1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 28, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ----------------------.
COMMISSION FILE NUMBER: 1-11311
LEAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3386776
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
21557 TELEGRAPH ROAD, SOUTHFIELD, MI 48086-5008
(Address of principal executive offices) (zip code)
(810) 746-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Approximate number of shares of Common Stock, $0.01 par value per share,
outstanding at November 4, 1996: 65,410,232
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 28, 1996
INDEX
Part I - Financial Information: Page No.
------------------------------- --------
Item 1 - Consolidated Financial Statements
Introduction to the Consolidated Financial Statements 3
Consolidated Balance Sheets - September 28, 1996 and
December 31, 1995 4
Consolidated Statements of Income - Three and Nine Month Periods
ended September 28, 1996 and September 30, 1995 5
Consolidated Statements of Cash Flows - Nine Month Periods
ended September 28, 1996 and September 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II - Other Information:
----------------------------
Item 6 - Exhibits and Report on Form 8-K 17
Signatures 18
----------
Exhibit Index 19
-------------
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LEAR CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO THE CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements of Lear Corporation and
subsidiaries (the "Company") have been prepared by Lear Corporation, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make
the information presented not misleading when read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission for
the period ended December 31, 1995.
The financial information presented reflects all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of the results of operations and financial
position for the interim periods presented. These results are not necessarily
indicative of a full year's results of operations.
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4
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
September 28, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51.5 $ 34.1
Accounts receivable, net 1,047.9 831.9
Inventories 202.1 196.2
Recoverable customer engineering and tooling 130.5 91.9
Other 76.6 53.1
----------- -----------
1,508.6 1,207.2
----------- -----------
LONG TERM ASSETS:
Property, plant and equipment, net 792.6 642.8
Goodwill, net 1,401.7 1,098.4
Other 160.5 112.9
----------- -----------
2,354.8 1,854.1
----------- -----------
$ 3,863.4 $ 3,061.3
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 5.5 $ 16.9
Accounts payable and drafts 960.3 857.0
Accrued liabilities 479.8 392.2
Current portion of long-term debt 8.5 9.9
----------- -----------
1,454.1 1,276.0
----------- -----------
LONG-TERM LIABILITIES:
Deferred national income taxes 44.2 37.3
Long-term debt 1,241.0 1,038.0
Other 177.4 130.0
----------- -----------
1,462.6 1,205.3
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized;
64,266,690 issued at September 28, 1996,
and 56,253,541 issued at December 31, 1995 .6 .6
Additional paid-in capital 817.0 559.1
Notes receivable from sale of common stock (.9) ( .9)
Less- Common stock held in treasury, 10,230 shares at cost (.1) (.1)
Retained earnings 142.9 42.2
Minimum pension liability adjustment (3.5) (3.5)
Cumulative translation adjustment (9.3) (17.4)
----------- -----------
946.7 580.0
----------- -----------
$ 3,863.4 $ 3,061.3
=========== ===========
The accompanying notes are an integral part of these balance sheets.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Net sales $ 1,505.6 $ 1,080.6 $ 4,530.1 $ 3,266.7
Cost of sales 1,361.9 997.4 4,098.9 3,012.0
Selling, general and administrative expenses 56.9 35.1 149.2 85.3
Amortization of goodwill 9.3 5.1 24.0 11.5
---------- ---------- --------- ---------
Operating income 77.5 43.0 258.0 157.9
Interest expense 28.4 21.6 75.9 50.0
Other expense, net 7.6 4.4 14.6 10.3
---------- ---------- --------- ---------
Income before provision for national income
taxes and extraordinary item 41.5 17.0 167.5 97.6
Provision for national income taxes 16.7 5.9 66.8 40.6
---------- ---------- --------- ---------
Net income before extraordinary item 24.8 11.1 100.7 57.0
Extraordinary loss on early extinguishment
of debt - (2.6) - (2.6)
---------- ---------- --------- ---------
Net income $ 24.8 $ 8.5 $ 100.7 $ 54.4
========== ========== ========= =========
Earnings per common share (Fully diluted):
Net income before extraordinary item $ .37 $ 0.22 $ 1.62 $ 1.13
Extraordinary loss - (0.05) - (0.05)
----------- ----------- ---------- ----------
Net income $ .37 $ 0.17 $ 1.62 $ 1.08
