Financial Instruments

Debt Instruments

The carrying values of the Company’s debt instruments vary from their fair values. The fair values were determined by reference to the quoted market prices of these securities (Level 2 input based on the GAAP fair value hierarchy). The estimated fair value, as well as the carrying value, of the Company's debt instruments are shown below (in millions):



	September 30, 2017		December 31, 2016
Estimated aggregate fair value	$	2,037.8	$	2,004.8
Aggregate carrying value ⁽¹⁾	1,975.0		1,943.7

⁽¹⁾ Credit agreement and senior notes, excluding the impact of unamortized original issue discount and debt issuance costs

Accounts Receivable Factoring

One of the Company's European subsidiaries has an uncommitted factoring agreement, which provides for aggregate purchases of specified customer accounts of up to €200 million. As of September 30, 2017, there were no factored receivables outstanding. The Company cannot provide any assurances that this factoring facility will be available or utilized in the future.

Marketable Equity Securities

Included in other current assets in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, are $40.7 million and $30.2 million, respectively, of marketable equity securities, which the Company accounts for under the fair value option. Accordingly, unrealized gains and losses arising from changes in the fair value of the marketable equity securities are recognized in the accompanying condensed consolidated statement of income as a component of other expense, net. The fair value of the marketable equity securities is determined by reference to quoted market prices in active markets (Level 1 input based on the GAAP fair value hierarchy).

Derivative Instruments and Hedging Activities

The Company has used derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates and interest rates and the resulting variability of the Company’s operating results. The Company is not a party to leveraged derivatives. The Company’s derivative financial instruments are subject to master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. On the date that a derivative contract for a hedging instrument is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or (4) a contract not designated as a hedging instrument.

For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the condensed consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the condensed consolidated balance sheet. When the underlying hedged transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the condensed consolidated statement of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the effective portion of the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the condensed consolidated balance sheet. In addition, changes in the fair value of contracts not designated as hedging instruments and the ineffective portion of both cash flow and net investment hedges are recorded in earnings and reflected in the condensed consolidated statement of income as other expense, net.

Foreign Exchange

The Company uses forwards, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates on known foreign currency exposures. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce exposure to fluctuations in foreign exchange rates. The principal currencies hedged by the Company include the Mexican peso, various European currencies, the Thai baht, the Japanese yen, the Canadian dollar and the Philippine peso.

The notional amount, estimated fair value and related balance sheet classification of the Company's foreign currency derivative contracts are shown below (in millions, except for maturities):



	September 30, 2017			December 31, 2016
Fair value of foreign currency contracts designated as cash flow hedges:
Other current assets	$	29.2		$	11.2
Other long-term assets	7.5			0.5
Other current liabilities	(14.7		)	(58.3		)
Other long-term liabilities	(2.5		)	(9.9		)
	19.5			(56.5		)
Notional amount	$	1,287.8		$	1,275.0
Outstanding maturities in months, not to exceed	24			24

Fair value of foreign currency contracts not designated as hedging instruments:
Other current assets	$	6.1		$	5.9
Other current liabilities	(4.2		)	(3.8		)
	1.9			2.1

Notional amount	$	1,020.3		$	681.2
Outstanding maturities in months, not to exceed	12			12

Total fair value	$	21.4		$	(54.4	)
Total notional amount	$	2,308.1		$	1,956.2

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

Accumulated Other Comprehensive Loss - Derivative Instruments and Hedging

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



	Three Months Ended						Nine Months Ended
	September 30, 2017			October 1, 2016			September 30, 2017		October 1, 2016
Gains (losses) recognized in accumulated other comprehensive loss:	$	(5.5	)	$	(22.3	)	$	68.1	$	(77.2	)

(Gains) losses reclassified from accumulated other comprehensive loss to:
Net sales	0.8			2.2			1.4		3.6
Cost of sales	(4.6		)	20.9			6.5		59.3
	(3.8		)	23.1			7.9		62.9
Comprehensive income (loss)	$	(9.3	)	$	0.8		$	76.0	$	(14.3	)

As of September 30, 2017 and December 31, 2016, pretax net gains (losses) of approximately $19.5 million and ($56.5) million, respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the next twelve month period, the Company expects to reclassify into earnings net gains of approximately $14.6 million recorded in accumulated other comprehensive loss as of September 30, 2017. Such gains will be reclassified at the time that the underlying hedged transactions are realized.

