1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 4, 1999
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LEAR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-11311 13-3386776
- -------------------------------- ---------------------- ---------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
21557 Telegraph Road
Southfield, Michigan 48086-5008
- -------------------------------------------------- ---------------------
(Address of principal executive offices) (zip code)
(248) 447-1500
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(Telephone number, including
area code, of agent for service)
No Change
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(Former name or former address,
if changes since last report)
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ITEM 2. ACQUISITION OF ASSETS
On May 4, 1999, Lear Corporation acquired UT Automotive, Inc., a
wholly-owned operating segment of United Technologies Corporation. UT Automotive
is a supplier of electrical, electronic, motor and interior products and systems
to the global automotive industry. Headquartered in Dearborn, Michigan, UT
Automotive has annual sales of approximately $3 billion, 44,000 employees and 90
facilities located in 18 countries.
The purchase price for UT Automotive was approximately $2.3 billion
(subject to post-closing adjustments) and was based upon estimates of future
earnings and evaluations of the net worth of the assets acquired. Funds for the
UT Automotive acquisition were provided by borrowings under our primary credit
facilities.
In connection with the UT Automotive acquisition, we amended and
restated our prior senior credit facility and entered into new credit
facilities. Our primary credit facilities now consist of an amended and
restated $2.1 billion revolving credit facility which matures on September 30,
2001, a new $500 million revolving credit facility which matures on May 4, 2004,
a new $500 million term loan having scheduled amortization beginning in October
2000 and a final maturity of May 4, 2004 and a new $1.4 billion interim loan
maturing on May 3, 2000.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. Historical Financial Statements.
1) Three Year Audited Financial Statements
UT AUTOMOTIVE, INC.
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of
United Technologies Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and statements of changes in UTC investment
and of cash flows present fairly, in all material respects, the financial
position of UT Automotive, Inc. and its automotive affiliates described in Note
1 (the Company) at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
March 31, 1999
4
UT AUTOMOTIVE, INC. 2
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31,
1998 1997
ASSETS
Cash and cash equivalents $ 43,396 $ 26,815
Accounts receivable (net of allowances of $3,880 and $1,793
at December 31, 1998 and 1997, respectively) 575,192 526,460
Inventories 170,672 177,113
Prepaid expenses 12,721 7,409
Deferred income tax benefits 57,354 62,635
---------- ----------
Total current assets 859,335 800,432
Investments and receivables due after one year 42,111 29,427
Fixed assets, net 709,706 635,922
Goodwill (net of accumulated amortization of $115,529 and
$102,283 at December 31, 1998 and 1997, respectively) 333,112 343,474
Deferred income tax benefits 1,816 7,732
Other assets 41,333 51,698
---------- ----------
Total assets $1,987,413 $1,868,685
========== ==========
LIABILITIES AND UTC INVESTMENT
Short-term borrowings and long-term debt currently due $ 9,445 $ 13,261
Accounts payable 376,972 300,101
Accrued liabilities 181,775 188,962
Income taxes currently payable 11,671 11,728
---------- ----------
Total current liabilities 579,863 514,052
Deferred income taxes 38,394 39,442
Long-term debt 5,212 6,370
Other long-term liabilities 96,509 125,346
Commitments and contingent liabilities (Note 19)
Minority interests in subsidiary companies 2,459 4,279
---------- ----------
Total liabilities 722,437 689,489
UTC investment 1,264,976 1,179,196
---------- ----------
Total liabilities and UTC investment $1,987,413 $1,868,685
========== ==========
See accompanying notes to combined financial statements.
5
UT AUTOMOTIVE, INC. 3
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
COMBINED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996
Net sales $ 2,900,337 $ 2,927,305 $ 3,085,580
Cost of goods sold 2,378,402 2,445,294 2,673,676
----------- ----------- -----------
Gross profit 521,935 482,011 411,904
Engineering, research and development 147,427 118,255 108,063
Selling, general and administrative 210,622 209,074 210,957
Allocated UTC costs 4,612 4,760 4,069
----------- ----------- -----------
159,274 149,922 88,815
Other income (expense)
Interest expense (22,238) (9,921) (8,476)
Other income, net 1,494 10,680 96,157
----------- ----------- -----------
Income before income taxes and minority interests 138,530 150,681 176,496
Income taxes 57,533 71,046 64,149
----------- ----------- -----------
Income before minority interests 80,997 79,635 112,347
Less - Minority interests in subsidiaries' earnings 855 253 1,192
----------- ----------- -----------
Net income $ 80,142 $ 79,382 $ 111,155
=========== =========== ===========
See accompanying notes to combined financial statements.