=========== =========== ========== ==========
The accompanying notes are an integral part of these statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN MILLIONS)
Nine Months Ended
-----------------
September 28, September 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 100.7 $ 54.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of goodwill 107.3 60.4
Amortization of deferred financing fees 2.5 1.9
Deferred national income taxes (1.2) 3.1
Extraordinary loss - 2.6
Other, net (4.8) .9
Change in working capital items, net of effects of acquisitions (76.5) (117.1)
-------- --------
Net cash provided by operating activities 128.0 6.2
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (100.0) (65.9)
Acquisitions, net (457.0) (891.8)
Other, net 4.0 2.2
-------- --------
Net cash used by investing activities (553.0) (955.5)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net 203.2 689.0
Short-term borrowings, net (6.2) (64.7)
Increase in cash overdrafts 13.0 29.6
Proceeds from sale of common stock, net 244.7 281.6
Other, net (1.4) (9.2)
-------- --------
Net cash provided by financing activities 453.3 926.3
-------- --------
Effect of foreign currency translation (10.9) 6.2
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 17.4 (16.8)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34.1 32.0
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51.5 $ 15.2
======== ========
CHANGES IN WORKING CAPITAL, net of effects of acquisitions
Accounts receivable $ (130.1) $ (124.3)
Inventories 13.9 (14.4)
Accounts payable 36.4 20.0
Accrued liabilities and other 3.3 1.6
-------- --------
$ (76.5) $ (117.1)
======== ========
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 79.1 $ 53.9
======== ========
Cash paid for income taxes $ 63.8 $ 57.0
======== ========
The accompanying notes are an integral part of these statements.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Lear
Corporation, a Delaware corporation, and its wholly-owned and majority-owned
subsidiaries. Investments in less than majority-owned businesses are generally
accounted for under the equity method.
(2) ACQUISITIONS
MASLAND CORPORATION
On June 27, the Company through a wholly owned subsidiary ("Acquisition
Corp.") acquired approximately 97% of the outstanding shares of common stock of
Masland Corporation ("Masland") pursuant to an offer to purchase which was
commenced on May 30, 1996. On July 1, 1996, Acquisition Corp. merged with and
into Masland, such that Masland became a wholly-owned subsidiary of the
Company. The aggregate purchase price for the acquisition of Masland (the
"Masland Acquisition") was $475.7 million (including the assumption of $80.7
million of Masland's existing net indebtedness and $10.0 million in fees and
expenses). Funds for the Masland Acquisition were provided by borrowings under
the Credit Agreement and New Credit Agreement, as described in Note 5.
Masland is a leading supplier of floor and acoustic systems to the
North American automotive market. Masland also is a major supplier of interior
luggage compartment trim components and other acoustical products which are
designed to minimize noise, heat and vibration for passenger cars and light
trucks.
The Masland Acquisition was accounted for as a purchase, and
accordingly, the assets purchased and liabilities assumed in the acquisition
have been reflected in the accompanying balance sheet as of September 28, 1996.
The operating results of Masland have been included in the statement of
operations since the date of acquisition. The purchase price consisted of the
following and has been allocated to the net assets purchased as follows (in
millions):
Consideration paid to stockholders, net of cash received $ 337.8
Consideration paid to former Masland stock option holders 22.1
Debt assumed 96.8
Stock options issued to former Masland option holders 9.0
Estimated fees and expenses 10.0
-------
Cost of acquisition $ 475.7
=======
Property, plant and equipment $ 127.2
Net working capital 36.7
Other assets purchased and liabilities assumed, net (6.6)
Goodwill 318.4
-------
Total allocation of cost $ 475.7
=======
The purchase price and related allocation may be revised in the next year
based on revisions of preliminary estimates of fair values made at the date of
purchase. Such changes are not expected to be significant.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
AUTOMOTIVE INDUSTRIES
On August 17, 1995, the Company purchased all of the issued and
outstanding common stock of Automotive Industries Holding, Inc. ("AI") for an
aggregate purchase price of $885.0 million. AI is a leading designer and
manufacturer of high quality interior trim systems and blow molded products
principally for North American and European car and light truck manufacturers.
