Basis of Presentation — Certain of the Company’s wholly-owned subsidiaries (the “Guarantors”) have unconditionally fully guaranteed, on a joint and several basis, the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all of the Company’s obligations under the amended primary credit facility and the indentures governing the Company’s senior notes, including the Company’s obligations to pay principal, premium, if any, and interest with respect to the senior notes. The senior notes consist of $300 million aggregate principal amount of 8.50% senior notes due 2013, $600 million aggregate principal amount of 8.75% senior notes due 2016, $399.5 million aggregate principal amount of 5.75% senior notes due 2014, $41.4 million aggregate principal amount of 8.11% senior notes due 2009 and $0.8 million aggregate principal amount of zero-coupon convertible senior notes due 2022. The Company repaid its previously outstanding €55.6 million aggregate principal amount of senior notes on April 1, 2008, the maturity date. Additionally, the Company issued an irrevocable call notice to redeem, on August 4, 2008, $41.4 million aggregate principal amount of 8.11% senior notes due 2009. The Guarantors under the indentures are currently Lear Automotive Dearborn, Inc., Lear Automotive (EEDS) Spain S.L., Lear Corporation EEDS and Interiors, Lear Corporation (Germany) Ltd., Lear Corporation Mexico, S. de R.L. de C.V., Lear Operations Corporation and Lear Seating Holdings Corp. #50. In lieu of providing separate financial statements for the Guarantors, the Company has included the supplemental guarantor condensed consolidating financial statements above. These financial statements reflect the guarantors listed above for all periods presented. Management does not believe that separate financial statements of the Guarantors are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantors are not presented.
As of December 31, 2007 and for the three and six months ended June 30, 2007, the supplemental guarantor condensed consolidating financial statements have been restated to reflect certain changes to the equity investments of guarantor subsidiaries.
Distributions — There are no significant restrictions on the ability of the Guarantors to make distributions to the Company.
Selling, General and Administrative Expenses — The Parent allocated $5.1 million and $0.8 million in the three months ended June 28, 2008 and June 30, 2007, respectively, and $13.0 million and $9.1 million in the six months ended June 28, 2008 and June 30, 2007, respectively, of corporate selling, general and administrative expenses to its operating subsidiaries. The allocations were based on various factors, which estimate usage of particular corporate functions, and in certain instances, other relevant factors, such as the revenues or the number of employees of the Company’s subsidiaries.
Long-term debt of the Parent and the Guarantors — A summary of long-term debt of the Parent and the Guarantors on a combined basis is shown below (in millions):
The obligations of foreign subsidiary borrowers under the amended primary credit facility are guaranteed by the Parent.
LEAR CORPORATION
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
We were incorporated in Delaware in 1987 and are one of the world’s largest automotive suppliers based on sales. We supply every major automotive manufacturer in the world, including General Motors, Ford, BMW, Fiat, Chrysler, PSA, Volkswagen, Hyundai, Renault-Nissan, Daimler, Mazda, Toyota, Porsche and Honda.
We supply automotive manufacturers with complete automotive seat and electrical distribution systems and select electronic products. Our strategy is to continue to strengthen our market position in seating globally, to leverage our competency in electrical distribution systems and electronic components and to achieve increased scale and global capabilities in our core products. Historically, we also supplied automotive interior components and systems, including instrument panels and cockpit systems, headliners and overhead systems, door panels and flooring and acoustic systems. We have divested substantially all of the assets of this segment to joint ventures in which we hold a minority interest.
Interior Segment
In 2007, we completed the transfer of substantially all of the assets of our North American interior business (as well as our interests in two China joint ventures) to International Automotive Components Group North America, Inc. (“IAC”) (the “IAC North America Transaction”). In connection with the IAC North America Transaction, we recorded a loss on divestiture of approximately $612 million, of which approximately $5 million was recognized in 2007 ($21 million recognized in the first six months of 2007) and $607 million was recognized in the fourth quarter of 2006. We also recognized additional costs related to the IAC North America Transaction of approximately $10 million, which are recorded in cost of sales and selling, general and administrative expenses in the accompanying condensed consolidated statement of income for the six months ended June 30, 2007.
In 2006, we completed the contribution of substantially all of our European interior business to International Automotive Components Group, LLC (“IAC Europe”), a separate joint venture with affiliates of WL Ross and Franklin, in exchange for an approximately one-third equity interest in IAC Europe (the “IAC Europe Transaction”). In connection with the IAC Europe Transaction, we recorded a loss on divestiture of approximately $35 million, of which approximately $6 million was recognized in 2007 ($4 million recognized in the first six months of 2007) and $29 million was recognized in 2006.
For further information related to the divestiture of our interior business, see Note 2, “Divestiture of Interior Business,” to the accompanying condensed consolidated financial statements.
Industry Overview
Demand for our products is directly related to automotive vehicle production. Automotive sales and production can be affected by general economic or industry conditions, labor relations issues, fuel prices, regulatory requirements, trade agreements and other factors. Our operating results are also significantly impacted by what is referred to in this section as “vehicle platform mix”; that is, the overall commercial success of the vehicle platforms for which we supply particular products, as well as our relative profitability on these platforms. In addition, it is possible that customers could elect to manufacture components internally that are currently produced by external suppliers, such as Lear. A significant 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 future operating results. In this regard, a continuation of the shift in consumer purchasing patterns from certain of our key light truck and SUV platforms toward passenger cars, crossover vehicles or other vehicle platforms where we generally have substantially less content will adversely affect our future operating results. In addition, our two largest customers, General Motors and Ford, accounted for approximately 42% of our net sales in 2007, excluding net sales to Saab, Volvo, Jaguar and Land Rover, which were affiliates of General Motors or Ford. The automotive operations of both General Motors and Ford experienced significant operating losses throughout 2007 and the first half of 2008, and both automakers are continuing to restructure their North American operations, which could have a material impact on our future operating results.
Automotive industry conditions in North America and Europe continue to be challenging. In North America, the industry is characterized by significant overcapacity, fierce competition and declining sales. In Europe, the market structure is more fragmented with significant overcapacity. We expect these challenging industry conditions to continue in the foreseeable future. During the first six months of 2008, North American production levels declined by approximately 12% from the comparable period in 2007, and production levels on several of our key platforms declined more significantly. This was due in part to a strike at a major automotive supplier. The strike affected numerous assembly plants at General Motors, including those that produce full-size pickup trucks and large SUVs, key programs for Lear. The strike and weak demand for full-size pickup trucks and large SUVs lowered production volumes in North America and adversely impacted our operating results during the first six months of 2008. The strike also adversely impacted our suppliers on affected programs, many of which
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were already experiencing financial distress as a result of unfavorable industry conditions in North America. The strike settled in the second quarter of 2008.
Historically, the majority of our sales and operating profit has been derived from the U.S.-based automotive manufacturers in North America and, to a lesser extent, automotive manufacturers in Western Europe. These customers have experienced declines in market share in their traditional markets. In addition, a disproportionate share of our net sales and profitability in North America has been on light truck and large SUV platforms of the domestic automakers, which are experiencing significant competitive pressures. As discussed below, our ability to maintain and improve our financial performance in the future will depend, in part, on our ability to significantly increase our penetration of Asian automotive manufacturers worldwide and leverage our existing North American and European customer base geographically and across both product lines.
Our customers require us to reduce costs and, at the same time, assume significant responsibility for the design, development and engineering of our products. Our profitability is largely dependent on our ability to achieve product cost reductions through restructuring actions, manufacturing efficiencies, product design enhancement and supply chain management. We also seek to enhance our profitability by investing in technology, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We continually evaluate operational and strategic alternatives to align our business with the changing needs of our customers, improve our business structure and lower the operating costs of our company.