6
UT AUTOMOTIVE, INC. 4
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
COMBINED STATEMENTS OF CHANGES IN UTC INVESTMENT
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
ACCUMULATED NON-
OTHER SHAREOWNER
NON-SHAREOWNER CHANGES IN
UTC CHANGES IN EQUITY FOR
INVESTMENT EQUITY TOTAL THE PERIOD
December 31, 1995 $ 1,136,571 $ 13,708 $ 1,150,279
Net income 111,155 111,155 $ 111,155
Foreign currency translation adjustment (2,576) (2,576) (2,576)
UTC investment activity (177,831) (177,831)
----------- ----------- ----------- -----------
December 31, 1996 1,069,895 11,132 1,081,027 $ 108,579
===========
Net income 79,382 79,382 $ 79,382
Foreign currency translation adjustment (32,977) (32,977) (32,977)
UTC investment activity 51,764 51,764
----------- ----------- ----------- -----------
December 31, 1997 1,201,041 (21,845) 1,179,196 $ 46,405
===========
Net income 80,142 80,142 $ 80,142
Foreign currency translation adjustment 10,216 10,216 10,216
UTC investment activity (4,578) (4,578)
----------- ----------- ----------- -----------
December 31, 1998 $ 1,276,605 $ (11,629) $ 1,264,976 $ 90,358
=========== =========== =========== ===========
See accompanying notes to combined financial statements.
7
UT AUTOMOTIVE, INC. 5
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 80,142 $ 79,382 $ 111,155
Adjustments to reconcile net income to net cash
flows from operating activities
Gain on disposition of business unit (78,000)
Depreciation 111,285 114,499 115,082
Goodwill amortization 13,005 12,820 12,045
(Gain) loss on fixed asset sales 4,861 227 (156)
Equity in earnings of investees (3,986) (1,439) (2,553)
Minority interests in subsidiaries' earnings 855 253 1,192
Deferred income taxes 9,552 (6,192) (17,497)
Change in operating assets and liabilities
(net of acquisitions and dispositions)
Accounts receivable (37,303) (32,567) (23,169)
Inventories 11,030 10,960 (1,688)
Prepaid expenses (5,088) 2,842 (2,063)
Accounts payable 69,433 (3,227) 20,145
Accrued liabilities (10,628) (43,661) 45,217
Other (net noncurrent) (14,532) (5,656) 15,724
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES 228,626 128,241 195,434
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposition of business unit 139,820
Purchase of fixed assets (192,902) (161,026) (137,292)
Sale of fixed assets 11,697 41,862 5,324
Investments and other, net (15,820) (49,463) (23,593)
--------- --------- ---------
NET CASH FLOWS USED FOR INVESTING ACTIVITIES (197,025) (168,627) (15,741)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt, net (2,357) (18,499) (5,980)
Short-term borrowings, net (3,405) (1,114) 5,465
UTC investment activity (4,578) 51,764 (177,831)
Other (4,846) (5,893) 284
--------- --------- ---------
NET CASH FLOWS (USED FOR) PROVIDED BY
FINANCING ACTIVITIES (15,186) 26,258 (178,062)
--------- --------- ---------
Effect of foreign exchange rate changes on cash and
cash equivalents 166 (3,346) (300)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16,581 (17,474) 1,331
Cash and cash equivalents- beginning of year 26,815 44,289 42,958
--------- --------- ---------
Cash and cash equivalents- end of year $ 43,396 $ 26,815 $ 44,289
========= ========= =========
See accompanying notes to combined financial statements.
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UT AUTOMOTIVE, INC. 6
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
UT Automotive, Inc. is a wholly-owned operating segment of United
Technologies Corporation ("UTC"). The accompanying combined financial
statements were prepared to show the historical operating results of the
entities comprising UTC's Automotive Business, which includes UT
Automotive, Inc. and certain affiliated entities which are subsidiaries
of other UTC operating units (collectively, "UT Automotive, Inc.", "UTA"
or the "Company"). Throughout the period covered by the combined
financial statements, the Company was treated as an operating segment of
UTC. Historically, separate financial statements were not prepared for
UTA.
The combined financial statements were prepared using UTC's historical
basis in the assets and liabilities of UTA. Changes in indebtedness
between the Company and UTC are reflected as part of the UTC investment
in the accompanying combined balance sheets.
The combined financial statements include all revenues, costs, assets and
liabilities directly attributable to UTA. Allocation of costs for
facilities, functions and certain services performed by UTC organizations
for UTA, including environmental and other risk management, internal
audit, transportation services, administration of benefit and insurance
programs and certain tax, legal and treasury functions have been made on
the basis described in Note 4. All of the allocations and estimates in
the combined financial statements are based on assumptions that UTA and
UTC management believe are reasonable in the circumstances. The Company's
financial information included herein is not necessarily indicative of
the financial position, results of operations and cash flows of the
Company in the future or indicative of the results that would have been
reported if the Company had operated as an unaffiliated enterprise.
2. SUMMARY OF ACCOUNTING PRINCIPLES
BUSINESS ACTIVITIES
The Company's operating activities include the design, development,
manufacture and sale of integrated automotive components and systems,
primarily for automotive original equipment manufacturers (OEMs).
