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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 June 28, 1997
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
(State or other jurisdiction of
incorporation or organization)
21557 TELEGRAPH ROAD, SOUTHFIELD, MI
(Address of principal executive offices)
13-3386776
(I.R.S. Employer Identification No.)
48086-5008
(zip code)
(248) 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.
Number of shares of Common Stock, $0.01 par value per share, outstanding at
July 31, 1997: 66,330,112
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 1997
INDEX
PAGE NO.
--------
Part I -- Financial Information:
Item 1 -- Consolidated Financial Statements
Introduction to the Consolidated Financial Statements......................... 3
Consolidated Balance Sheets -- June 28, 1997 and December 31, 1996............ 4
Consolidated Statements of Income -- Three and Six Month Periods ended June
28, 1997 and June 29, 1996................................................... 5
Consolidated Statements of Cash Flows -- Six Month Periods ended June 28, 1997
and June 29, 1996............................................................ 6
Notes to the Consolidated Financial Statements................................ 7
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 11
Part II -- Other Information:
Item 4 -- Submission of Matters to a Vote of Security Holders.................... 15
Item 6 -- Exhibits and Reports on Form 8-K....................................... 16
Signatures......................................................................... 17
2
3
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, 1996.
The financial information presented reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations and statements of
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)
JUNE 28, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 16.5 $ 26.0
Accounts receivable, net........................................... 1,102.6 909.6
Inventories........................................................ 190.5 200.0
Recoverable customer engineering and tooling....................... 124.0 113.9
Other.............................................................. 93.5 97.9
---------- ----------
1,527.1 1,347.4
---------- ----------
LONG-TERM ASSETS:
Property, plant and equipment, net................................. 868.4 866.3
Goodwill, net...................................................... 1,452.8 1,448.2
Other.............................................................. 166.6 154.9
---------- ----------
2,487.8 2,469.4
---------- ----------
$ 4,014.9 $3,816.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings.............................................. $ 24.5 $ 10.3
Accounts payable................................................... 1,050.4 960.5
Accrued liabilities................................................ 601.7 520.2
Current portion of long-term debt.................................. 9.7 8.3
---------- ----------
1,686.3 1,499.3
---------- ----------
LONG-TERM LIABILITIES:
Deferred national income taxes..................................... 43.8 49.6
Long-term debt..................................................... 994.1 1,054.8
Other.............................................................. 185.8 194.4
---------- ----------
1,223.7 1,298.8
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized; 66,252,554
issued at June 28, 1997 and 65,586,129 issued at December 31,
1996............................................................ .7 .7
Additional paid-in capital......................................... 844.6 834.5
Notes receivable from sale of common stock......................... (.5) (.6)
Less -- Common stock held in treasury, 10,230 shares at cost....... (.1) (.1)
Retained earnings.................................................. 297.1 194.1
Minimum pension liability adjustment............................... (1.0) (1.0)
Cumulative translation adjustment.................................. (35.9) (8.9)
---------- ----------
1,104.9 1,018.7
---------- ----------
$ 4,014.9 $3,816.8
========== ==========
The accompanying notes are an integral part of these balance sheets.