PRO FORMA INFORMATION
The following pro forma unaudited results of operations of the Company
for the three and nine month periods ended September 28, 1996 and September 30,
1995 were prepared to illustrate the estimated effects of (i) the Masland
Acquisition (including the refinancing of certain debt of Masland pursuant to
the Credit Agreement), (ii) the AI acquisition and certain acquisitions
completed by AI prior to the purchase of AI by the Company (including the
refinancing of certain debt of AI pursuant to the Credit Agreement), (iii) the
public offering of 7.5 million shares of the Company's common stock by the
Company and the application of net proceeds therefrom in September 1995, (iv)
the refinancing of the Company's prior credit facility with borrowings under the
Credit Agreement, (v) the completion of the New Credit Agreement (Note 5) and
(vi) the 1996 Note Offering (Note 4) and the 1996 Common Stock Offering (Note 3)
and the application of the net proceeds to the Company therefrom to repay
indebtedness outstanding under the Credit Agreements, a portion of which was
incurred to finance the Masland Acquisition, (collectively, the "Pro Forma
Transactions"), as if the Pro Forma Transactions had occurred as of January 1 of
each year presented.
(Unaudited, in millions, except per share data):
Three Months Ended Nine Months Ended
------------------- -----------------
September 28, September 30, September 28, September 30,
------------- ------------- ------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $ 1,505.6 $ 1,281.7 $ 4,791.8 $ 4,144.6
Net income $ 25.0 $ 6.0 $ 102.7 $ 66.0
Net income per share $ .37 $ .09 $ 1.52 $ .98
The pro forma information above does not purport to be indicative of the
results that actually would have been achieved if the operations were combined
during the periods presented, and is not intended to be a projection of future
results or trends.
(3) ISSUANCE OF COMMON STOCK
In July 1996, the Company issued and sold 7.5 million shares of common
stock (the "1996 Common Stock Offering"). Concurrently with this issuance, 7.5
million shares were sold by certain stockholders of the Company. Net of
issuance costs, the Company received proceeds of approximately $242.8 million
for the shares of common stock sold by the Company. The proceeds of this
issuance were used to repay indebtedness outstanding under the Credit
Agreements, a portion of which was incurred to finance the Masland Acquisition.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(4) ISSUANCE OF SUBORDINATED NOTES
In July 1996, the Company issued $200 million aggregate principal amount
of its 9 1/2 % Subordinated Notes due 2006 (the "1996 Note Offering").
Interest on the notes is payable on January 15 and July 15 of each year. The
notes are redeemable at the option of the Company, in whole or in part, on or
after July 15, 2001. Net of issuance costs, the Company received proceeds of
approximately $195.5 million in connection with the sale of the notes. The
proceeds of this issuance were used to repay indebtedness outstanding under the
Credit Agreements, a portion of which was incurred to finance the Masland
Acquisition.
(5) NEW CREDIT AGREEMENT
On June 27, 1996, the Company entered into a second revolving credit
agreement with a syndicate of financial institutions (the "New Credit
Agreement"). The New Credit Agreement contains substantially identical terms as
the Company's $1.445 billion Credit Agreement dated August 17, 1995, as amended
(the "Credit Agreement") and permits borrowings of up to $300 million. Following
the Masland Acquisition, the Company borrowed the full amount permitted under
the New Credit Agreement and used the proceeds to repay a portion of the
outstanding indebtedness under the Credit Agreement.
Borrowings under the Credit Agreement and the New Credit Agreement bear
interest, at the election of the Company, at a floating rate of interest equal
to (i) the higher of Chemical Bank's prime lending rate or the federal funds
rate plus .5% or (ii) the Eurodollar Rate (as defined in the New Credit
Agreement and Credit Agreement) plus a borrowing margin of .5% to 1.0%. The
applicable borrowing margin is determined based on the level of a specified
financial ratio of the Company. Under the Credit Agreement and the New Credit
Agreement, Lear is permitted to convert variable rate interest obligations on an
aggregate of up to $500 million in principal amount of indebtedness into fixed
rate interest obligations.