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts and activities of
UTA and its majority controlled and owned subsidiaries and affiliates
which comprise the Automotive Business of UTC. Majority-owned
subsidiaries in which the minority shareowners have rights that overcome
the presumption for consolidation are accounted for on the equity method.
All material intercompany transactions between operations included in the
combined financial statements have been eliminated in combination. Sales
from UTA to other non-Automotive UTC affiliates are not significant.
Transactions between UTA and UTC (and other UTC business units) are
herein referred to as "related party" or "affiliated" transactions.
Beginning January 1, 1997, international operating subsidiaries, which
had generally been included in the financial statements based on fiscal
years ending November 30, are included in the combined financial
statements based on fiscal years ending December 31. December 1996
results from these international subsidiaries, which were not
significant, were included in UTC investment.
9
UT AUTOMOTIVE, INC. 7
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
2. SUMMARY OF ACCOUNTING PRINCIPLES (CONTINUED)
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
REVENUE RECOGNITION
Accounts receivable represent receivables for shipments made to customers
or for other amounts due in connection with customer orders (including
tooling and freight). Revenue is recognized upon shipment of the product
to the customer.
TOOLING
Tooling receivables represent costs incurred on tooling projects which
are reimbursable from customers.
INVENTORIES
Inventories are stated at the lower of cost or estimated realizable
value. Approximately 18% and 20% of total inventories were carried on the
last-in, first-out (LIFO) cost method at December 31, 1998 and 1997,
respectively. The remaining inventories are carried on the first-in,
first-out (FIFO) method. Included in cost are direct material, direct
labor, and allocations of certain manufacturing overhead costs.
FIXED ASSETS
Fixed assets are stated at cost. Cost includes capitalized interest of
$2,246, $1,464 and $1,923 in 1998, 1997 and 1996, respectively.
Provisions for depreciation of plant and equipment have generally been
made using the straight-line method for financial reporting purposes.
Estimated useful lives generally range from 20 to 40 years for buildings
and improvements, from 3 to 12 years for machinery and equipment, and
from 3 to 10 years for office equipment. Expenditures for non-reimbursed
tooling are capitalized and are generally amortized over 3 years.
Improvements to leased property are amortized over the life of the lease.
10
UT AUTOMOTIVE, INC. 8
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
2. SUMMARY OF ACCOUNTING PRINCIPLES (CONTINUED)
ENVIRONMENTAL ACTIVITIES
Provisions for environmental remediation activities, including costs
relating to closed or sold facilities, are recorded when remedial efforts
are probable and related amounts can be reasonably estimated. This
generally occurs when a remedial investigation or a feasibility study has
been completed and sometimes at an earlier time, based on the specific
circumstances and past experience. Provisions include costs for
remediation, environmental studies, post-closure monitoring and other
incremental costs related to remediation activities. When no amount
within a range of estimates is more likely, the minimum is accrued. For
sites with multiple responsible parties, the Company considers its likely
proportionate share of the anticipated remediation costs and the ability
of the other parties to fulfill their obligations in establishing a
provision for these costs. Liabilities with fixed or reliably
determinable future cash payments are discounted.
Potential insurance reimbursements are not recorded based upon the
uncertainty of recovery. Amounts related to anticipated reimbursements
due under environmental remediation indemnification agreements are
recorded when recovery is assessed as probable. The Company periodically
assesses its environmental liabilities and, separately, the amount and
collectibility of the related indemnification assets, through reviews of
contractual commitments, site assessments, feasibility studies, formal
remedial design and action plans and review of financial viability of the
indemnifying parties.
ENGINEERING, RESEARCH AND DEVELOPMENT AND OTHER COSTS
Engineering, research and development costs are generally charged to
operations as incurred. Selling, general and administrative expenses are
also charged to operations as incurred.
GOODWILL AND OTHER LONG-LIVED ASSETS
Cost in excess of values assigned to the underlying net assets of
acquired companies are generally being amortized using the straight-line
method over periods ranging from 10 to 40 years.
The Company evaluates potential impairment of goodwill on an ongoing basis
and other long-lived assets when appropriate. If the carrying amount of an
asset exceeds the sum of its undiscounted expected future cash flows, the
asset's carrying value is written down to fair value.
11
UT AUTOMOTIVE, INC. 9
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
2. SUMMARY OF ACCOUNTING PRINCIPLES (CONTINUED)
INCOME TAXES
The Company and its domestic combined affiliates are included in the
consolidated U.S. federal income tax return of UTC. It is generally the
policy of the Company to determine its income tax provision on a separate
return basis. Under an arrangement with UTC, income taxes are charged to
members of the U.S. consolidated group based upon amounts they would pay
or receive if they filed a separate income tax return. The provision for
income taxes has been prepared as if a consolidated U.S. federal income
tax return had been filed separately by the Company and its combined
affiliates under a similar arrangement. Deferred income taxes are
provided on the differences in the book and tax bases of assets and
liabilities at the statutory tax rates expected to be in effect when such
differences are reversed. A valuation allowance is provided on the tax
benefits otherwise associated with certain tax attributes unless it is
considered more likely than not that the benefits will be realized. UTC
pays domestic taxes on behalf of the Company and reflects the funding
through the UTC investment account.