Our material cost as a percentage of net sales was 69.1% in the first six months of 2008 as compared to 68.0% in 2007 and 68.8% in 2006. Raw material, energy and commodity costs have increased significantly over the past several years. Unfavorable industry conditions have also resulted in financial distress within our supply base and an increase in commercial disputes and the risk of supply disruption. We have developed and implemented strategies to mitigate or partially offset the impact of higher raw material, energy and commodity costs, which include cost reduction actions, the utilization of our cost technology optimization process, the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments and the acceleration of low-cost country sourcing and engineering. However, due to the magnitude and duration of the increased raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, offset only a portion of the adverse impact. In addition, higher crude oil prices indirectly impact our operating results by adversely affecting demand for certain of our key light truck and large SUV platforms. Energy costs and the prices of several of our key raw materials have increased substantially. In particular, in the second quarter of 2008, hot rolled steel average prices increased 64%, copper average prices increased 10% and crude oil average prices increased 91% from the comparable period in 2007 in North America. These recent increases are likely to have an adverse impact on our operating results in the foreseeable future. See “– Forward-Looking Statements” and Item 1A, “Risk Factors – High raw material costs may continue to have a significant adverse impact on our profitability,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
Outlook
In evaluating our financial condition and operating performance, we focus primarily on earnings growth and cash flows, as well as return on investment on a consolidated basis. In addition to maintaining and expanding our business with our existing customers in our more established markets, we have increased our emphasis on expanding our business in the Asian market (including sourcing activity in Asia) and with Asian automotive manufacturers worldwide. The Asian market presents growth opportunities, as automotive manufacturers expand production in this market to meet increasing demand. We currently have twelve joint ventures in China and several other joint ventures dedicated to serving Asian automotive manufacturers. We will continue to seek ways to expand our business in the Asian market and with Asian automotive manufacturers worldwide. In addition, we have improved our low-cost country manufacturing capabilities through expansion in Asia, Eastern Europe, Africa, Central America and Mexico.
Our success in generating cash flow will depend, in part, on our ability to efficiently manage working capital. 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 industry conditions, as well as our financial results. In addition, our cash flow is impacted by our ability to efficiently manage our capital spending. We utilize return on investment as a measure of the efficiency with which assets are deployed to increase earnings. Improvements in our return on investment will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.
Restructuring
In 2005, we implemented a comprehensive restructuring strategy intended to (i) better align our manufacturing capacity with the changing needs of our customers, (ii) eliminate excess capacity and lower our operating costs and (iii) streamline our organizational structure and reposition our business for improved long-term profitability. In connection with these restructuring actions, we incurred
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pretax restructuring costs of approximately $351 million and related manufacturing inefficiency charges of approximately $35 million through 2007.
In 2008, we expect to incur restructuring and related manufacturing inefficiency costs of approximately $140 million. In light of current industry conditions and recent customer announcements in North America, we expect restructuring and related investments in 2009 to be consistent with those in 2008. In connection with our prior restructuring actions and current activities, we recorded restructuring charges of approximately $72 million and related manufacturing inefficiency charges of approximately $10 million in the first six months of 2008.
Other Matters
In the first quarter of 2007, we recognized a curtailment gain of $36 million related to our decision to freeze our U.S. salaried pension plan, as well as a loss of $4 million related to the acquisition of the minority interest in an affiliate. In addition, we recognized $12 million in costs related to an Agreement and Plan of Merger, as amended (the “AREP merger agreement”), with AREP Car Holdings Corp. and AREP Car Acquisition Corp., which was subsequently terminated in the third quarter of 2007. In the second quarter of 2007, we recognized a one-time tax benefit of $13 million related to a reversal of a valuation allowance in a European subsidiary. For further information regarding the AREP merger agreement, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Merger Agreement,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
As discussed above, our results for the first six months of 2008 and 2007 reflect the following items (in millions):
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| | Three months ended | | Six months ended | |
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Costs related to divestiture of Interior business | | | $ | — | | | | $ | 1 | | | | $ | — | | | | $ | 35 | | |
Costs related to restructuring actions, including manufacturing inefficiencies of $7 million and $10 million in the three and six months ended June 28, 2008, respectively, and $3 million and $5 million in the three and six months ended June 30, 2007, respectively | | | | 58 | | | | | 35 | | | | | 82 | | | | | 51 | | |
U.S. salaried pension plan curtailment gain | | | | — | | | | | — | | | | | — | | | | | (36 | ) | |
Costs related to merger transaction | | | | — | | | | | 2 | | | | | — | | | | | 12 | | |
Loss on joint venture transaction | | | | — | | | | | — | | | | | — | | | | | 4 | | |
Tax benefit | | | | — | | | | | (13 | ) | | | | — | | | | | (13 | ) | |
For further information regarding these items, see “— Restructuring” and Note 2, “Divestiture of Interior Business,” Note 3, “Restructuring Activities,” Note 8, “Pension and Other Postretirement Benefit Plans,” and Note 10, “Other Expense, Net,” to the accompanying condensed consolidated financial statements.
This section includes forward-looking statements that are subject to risks and uncertainties. For further information regarding other factors that have had, or may have in the future, a significant impact on our business, financial condition or results of operations, see “— Forward-Looking Statements” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
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LEAR CORPORATION
RESULTS OF OPERATIONS
A summary of our operating results as a percentage of net sales is shown below (dollar amounts in millions):
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Net sales | | | | | | | | | | | | | | | | | | | | | | | | | |
Seating | | $ | 3,141.2 | | | 78.9 | % | $ | 3,264.5 | | | 78.6 | % | $ | 6,177.3 | | | 78.8 | % | $ | 6,258.7 | | | 73.1 | % |
Electrical and electronic | | | 837.8 | | | 21.1 | | | 825.1 | | | 19.8 | | | 1,659.3 | | | 21.2 | | | 1,613.8 | | | 18.9 | |
Interior | | | — | | | — | | | 65.7 | | | 1.6 | | | — | | | — | | | 688.9 | | | 8.0 | |
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Net sales | | | 3,979.0 | | | 100.0 | | | 4,155.3 | | | 100.0 | | | 7,836.6 | | | 100.0 | | | 8,561.4 | | | 100.0 | |
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Gross profit | | | 261.1 | | | 6.6 | | | 337.6 | | | 8.1 | | | 557.2 | | | 7.1 | | | 648.5 | | | 7.6 | |
Selling, general and administrative expenses | | | 155.6 | | | 3.9 | | | 142.8 | | | 3.4 | | | 288.8 | | | 3.7 | | | 269.3 | | | 3.1 | |
Divestiture of Interior business | | | — | | | — | | | (0.7 | ) | | — | | | — | | | — | | | 24.9 | | | 0.3 | |
Interest expense | | | 45.6 | | | 1.2 | | | 51.3 | | | 1.2 | | | 93.0 | | | 1.2 | | | 102.8 | | | 1.2 | |
Other expense, net | | | 4.1 | | | 0.1 | | | 0.3 | | | — | | | 10.1 | | | 0.1 | | | 25.3 | | | 0.3 | |
Provision for income taxes | | | 37.5 | | | 0.9 | | | 20.3 | | | 0.5 | | | 68.8 | | | 0.9 | | | 52.7 | | | 0.7 | |
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Net income | | $ | 18.3 | | | 0.5 | % | $ | 123.6 | | | 3.0 | % | $ | 96.5 | | | 1.2 | % | $ | 173.5 | | | 2.0 | % |
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Three Months Ended June 28, 2008 vs. Three Months Ended June 30, 2007
Net sales in the second quarter of 2008 were $4.0 billion as compared to $4.2 billion in the second quarter of 2007, a decrease of $176 million or 4.2%. Lower industry production volumes, due in part to the American Axle strike, and unfavorable vehicle platform mix in North America, slightly offset by favorable production in other regions, negatively impacted net sales by $489 million. This decrease was partially offset by the impact of net foreign exchange rate fluctuations, which increased net sales by $314 million.
Gross profit and gross margin were $261 million and 6.6% in the quarter ended June 28, 2008, as compared to $338 million and 8.1% in the quarter ended June 30, 2007. The net impact of lower industry production volumes, including volume declines and associated costs and inefficiencies related to the American Axle strike, as well as unfavorable vehicle platform mix, reduced gross profit by $149 million. This decrease was partially offset by the benefit of our productivity and restructuring actions and the recovery of previously-incurred program-related engineering costs.