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5
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales............................................. $1,839.3 $1,618.7 $3,563.3 $3,024.5
Cost of sales......................................... 1,625.8 1,451.8 3,171.9 2,737.0
Selling, general and administrative expenses.......... 67.2 49.0 133.3 92.3
Amortization of goodwill.............................. 9.7 7.4 19.4 14.7
-------- -------- -------- --------
Operating income.................................... 136.6 110.5 238.7 180.5
Interest expense...................................... 26.7 23.1 53.9 47.5
Other expense, net.................................... 7.3 3.9 12.8 7.0
-------- -------- -------- --------
Income before provision for national income taxes... 102.6 83.5 172.0 126.0
Provision for national income taxes................... 41.5 33.4 69.0 50.1
-------- -------- -------- --------
Net income.......................................... $ 61.1 $ 50.1 $ 103.0 $ 75.9
======= ======= ======= =======
Net income per common share......................... $ .89 $ .83 $ 1.51 $ 1.26
======= ======= ======= =======
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)
SIX MONTHS ENDED
--------------------
JUNE 28, JUNE 29,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 103.0 $ 75.9
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of goodwill............................ 87.3 67.7
Amortization of deferred financing fees.............................. 1.7 1.6
Other, net........................................................... (20.1) (.1)
Change in working capital items, net................................. (48.4) (19.3)
-------- --------
Net cash provided by operating activities.......................... 123.5 125.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.............................. (75.1) (64.9)
Acquisitions, net....................................................... (59.1) (306.4)
Other, net.............................................................. 1.4 1.9
-------- --------
Net cash used in investing activities.............................. (132.8) (369.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net........................................... (56.2) 260.1
Increase (decrease) in cash overdrafts.................................. 38.7 (8.0)
Short-term borrowings, net.............................................. 10.8 (5.4)
Other, net.............................................................. 3.5 .5
-------- --------
Net cash provided by (used in) financing activities................ (3.2) 247.2
-------- --------
Effect of foreign currency translation.................................... 3.0 (5.7)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................... (9.5) (2.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 26.0 34.1
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 16.5 $ 32.0
======== ========
CHANGES IN WORKING CAPITAL, net of impact of acquisitions:
Accounts receivable..................................................... $ (234.1) $ (141.0)
Inventories............................................................. 5.2 15.7
Accounts payable........................................................ 89.5 124.1
Accrued liabilities and other........................................... 91.0 (18.1)
-------- --------
$ (48.4) $ (19.3)
======== ========
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest.................................................. $ 53.2 $ 46.8
======== ========
Cash paid for income taxes.............................................. $ 41.7 $ 41.6
======== ========
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) ACQUISITION OF MASLAND CORPORATION AND PRO FORMA FINANCIAL DATA
On June 27, 1996, the Company, through a wholly owned subsidiary ("PA
Acquisition Corp."), acquired 97% of the issued and 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, the remaining issued and
outstanding shares of common stock of Masland were acquired and PA 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). Masland was a leading supplier of floor and acoustic systems
to the North American automotive market. Masland also was a major supplier of
interior luggage compartment trim components and other acoustical products which
are designed to minimize noise, vibration and harshness 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 consolidated balance sheets and the operating
results of Masland have been included in the consolidated financial statements
since the date of acquisition.
The following pro forma unaudited financial data is presented to illustrate
the estimated effects of (i) the Masland Acquisition (including the refinancing
of certain debt of Masland pursuant to the Company's prior revolving senior
credit facilities (the "Prior $1.8 billion Credit Agreements")), and (ii) the
issuance of 7,500,000 shares of the Company's common stock and the issuance of
$200.0 million aggregate principal amount of the Company's 9 1/2% Subordinated
Notes in July, 1996, and the application of the net proceeds to the Company
therefrom to repay indebtedness outstanding under the Company's Prior $1.5
billion Credit Agreement, 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, 1996 (unaudited; in millions, except
per share data):
THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 29, 1996 JUNE 29, 1996
------------------- -----------------
Net sales................................... $ 1,758.9 $ 3,286.2
Net income.................................. $ 49.8 $ 77.7
Net income per common share................. $ .73 $ 1.15
(3) ACQUISITION OF DUNLOP COX
On June 5, 1997, the Company acquired all of the outstanding shares of
common stock of Dunlop Cox Limited ("Dunlop Cox") for approximately $60 million
