assets of two foreign subsidiaries.

The provision for income taxes was $29 million for the third quarter of 2012, representing an effective tax rate of 19.0% on pretax income before equity in net income of affiliates of $154 million, as compared to $31 million for the third quarter of 2011, representing an effective tax rate of 22.5% on pretax income before equity in net income of affiliates of $138 million. In the third quarter of 2012 and 2011, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of our restructuring charges and other expenses, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. In the third quarter of 2011, we recognized a tax benefit of $3 million related to the reversal of a full valuation allowance on the deferred tax assets of a foreign subsidiary and an increase in tax expense related to the phase out of preferential tax holiday rates in several Chinese subsidiaries. Excluding these items, the effective tax rate in the third quarter of 2012 and 2011 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items.
Our current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances in certain countries, particularly the United States. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our future provision for income taxes will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowances are eliminated. Accordingly, income taxes are impacted by the U.S. and foreign valuation allowances and the mix of earnings among jurisdictions.
As of December 31, 2011, we had a valuation 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 continue to generate pretax earnings in the United States in 2012 and our forecasted earnings thereafter remain favorable, it is likely that a significant portion of the U.S. valuation allowance will be reversed in the fourth quarter of 2012. 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.
Equity in net income of affiliates was $3 million in the third quarter of 2012, as compared to $2 million in the third quarter of 2011.
Net income attributable to Lear in the third quarter of 2012 was $121 million, or $1.23 per diluted share, as compared to $101 million, or $0.95 per diluted share, in the third quarter of 2011, for the reasons described above.
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 pretax income before equity in net income of affiliates, interest expense and other expense (“segment earnings”) and segment earnings divided by net sales (“margin”) are not measures of performance under GAAP. Segment earnings and the related margin are used by management to evaluate the performance of our reportable operating segments. Segment earnings should not be considered in isolation or as a substitute for net income attributable to Lear, net cash provided by operating activities or other statement of comprehensive income or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income before provision for income taxes and equity in net income of affiliates, see Note 15, “Segment Reporting,” to the condensed consolidated financial statements included in this Report.

Nine Months Ended September 29, 2012 vs. Nine Months Ended October 1, 2011
Net sales in the first nine months of 2012 were $10.8 billion, as compared to $10.6 billion in first nine months of 2011, an increase of $200 million or 2%. New business, the acquisition of Guilford and improved production volumes on key Lear platforms positively impacted net sales by $491 million, $114 million and $72 million, respectively. These increases were partially offset by net foreign exchange rate fluctuations of $482 million.
Cost of sales in the first nine months of 2012 was $9.9 billion, as compared to $9.7 billion in the first nine months of 2011. This increase is primarily due to the impact of new business, the acquisition of Guilford and improved production volumes on key Lear platforms, partially offset by net foreign exchange rate fluctuations.
Gross profit and gross margin were $916 million and 8.4%, respectively, in the nine months ended September 29, 2012, as compared to $951 million and 8.9%, respectively, in the nine months ended October 1, 2011. Gross profit was negatively impacted by higher product and facility launch costs and program development costs. Favorable operating performance and the benefit of operational restructuring actions and new business were largely offset by selling price reductions.
Selling, general and administrative expenses, including engineering and development expenses, were $347 million in the nine months ended September 29, 2012, as compared to $352 million in the nine months ended October 1, 2011. As a percentage of net sales, selling, general and administrative expenses were 3.2% in the first nine months of 2012, as compared to 3.3% in the first nine months of 2011.
Amortization of intangible assets was $23 million in the first nine months of 2012, as compared to $21 million in the first nine months of 2011, reflecting the amortization of intangible assets related to the acquisition of Guilford.
Interest expense was $40 million in the first nine months of 2012, as compared to $25 million in the first nine months of 2011. This increase was primarily due to the refund of interest in 2011 related to a favorable settlement of an indirect tax matter in a foreign jurisdiction.
Other expense, net, which includes non-income related taxes, foreign exchange gains and losses, gains and losses related to certain derivative instruments and hedging activities, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $12 million in the first nine months of 2012, as compared to $15 million in the first nine months of 2011. In the first nine months of 2012, we recognized a gain of $12 million related to insurance recoveries and a loss of $4 million related to the redemption of 10% of the original aggregate principal amount of our outstanding senior notes. In the first nine months of 2011, we recognized gains of $6 million related to transactions with affiliates.
The provision for income taxes was $100 million for the first nine months of 2012, representing an effective tax rate of 20.3% on pretax income before equity in net income of affiliates of $494 million, as compared to $91 million for the first nine months of 2011, representing an effective tax rate of 16.9% on pretax income before equity in net income of affiliates of $538 million. In the first nine months of 2012 and 2011, the provision for income taxes was primarily impacted by the level and mix of earnings among tax jurisdictions. The provision was also impacted by a portion of our restructuring charges and other expenses, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. In the first nine months of 2011, we recognized tax benefits of $23 million related to the reversal of full valuation allowances on the deferred tax assets of two foreign subsidiaries and an increase in tax expense related to the phase out of preferential tax holiday rates in several Chinese subsidiaries. Excluding these items, the effective tax rate in the first nine months of 2012 and 2011 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items.
For a description of our valuation allowances, see “Three Months Ended September 29, 2012 vs. Three Months Ended October 1, 2011,” above.
Equity in net income of affiliates was $33 million in the first nine months of 2012, as compared to $10 million in the first nine months of 2011. In the first nine months of 2012, we recognized income of $17 million related to our portion of an affiliate’s reversal of a valuation allowance with respect to its deferred tax assets. The increase between periods also reflects the improved performance of our equity affiliates.