Selling, general and administrative expenses, including research and development, were $156 million in the three months ended June 28, 2008, as compared to $143 million in the three months ended June 30, 2007. As a percentage of net sales, selling, general and administrative expenses were 3.9% in the second quarter of 2008 and 3.4% in the second quarter of 2007. The increase in selling, general and administrative expenses was primarily due to the impact of net foreign exchange rate fluctuations. An increase in product development costs related to our sales backlog and infrastructure costs in emerging markets was largely offset by favorable cost performance in other markets.
Interest expense was $46 million in the second quarter of 2008 as compared to $51 million in the second quarter of 2007. This decrease was primarily due to lower borrowing costs and lower borrowing levels in the second quarter of 2008.
Other expense, which includes non-income related taxes, foreign exchange gains and losses, discounts and expenses associated with our asset-backed securitization and factoring facilities, gains and losses related to derivative instruments and hedging activities, minority interests in consolidated subsidiaries, equity in net income of affiliates, gains and losses on the sales of assets and other miscellaneous income and expense, was $4 million in the second quarter of 2008 as compared to less than $1 million in the second quarter of 2007. The increase in other expense was primarily due to an increase in foreign exchange losses and a decrease in equity in net income of affiliates, which were partially offset by a decrease in miscellaneous expense.
The provision for income taxes was $38 million for the second quarter of 2008, representing an effective tax rate of 67.2% on pretax income of $56 million, as compared to $20 million for the second quarter of 2007, representing an effective tax rate of 14.1% on pretax income of $144 million. The provision for income taxes in the second quarter of 2008 was impacted by a portion of our restructuring charges, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. Excluding these items, the effective tax rate in the second quarter of 2008 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings,
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LEAR CORPORATION
losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items. The provision for income taxes in the second quarter of 2007 was impacted by a portion of our restructuring charges, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. This was offset by the impact of a one-time tax benefit of $13 million related to a reversal of a valuation allowance in a European subsidiary. Further, our current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances in certain countries, particularly the United States. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our future income tax expense will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated. Accordingly, income taxes are impacted by the U.S. and foreign valuation allowances and the mix of earnings among jurisdictions.
Net income in the second quarter of 2008 was $18 million, or $0.23 per diluted share, as compared to $124 million, or $1.58 per diluted share, in the second quarter of 2007, for the reasons described above.
Reportable Operating Segments
Historically, we have had three reportable operating segments: seating, which includes seat systems and the components thereof; electrical and electronic, which includes electrical distribution systems and electronic products, primarily wire harnesses, junction boxes, terminals and connectors and various electronic control modules, as well as audio sound systems and in-vehicle television and video entertainment systems; and interior, which has been divested and included instrument panels and cockpit systems, headliners and overhead systems, door panels, flooring and acoustic systems and other interior products. For further information related to our interior business, see Note 2, “Divestiture of Interior Business,” to the accompanying condensed consolidated financial statements. The financial information presented below is for our three reportable operating segments and our other category for the periods presented. The other category includes unallocated costs related to corporate headquarters, geographic headquarters and the elimination of intercompany activities, none of which meets the requirements of being classified as an operating segment. Corporate and geographic headquarters costs include various support functions, such as information technology, purchasing, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment’s income before divestiture of Interior business, interest expense, other expense and provision for income taxes (“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, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income before provision for income taxes, see Note 16, “Segment Reporting,” to the accompanying condensed consolidated financial statements.
Seating
A summary of financial measures for our seating segment is shown below (dollar amounts in millions):
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Net sales | | $ | 3,141.2 | | $ | 3,264.5 | |
Segment earnings (1) | | | 130.0 | | | 238.8 | |
Margin | | | 4.1 | % | | 7.3 | % |
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Seating net sales were $3.1 billion in the second quarter of 2008 as compared to $3.3 billion in the second quarter of 2007. Lower industry production volumes, due in part to the American Axle strike, and unfavorable vehicle platform mix in North America, slightly offset by favorable production in other regions, negatively impacted net sales by $419 million. This decrease was partially offset by the impact of net foreign exchange rate fluctuations, which increased net sales by $232 million. Segment earnings and the related margin on net sales were $130 million and 4.1% in the second quarter of 2008 as compared to $239 million and 7.3% in the second quarter of 2007. The decline in segment earnings was largely due to the net impact of lower industry production volumes, including volume declines and associated costs and inefficiencies related to the American Axle strike, and unfavorable vehicle platform mix, which negatively impacted segment earnings by $130 million. This decrease was partially offset by the benefit of our productivity and restructuring actions. In addition, in the second quarter of 2008, we incurred costs related to our restructuring actions of $43 million as compared $12 million in the second quarter of 2007.
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LEAR CORPORATION
Electrical and electronic
A summary of financial measures for our electrical and electronic segment is shown below (dollar amounts in millions):
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Net sales | | $ | 837.8 | | $ | 825.1 | |
Segment earnings (1) | | | 31.2 | | | 23.5 | |
Margin | | | 3.7 | % | | 2.8 | % |
Electrical and electronic net sales were $838 million in the second quarter of 2008 as compared to $825 million in the second quarter of 2007. The impact of net foreign exchange rate fluctuations and the benefit of new business outside of North America favorably impacted net sales by $82 million and $20 million, respectively. These increases were largely offset by lower industry production volumes and net selling price reductions. Segment earnings and the related margin on net sales were $31 million and 3.7% in the second quarter of 2008 as compared to $24 million and 2.8% in the second quarter of 2007. The improvement in segment earnings was largely due to a decrease in costs related to our restructuring actions, from $15 million in the second quarter of 2007 to $9 million in the current quarter. The benefit of our productivity and restructuring actions, as well as the recovery of previously-incurred program-related engineering costs, were largely offset by net selling price reductions and lower industry production volumes.
Interior
A summary of financial measures for our interior segment is shown below (dollar amounts in millions):
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Net sales | | $ | — | | | | | $ | 65.7 | | |
Segment earnings (1) | | | — | | | | | | (0.6 | ) | |
Margin | | | — | % | | | | | (0.9 | )% | |
We substantially completed the divestiture of our interior business in the first quarter of 2007. See “– Executive Overview” for further information.
Other
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
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Net sales | | $ | — | | $ | — | |
Segment earnings (1) | | | (55.7 | ) | | (66.9 | ) |
Margin | | | N/A | | | N/A | |
Our other category includes unallocated corporate and geographic headquarters costs, as well as the elimination of intercompany activity. Corporate and geographic headquarters costs include various support functions, such as information technology, purchasing, corporate finance, legal, executive administration and human resources. Segment earnings related to our other category were ($56) million in the second quarter of 2008 as compared to ($67) million in the second quarter of 2007. In the second quarter of 2007, we incurred transaction costs of $2 million related to the AREP merger agreement and costs of $2 million related to the divestiture of our interior business.
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Six Months Ended June 28, 2008 vs. Six Months Ended June 30, 2007
Net sales in the first six months of 2008 were $7.8 billion as compared to $8.6 billion in the first six months of 2007, a decrease of $725 million or 8.5%. Lower industry production volumes, due in part to the American Axle strike, and unfavorable vehicle platform mix, particularly in North America, as well as the divestiture of our interior business, negatively impacted net sales by $787 million and $656 million, respectively. These decreases were partially offset by the impact of net foreign exchange rate fluctuations, which increased net sales by $599 million.
Gross profit and gross margin were $557 million and 7.1% in the six months ended June 28, 2008, as compared to $649 million and 7.6% in the six months ended June 30, 2007. Lower industry production volumes, including volume declines and associated costs and inefficiencies related to the American Axle strike, as well as unfavorable vehicle platform mix in North America reduced gross profit by $236 million. This decrease was partially offset by the benefit of our productivity and restructuring actions, as well as the timing of commercial settlements and the recovery of previously-incurred program-related engineering costs.
Selling, general and administrative expenses, including research and development, were $289 million in the first six months of 2008, as compared to $269 million in the first six months of 2007. As a percentage of net sales, selling, general and administrative expenses were 3.7% in the first half of 2008 and 3.1% in the first half of 2007. The increase in selling, general and administrative expenses was primarily due to a curtailment gain of $36 million recognized in the first quarter of 2007 related to our decision to freeze our U.S. salaried pension plan, as well as the impact of net foreign exchange rate fluctuations. These increases were partially offset by the divestiture of our interior business and transaction costs related to the AREP merger agreement in the first half of 2007, as well as favorable cost performance in the first half of 2008.