(the "Dunlop Cox Acquisition"). Dunlop Cox, based in Nottingham, England,
provides Lear with the ability to design and manufacture manual and
electronically-powered automotive seat adjusters. For the year ended December
31, 1996, Dunlop Cox had sales of approximately $39 million. The Dunlop Cox
Acquisition was accounted for as a purchase, and accordingly, the assets
purchased and liabilities assumed have been reflected at their estimated fair
market value in the accompanying balance sheet as of June 28, 1997. The
operations of Dunlop Cox from the acquisition date were not material to the
consolidated statement of income of the Company.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally 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):
JUNE 28, DECEMBER 31,
1997 1996
-------- ------------
Raw materials............................................ $125.5 $124.7
Work-in-process.......................................... 21.0 25.0
Finished goods........................................... 44.0 50.3
------ ------
$190.5 $200.0
====== ======
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciable property is
depreciated over the estimated useful lives of the assets, using principally the
straight-line method. A summary of property, plant and equipment is shown below
(in millions):
JUNE 28, DECEMBER 31,
1997 1996
-------- ------------
Land.................................................... $ 55.5 $ 52.3
Buildings and improvements.............................. 303.6 287.6
Machinery and equipment................................. 869.2 836.8
-------- --------
Total property, plant and equipment..................... 1,228.3 1,176.7
Less accumulated depreciation........................... (359.9) (310.4)
-------- --------
Net property, plant and equipment....................... $ 868.4 $ 866.3
======== ========
(6) LONG-TERM DEBT
Long term debt is comprised of the following (in millions):
JUNE 28, DECEMBER 31,
1997 1996
-------- ------------
Credit agreements........................................ $441.1 $ 481.3
Industrial revenue bonds................................. 32.0 22.6
Other.................................................... 60.7 89.2
------ --------
533.8 593.1
Less -- Current portion.................................. (9.7) (8.3)
------ --------
524.1 584.8
------ --------
9 1/2% Subordinated Notes.............................. 200.0 200.0
8 1/4% Subordinated Notes.............................. 145.0 145.0
11 1/4% Senior Subordinated Notes...................... 125.0 125.0
------ --------
470.0 470.0
------ --------
$994.1 $1,054.8
====== ========
On July 15, 1997, the Company redeemed all of its 11 1/4% Senior
Subordinated Notes due 2000 at par using borrowings under its existing $1.8
billion multi-currency revolving credit facility with a syndicate of lenders
(the "Credit Agreement").
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9
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(7) COMMON SHARES OUTSTANDING
The weighted average number of shares of common stock outstanding is as
follows for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
Primary......................... 68,070,273 60,060,508 68,059,280 59,984,438
Fully Diluted................... 68,282,638 60,078,101 68,248,762 60,052,761
(8) FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments selectively to offset
exposures to market risks arising from changes in foreign exchange rates and
interest rates. Derivative financial instruments currently utilized by the
Company primarily include forward foreign exchange contracts and interest rate
swaps.
Certain foreign currency contracts entered into by the Company qualify for
hedge accounting as only firm commitments to purchase raw materials in a foreign
currency are hedged. Gains and losses from these contracts are deferred and
generally recognized in cost of sales as of the settlement date. Other foreign
currency contracts entered into by the Company, which do not receive hedge
accounting treatment, are marked to market with unrealized gains or losses
recognized in other expense in the income statement. Interest rate swaps are
accounted for by recognizing interest expense and interest income in the amount
of anticipated interest payments.
(9) FINANCIAL ACCOUNTING STANDARDS
Earnings per Share
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which changes the calculation of earnings per share to be more
consistent with countries outside of the United States. In general, the
statement requires two calculations of earnings per share to be disclosed, basic
EPS and diluted EPS. Basic EPS is to be computed using only weighted average
shares outstanding. The Company's diluted EPS is computed using the average
share price for the period when calculating the dilution of options and
warrants. This statement must be adopted by the Company in its December 31, 1997
consolidated financial statements and early adoption is not permitted. If this
statement had been adopted for the periods presented, the net income and per
share amounts would have been as follows (unaudited; in millions, except per
share data):
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
Net income................................. $61.1 $50.1 $103.0 $75.9
===== ===== ====== =====
Basic net income per share................. $ .92 $ .88 $ 1.56 $1.34
===== ===== ====== =====
Diluted net income per share............... $ .90 $ .83 $ 1.51 $1.27
===== ===== ====== =====
Comprehensive Income
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income. Comprehensive income is defined as all changes in a
Company's net assets except changes resulting from transactions with
shareholders. It differs from net income in that certain items currently
recorded to equity would be a part of comprehensive income.