Amounts available under the New Credit Agreement and the Credit
Agreement will be reduced by an aggregate amount of $750 million prior to
maturity on September 30, 2001.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(6) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
principally determined by using the first-in, first-out method. Finished goods
and work-in-process inventories include material, labor and manufacturing
overhead costs.
Inventories are comprised of the following (in millions):
September 28, December 31,
1996 1995
---- ----
Raw materials $ 128.6 $ 139.4
Work-in-process 24.9 18.0
Finished goods 48.6 38.8
-------- --------
$ 202.1 $ 196.2
======== ========
(7) LONG-TERM DEBT
Long term debt is comprised of the following (in millions):
September 28, December 31,
1996 1995
---- ----
Domestic revolving credit loans $ 716.4 $ 717.1
Industrial revenue bonds 22.7 20.9
Other 40.4 39.9
-------- --------
779.5 777.9
Less- Current portion (8.5) (9.9)
-------- --------
771.0 768.0
-------- --------
Subordinated Debt:
9 1/2 % Subordinated Notes 200.0 -
8 1/4 % Subordinated Notes 145.0 145.0
11 1/4 % Senior Subordinated Notes 125.0 125.0
-------- --------
470.0 270.0
-------- --------
$1,241.0 $1,038.0
======== ========
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(8) COMMON SHARES OUTSTANDING
The weighted average number of shares of the Company's common stock is
as follows for the periods presented:
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Primary 67,004,490 50,927,792 62,320,313 49,985,045
Fully Diluted 67,004,490 50,966,315 62,342,246 50,206,725
(9) SUBSEQUENT EVENT
In October 1996, Lear signed a Memorandum of Understanding with Borealis
Holding AB to acquire its wholly owned subsidiary, Borealis Industrier AB.
Borealis Industrier AB manufactures instrument panels, door panels, climate
systems, exterior trim and various components for the European automotive and
truck industry. Borealis Industrier AB had 1995 sales of approximately $230
million and employs approximately 1,800 people at six sites located in Sweden.
Consummation of the acquisition is subject to certain conditions, including
the signing of a definitive agreement, completion of due diligence and the
acceptance by the Swedish competition authority.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 1996 VS. THREE MONTHS ENDED SEPTEMBER 30, 1995.
Net sales of $1,505.6 million in the quarter ended September 28, 1996 surpassed
the third quarter of 1995 by $425.0 million or 39.3%. Net sales as compared to
prior year benefited from the acquisitions of Masland Corporation and
Automotive Industries Holding, Inc., in June 1996 and August 1995,
respectively. Further contributing to the overall increase in sales was new
business introduced globally within the past year and increased automotive
production and content on carryover seat programs in North America and Mexico.
Net sales in the United States and Canada of $1,013.3 million in the third
quarter of 1996 exceeded the comparable period in the prior year by $283.1
million or 38.8%. Sales in the current quarter benefited from the contribution
of $203.6 million in incremental sales from the Masland and AI acquisitions and
vehicle production increases by domestic automotive manufacturers on
established passenger car and truck seat programs.
Net sales in Europe of $331.5 million increased in the third quarter of 1996 as
compared to the third quarter of 1995 by $52.9 million or 19.0%. Sales in the
quarter ended September 28, 1996 benefited from $21.5 million in sales from the
AI acquisition and additional volume on existing programs in Italy, Germany and
Sweden.
Net sales of $160.8 million in the third quarter of 1996 in the Company's
remaining geographic regions, consisting of Mexico, the Pacific Rim, South
America and South Africa surpassed the third quarter of the prior year by $89.0
million or 124.0%. Sales in the current quarter benefited from increased
General Motors passenger car and Chrysler truck activity and from new business
operations in South America, Australia and South Africa.