Interest expense was $93 million in the six months ended June 28, 2008, as compared to $103 million in the six months ended June 30, 2007. This decrease was primarily due to lower borrowing costs and lower borrowing levels in the first half of 2008.
Other expense, which includes non-income related taxes, foreign exchange gains and losses, discounts and expenses associated with our asset-backed securitization and factoring facilities, gains and losses related to derivative instruments and hedging activities, minority interests in consolidated subsidiaries, equity in net income of affiliates, gains and losses on the sales of assets and other miscellaneous income and expense, was $10 million in the first six months of 2008 as compared to $25 million in the first six months of 2007. The decrease in other expense was primarily due to a decrease in miscellaneous expense, as well as an increase in gains related to derivative instruments and hedging activities, which were partially offset by an increase in foreign exchange losses. In addition, we recognized a loss of $4 million related to the acquisition of the minority interest in an affiliate in the first quarter of 2007.
The provision for income taxes was $69 million for the first half of 2008, representing an effective tax rate of 41.6% on pretax income of $165 million, as compared to $53 million for the first half of 2007, representing an effective tax rate of 23.3% on pretax income of $226 million. The provision for income taxes in the first half of 2008 was impacted by a portion of our restructuring charges, for which no tax benefit was provided as the charges were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. Excluding these items, the effective tax rate in the first half of 2008 approximated the U.S. federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax credits, income tax incentives and other permanent items. The provision for income taxes in the first half of 2007 was impacted by costs of $35 million related to the divestiture of our interior business, a significant portion of which provided no tax benefit as they were incurred in the United States. The provision was also impacted by a portion of our restructuring charges and costs related to the AREP merger agreement, 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. This was offset by the impact of the U.S. salaried pension plan curtailment gain of $36 million, for which no tax expense was provided as it was incurred in the United States, and the impact of a one-time tax benefit of $13 million related to a reversal of a valuation allowance in a European subsidiary. Further, our current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances in certain countries, particularly the United States. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our future income tax expense will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated. Accordingly, income taxes are impacted by the U.S. and foreign valuation allowances and the mix of earnings among jurisdictions.
Net income in the first six months of 2008 was $97 million, or $1.23 per diluted share, as compared to $174 million, or $2.22 per diluted share, in the first six months of 2007, for the reasons described above.
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LEAR CORPORATION
Reportable Operating Segments
Historically, we have had three reportable operating segments: seating, which includes seat systems and the components thereof; electrical and electronic, which includes electrical distribution systems and electronic products, primarily wire harnesses, junction boxes, terminals and connectors and various electronic control modules, as well as audio sound systems and in-vehicle television and video entertainment systems; and interior, which has been divested and included instrument panels and cockpit systems, headliners and overhead systems, door panels, flooring and acoustic systems and other interior products. For further information related to our interior business, see Note 2, “Divestiture of Interior Business,” to the accompanying condensed consolidated financial statements. The financial information presented below is for our three reportable operating segments and our other category for the periods presented. The other category includes unallocated costs related to corporate headquarters, geographic headquarters and the elimination of intercompany activities, none of which meets the requirements of being classified as an operating segment. Corporate and geographic headquarters costs include various support functions, such as information technology, purchasing, corporate finance, legal, executive administration and human resources. Financial measures regarding each segment’s income before divestiture of Interior business, interest expense, other expense and provision for income taxes (“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, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated segment earnings to consolidated income before provision for income taxes, see Note 16, “Segment Reporting,” to the accompanying condensed consolidated financial statements.
Seating
A summary of financial measures for our seating segment is shown below (dollar amounts in millions):
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| | Six months ended | |
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|
| | June 28,
2008 | | June 30,
2007 | |
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| |
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| | | | | | | |
Net sales | | $ | 6,177.3 | | $ | 6,258.7 | |
Segment earnings | | | 313.3 | | | 435.9 | |
Margin | | | 5.1 | % | | 7.0 | % |
Seating net sales were $6.2 billion in the first half of 2008 as compared to $6.3 billion in the first half of 2007. Lower industry production volumes, due in part to the American Axle strike, and unfavorable vehicle platform mix, particularly in North America, negatively impacted net sales by $683 million. The impact of net foreign exchange rate fluctuations and the benefit of new business, primarily outside of North America, favorably impacted net sales by $449 million and $126 million, respectively. Segment earnings and the related margin on net sales were $313 million and 5.1% in the first half of 2008 as compared to $436 million and 7.0% in the first half of 2007. The decline in segment earnings was largely due to lower industry production volumes, including volume declines and associated costs and inefficiencies related to the American Axle strike, and unfavorable vehicle platform mix in North America, which negatively impacted segment earnings by $210 million. This decrease was largely offset by the benefit of our productivity and restructuring actions and the timing of commercial settlements. In addition, in the first half of 2008, we incurred costs related to our restructuring actions of $57 million as compared to $7 million in the first half of 2007.
Electrical and Electronic
A summary of financial measures for our electrical and electronic segment is shown below (dollar amounts in millions):
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| | Six months ended | |
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| | June 28,
2008 | | June 30,
2007 | |
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Net sales | | $ | 1,659.3 | | $ | 1,613.8 | |
Segment earnings | | | 66.5 | | | 41.0 | |
Margin | | �� | 4.0 | % | | 2.5 | % |
Electrical and electronic net sales were $1.7 billion in the first half of 2008 as compared to $1.6 billion in the first half of 2007. The impact of net foreign exchange rate fluctuations and the benefit of new business outside of North America favorably impacted net sales by $150 million and $34 million, respectively. These increases were largely offset by lower industry production volumes and net selling price reductions. Segment earnings and the related margin on net sales were $66 million and 4.0% in the first half of 2008 as
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LEAR CORPORATION
compared to $41 million and 2.5% in the first half of 2007. The improvement in segment earnings was largely due to the benefit of our productivity and restructuring actions, as well as the recovery of previously-incurred program-related engineering costs and the net impact of legal and commercial claims, partially offset by net selling price reductions and lower industry production volumes. In addition, in the first half of 2008, we incurred costs related to our restructuring actions of $19 million as compared to $35 million in the first half of 2007.
Interior
A summary of financial measures for our interior segment is shown below (dollar amounts in millions):
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| | Six months ended | |
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| | June 28,
2008 | | | | June 30,
2007 | |
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Net sales | | $ | — | | | | | $ | 688.9 | | |
Segment earnings | | | — | | | | | | 8.2 | | |
Margin | | | — | % | | | | | 1.2 | % | |
We substantially completed the divestiture of our interior business in the first quarter of 2007. See “– Executive Overview” for further information
Other
A summary of financial measures for our other category, which is not an operating segment, is shown below (dollar amounts in millions):
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| | Six months ended | |
| |
| |
| | June 28,
2008 | | June 30,
2007 | |
| |
| |
| |
| | | | | | | |
Net sales | | $ | — | | $ | — | |
Segment earnings | | | (111.4 | ) | | (105.9 | ) |
Margin | | | N/A | | | N/A | |
Our other category includes unallocated corporate and geographic headquarters costs, as well as the elimination of intercompany activity. Corporate and geographic headquarters costs include various support functions, such as information technology, purchasing, corporate finance, legal, executive administration and human resources. Segment earnings related to our other category were ($111) million in the first six months of 2008 as compared to ($106) million in the first six months of 2007. In the six months of 2007, we recognized a curtailment gain of $36 million related to our decision to freeze our U.S. salaried pension plan, which was partially offset by transaction costs of $12 million related to the AREP merger agreement and costs of $8 million related to the divestiture of our interior business.
RESTRUCTURING
In 2005, we implemented a comprehensive restructuring strategy intended to (i) better align our manufacturing capacity with the changing needs of our customers, (ii) eliminate excess capacity and lower our operating costs and (iii) streamline our organizational structure and reposition our business for improved long-term profitability. In connection with these restructuring actions, we incurred pretax restructuring costs of approximately $351 million and related manufacturing inefficiency charges of approximately $35 million through 2007.