CASH AND CASH EQUIVALENTS
For purposes of the combined statements of cash flows, the Company
considers highly liquid investments with a maturity of three months or
less at the time of purchase to be cash equivalents. UTC provides
centralized treasury functions and financing for UTA, including
substantially all domestic investing and borrowing activities for UTA. As
part of this practice, surplus cash is remitted to UTC and UTC advances
cash, as necessary, to UTA. As of December 31, 1998, cash and cash
equivalents included approximately $3,400 of cash pledged against open
lines of credit.
HEDGING ACTIVITY
The Company enters into forward foreign exchange contracts to hedge
foreign currency denominated receivables and payables. The Company
utilizes such instruments as risk management tools and not for trading or
speculative purposes. Gains and losses relating to derivatives used for
hedging purposes that satisfy the appropriate criteria are deferred and
included in income when the related operating revenues and expenses are
recognized. Such contracts (notional amounts approximating $46,326 and
$39,042 at December 31, 1998 and 1997, respectively) generally have
maturities of one year or less and the counterparties are typically major
international financial institutions or UTC affiliates. Cash flows
attributable to the derivative contracts are generally included with the
cash flows from the associated hedged receivables or payables. Derivative
instruments that are not effective as hedges would be reported at market
value and the related gains or losses would be recognized in earnings.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective January 1, 2000.
Management believes adoption of this standard will not have a material
impact on the Company's financial position, results of operations or cash
flows.
12
UT AUTOMOTIVE, INC. 10
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
2. SUMMARY OF ACCOUNTING PRINCIPLES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's significant international combined affiliates, excluding
Mexico, the Philippines, Honduras and Hungary, use the local currency as
the functional currency and translate all assets and liabilities at year
end exchange rates, all income and expense accounts at average rates and
record adjustments resulting from the translations as a separate
component of UTC investment.
The remaining international entities (Mexico, the Philippines, Honduras
and Hungary) utilize the U.S. dollar as the functional currency and
translate monetary assets and liabilities at period-end exchange rates
and inventories, property and nonmonetary assets and liabilities at
historical rates. Income and expense accounts are translated at the
average rates in effect during the period, except that depreciation and
cost of sales are translated at historical rates. Adjustments resulting
from translations of these entities are included in the results of
operations. Gains and losses resulting from transactions of the Company
and its subsidiaries which are made in currencies different from their
own are included in results of operations as they occur. Total currency
transaction gains and losses are included in other income, net in the
accompanying statements of operations.
3. SUPPLEMENTAL CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1998 1997 1996
Cash paid for interest $ 22,184 $ 9,873 $ 8,548
Cash paid for income taxes $ 47,795 $ 78,490 $ 79,076
Interest expense includes $20,310, $5,991 and $4,021 of charges from UTC
affiliates in 1998, 1997 and 1996, respectively. The amounts shown as
income taxes paid include amounts paid by UTC and charged to the Company
relating to the tax liabilities of the Company recorded in the combined
financial statements.
13
UT AUTOMOTIVE, INC. 11
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
INTERCOMPANY ACTIVITIES
UTC provides the Company with certain environmental and other risk
management, internal audit, legal, tax, pension fund management,
transportation services and domestic cash management services. In
addition, as discussed below and in Note 16, UTA employees participate in
certain UTC employee benefit programs which are sponsored and
administered by UTC. All direct costs relating to these services and
participation in these plans are charged to the Company and indirect
costs are allocated using allocation methods UTC and UTA management
believe are reasonable.
In addition to direct charges, the combined financial statements include
a corporate overhead allocation which is based upon estimated allocations
of costs incurred by UTC which directly benefit the Company. This charge
was $4,612, $4,760 and $4,069 for the years ended December 31, 1998, 1997
and 1996, respectively. Indirect cost allocations are made based upon
employee headcount, estimated percent of UTA use of various services and
level-of-effort based methodologies, as appropriate.
UTC provides centralized treasury functions and financing, including
substantially all domestic investing and borrowing activities for the
Company. As part of this practice, surplus cash is remitted to UTC and
UTC advances cash, as necessary, to the Company. No interest is charged
or paid on the net UTC investment amount. Interest is charged or credited
on notes receivable and notes payable from or to affiliates.
United Technologies Research Center provides the Company with certain
research services. Charges for these services were $3,321, $3,028 and
$3,695 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company's sales to and purchases from other UTC
business units are not material.