Gross Profit (net sales less cost of sales) and gross margin (gross profit as a
percentage of net sales) were $143.7 million and 9.5% for the third quarter of
1996 as compared to $83.2 million and 7.7% in 1995. Gross profit in the
current quarter benefited from the overall growth in North American and
European sales activity, including the acquisition of Masland and production of
new business programs in South America and South Africa.
Selling, general and administrative expenses as a percentage of net sales
increased to 3.8% in the third quarter of 1996 as compared to 3.3% in the third
quarter of 1995. The increase in actual expenditures was primarily due to the
Masland acquisition and engineering and support expenses associated with the
expansion of domestic and international business.
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Operating income and operating margin improved to $77.5 million and 5.1% for
the quarter ended September 28, 1996, as compared to $43.0 million and 4.0% a
year earlier. The increase in operating income was primarily due to increased
market demand and content on domestic and foreign car and truck programs and to
the acquisition of Masland, partially offset by increased design, development
and administrative expenses. Non-cash depreciation and amortization charges
were $39.6 million and $23.3 million for the third quarter of 1996 and 1995,
respectively.
Interest expense for the third quarter of 1996 increased by $6.8 million over
the prior year to $28.4 million. The increase is primarily due to interest
incurred on additional debt utilized to finance the Masland and AI
acquisitions.
Other expenses for the three months ended September 28, 1996, which include
state and local taxes, foreign exchange, minority interest of consolidated
subsidiaries, equity income of non-consolidated affiliates and other
non-operating expenses, increased in comparison to prior year due to increased
minority interest expenses related to the Company's South American and Masland
operations and higher state and local taxes.
Net income for the third quarter of 1996 was $24.8 million, or $.37 per share,
as compared to $8.5 million, or $.17 per share in the corresponding quarter in
the prior year. The provision for income taxes was $16.7 million resulting in
an effective tax rate of 40.2% for the current quarter as compared to $5.9
million and an effective tax rate of 34.7% in the prior year. The 34.7% tax
rate in the prior year reflects a change in the estimated annual tax rate.
Earnings per share increased in the third quarter of 1996 by 117.6% despite an
increase in the weighted average number of shares outstanding of approximately
16.0 million shares. Net income for the quarter ended September 30, 1995
reflects an extraordinary loss of $2.6 million related to the early retirement
of debt.
NINE MONTHS ENDED SEPTEMBER 28, 1996 VS. NINE MONTHS ENDED SEPTEMBER 30, 1995.
Net sales of $4,530.1 million for the nine month period of 1996 surpassed the
nine month period of the prior year by $1,263.4 million or 38.7%. Sales as
compared to the prior year benefited from the acquisitions of AI and Masland,
new business introduced globally within the past twelve months and increased
production build schedules on mature domestic and foreign seat programs.
Gross profit and gross margin were $431.2 million and 9.5% for the nine month
period ended September 28, 1996 as compared to $254.7 million and 7.8% a year
earlier. Gross profit in the current year reflects the contribution of the AI
and Masland acquisitions coupled with benefits derived from increased global
market demand on new and ongoing seat programs. Partially offsetting the
increase in gross profit were the General Motors' work stoppage in the first
quarter of 1996 and downtime associated with a Chrysler model changeover.
13
14
Selling, general and administrative expenses, including research and
development, for the current period increased as a percentage of net sales to
3.3% from 2.6% in the comparable period in the prior year. Actual expenditures
increased in comparison to prior year due to the inclusion of AI and Masland
operating expenses as well as increased North American and European engineering
and administrative expenses necessary to support established and potential
business opportunities.
Operating income and operating margin improved to $258.0 million and 5.7% for
the first nine months of 1996 as compared to $157.9 million and 4.8% in the
prior year. The increase in operating income was largely the result of the
Masland acquisition coupled with increased industry build schedules by domestic
and foreign automotive manufacturers on new and mature seat programs.
Partially offsetting the increase in operating income were engineering and
administrative support expenses, Chrysler's downtime for model changeover and
the adverse impact of the General Motors' work stoppage in the first quarter of
1996. Non-cash depreciation and amortization charges were $107.3 million and
$60.4 million for the nine month period of the current and prior years,
respectively.