In 2008, we expect to incur restructuring and related manufacturing inefficiency costs of approximately $140 million. In light of current industry conditions and recent customer announcements in North America, we expect restructuring and related investments in 2009 to be consistent with those in 2008. Restructuring and related manufacturing inefficiency costs include employee termination benefits, 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. We also expect to 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. Generally, charges are recorded as elements of the restructuring strategy are finalized. Actual costs recorded in our condensed consolidated financial statements may vary from current estimates.
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LEAR CORPORATION
In connection with our prior restructuring actions and current activities, we recorded restructuring charges of approximately $72 million and related manufacturing inefficiency charges of approximately $10 million in the first six months of 2008, including $71 million recorded as cost of sales and $11 million recorded as selling, general and administrative expenses. Restructuring activities resulted in cash expenditures of $83 million in the first six months of 2008. The 2008 charges consist of employee termination benefits of $58 million, fixed asset impairment charges of $3 million, contract termination costs of $1 million and other related costs of $10 million. We also estimate that we incurred approximately $10 million in manufacturing inefficiency costs during this period as a result of the restructuring. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements and completed negotiations. Asset impairment charges relate to the disposal of machinery and equipment with carrying values of $3 million in excess of related estimated fair values. Contract termination costs include lease cancellation costs of $1 million, pension benefit curtailment charges of $1 million, a reduction in previously recorded repayments of various government-sponsored grants of ($2) million and various other costs of $1 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. In addition, approximately 90% of the costs associated with our current restructuring strategy are expected to require cash expenditures. Our principal sources of liquidity are cash flows from operating activities and borrowings under available credit facilities. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, royalties and other distributions and advances from our subsidiaries to provide the funds necessary to meet our obligations. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from our non-U.S. subsidiaries, see Note 10, “Income Taxes,” to the consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
Cash Flow
Cash provided by operating activities was $194 million in the first six months of 2008 as compared to $248 million in the first six months of 2007. This decrease primarily reflects lower earnings. In addition, the net change in working capital and the net change in recoverable customer engineering and tooling resulted in a decrease in operating cash flow between periods of $48 million and $26 million, respectively. These decreases were partially offset by the net change in sold accounts receivable, which increased operating cash flow between periods by $107 million. In the first six months of 2008, increases in accounts receivable and accounts payable used cash of $273 million and generated cash of $162 million, respectively, reflecting the timing of payments received from our customers and made to our suppliers.
Cash used in investing activities was $85 million in the first six months of 2008 as compared to $154 million in the first six months of 2007. In the first quarter of 2008, we received cash of $9 million as settlement of a purchase price contingency related to our acquisition of GHW Grote and Hartmann GmbH in 2004. In the first quarter of 2007, we had cash outflows in connection with the divestiture of our interior business and joint venture transactions of $56 million and $18 million, respectively. These reductions in cash outflows were partially offset by an increase in capital expenditures of $27 million. Capital expenditures in 2008 are estimated at $230 million to $250 million.
Cash used in financing activities was $98 million in the first six months of 2008 as compared to $27 million in the first six months of 2007. This increase primarily reflects the repayment of our €56 million aggregate principal amount of senior notes on April 1, 2008, the maturity date.
Capitalization
In addition to cash provided by operating activities, we utilize a combination of available credit facilities to fund our capital expenditures and working capital requirements. For the six months ended June 28, 2008 and June 30, 2007, our average outstanding long-term debt balance, as of the end of each fiscal quarter, was $2.4 billion and $2.5 billion, respectively. The weighted average long-term interest rate, including rates under our committed credit facility and the effect of hedging activities, was 7.5% and 7.6% for the respective periods.
In addition, we utilize uncommitted lines of credit as needed for our short-term working capital fluctuations. For the six months ended June 28, 2008 and June 30, 2007, our average outstanding short-term debt balance, as of the end of each fiscal quarter, was $19 million and $20 million, respectively. The weighted average short-term interest rate on our unsecured short-term debt balances, including the effect of hedging activities, was 7.0% and 4.6%, respectively. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors. See “— Off-Balance Sheet Arrangements” and “— Accounts Receivable Factoring.”
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LEAR CORPORATION
Primary Credit Facility
As of June 28, 2008, our primary credit facility consisted of an amended and restated credit and guarantee agreement, which provided for maximum revolving borrowing commitments of $1.7 billion and a term loan facility of $1.0 billion. The $1.7 billion revolving credit facility matured on March 23, 2010, and the $1.0 billion term loan facility matured on April 25, 2012. As of June 28, 2008, we had $991 million in borrowings outstanding under our term loan facility, with no additional availability. As of June 28, 2008, there were no amounts outstanding under the revolving credit facility and $61 million committed under outstanding letters of credit.
On July 3, 2008, we amended our primary credit facility (“amended primary credit facility”) to, among other things, extend certain of the revolving credit commitments thereunder from March 23, 2010 to January 31, 2012. The extension was offered to each revolving lender, and lenders consenting to the amendment had their revolving credit commitments reduced by 33.33% on July 11, 2008. After giving effect to the amendment, we had outstanding approximately $1.3 billion of revolving credit commitments, $468 million of which mature on March 23, 2010 and $822 million of which mature on January 31, 2012. The amendment had no effect on our term loan facility issued under the prior primary credit facility, which continues to have a maturity date of April 25, 2012. The amended primary credit facility provides for multicurrency borrowings in a maximum aggregate amount of $400 million, Canadian borrowings in a maximum aggregate amount of $100 million and swing-line borrowings in a maximum aggregate amount of $200 million, the commitments for which are part of the aggregate amended revolving credit facility commitment.
Our obligations under the amended primary credit facility are secured by a pledge of all or a portion of the capital stock of certain of our subsidiaries, including substantially all of our first-tier subsidiaries, and are partially secured by a security interest in our assets and the assets of certain of our domestic subsidiaries. In addition, our obligations under the amended primary credit facility are guaranteed, on a joint and several basis, by certain of our subsidiaries, all of which are directly or indirectly 100% owned by Lear.
The amended primary credit facility contains certain affirmative and negative covenants, including (i) limitations on fundamental changes involving us or our subsidiaries, asset sales and restricted payments, (ii) a limitation on indebtedness with a maturity shorter than the term loan facility, (iii) a limitation on aggregate subsidiary indebtedness to an amount which is no more than 5% of consolidated total assets, (iv) a limitation on aggregate secured indebtedness to an amount which is no more than $100 million and (v) requirements that we maintain a leverage ratio of not more than 3.50 to 1, as of June 28, 2008, with decreases over time and an interest coverage ratio of not less than 2.75 to 1, as of June 28, 2008, with increases over time. The amended primary credit facility also contains customary events of default, including an event of default triggered by a change of control of Lear. For further information related to our amended primary credit facility described above, including the operating and financial covenants to which we are subject and related definitions, see the agreement governing our amended primary credit facility, which has been included as an exhibit to this Report.
The leverage and interest coverage ratios, as well as the related components of their computation, are defined in the amended primary credit facility, which is included as an exhibit to this Report. The leverage ratio is calculated as the ratio of consolidated indebtedness to consolidated operating profit. For the purpose of the covenant calculation, (i) consolidated indebtedness is generally defined as reported debt, net of cash and cash equivalents and excludes transactions related to our asset-backed securitization and factoring facilities and (ii) consolidated operating profit is generally defined as net income excluding income taxes, interest expense, depreciation and amortization expense, other income and expense, minority interests in income of subsidiaries in excess of net equity earnings in affiliates, certain historical restructuring and other non-recurring charges, extraordinary gains and losses and other specified non-cash items. Consolidated operating profit is a non-GAAP financial measure that is presented not as a measure of operating results, but rather as a measure used to determine covenant compliance under our amended primary credit facility. The interest coverage ratio is calculated as the ratio of consolidated operating profit to consolidated interest expense. For the purpose of the covenant calculation, consolidated interest expense is generally defined as interest expense plus any discounts or expenses related to our asset-backed securitization facility less amortization of deferred financing fees and interest income. As of June 28, 2008, we were in compliance with all covenants set forth in the amended primary credit facility and in our prior primary credit facility. Our leverage and interest coverage ratios were 2.1 to 1 and 4.8 to 1, respectively. These ratios are calculated on a trailing four quarter basis. As a result, any decline in our future operating results will negatively impact our leverage and interest coverage ratios. Our failure to comply with these financial covenants could have a material adverse effect on our liquidity and operations.