9
10
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Comprehensive income must be reported in a financial statement with the
cumulative total presented as a component of equity. This statement must be
adopted by the Company in its 1998 quarterly financial statements.
Segment Information
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which introduces a new model for
segment reporting based upon the way the chief operating decision-maker
organizes segments within the Company for making operating decisions and
assessing performance. The Statement requires disclosures for each segment that
are similar to those currently required with the addition of quarterly
disclosure requirements and geographic data by country. This statement must be
adopted by the Company in its December 31, 1998 consolidated financial
statements.
(10) SUBSEQUENT EVENTS
On June 30, 1997, the Company's then-largest shareholders, certain merchant
banking partnerships affiliated with Lehman Brothers Holdings Inc., sold all
10,284,854 of their shares of common stock of Lear in a secondary offering.
On July 31, 1997, the Company acquired certain equity and partnership
interests in Keiper Car Seating GmbH & Co. and certain of its subsidiaries and
affiliates (collectively, "Keiper") for approximately $260 million. Keiper was a
leading supplier of automotive vehicle seat systems with operations in Germany,
Italy, Hungary, Brazil and South Africa, with unaudited sales for the year ended
December 31, 1996 of approximately $615 million.
On August 4, 1997, the Company entered into a definitive agreement to
acquire ITT Automotive Seat Sub-Systems Unit ("ITT Seat Sub-Systems"), a North
American supplier of power seat adjusters and power recliners. ITT Seat
Sub-Systems had 1996 sales to non-Lear facilities of approximately $115 million.
10
11
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 28, 1997 VS. THREE MONTHS ENDED JUNE 29, 1996.
Net sales increased by 13.6% to $1,839.3 million in the second quarter of
1997 as compared to $1,618.7 million in the second quarter of 1996. Net sales
for the quarter ended June 28, 1997 benefited from the acquisitions of Masland
Corporation ("Masland"), Borealis Industrier, AB ("Borealis") and Empetek
Autodily S.R.O. ("Empetek") in June 1996, December 1996 and March 1997,
respectively, which collectively accounted for $226.3 million of the increase,
and new business introduced globally within the past year. Partially offsetting
the increase in sales were the adverse impacts of the General Motors and
Chrysler work stoppages in the United States, Canada and Mexico and exchange
rate fluctuations in Europe. As a result of Lear's continued global expansion,
the Company anticipates that foreign exchange fluctuations will continue to have
an impact on net sales.
Net sales in the United States and Canada of $1,193.9 million increased in
the second quarter of 1997 as compared to the second quarter of 1996 by $148.6
million or 14.2%. Sales in the current quarter benefited from the contribution
of $156.0 million in sales from the Masland acquisition and new sport utility
and truck programs introduced by domestic automotive manufacturers as industry
build schedules for mature programs remained essentially unchanged. Partially
offsetting the increase in sales was downtime associated with customer work
stoppages which collectively impacted revenue by $59.4 million.
Net sales in Europe of $484.1 million in the second quarter of 1997
surpassed the comparable period in the prior year by $49.8 million or 11.5%.
Sales in the quarter ended June 28, 1997 benefited from $54.5 million in sales
from the Borealis acquisition and vehicle production increases on established
programs in Italy and Austria. Partially offsetting the increase in sales were
unfavorable exchange rate fluctuations in Germany, Italy, Sweden, and Austria.
Net sales of $161.3 million in the Company's remaining geographic regions,
consisting of Mexico, South America, the Asia/Pacific Rim region and South
Africa, exceeded the second quarter of 1996 by $22.2 million or 16.0%. Sales in
the second quarter of 1997 reflect increased market demand for new and ongoing
seat programs in South America and $12.3 million in sales from the Masland
acquisition. Partially offsetting the increase in sales was the Chrysler work
stoppage and the production phase out of a General Motors truck program.
Gross profit (net sales less cost of sales) and gross margin (gross profit
as a percentage of net sales) were $213.5 million and 11.6% for the second
quarter of 1997 as compared to $166.9 million and 10.3% for the second quarter
of 1996. Gross profit in 1997 reflects the contribution of the Masland and
Borealis acquisitions coupled with the benefits derived from increased foreign
sales. Partially offsetting the increase in gross profit was the impact of
customer work stoppages in North America.