CONF CALL

Ed Lowenfeld
Thank you, Martina. Good morning, everyone, and thank you for joining as for our fourth quarter and full year 2012 earnings call. Our earnings press release was filed this morning with the Securities and Exchange Commission, and materials for our earnings call are posted on our website, lear.com, through the Investor Relations link.

Today's presenters are Matt Simoncini, President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership.

Before we begin, I'd like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide titled Investor Information at the beginning of the presentation materials and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information at the end of the presentation materials.

Slide 3 shows the agenda for today's review. First, Matt Simoncini will provide a company overview. Next, Jeff Vanneste will cover our fourth quarter and full year financial results for 2012 and outlook for 2013, then Matt will come back with some wrap-up comments. Following the formal presentation, we will be happy take your questions. Now please turn to Slide #4, and I'll hand it over to Matt.

Matthew J. Simoncini - Chief Executive Officer, President and Director
Thanks, Ed, and good morning. Despite a challenging industry environment in Europe, Lear posted strong financial results in the fourth quarter with the improvement in sales, earnings and free cash flow. Sales in the fourth quarter were $3.7 billion, up 6% from a year ago, reflecting the benefit in new business and the Guilford acquisition, partially offset by adverse impact of foreign exchange. Lower production in Europe was largely offset by increased productions in other regions of the world. Adjusted earnings per share was $1.48 per share, up 17% from a year ago, and free cash flow was $219 million.

Our Electrical business continues its rapid growth and achieved a quarterly sales record of $959 million in the fourth quarter. Adjusted margins improved to 8.4% from 6.3% last year, as the business continues to benefit from sales growth, market share gains and cost benefits from our improved footprint.

We continue to return cash to shareholders. In the fourth quarter, we returned $64 million to shareholders through a combination of share repurchases and dividends. Since the inception of these programs in the first quarter of 2011, we have returned $608 million to our shareholders.

Moving to the full year. 2012 marked our third consecutive year of higher revenue and earnings per share, where revenues of $14.6 billion and earnings per share of $5.49 per share.

As outlined on Slide 5, our sales are well balanced by region and by customer. We have made steady progress diversifying our sales over the last several years, with over 60% of our total sales in 2012 coming from outside of North America. The Asia Pacific region continues to grow, representing 17% of our consolidated worldwide sales. In addition, we have $1.7 billion in sales at our core nonconsolidated joint venture, further diversifying our sales profile.

Slide 6 shows our growth in key emerging markets. Our consolidated sales in China, Brazil, India and Russia have more than doubled over the past several years from $1.2 billion in 2008 to $2.7 billion in 2012. This represents an annual growth rate of 23% versus the industry growth in these markets of 17%.

Lear's total sales in China, including nonconsolidated sales of approximately $950 million, are $2.4 billion. Since 2008, total sales in China have tripled.

Slide 7 shows our 3-year sales backlog, which is unchanged from what we reported at the Detroit Auto Show last month. As a reminder, our backlog only includes awarded programs, net of loss business and programs rolling off. We do not include pursued or high-confidence new business or nonconsolidated sales. The backlog is based on specific car line volumes and foreign exchange assumptions by country.

Our backlog for the 2013 through 2015 period stands at $1.8 billion. The backlog continues to represent further diversification of our sales, as 55% is in our Seating business and 45% is in EPMS. We are growing our sales in all regions of the world. For 2015, there's still open sourcing, so we do expect that number to increase as new programs are awarded over the next several months.