Reconciliations of (i) consolidated indebtedness to reported debt, (ii) consolidated operating profit to income before provision for income taxes and (iii) consolidated interest expense to reported interest expense are shown below (in millions):
39
LEAR CORPORATION
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| | | June 28,
2008 | | | | | | | |
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Consolidated indebtedness | | | $ | 1,762.7 | | | | | | | |
Cash and cash equivalents (subject to $700 million limitation) | | | | 623.5 | | | | | | | |
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Reported debt | | | $ | 2,386.2 | | | | | | | |
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| | Three Months
Ended
June 28, 2008 | | Six Months
Ended
June 28, 2008 | |
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Consolidated operating profit | | | $ | 189.1 | | | | $ | 434.4 | | |
Depreciation and amortization | | | | (77.4 | ) | | | | (151.9 | ) | |
Consolidated interest expense | | | | (42.2 | ) | | | | (86.4 | ) | |
Other expense, net (excluding certain amounts related to asset-backed securitization facility) | | | | (4.0 | ) | | | | (9.8 | ) | |
Other non-cash items | | | | (9.7 | ) | | | | (21.0 | ) | |
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Income before provision for income taxes | | | $ | 55.8 | | | | $ | 165.3 | | |
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Consolidated interest expense | | | $ | 42.2 | | | | $ | 86.4 | | |
Certain amounts related to asset-backed securitization facility | | | | (0.1 | ) | | | | (0.3 | ) | |
Amortization of deferred financing fees | | | | 2.1 | | | | | 4.3 | | |
Bank facility and other fees | | | | 1.4 | | | | | 2.6 | | |
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Reported interest expense | | | $ | 45.6 | | | | $ | 93.0 | | |
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Senior Notes
In addition to borrowings outstanding under our amended primary credit facility, as of June 28, 2008, we had $1.3 billion of senior notes outstanding, consisting primarily of $300 million aggregate principal amount of senior notes due 2013, $600 million aggregate principal amount of senior notes due 2016, $399 million aggregate principal amount of senior notes due 2014, $1 million accreted value of zero-coupon convertible senior notes due 2022 and $41 million aggregate principal amount of senior notes due 2009 (the “2009 notes”). We repaid €56 million aggregate principal amount of senior notes on April 1, 2008, the maturity date.
In connection with the amendment of our primary credit facility discussed above, we issued an irrevocable call notice to redeem our outstanding 2009 notes (having an aggregate principal amount outstanding of $41 million as of June 28, 2008) on August 4, 2008. The 2009 notes must be redeemed at the greater of (a) 100% of the principal amount to be redeemed or (b) the sum of the present value of the remaining scheduled payments of principal and interest thereon from the redemption date to the maturity date, discounted to the redemption date on a semiannual basis at the applicable treasury rate plus 50 basis points, together with any interest accrued but not yet paid to the redemption date. We estimate a loss on the extinguishment of the 2009 notes of approximately $2 million, which will be recognized in other expense, net in the third quarter of 2008.
All of our senior notes are guaranteed by the same subsidiaries that guarantee our amended primary credit facility. In the event that any such subsidiary ceases to be a guarantor under the amended primary credit facility, such subsidiary will be released as a guarantor of the senior notes. Our obligations under the senior notes are not secured by the pledge of the assets or capital stock of any of our subsidiaries.
With the exception of our zero-coupon convertible senior notes, our senior notes contain covenants restricting our ability to incur liens and to enter into sale and leaseback transactions. As of June 28, 2008, we were in compliance with all covenants and other requirements set forth in our senior notes.
The senior notes due 2013 and 2016 (having an aggregate principal amount outstanding of $900 million as of June 28, 2008) provide holders of the notes the right to require us to repurchase all or any part of their notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, upon a “change of control” (as defined in the indenture governing the notes). The indentures governing our other senior notes do not contain a change of control repurchase obligation.
Scheduled cash interest payments on our outstanding debt are approximately $90 million in the last six months of 2008.
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LEAR CORPORATION
For further information related to our senior notes described above, see Note 9, “Long-Term Debt,” to the consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
Off-Balance Sheet Arrangements
Asset-Backed Securitization Facility
Prior to April 30, 2008, we had in place an asset-backed securitization facility (the “ABS facility”), which provided for maximum purchases of adjusted accounts receivable of $150 million. The ABS facility expired on April 30, 2008, and we did not elect to renew the existing facility. There were no accounts receivable sold under this facility in 2008.
Guarantees and Commitments
We guarantee certain of the debt of some of our unconsolidated affiliates. The percentages of debt guaranteed of these entities are based on our ownership percentages. As of June 28, 2008, the aggregate amount of debt guaranteed was approximately $9 million.
Accounts Receivable Factoring
Certain of our European and Asian subsidiaries periodically factor their accounts receivable with financial institutions. Such receivables are factored without recourse to us and are excluded from accounts receivable in the accompanying condensed consolidated balance sheets. In the second quarter of 2008, certain of our European subsidiaries entered into extended factoring agreements which provide for aggregate purchases of specified customer accounts receivable of up to €315 million through Aril 30, 2011. The level of funding utilized under this European factoring facility is based on the credit ratings of each specified customer. In addition, the facility provider can elect to discontinue the facility in the event that our corporate credit rating declines below B- by Standard & Poor’s Ratings Services. As of June 28, 2008 and December 31, 2007, the amount of factored receivables was $227 million and $104 million, respectively. We cannot provide any assurances that these factoring facilities will be available or utilized in the future.
Credit Ratings
The credit ratings below are not recommendations to buy, sell or hold our securities and are subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
The credit ratings of our senior secured and unsecured debt as of the date of this Report are shown below. For our senior secured debt, the ratings of Standard & Poor’s Ratings Services and Moody’s Investors Service are three and five levels below investment grade, respectively. For our senior unsecured debt, the ratings of Standard & Poor’s Ratings Services and Moody’s Investors Service are four and six levels below investment grade, respectively.
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| | Standard & Poor’s
Ratings Services | | Moody’s
Investors Service | |
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Credit rating of senior secured debt | | | BB– | | B2 | |
Corporate rating | | | B+ | | B2 | |
Credit rating of senior unsecured debt | | | B+ | | B3 | |
Ratings outlook | | Stable | | Stable | |
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Common Stock Repurchase Program
In February 2008, our Board of Directors authorized a common stock repurchase program, which modified our previous common stock repurchase program, approved in November 2007, to permit the repurchase of up to 3,000,000 shares of our common stock through February 14, 2010. We expect to fund the share repurchases through a combination of cash on hand, future cash flows from operations and borrowings under available credit facilities. Share repurchases under this program may be made through open market purchases, privately negotiated transactions, block trades or other available methods. The timing and actual number of shares repurchased will depend on a variety of factors, including price, alternative uses of capital, corporate and regulatory requirements and market conditions. The common stock repurchase program may be suspended or discontinued at any time. See “— Forward-Looking Statements.” In the first half of 2008, we repurchased 61,700 shares of our outstanding common stock at an average purchase price of $25.43 per share, excluding commissions of $0.03 per share, under this program. As of June 28, 2008, 2,784,042 shares of common stock were available for repurchase under the common stock repurchase program. Subsequent to June 28, 2008, we repurchased an additional 197,500 shares of our outstanding common stock at an average purchase price of $13.29 per share, excluding commissions of $0.03 per share, under this program. As of the date of this Report, 2,586,542 shares of common stock were available for repurchase under the common stock repurchase program.
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LEAR CORPORATION
Adequacy of Liquidity Sources
We believe that cash flows from operations and availability under our available credit facilities will be sufficient to meet our liquidity needs, including capital expenditures and anticipated working capital requirements, for the foreseeable future. Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. See “— Executive Overview” above, “— Forward-Looking Statements” below and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
Market Rate Sensitivity
In the normal course of business, we are exposed to market risk associated with fluctuations in foreign exchange rates and interest rates. We manage these risks through the use of derivative financial instruments in accordance with management’s guidelines. We enter into all hedging transactions for periods consistent with the underlying exposures. We do not enter into derivative instruments for trading purposes.