Selling, general and administrative expenses, including research and
development, as a percentage of net sales increased to 3.7% in the second
quarter of 1997 as compared to 3.0% in the second quarter of 1996. Actual
expenditures increased in comparison to prior year due to the inclusion of
Masland and Borealis operating expenses and increased design, development and
administrative expenses necessary to support domestic and international
business.
Operating income and operating margin (operating income as a percentage of
net sales) improved to $136.6 million and 7.4% for the quarter ended June 28,
1997 as compared to $110.5 million and 6.8% a year earlier. For the current
quarter, operating income benefited from the incremental operating income
generated from acquisitions along with the benefits derived from global vehicle
build schedules for new and ongoing programs. Partially offsetting the increase
in operating income were reduced utilization at General Motors and Chrysler
facilities and increased engineering and administrative support expenses at
North American and European technology centers. Non-cash depreciation and
amortization charges were $43.8 million and $34.5 million for the second quarter
of 1997 and 1996, respectively.
11
12
For the quarter ended June 28, 1997, interest expense increased by $3.6
million to $26.7 million as compared to the corresponding period in the prior
year. The increase in interest expense was largely the result of borrowings
incurred to finance the Masland and Borealis acquisitions which more than offset
the proceeds generated from the Company's July 1996 common stock offering.
Other expenses for the three months ended June 28, 1997, which include
state and local taxes, foreign exchange, minority interests in consolidated
subsidiaries, equity in net income of affiliates and other non-operating
expenses, increased to $7.3 million from $3.9 million in the second quarter of
1996 primarily due to state and local taxes and foreign exchange losses.
Net income for the second quarter of 1997 was $61.1 million, or $.89 per
share, as compared to $50.1 million, or $.83 per share in the prior year second
quarter. The provision for income taxes was $41.5 million resulting in an
effective tax rate of 40.4% for the current quarter as compared to $33.4 million
and an effective tax rate of 40.0% in the prior year. Earnings per share
increased in the second quarter of 1997 by 7.2% despite the previously mentioned
customer work stoppages and an increase in the weighted average number of shares
outstanding of approximately 8.2 million shares.
SIX MONTHS ENDED JUNE 28, 1997 VS. SIX MONTHS ENDED JUNE 29, 1996.
Net sales of $3,563.3 million for the six month period of 1997 increased by
$538.8 million or 17.8% as compared to $3,024.5 million for the six month period
of 1996. Sales as compared to the prior year benefited from acquisitions,
primarily Masland and Borealis, which accounted for $433.9 million of the
increase, new business introduced worldwide within the past twelve months and
incremental volume and content on established programs in North America and
South America. Partially offsetting the increase in sales were customer work
stoppages and exchange rate fluctuations in Europe.
Gross profit and gross margin improved to $391.4 million and 11.0% in the
first half of 1997 as compared to $287.5 million and 9.5% a year earlier. Gross
profit in the current six months reflects the contribution of the Masland and
Borealis acquisitions coupled with the benefits derived from increased global
market demand on new and carryover programs. Partially offsetting the increase
in gross profit were the General Motors and Chrysler work stoppages in the
second quarter of 1997.
Selling, general and administrative expenses, including research and
development, for the six month period ended June 28, 1997, increased as a
percentage of net sales to 3.7% from 3.1% in the prior year. Actual expenditures
increased in comparison to prior year due to the inclusion of Masland and
Borealis operating expenses and increased North American and European
engineering and administrative expenses required to support the expansion of
existing business and expenses related to the pursuit of new business
opportunities.
Operating income and operating margin improved to $238.7 million and 6.7%
in the first half of 1997 as compared to $180.5 million and 6.0% for the first
half of 1996. Operating income in the first half of 1997 benefited from the
acquisition of Masland coupled with increased industry build schedules by
domestic and foreign automotive manufacturers on new and established programs.