Slide 8 provides an update on our share repurchase program. During the fourth quarter, we purchased 1.2 million shares of stock for a total of $50 million. We have been repurchasing shares since early 2011. Through the end of 2012, we have invested approximately $500 million to repurchase 11.5 million shares or about 11% of our shares since the program began.

Following the $800 million increase in our share repurchase authorization in January, we have a remaining authorization of $1 billion over the next 3 years. The available repurchase authorization reflects approximately 20% of our market cap at current prices. Going forward, we plan to continue to buy shares consistently subject to the company's alternative uses of capital and prevailing financial and market conditions.

Slide 9 highlights the key elements of our strategy. We have the product expertise, global reach, competitive footprint and financial flexibility to profitably grow our business. We plan to continue to invest in the emerging market and expand our low-cost component capabilities to further improve our competitiveness and to support future profitable sales growth. We're well positioned for the industry trends towards global platforms and increasing electrical content, as well as directed component sourcing.

We are evaluating certain niche acquisitions that will complement our present product offering, facilitate diversification of our sales, and further increase our component capabilities in emerging markets. No transformational acquisitions are needed or planned.

Going forward, we plan to continue to invest in our core businesses while maintaining a strong and flexible balance sheet. At the same time, we plan to continue to return cash to shareholders on a consistent basis.

Now I'll turn over to Jeff who will take you through our financial results and outlook.

Jeffrey H. Vanneste - Chief Financial Officer and Senior Vice President
Thanks, Matt. Slide 11 shows vehicle production in our key markets for the fourth quarter and for the full year. In the quarter, 20 million vehicles were produced globally, up 2% from 2011. As Matt mentioned, business conditions in Europe remained challenging in the fourth quarter, as industry production decreased by 8%. In North America, the recovery continued with industry production up 10%. China's production increased 4% versus last year. For the full year, global vehicle production was a record 79.7 million units, up 7% from 2011, reflecting increases in all major markets except Europe.

Slide 12 shows our financial results for the fourth quarter and full year of 2012. As previously mentioned, fourth quarter sales were up 6% to $3.7 billion. Excluding the impact of foreign exchange, Lear's sales in the quarter were up 8%. For the full year, sales were $14.6 billion, up 3%. Excluding the impact of foreign exchange, Lear's sales in 2012 were up 7%.

In the fourth quarter, pretax income before equity loss, interest and other income was $159 million, up $57 million from a year ago. For the full year, pretax income before equity income, interest and other expense was $705 million, up $26 million from 2011.

Interest expense was $10 million in the fourth quarter, down $5 million, primarily reflecting the favorable settlement of tax matters in foreign jurisdictions. For the full year, interest expense was $50 million, up $10 million, primarily reflecting the favorable settlement of a tax matter in 2011.

During the quarter, net income was impacted by $767 million in onetime tax benefits related primarily to the release of our valuation allowance in the U.S. In addition, equity and net income loss from affiliates, as well as other income expense, were also impacted by onetime items during the fourth quarter. I'll provide more details on those items on the next slide.

Slide 13 shows the impact of nonoperating items on our fourth quarter results. During the fourth quarter, we incurred $45 million of restructuring costs, primarily related to the planned closure of our Genk, Belgium facility, as well as various census-related actions. Other special items include $13 million of income, primarily reflecting insurance settlements. Excluding the impact of these items, we had core operating earnings of $191 million, up $15 million from 2011. The increase in earnings reflects new business and operating improvements, partially offset by increased product and facility launch costs, primarily in South America, and higher program development costs associated with the sales backlog.

Equity loss in the fourth quarter includes special items of $11.8 million related primarily to impairment and restructuring charges at one of our noncore joint ventures. Other income in the fourth quarter includes special items of $14.2 million, reflecting insurance settlements.

Net income in the fourth quarter includes tax benefits of $767 million, primarily related to the value -- through the reversal of the valuation allowance on our deferred tax assets in the U.S. Adjusted for restructuring and other special items, net income attributable to Lear in the fourth quarter was $145 million, and diluted earnings per share was $1.48.

Slide 14 provides a summary of free cash flow. We generated $219 million of free cash flow in the fourth quarter and $291 million for the full year. We finished the year with cash of $1.4 billion.

Capital expenditures were $439 million in 2012, up $113 million from 2011, reflecting increased investment in component capabilities and the emerging markets.

Slide 15 provides a tax update. As mentioned previously, in the fourth quarter, based on our profitability in the U.S. over the past 3 years and our outlook for continued profitability, we released a significant portion of our valuation allowance related to our deferred taxes in the U.S. This resulted in a onetime tax benefit of $739 million. And in 2013, we expect a more normalized effective tax rate of approximately 30%.