EMPLOYEE BENEFIT ADMINISTRATION
The Company's employees participate in tax-qualified defined benefit
pension plans, defined contribution savings plans and various welfare
benefit plans sponsored and administered by UTC. UTC has historically
charged back to the Company its pro rata share of administration and
funding expenses incurred by UTC in the operation of these plans for the
benefit of UTA employees. The Company has been responsible for the cost
of funding pension and savings plan benefits accrued by its employees.
Welfare benefit programs are generally self-insured and experience-rated
on the basis of Company employees without regard to the claims experience
of employees of other affiliated companies. The Company independently
administers a small number of benefit plans in connection with certain
plants or facilities that maintain separate benefit programs. The size of
these independent programs is not material in relation to the aggregate
employee benefit programs of the Company.
14
UT AUTOMOTIVE, INC. 12
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
5. ACQUISITION AND DIVESTITURE ACTIVITY
During 1998, the Company paid approximately $3,300 for a 47% interest in
NTTF, an Indian components manufacturer; approximately $8,500 ($760 to be
paid in 1999) for a 50% interest in Ri Yong, a Chinese cooling fan module
manufacturer; approximately $4,000 to buyout the remaining 25% minority
interest in its Loewe operation; and $2,000 for a preferred share
interest of 6% in Eclipse International, Inc., a US based technology
company specializing in software and hardware critical to the development
of the AutoPC. In addition, during 1998, the Company assumed the
remaining minority interest in its Xianfeng venture, to facilitate its
closure and redistribution of assets to the Company's other Chinese
operations, and contributed net assets of $3,055 for a 45% interest in a
newly-formed battery cable joint venture with Saturn Electronics.
During 1997, the Company paid approximately $34,400 for a 75% interest in
Loewe GmbH, a German electronic switch manufacturer and $8,500 for a 50%
interest in MMA, a producer of motors based in Argentina. The purchase
price for Loewe exceeded the estimated fair value of the net assets
acquired and, accordingly, $20,498 was recorded as goodwill and is being
amortized over its estimated useful life of 20 years.
During 1996, the Company sold its interest in its steering wheels
business. The proceeds on the sale approximated $140,000 and the pre-tax
gain recorded on this sale was approximately $78,000. In addition, during
1996, the Company paid approximately $42,100 to purchase the remaining
30% minority interest in Gate SpA, including approximately $16,900
assigned to intangible assets.
15
UT AUTOMOTIVE, INC. 13
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
6. COST REDUCTION AND OTHER ACTIONS
During 1998, 1997 and 1996, the Company recorded pre-tax charges
totalling $9,245, $25,478 and $41,835, respectively, related to ongoing
efforts to reduce costs in response to industry conditions. The following
table summarizes the costs and related reserves relating to these
actions:
SEVERANCE FACILITY ASSET
AND RELATED AND OTHER WRITE-
COSTS COSTS DOWNS TOTAL
1996 Charges $ 15,802 $ 4,513 $ 21,520 $ 41,835
Utilized in 1996 (3,073) (21,520) (24,593)
-------- -------- -------- --------
Balance at December 31, 1996 12,729 4,513 17,242
1997 Charges 15,673 4,100 5,705 25,478
Utilized in 1997 (18,851) (2,659) (5,705) (27,215)
Adjustments in 1997 (826) (826)
-------- -------- -------- --------
Balance at December 31, 1997 8,725 5,954 14,679
1998 Charges 4,887 1,180 3,178 9,245
Utilized in 1998 (6,780) (2,354) (3,178) (12,312)
Adjustments in 1998 (4,728) (1,691) (6,419)
-------- -------- -------- --------
Balance at December 31, 1998 $ 2,104 $ 3,089 $ -- $ 5,193
======== ======== ======== ========
Provisions for cost reduction and other actions are included in cost of
goods sold in the statements of operations except as described below.
Generally, costs relating to severance and related costs and facility and
other costs are cash charges. Fixed asset provisions are non-cash
charges.
1998 ACTIONS
The Company provided $9,245 for the closure of its Valls, Spain and Bay
Valley, Michigan facilities. Included in this charge were termination
benefits of $4,887 related to approximately 426 employees, $3,178 for
fixed asset write downs and $1,180 for facility closing costs. The
business and related revenues will be transferred to other UTA
facilities. Other than facility closing costs, these actions are expected
to be substantially completed during 1999. In addition, during 1998, the
estimated costs of a workforce reduction action recorded during 1996 were
reduced by $3,900, the estimated facility closing costs recorded during
1997 and 1996 were reduced by $1,300 due to additional customer
requirements and additional adjustments of $1,200 relate to differences
between estimated costs and actual costs incurred.
1997 ACTIONS
In response to market conditions during 1997, the Company provided
approximately $14,910 on a pre-tax basis for the restructuring of certain
North American and European operations, including the elimination of
excess plant capacity and personnel reductions. The provisions included
$5,105 for severance and related benefit payments to approximately 579
employees, $5,705 for asset write-downs and $4,100 for facility closing
costs and other. Adjustments during 1997 relate to differences between
estimated costs and actual costs incurred.