For the nine months ended September 28, 1996, interest expense increased by
$25.9 million to $75.9 million as compared to the corresponding period in the
prior year. The increase in interest expense was largely the result of
interest incurred on additional debt utilized to finance the Masland and AI
acquisitions.
Other expenses for the nine months ended September 28, 1996, which include
state and local taxes, foreign exchange, minority interest of consolidated
subsidiaries, equity income of non-consolidated affiliates and other
non-operating expenses, increased in comparison to prior year as increased
state and local taxes and minority interest expense from the Company's South
American and Masland operations more than offset favorable foreign exchange
related to the Company's North American and European operations.
Net income for the first nine months of 1996 was $100.7 million, or $1.62 per
share, as compared to $54.4 million, or $1.08 per share in the comparable
period in 1995. The provision for income taxes in the current period was $66.8
million, resulting in an effective tax rate of 39.9%, as compared to $40.6
million and an effective tax rate of 41.6% in the previous year. The decline
in the effective tax rates is primarily due to changes in operating performance
and related income levels among the various tax jurisdictions. Earnings per
share increased in the first nine months of 1996 by 50.0% despite the impact of
the General Motors work stoppage and an increase in the weighted average number
of shares outstanding of approximately 12.1 million shares on a fully-diluted
basis.
The Company's future operating results are directly related to domestic and
foreign automotive vehicle production. In October and November, 1996, work
stoppages at various customer facilities have adversely affected the fourth
quarter operating results of the Company. Based upon preliminary estimates,
which could differ materially depending on production schedules for the
remainder of 1996 as to the recovery of a portion of these lost volumes, the
Company anticipates that the earnings per share for the quarter ending
December 31, 1996, will be adversely affected by approximately $.10 per share.
14
15
LIQUIDITY AND CAPITAL RESOURCES
On July 1, 1996, the Company completed the acquisition of 100% of the
outstanding shares of Masland for an aggregate purchase price of $475.7
million, including the assumption of existing net indebtedness and transaction
costs. In connection with the Masland Acquisition, the Company entered into a
second revolving credit agreement with a syndicate of financial institutions
(the "New Credit Agreement" and, together with the Credit Agreement, the
"Credit Agreements"). The New Credit Agreement contains substantially
identical terms as the Credit Agreement and permits borrowings of up to $300
million. Substantially all of the total purchase price of Masland was
initially financed with borrowings under the Credit Agreements.
In July, 1996, the Company issued 7.5 million shares of common stock at $33.50
per share and $200 million aggregate principal amount of 9 1/2% Subordinated
Notes due 2006. The $438.3 million of proceeds ($242.8 million and $195.5
million from the Common Stock Offering and Note Offering proceeds,
respectively), net of issuance costs, received by the Company were used to
repay indebtedness incurred under the Credit Agreements in connection with the
purchase of Masland.
As of the end of September, the Company had an aggregate of $1.745 billion
available under these secured Credit Agreements, of which $716.4 million was
outstanding and $44.0 million was committed under outstanding letters of
credit, resulting in $984.6 million unused and available. In addition to debt
outstanding under the Credit Agreements, the Company had an additional $538.6
million of debt, including short-term borrowings, primarily consisting of
$470.0 million of subordinated debentures due between 2000 and 2006.
Borrowing under the Credit Agreements are guaranteed by substantially all of
the Company's direct and indirect domestic subsidiaries and secured by (i) a
pledge of all of the capital stock of substantially all of the Company's
domestic subsidiaries, (ii) a grant of security interest in substantially all
of the assets of the Company and its domestic subsidiaries and (iii) the
mortgages of certain of the real property of the Company and its domestic
subsidiaries.