During the three and nine months ended September 30, 2017 and October 1, 2016, amounts recognized in the accompanying condensed consolidated statements of comprehensive income related to changes in the fair value of cash flow and fair value hedges excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of cash flow and fair value hedges were not material.

Fair Value Measurements

GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:



Market:		This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Income:		This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.

Cost:		This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).

Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:



Level 1:		Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:		Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.

Level 3:		Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.

The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.

Items Measured at Fair Value on a Recurring Basis

Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, are shown below (in millions):



	September 30, 2017
	Frequency	Asset (Liability)		Valuation Technique	Level 1		Level 2		Level 3
Foreign currency contracts, net	Recurring	$	21.4	Market/ Income	$	—	$	21.4	$	—
Marketable equity securities	Recurring	$	40.7	Market	$	40.7	$	—	$	—



	December 31, 2016
	Frequency	Asset (Liability)			Valuation Technique	Level 1		Level 2			Level 3
Foreign currency contracts, net	Recurring	$	(54.4	)	Market/ Income	$	—	$	(54.4	)	$	—
Marketable equity securities	Recurring	$	30.2		Market	$	30.2	$	—		$	—

The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, the Company adjusts these discount rates, if required, by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. If an estimate of the credit spread is required, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy. As of September 30, 2017 and December 31, 2016, there were no derivative contracts that were classified within Level 3 of the fair value hierarchy. In addition, there were no transfers in or out of Level 3 of the fair value hierarchy in 2017.

Items Measured at Fair Value on a Non-Recurring Basis

The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy.

As a result of the 2017 consolidation of Lear STEC, Level 3 fair value estimates of $16.2 million related to property, plant and equipment, $66.0 million related to customer-based intangible assets and $125.0 million related to redeemable noncontrolling interest are recorded in the accompanying condensed consolidated balance sheet as of September 30, 2017. In addition, the consolidation of Lear STEC required a Level 3 fair value estimate of $94.0 million related to the Company's previously held equity interest.

As a result of the 2017 acquisition of Antolin Seating, Level 3 fair value estimates of $81.7 million related to property, plant and equipment and $121.4 million related to intangible assets are recorded in the accompanying condensed consolidated balance sheet as of September 30, 2017.

As a result of the 2016 acquisition of AccuMED, Level 3 fair value estimates of $11.2 million and $13.9 million related to property, plant and equipment are recorded in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively. Level 3 fair value estimates of $53.0 million related to intangible assets are recorded in the accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.

Fair value estimates of property, plant and equipment were based on independent appraisals, giving consideration to the highest and best use of the assets. Key assumptions used in the appraisals were based on a combination of market and cost approaches, as appropriate. Fair value estimates of customer-based intangible assets were based on the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets. Fair value estimates of redeemable noncontrolling and equity interests were based on the present value of future cash flows and a value to earnings multiple approach and reflect discounts for the lack of control and the lack of marketability associated with noncontrolling and equity interests. Further, the fair value estimate of the redeemable noncontrolling interest includes an estimate of the fair value associated with the noncontrolling interest holder's embedded redemption option. The fair value of this redemption option was determined using the Monte Carlo valuation model and includes various assumptions including the expected volatility, risk free rate and dividend yield.

For further information related to assets and liabilities measured at fair value on a non-recurring basis, see Note 2, “Acquisitions,” and Note 6, "Long-Term Assets."

As of September 30, 2017, there were no additional significant assets or liabilities measured at fair value on a non-recurring basis.