Foreign Exchange
Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies (“transactional exposure”). We mitigate this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred where appropriate and included in the measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions.
Our most significant foreign currency transactional exposures relate to the Mexican peso and various European currencies. We have performed a quantitative analysis of our overall currency rate exposure as of June 28, 2008. The potential adverse earnings impact related to net transactional exposures from a hypothetical 10% strengthening of the U.S. dollar relative to all other currencies for a twelve-month period is approximately $8 million. The potential adverse earnings impact related to net transactional exposures from a similar strengthening of the Euro relative to all other currencies for a twelve-month period is approximately $14 million.
As of June 28, 2008, foreign exchange contracts representing $395 million of notional amount were outstanding with maturities of less than six months. As of June 28, 2008, the fair market value of these contracts was approximately $22 million. A 10% change in the value of the U.S. dollar relative to all other currencies would result in a $16 million change in the aggregate fair market value of these contracts. A 10% change in the value of the Euro relative to all other currencies would result in a $14 million change in the aggregate fair market value of these contracts.
There are certain shortcomings inherent in the sensitivity analysis presented. The analysis assumes that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.
In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars (“translation exposure”). In 2007, net sales outside of the United States accounted for 72% of our consolidated net sales, although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate this exposure.
Interest Rates
Our exposure to variable interest rates on outstanding variable rate debt instruments indexed to United States or European Monetary Union short-term money market rates is partially managed by the use of interest rate swap and other derivative contracts. These contracts convert certain variable rate debt obligations to fixed rate, matching effective and maturity dates to specific debt instruments. From time to time, we also utilize interest rate swap and other derivative contracts to convert certain fixed rate debt obligations to variable rate, matching effective and maturity dates to specific debt instruments. All of our interest rate swap and other derivative contracts are executed with banks that we believe are creditworthy and are denominated in currencies that match the underlying debt instrument. Net interest payments or receipts from interest rate swap and other derivative contracts are included as adjustments to interest expense in our consolidated statements of income on an accrual basis.
We have performed a quantitative analysis of our overall interest rate exposure as of June 28, 2008. This analysis assumes an instantaneous 100 basis point parallel shift in interest rates at all points of the yield curve. The potential adverse earnings impact from this hypothetical increase for a twelve-month period is approximately $3 million.
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LEAR CORPORATION
As of June 28, 2008, interest rate swap and other derivative contracts representing $600 million of notional amount were outstanding with maturities through September 2011. All of these contracts are designated as cash flow hedges and modify the variable rate characteristics of our variable rate debt instruments. As of June 28, 2008, the fair market value of these contracts was approximately negative $21 million. The fair market value of all outstanding interest rate swap and other derivative contracts is subject to changes in value due to changes in interest rates. A 100 basis point parallel shift in interest rates would result in a $10 million change in the aggregate fair market value of these contracts.
Commodity Prices
We have commodity price risk with respect to purchases of certain raw materials, including steel, leather, resins, chemicals, copper and diesel fuel. Since the first quarter of 2007, energy costs and the prices of several of our key raw materials have increased substantially. In limited circumstances, we have used financial instruments to mitigate this risk.
We have developed and implemented strategies to mitigate or partially offset the impact of higher raw material, energy and commodity costs, which include cost reduction actions, the utilization of our cost technology optimization process, the selective in-sourcing of components, the continued consolidation of our supply base, longer-term purchase commitments and the acceleration of low-cost country sourcing and engineering. However, due to the magnitude and duration of the increased raw material, energy and commodity costs, these strategies, together with commercial negotiations with our customers and suppliers, offset only a portion of the adverse impact. In addition, higher crude oil prices indirectly impact our operating results by adversely affecting demand for certain of our key light truck and large SUV platforms. Higher energy and raw material prices are likely to have an adverse impact on our operating results in the foreseeable future. See “— Forward-Looking Statements” and Item 1A, “Risk Factors — High raw material costs may continue to have a significant adverse impact on our profitability” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
We use derivative instruments to reduce our exposure to fluctuations in certain commodity prices, including copper and natural gas. Commodity contracts are executed with banks that we believe are creditworthy. A portion of our derivative instruments are currently designated as cash flow hedges. As of June 28, 2008, commodity swap contracts representing $57 million of notional amount were outstanding with maturities of less than 18 months. As of June 28, 2008, the fair market value of these contracts was approximately $3 million. The potential adverse earnings impact from a 10% parallel worsening of the respective commodity curves for a twelve month period is approximately $6 million.
OTHER MATTERS
Legal and Environmental Matters
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial and contractual disputes, product liability claims and environmental and other matters. As of June 28, 2008, we had recorded reserves for pending legal disputes, including commercial disputes and other matters, of $34 million. Although these reserves were determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” the ultimate outcomes of these matters are inherently uncertain, and actual results may differ significantly from current estimates. As of June 28, 2008, we also had recorded reserves for product liability claims and environmental matters of $37 million and $3 million, respectively. For a more complete description of our outstanding legal proceedings, see Note 15, “Legal and Other Contingencies,” to the accompanying condensed consolidated financial statements and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
Significant Accounting Policies and Critical Accounting Estimates
Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, they are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates. For a discussion of our significant accounting policies and critical accounting estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Critical Accounting Estimates,” and Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2007. There have been no significant changes in our significant accounting policies or critical accounting estimates during the first six months of 2008.
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LEAR CORPORATION
Recently Issued Accounting Pronouncements
Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The provisions of this statement are generally to be applied prospectively in the fiscal year beginning January 1, 2008. With the exception of newly required disclosures, the effects of adoption were not significant. For further information, see Note 17, “Financial Instruments,” to the accompanying condensed consolidated financial statements included in this Report.
The FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115.” This statement provides entities with the option to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The provisions of this statement are effective as of the beginning of the first fiscal year beginning after November 15, 2007. We did not apply the provisions of SFAS No. 159 to any of our existing financial assets or liabilities.
Pension and Other Postretirement Benefit Plans
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” requires the measurement of defined benefit plan assets and liabilities as of the annual balance sheet date beginning in the fiscal period ending after December 15, 2008. In previous years, we measured our plan assets and liabilities using an early measurement date of September 30, as allowed by the original provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In the first quarter of 2008, the required adjustment to recognize the net periodic benefit cost for the transition period from October 1, 2007 to December 31, 2007, was determined using the 15-month measurement approach. Under this approach, the net periodic benefit cost was determined for the period from October 1, 2007 to December 31, 2008, and the adjustment for the transition period was calculated on a pro-rata basis. We recorded an after-tax transition adjustment of $7 million as an increase to beginning retained deficit, $1 million as an increase to accumulated other comprehensive income and $6 million as an increase to the net pension and other postretirement liability related accounts in the accompanying condensed consolidated balance sheet as of January 1, 2008.
The Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability, in accordance with SFAS No. 106, for endorsement split-dollar life insurance arrangements that provide postretirement benefits. This EITF is effective for the fiscal period beginning after December 15, 2007. In accordance with the EITF’s transition provisions, we recorded approximately $5 million as a cumulative effect of a change in accounting principle as of January 1, 2008. The cumulative effect adjustment was recorded as an increase to beginning retained deficit and an increase to other long-term liabilities in the accompanying condensed consolidated balance sheet as of January 1, 2008. In addition, we expect to record additional postretirement benefit expenses of less than $1 million in 2008 associated with the adoption of this EITF.
Business Combinations and Noncontrolling Interests
The FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” This statement significantly changes the financial accounting for and reporting of business combination transactions. The provisions of this statement are to be applied prospectively to business combination transactions in the first annual reporting period beginning on or after December 15, 2008. We will evaluate the impact of this statement on future business combinations.
The FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries. This statement requires the reporting of all noncontrolling interests as a separate component of stockholders’ equity, the reporting of consolidated net income as the amount attributable to both the parent and the noncontrolling interests and the separate disclosure of net income attributable to the parent and to the noncontrolling interests. In addition, this statement provides accounting and reporting guidance related to changes in noncontrolling ownership interests. With the exception of the reporting requirements described above which require retrospective application, the provisions of SFAS No. 160 are to be applied prospectively in the first annual reporting period beginning on or after December 15, 2008. As of June 28, 2008 and December 31, 2007, noncontrolling interests of $35 million and $27 million, respectively, are recorded in other long-term liabilities in the accompanying condensed consolidated balance sheets. Net income attributable to noncontrolling interests of $7 million and $11 million in the three and six months ended June 28, 2008, respectively, and $7 million and $17 million in the three and six months ended June 30, 2007, respectively, are recorded in other expense, net in the accompanying condensed consolidated statements of income.
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LEAR CORPORATION
Derivative Instruments and Hedging Activities
The FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures regarding (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, performance and cash flows. The provisions of this statement are effective for the fiscal year and interim periods beginning after November 15, 2008. We are currently evaluating the provisions of this statement.
Hierarchy of Generally Accepted Accounting Principles
The FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the accounting principles to be used in the preparation of financial statements presented in conformity with generally accepted accounting principles in the United States. This statement is effective sixty days after approval by the Securities and Exchange Commission. We do not expect the effects of adoption to be significant.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words “will,” “may,” “designed to,” “outlook,” “believes,” “should,” “anticipates,” “plans,” “expects,” “intends,” “estimates” and similar expressions identify these forward-looking statements. All statements contained or incorporated in this Report which address operating performance, events or developments that we expect or anticipate may occur in the future, including statements related to business opportunities, awarded sales contracts, sales backlog and on-going commercial arrangements or statements expressing views about future operating results, are forward-looking statements. Important factors, risks and uncertainties that may cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:
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• | general economic conditions in the markets in which we operate, including changes in interest rates or currency exchange rates; |
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• | the financial condition of our customers or suppliers; |
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• | changes in actual industry vehicle production levels from our current estimates; |
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• | fluctuations in the production of vehicles for which we are a supplier; |
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• | the loss of business with respect to, or the lack of commercial success of, a vehicle model for which we are a significant supplier, including declines in sales of full-size pickup trucks and large sport utility vehicles; |
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• | disruptions in the relationships with our suppliers; |
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• | labor disputes involving us or our significant customers or suppliers or that otherwise affect us; |
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• | our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions; |
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• | the outcome of customer productivity negotiations; |
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• | the impact and timing of program launch costs; |
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• | the costs, timing and success of restructuring actions; |
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• | increases in our warranty or product liability costs; |
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• | risks associated with conducting business in foreign countries; |
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• | competitive conditions impacting our key customers and suppliers; |
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• | the cost and availability of raw materials and energy; |
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• | our ability to mitigate increases in raw material, energy and commodity costs; |
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• | the outcome of legal or regulatory proceedings to which we are or may become a party; |
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• | unanticipated changes in cash flow, including our ability to align our vendor payment terms with those of our customers; |
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• | our ability to access capital markets on commercially reasonable terms; and |
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• | other risks, described in Part II – Item 1A, “Risk Factors,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007, and from time to time in our other SEC filings. |
The forward-looking statements in this Report are made as of the date hereof, and we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.
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LEAR CORPORATION
ITEM 4 — CONTROLS AND PROCEDURES
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(a) | Disclosure Controls and Procedures |
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| The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chairman, Chief Executive Officer and President along with the Company’s Senior Vice President and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. However, based on that evaluation, the Company’s Chairman, Chief Executive Officer and President along with the Company’s Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report. |
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(b) | Changes in Internal Controls over Financial Reporting |
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| There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 28, 2008, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. |
PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial and contractual disputes, product liability claims and environmental and other matters. For a more complete description of our outstanding legal proceedings, see Note 15, “Legal and Other Contingencies,” to the accompanying condensed consolidated financial statements and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
ITEM 1A — RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2007.
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As discussed in Part I – Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capitalization – Common Stock Repurchase Program,” in February 2008, our Board of Directors authorized a common stock repurchase program which modified our previous common stock repurchase program, approved in November 2007, to permit the repurchase of up to 3,000,000 shares of our common stock through February 14, 2010. The common stock repurchase program may be suspended or discontinued at any time. A summary of the shares of our common stock repurchased during the quarter ended June 28, 2008, is shown below:
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LEAR CORPORATION
| | | | | | | | | |
Period | | Total Number
of Shares
Purchased | | Average
Price Paid
per Share | | Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs | | Maximum Number of Shares
that May Yet be Purchased
Under the Program | |
March 30, 2008 through April 26, 2008 | | — | | — | | — | | 2,784,042 | |
April 27, 2008 through May 24, 2008 | | — | | — | | — | | 2,784,042 | |
May 25, 2008 through June 28, 2008 | | — | | — | | — | | 2,784,042 | |
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| | | | | | | | | |
Total | | — | | — | | — | | 2,784,042 | |
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ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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(a) | The 2008 Annual Meeting of Stockholders of Lear Corporation was held on May 8, 2008. At the meeting, the following matters were submitted to a vote of the stockholders of Lear Corporation. There were no broker non-votes in matters (1) and (2) described below. An independent inspector of elections was engaged to tabulate stockholder votes. |
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| (1) | The election of three directors to hold office until the 2009 Annual Meeting of Stockholders. The vote with respect to each nominee was as follows: |
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Nominee | | For | | Withheld | |
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Vincent J. Intrieri | | 57,738,512 | | 10,452,140 | |
Conrad L. Mallett, Jr. | | 39,383,994 | | 28,806,657 | |
Robert E. Rossiter | | 42,205,747 | | 25,984,891 | |
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| (2) | The appointment of the firm Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008. |
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For | | Against | | Abstain | | | |
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| | | |
67,814,783 | | 321,302 | | 54,565 | | | |
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| (3) | The approval of a stockholder proposal to adopt simple majority votes requirements in the Company’s Charter and By- laws. |
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For | | Against | | Abstain | | Broker Non-Votes | |
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56,271,891 | | 7,503,823 | | 54,416 | | 4,360,521 | |
ITEM 6 — EXHIBITS
The exhibits listed on the “Index to Exhibits” on page 49 are filed with this Form 10-Q or incorporated by reference as set forth below.
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LEAR CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LEAR CORPORATION | | | |
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Dated: August 4, 2008 | | By: | /s/ Robert E. Rossiter |
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| | | Robert E. Rossiter |
| | | Chairman, Chief Executive Officer and President |
| | | |
| | By: | /s/ Matthew J. Simoncini |
| | |
|
| | | Matthew J. Simoncini |
| | | Senior Vice President and Chief Financial Officer |
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LEAR CORPORATION
Index to Exhibits
| | | |
Exhibit Number | | Exhibit |
| |
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* 10.1 | | | Cash-Settled Stock Appreciation Rights Terms and Conditions for James H. Vandenberghe (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 5, 2008). |
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10.2 | | | Master Contract for the Regular Factoring of Claims á forfeit between Lear Corporation GmbH and Dresdner Bank Aktiengesellschaft in Frankfurt am Main, dated June 20, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 26, 2008). |
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10.3 | | | Master Contract for the Regular Factoring of Claims á forfeit between Lear Corporation Austria GmbH and Dresdner Bank Aktiengesellschaft in Frankfurt am Main, dated June 20, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 26, 2008). |
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10.4 | | | Master Contract for the Regular Factoring of Claims á forfeit between Lear Automotive Services (Netherlands) B.V. and Dresdner Bank Aktiengesellschaft in Frankfurt am Main, dated June 20, 2008 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated June 26, 2008). |
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**10.5 | | | First Amendment, dated as of June 27, 2008, to the Amended and Restated Credit and Guarantee Agreement, dated as of April 25, 2006, among Lear, certain subsidiaries of Lear, the several lenders from time to time parties thereto, the several agents parties thereto and JP Morgan Chase Bank, N.A., as general administrative agent. |
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** 31.1 | | | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. |
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** 31.2 | | | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
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** 32.1 | | | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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** 32.2 | | | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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* | | | Compensatory plan or arrangement. |
** | | | Filed herewith. |
49