16
UT AUTOMOTIVE, INC. 14
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
6. COST REDUCTION AND OTHER ACTIONS (CONTINUED)
In addition, included in selling general and administrative expense, the
Company provided approximately $10,568 on a pre-tax basis for
administrative work force reductions of approximately 345 employees at
its Worldwide Headquarters facility. These actions are substantially
completed at December 31, 1998.
1996 ACTIONS
In 1996, the Company recorded charges of $41,835 on a pre-tax basis for
cost reduction and other actions, including the discontinuance of certain
product lines and the consolidation of certain production facilities.
These actions were taken in response to changing industry conditions and
to enhance cost structure and competitive position. The provisions
included $15,802 for employee severance and related benefits for
approximately 1,602 employees, $21,520 for asset write-downs and $4,513
for facility carrying costs and other. These actions are substantially
complete at December 31, 1998.
7. SIGNIFICANT CUSTOMERS
The Company has direct sales to three customers that accounted for the
following amounts of total sales for the years ended December 31:
1998 1997 1996
Ford Motor Company $1,003,287 $1,123,098 $1,223,517
DaimlerChrysler AG 396,181 450,115 504,885
General Motors Corporation 273,246 307,358 286,965
In addition to the direct sales to the customers noted above, the Company
has significant sales to certain suppliers of these customers. Although
the Company is directly affected by the economic well-being of the
automotive industry and the significant customers noted above, management
does not believe significant credit risk exists at the current time. The
Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral. Historically, the Company has
not experienced significant losses related to receivables from individual
customers.
17
UT AUTOMOTIVE, INC. 15
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
8. ACCOUNTS RECEIVABLE
DECEMBER 31,
1998 1997
-------------------------------
Trade $ 484,435 $ 437,002
Tooling - billed 15,400 14,727
Tooling - unbilled 46,723 45,660
Other current receivables 32,514 30,864
Less - allowances (3,880) (1,793)
------------- --------------
$ 575,192 $ 526,460
============= ==============
9. INVENTORIES
DECEMBER 31,
1998 1997
-------------------------------
Raw materials and work-in-process $ 137,001 $ 140,499
Finished goods 67,273 76,840
LIFO reserve (23,049) (27,441)
Other reserves (10,553) (12,785)
------------- --------------
$ 170,672 $ 177,113
============= ==============
During 1998, 1997 and 1996, certain inventories carried under the LIFO
valuation method were reduced. These reductions resulted in a liquidation
of LIFO inventory quantities carried at costs that prevailed in prior
years which were lower than the cost of current purchases. The effect of
the liquidation of LIFO inventories decreased cost of goods sold by
approximately $2,973, $640 and $917 and increased net income by
approximately $1,843, $397 and $569 for the years ended December 31,
1998, 1997 and 1996, respectively.
10. INVESTMENTS AND RECEIVABLES DUE AFTER ONE YEAR
DECEMBER 31,
1998 1997
-------------------------------
Joint venture investments $ 30,863 $ 13,926
Other 11,248 15,501
------------- --------------
$ 42,111 $ 29,427
============= ==============
Joint Venture investments accounted for under the equity method include a
51% interest in Furukawa, a Mexican wire harness manufacturer; a 50%
interest in MMA, an Argentinean electrical motor and cooling fan module
manufacturer; a 50% interest in Ri Yong, a Chinese electric motor
manufacturer; a 45% interest in Saturn, a battery cable manufacturer; and
a 47% interest in NTTF, a switch, components and tooling manufacturer
located in India.
18
UT AUTOMOTIVE, INC. 16
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
11. FIXED ASSETS
DECEMBER 31,
1998 1997
---------------------------------------
Fixed assets, at cost
Land $ 16,501 $ 16,602
Buildings and improvements 224,718 212,240
Machinery, tools and equipment 1,062,251 943,548
Construction-in-progress 47,286 42,029
---------- ----------
1,350,756 1,214,419
Less - accumulated depreciation (641,050) (578,497)
---------- ----------
$ 709,706 $ 635,922
========== ==========
12. ACCRUED LIABILITIES
DECEMBER 31,
1998 1997
---------------------------------------
Employee benefits $ 53,619 $ 44,911
Workers' compensation 18,188 21,564
Payroll 20,912 21,350
Environmental 11,500 10,347
Warranty 27,990 9,712
Other 49,566 81,078
-------- --------
$181,775 $188,962
======== ========
13. OTHER LONG-TERM LIABILITIES
DECEMBER 31,
1998 1997
---------------------------------------
Environmental $60,096 $ 70,960
Warranty 20,131 34,072
Other 16,282 20,314
------- --------
$96,509 $125,346
======= ========
19
UT AUTOMOTIVE, INC. 17
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
14. BORROWINGS AND LINES OF CREDIT
The following summarizes the short-term borrowings and long-term debt of
the Company and its subsidiaries (including the weighted average interest
rate at December 31, 1998).