Partially offsetting the increase in operating income were engineering and
administrative support expenses and the adverse impact of customer work
stoppages in the second quarter of 1997. Non-cash depreciation and amortization
charges were $87.3 million and $67.7 million for the first half of 1997 and
1996, respectively.
For the six months ended June 28, 1997, interest expense increased by $6.4
million to $53.9 million over the first six months of 1996 largely as a result
of interest on additional debt incurred to finance the Masland and Borealis
acquisitions.
Other expenses for the first half of 1997, which include state and local
taxes, foreign exchange, minority interests in consolidated subsidiaries, equity
in net income of affiliates and other non-operating expenses increased to $12.8
million from $7.0 million for the first half of 1996 due to increased provisions
for minority interest and state and local taxes.
Net income for the first six months of 1997 was $103.0 million or $1.51 per
share as compared to $75.9 million or $1.26 per share for the first six months
of 1996. Earnings per share in the current six month
12
13
period increased by 19.8% over the same period in 1996, despite the impact of
the General Motors and Chrysler work stoppages and an increase in the weighted
average number of shares outstanding of approximately 8.1 million shares. The
provision for income taxes in the current period was $69.0 million, or an
effective tax rate of 40.1% as compared to $50.1 million, or an effective tax
rate of 39.8% in the previous year.
LIQUIDITY AND FINANCIAL CONDITION
Lear's financial position continued to strengthen during the first half of
1997 despite the additional debt incurred in 1997 to acquire Dunlop Cox and
Empetek and the impact of the General Motors and Chrysler work stoppages. Strong
cash flows were sufficient to offset acquisition costs and resulted in an
improved total debt to total capitalization ratio of 48.2% at June 28, 1997, as
compared to 49.7% at March 29, 1997 and 51.3% at December 31, 1996. In addition,
Lear received upgrades from both Standard and Poor's Corporation ("S&P") and
Moody's Investors Service ("Moody's"). On June 27, 1997, S&P upgraded Lear's
corporate rating from BB+ to BBB- and the Company's 8 1/4% and 9 1/2%
Subordinated Notes from BB- to BB+. On August 7, 1997, Moody's upgraded Lear's
$1.8 billion secured bank facility (the "Credit Agreement") from Ba1 to Baa3 and
the 8 1/4% and 9 1/2% Subordinated Notes from B1 to Ba3.
As of June 28, 1997, the Company had $441.1 million outstanding under the
Credit Agreement, which matures on September 30, 2001, and $50.1 million
committed under outstanding letters of credit, resulting in approximately $1.3
billion unused and available. On July 15, 1997, the Company took advantage of
the favorable interest rate environment by redeeming $125.0 million in aggregate
principal amount of its 11 1/4% Senior Subordinated Notes due 2000 at par with
borrowings under the Credit Agreement.
In addition to debt outstanding under the Credit Agreement, the Company had
an additional $587.2 million of debt outstanding as of June 28, 1997, consisting
primarily of $470.0 million of subordinated notes (including the $125.0 million
11 1/4% Senior Subordinated Notes) due between the years 2000 and 2006.
Net cash provided by operating activities was $123.5 million during the
first six months of 1997 compared to $125.8 million for the same period in 1996.
Net income increased 35.7%, from $75.9 million in the first six months of 1996
to $103.0 million in the same period of 1997, as a result of acquisitions, new
business programs and increased volume and content on existing programs. In
addition, net income included non-cash depreciation and goodwill amortization
charges of $87.3 million in the first half of 1997 and $67.7 million in 1996.
Cash flow provided by increased earnings was partially offset by the net change
in working capital, primarily due to the timing of accounts receivable
collections.
Net cash used in investing activities decreased from $369.4 million in the
first six months of 1996 to $132.8 million in 1997. The 1996 Masland acquisition
resulted in a net use of funds of $306.4 million while the 1997 Dunlop Cox and
Empetek acquisitions resulted in an aggregate net use of $59.1 million. Capital
expenditures increased from $64.9 million in the first half of 1996 to $75.1
million in the same period of 1997 as a result of acquisitions and expenditures
incurred to support future programs. Approximately $120 million of additional
capital expenditures are expected for the remainder of 1997.
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.