The 9 1/2% Notes are subordinated in right of payment to all existing and
future Senior Indebtedness (as defined in the Indenture relating to the 9 1/2%
Notes), including indebtedness outstanding under the Credit Agreements and the
11 1/4% Notes. Interest on the 9 1/2% Notes is payable on January 15 and July
15 of each year. The 9 1/2% Notes are redeemable at the option of the Company,
in whole or in part, on or after July 15, 2001. The Indenture pursuant to
which the 9 1/2% Notes were issued contains certain covenants that restrict,
among other things, the incurrence of additional indebtedness, the payment of
dividends, the repurchase of capital stock, the creation of liens, the sale of
assets, and the issuance of preferred stock.
In the second quarter of 1996, Moody's Investors Services ("Moody's") upgraded
its rating of the Company's primary debt instruments. The Credit Agreements
were upgraded from Ba2 to Ba1, the Company's 8 1/4% Subordinated Notes from B2
to B1 and the Company's 11 1/4% Senior Subordinated Notes from B1 to Ba3.
Standard and Poors Ratings Group ("S&P") also upgraded its rating of the Credit
Agreements to BB+ from BB- and the two subordinated debt issues to BB- from B.
The 9 1/2% Subordinated Notes were assigned a B1 and BB- rating from Moody's
and S&P, respectively.
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Net cash provided by operating activities increased to $128.0 million during
the nine months ended September 28, 1996 compared to $6.2 million during the
comparable period in 1995. Net income increased 85%, from $54.4 million in
1995 to $100.7 million in 1996 as a result of increased activities due to the
acquisitions of AI and Masland, new business awarded, cost reduction programs
and increased production levels on existing programs. In addition, net income
includes noncash depreciation and goodwill amortization charges for the nine
month periods, which increased by $46.9 million, from $60.4 million in 1995 to
$107.3 million in 1996 primarily as a result of the AI and Masland
acquisitions. Cash flow provided by earnings was partially offset by the net
change in working capital.
The net change in working capital resulted in a net use of $76.5 million and
$117.1 million for the nine months ended September 28, 1996 and September 30,
1995, respectively. The use of working capital decreased in 1996 primarily due
to a reduction in inventory levels from December 31, 1995 despite an increase
in sales activity.
Net cash used by investing activities, primarily acquisitions, was $553.0
million and $955.5 million for the nine months ended September 28, 1996 and
September 30, 1995, respectively. The Masland Acquisition, consummated July
1996, resulted in a net $457.0 million use of funds while the AI Acquisition,
consummated August 1995, resulted in a net $891.8 million cash use. Capital
expenditures increased in the nine month periods from $65.9 million in 1995 to
$100.0 million in 1996 as a result of the Masland and AI acquisitions as well
as to support new programs under production in 1996.
As of September 28, 1996 the Company had $51.5 million of cash and cash
equivalents. The Company believes that cash flows from operations and
available credit facilities will be sufficient to meet its debt service
obligations, projected capital expenditures and working capital requirements.
"SAFE HARBOR" PROVISIONS
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to, (i)
general economic conditions in the markets in which the Company operates, (ii)
fluctuations in worldwide or regional automobile and light truck production,
(iii) labor disputes involving the Company or its significant customers, (iv)
changes in practices and/or policies of the Company's significant customers
towards outsourcing automotive components and systems, and (v) other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings. The Company does not intend to update these forward-looking
statements.
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LEAR CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the quarter ended September
28, 1996:
Form 8-K filed on July 3, 1996 (dated June 27, 1996) with respect to the
acquisition of Masland Corporation. Such 8-K contains audited financial
statements of Masland Corporation for the fiscal year ended June 30, 1995
and unaudited financial statements for the period ended March 29, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAR CORPORATION
Dated: November 11, 1996 By: /s/ James H. Vandenberghe
-----------------------------
James H. Vandenberghe
Executive Vice President,
Chief Financial Officer
and a Director
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LEAR CORPORATION
FORM 10 -Q
EXHIBIT INDEX
FOR THE QUARTER ENDED SEPTEMBER 28, 1996
EXHIBIT
NUMBER EXHIBIT
4.1 Indenture dated as of July 1, 1996 by and between the Company
and The Bank of New York, as trustee, relating to the 9 1/2%
Subordinated Notes due 2006, filed herewith.
27.1 Financial Data Schedule for the quarter ended September 28,
1996, filed herewith.
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