SHORT-TERM BORROWINGS
DECEMBER 31,
-----------------------------
1998 1997
Short term foreign note and
bank borrowings (4.6%) $ 7,871 $ 10,822
Current portion of long-term debt
and capital lease obligations 1,574 2,439
---------- ----------
$ 9,445 $ 13,261
========== ==========
LONG-TERM DEBT MATURITY AT
DECEMBER 31, 1998
Notes and other debt
Denominated in foreign currency (3.22%) 1999-2010 $ 2,416 $ 2,398
Denominated in U.S. dollars - 730
Capital lease obligations (9.65%) 1999-2013 4,370 5,681
---------- ----------
Total long-term debt and capital
lease obligations 6,786 8,809
Less - current portion of long-
term debt and capital lease obligations 1,574 2,439
---------- ----------
$ 5,212 $ 6,370
========== ==========
At December 31, 1998, approximately $59,900 was available under
short-term lines of credit with local banks at the Company's various
international operations. Capital lease obligations related primarily to
buildings at certain foreign subsidiaries.
Principal payments required on long-term debt and capital lease
obligations as of December 31, 1998 are as follows:
1999 $ 1,574
2000 1,250
2001 1,077
2002 1,053
2003 308
Thereafter 1,524
----------
$ 6,786
==========
20
UT AUTOMOTIVE, INC. 18
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
15. TAXES ON INCOME
The provision for income taxes is comprised of the following:
DECEMBER 31,
----------------------------------------
1998 1997 1996
Current
United States
Federal $ 8,827 $ 12,561 $ 45,719
State 1,545 2,100 6,241
Foreign 35,210 53,441 28,112
----------- ----------- -----------
45,582 68,102 80,072
----------- ----------- -----------
Deferred
United States
Federal 3,382 7,293 (14,591)
State (273) 315 (999)
Foreign 8,842 (4,664) (333)
----------- ----------- -----------
11,951 2,944 (15,923)
----------- ----------- -----------
$ 57,533 $ 71,046 $ 64,149
=========== =========== ===========
Deferred income taxes represent the tax effects of differences in the
book and tax reporting bases of assets and liabilities at the statutory
tax rates expected to be in effect when such differences reverse.
Temporary differences and carryforwards that gave rise to a significant
portion of deferred tax assets and liabilities at December 31 include:
21
UT AUTOMOTIVE, INC. 19
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
15. TAXES ON INCOME (CONTINUED)
DECEMBER 31,
1998 1997
-----------------------
CURRENT
Deferred tax assets
Net state deferred tax asset $ 6,163 $ 7,239
Net foreign deferred tax asset 1,180 709
Inventory provisions 12,737 11,244
Provisions for warranty 9,817 1,570
Environmental remediation provisions 4,025 3,621
Insurance and employee benefits 15,141 15,987
Other nondeductible provisions 7,018 17,774
Allowance for doubtful accounts 51 235
Other items (net) 1,222 4,256
-------- --------
Total current deferred tax assets 57,354 62,635
-------- --------
Deferred tax liabilities
Net foreign deferred tax liabilities 111
-------- --------
111
-------- --------
Net current deferred asset $ 57,354 $ 62,524
======== ========
NONCURRENT
Deferred tax assets
Other asset amortization $ 3,904 $ --
Provisions for warranty 3,782 11,596
Insurance and employee benefits 235
Environmental remediation provisions 21,034 24,941
Federal, state and foreign loss carryforward 7,733 8,005
Net foreign deferred tax asset 1,816 7,732
Other items (net) 104
Valuation allowance (7,733) (8,005)
-------- --------
Total noncurrent deferred tax asset $ 30,875 $ 44,269
======== ========
22
UT AUTOMOTIVE, INC. 20
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
15. TAXES ON INCOME (CONTINUED)
DECEMBER 31,
------------------------------
1998 1997
Deferred tax liabilities
Tax depreciation and capital allowance $ 36,028 $ 47,056
Other provisions 8,310 8,378
Net state deferred tax liability 1,910 3,306
Foreign depreciation 15,554 15,779
Other net foreign deferred tax liabilities 5,651 1,460
-------- --------
Total deferred tax liability 67,453 75,979
-------- --------
Net noncurrent deferred liability $(36,578) $(31,710)
======== ========
Net deferred tax asset $ 20,776 $ 30,814
======== ========
The Company has provided a valuation allowance for certain tax benefits
of affiliates' foreign net operating loss carryforwards of approximately
$30,200, (tax effect of $7,733) which expire between 1999 and 2003.
During the periods UTA generated foreign tax credits which were utilized
by UTC on a consolidated basis but which could not be utilized by UTA
currently (or reasonably be expected to be used by UTA in the future) on
a stand alone basis. The benefits of these credits have not been included
in the UTA tax provision.