ACCOUNTING POLICIES
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which changes the calculation of earnings per share to be more
consistent with countries outside of the United States. The Company is required
to adopt this statement in its December 31, 1997 consolidated financial
statements. If this statement had been adopted for the periods presented, the
impact on the Company's financial statements is disclosed in Note 9 to its June
28, 1997 quarterly financial statements included herein.
Also during 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". SFAS No. 130 requires
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increased disclosure of comprehensive income and must be adopted by the Company
in its 1998 quarterly financial statements. SFAS No. 131 requires limited
segment data on a quarterly basis and geographic data by country. SFAS No. 131
must be adopted by the Company in its December 31, 1998 consolidated financial
statements. These requirements are discussed in further detail in Note 9 to its
June 28, 1997 quarterly financial statements included herein.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
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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15
LEAR CORPORATION
PART II -- OTHER INFORMATION
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of Lear Corporation was held on May
15, 1997. At the meeting, the following matters were submitted to a vote of the
stockholders of Lear Corporation. Pursuant to the rules of the New York Stock
Exchange, there were no broker non-votes in any of the matters described below.
(1) The election of four directors to hold office until the Annual
Meeting of Stockholders in the year 2000. The vote with respect to each
nominee was as follows:
NOMINEE FOR WITHHELD
- ------------------ ---------- --------
G. Andrea Botta 31,784,755 89,983
Irma B. Elder 31,782,889 91,849
David P. Spalding 31,675,637 199,101
James A. Stern 31,675,173 199,565
(2) To approve the Lear Corporation Long-Term Stock Incentive Plan
FOR AGAINST WITHHELD
- ------------------ ---------- --------
43,493,297 15,610,375 77,892
(3) The appointment of the firm of Arthur Andersen LLP as independent
auditors of Lear Corporation for the year ending December 31, 1997.
FOR AGAINST WITHHELD
- ------------------ ---------- --------
59,082,630 64,524 34,410
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ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Lear Corporation 1996 Stock Option Plan, as amended and restated, filed
herewith.
10.2 Lear Corporation Long-Term Stock Incentive Plan, as amended and restated,
filed herewith.
10.3 Lear Corporation Outside Directors Compensation Plan, as amended and restated,
filed herewith.
10.4 Second Amended and Restated Secured Promissory Note dated as of March 29, 1997
between Lear Corporation and James A. Hollars, filed herewith.
10.5 Purchase Agreement dated as of May 26, 1997 among Keiper GmbH & Co., Putsch
GmbH & Co. KG, Keiper Recaro GmbH, Keiper Car Seating Verwaltungs GmbH, Lear
Corporation GmbH & Co. and Lear Corporation, filed herewith.
27.1 Financial Data Schedule for the Quarter Ended June 28, 1997.
(b) The following reports on Form 8-K were filed during the quarter ended
June 28, 1997.
April 3, 1997 -- Form 8-K relating to the promotion of certain of the
Company's executive officers.
June 6, 1997 -- Form 8-K relating to the impact of work stoppages at
General Motors and Chrysler assembly plants.
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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
By: /s/ DONALD J. STEBBINS
------------------------------------
Donald J. Stebbins
Senior Vice President and
Chief Financial Officer
Dated: August 12, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- ------------------------------------------------------------------------------------
10.1 Lear Corporation 1996 Stock Option Plan, as amended and restated, filed herewith.
10.2 Lear Corporation Long-Term Stock Incentive Plan, as amended and restated, filed
herewith.
10.3 Lear Corporation Outside Directors Compensation Plan, as amended and restated, filed
herewith.
10.4 Second Amended and Restated Secured Promissory Note dated as of March 29, 1997
between Lear Corporation and James A. Hollars, filed herewith.
10.5 Purchase Agreement dated as of May 26, 1997 among Keiper GmbH & Co., Putsch GmbH &
Co. KG, Keiper Recaro GmbH, Keiper Car Seating Verwaltungs GmbH, Lear Corporation
GmbH & Co. and Lear Corporation, filed herewith.
27.1 Financial Data Schedule for the Quarter Ended June 28, 1997.