We continue to have global tax attributes in excess of $1.1 billion, which will reduce our cash taxes for the next several years. Approximately 45% of the tax attributes relate to the U.S., with the remainder in foreign countries. These tax attributes can be used to offset approximately $3.6 billion of future taxable income. The vast majority of our tax attributes either have no expiration date or a 20-year life, providing the company with ample opportunity to realize these benefits. Lear's cash tax rate is expected to be approximately 20% for the next several years, reflecting the benefit of our global tax attributes.

Slide 17 summarizes industry production assumptions for 2013. Global industry production is forecasted to grow from 79.7 million units in 2012 to 80.7 million units in 2013, an increase of 1%. Production in North America is forecast to increase by 1% to 15.6 million units, and production in Europe is forecasted to decline by approximately 4% to 16.2 million units. Growth in the emerging markets is expected to continue, with production in both China and India forecasted to grow by 9% in 2013. Our 2013 financial outlook is based on an average euro assumption of $1.28 per euro.

Slide 18 summarizes our financial outlook for 2013, which is unchanged from what we announced at the Detroit Auto Show. For 2013, Lear expects net sales to increase to $15 billion to $15.5 billion, primarily reflecting the impact of our sales backlog. Core operating earnings are forecasted in the range of $725 million to $775 million, relatively flat with 2012, reflecting higher sales, offset by lower production in Europe and key program changeovers. Interest expense in 2013 is expected to increase to about $80 million, up from 2012, reflecting primarily the impact of the new $500 million bond.

Tax expense is estimated to be $195 million to $210 million, reflecting the increase in our effective tax rate to approximately 30%. As mentioned previously, given our tax attributes, we expect the cash tax rate to be approximately 20% for the next several years.

Capital expenditures are expected to remain elevated in 2013 at approximately $450 million, reflecting our strong sales backlog, as well as additional investment in component capabilities and the emerging markets. Free cash flow for 2013 is forecasted at $275 million.

Now I'll turn it back over to Matt for some closing comments.

Matthew J. Simoncini - Chief Executive Officer, President and Director
Great. Thanks, Jeff. Lear continues to deliver solid financial results, and 2012 was our third consecutive year of higher sales and earnings per share. We also continue to make progress on achieving our strategic objectives. We believe that the investments we've been making in components and emerging markets will provide benefits and lead to improved results going forward.

Our strong and flexible balance sheet will allow us to continue to profitably grow our business and create value for our shareholders.

In closing, I want to thank the Lear team for their hard work and dedication. I'm confident with your support that Lear will continue to be successful. With that, we'd be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Itay Michaeli from Citigroup.

Itay Michaeli - Citigroup Inc, Research Division
I was hoping you can help us in terms of thinking about the cadence of earnings and margins throughout the year, just how should we prepare for the first couple of quarters at least, given the volatility in some of the production schedules there.

Matthew J. Simoncini - Chief Executive Officer, President and Director
Yes, I think, what we're seeing from our side is a pretty normal, I would say, seasonality, if there's such a thing. A little bit stronger in the first half, a little bit weaker in the second half, driven by the third quarter shutdown more than anything. The margin should be pretty consistent around that overall 5% number first half to second half. So it's a year without a meaningful spike or hockey stick, or in that regard, a pullback. We just think it's going to be a fairly steady year in -- based on the production cadence that we see at this point.

Itay Michaeli - Citigroup Inc, Research Division
That's helpful. And then on the pace of buybacks and cash deployment, can you help us a little bit more in terms of how we should think about it? You did issue some debt, which would be a bit dilutive given the increase in interest expense. So should we think about the deployment to be a bit more front-end loaded in the next 3 years as opposed to how it's proceeded in the past 2 years?

Matthew J. Simoncini - Chief Executive Officer, President and Director
Well, I think the increase of the authorization of $800 million is a fairly significant step-up, obviously, in the pace that we've been buying at over the first 2 years. The open $1 billion authorization over 3 years would imply a rate of slightly over $80 million a quarter. From our standpoint, I think what you should assume is that we buy in a pace that's consistent throughout the period, contingent upon prevailing market conditions. So I wouldn't expect it to be different at this point.

Itay Michaeli - Citigroup Inc, Research Division
That's helpful. And just lastly, a quick housekeeping. Can you share what you've assumed for 2013 production for the GMT900/K2XX platform?

Jeffrey H. Vanneste - Chief Financial Officer and Senior Vice President
We've assumed production volumes that are relatively flat year-over-year with 2012, I think, at 1,040,000 vehicles.

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