The sources of income (loss) before income taxes and minority interest
were:
DECEMBER 31,
-------------------------------
1998 1997 1996
United States $ 26,704 $ 31,526 $ 75,923
Foreign 111,826 119,155 100,573
-------- -------- --------
$138,530 $150,681 $176,496
======== ======== ========
Deferred income taxes generally have not been provided on undistributed
earnings of international subsidiaries of approximately $236,626, which
are included in UTC investment at December 31, 1998.
23
UT AUTOMOTIVE, INC. 21
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
15. TAXES ON INCOME (CONTINUED)
Differences between the effective income tax rate and the statutory U.S.
federal income tax rate are as follows:
DECEMBER 31,
---------------------------------
1998 1997 1996
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State and local income tax rate, net of
federal income tax benefit 0.6 1.0 2.0
Amortization of goodwill without tax effect 2.9 2.7 4.8
Foreign rate difference on foreign provision (1.1) (5.2) (4.0)
Additional U.S. cost of foreign transactions 6.9 18.3 0.8
Other (2.8) (4.7) (2.3)
---- ---- ----
Effective income tax rate 41.5% 47.1% 36.3%
==== ==== ====
16. EMPLOYEE BENEFIT PLANS
EMPLOYEE PENSION BENEFITS
The Company and its domestic subsidiaries participate with UTC in certain
defined benefit pension plans covering substantially all U.S. employees.
For salaried employees, plan benefits are generally based on years of
service and the employee's compensation during the last several years of
employment. For hourly employees, plan benefits are generally based on
years of service and the benefit level established at each facility.
Expenses for these plans are allocated from UTC on an actuarial basis
utilizing participant and plan design data. Certain foreign subsidiaries
of the Company have defined benefit pension plans or severance indemnity
plans covering their employees. The Company and UTC account for the cost
of their defined benefit plans in accordance with Statement of Financial
Accounting Standards No. 87 (FAS 87), "Employers' Accounting for
Pensions." Certain additional employees, primarily located in foreign
countries, are covered by benefit arrangements which do not meet the
reporting requirements of FAS 87.
Summarized below are the components of net periodic pension cost for the
Company's net pension cost for participation in the UTC U.S. plans,
foreign defined benefit plans and other costs for pension and severance
indemnity plans.
DECEMBER 31,
-----------------------
1998 1997 1996
Participation in UTC U.S. plans $2,815 $3,608 $7,560
UTA foreign defined benefit plans 723 882 847
Other costs, principally foreign
service indemnity plans 487 213 261
------ ------ ------
Total pension cost $4,025 $4,703 $8,668
====== ====== ======
24
UT AUTOMOTIVE, INC. 22
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
Unfunded liabilities for pension plans of certain international
subsidiaries and for employee severance benefits, including those
accruing to employees under foreign government regulations, are included
in other long-term liabilities in the accompanying combined balance
sheets.
EMPLOYEE HEALTHCARE AND INSURANCE BENEFITS
UTC provides certain employee healthcare and insurance benefits. In
situations where full-time salaried employees retire from the Company
between age 55 and age 65, most are eligible to receive, at a cost that
varies on the basis of service with the Company, certain healthcare
benefits identical to those available to active employees. Coverage ends
at age 65. Certain retired employees of businesses acquired by the
Company are covered under other healthcare plans that vary in terms of
coverage, deductibles and retiree contributions. In addition, certain
retirees may elect, at retirement, to continue life insurance coverage of
up to twice their annual base pay as of that date. Expenses for these
plans are allocated from UTC on an actuarial basis utilizing participant
and plan design data. Net periodic postretirement benefit cost
approximated $2,400, $1,817 and $1,702 for the years ended December 31,
1998, 1997 and 1996, respectively.
For purposes of the combined financial statements, UTA accounts for its
participation in UTC pension and postretirement benefit plans as if they
participated in multi-employer plans.
Pension assets or liabilities under UTC sponsored domestic pension plans
have been included as part of the UTC investment balance in the
accompanying combined balance sheets.
The accompanying combined balance sheets do not include liabilities for
active and retired salaried and hourly employees of the Company who
participate in the UTC retiree health and life insurance benefit plans.
These amounts are included in the UTC investment balance in the
accompanying combined balance sheets.
EMPLOYEE INCENTIVE PLANS
The Company participated in UTC long-term incentive plans utilizing
various types of market and performance based incentive awards, which may
be granted to officers and employees, including grants of UTC common
stock and stock options. The exercise prices of stock options, which are
to be set at the time of the grant, will not be less than the fair market
value of the shares on the date of grant.
During the years ended December 31, 1998, 1997 and 1996, the Company
expensed $5,000, $6,033 and $7,625, respectively, with respect to the
costs of UTA management participation in the incentive compensation
plans.
EMPLOYEE SAVINGS PLAN
The Company participates in UTC's Employee Stock Ownership Plan. The
amounts expensed relative to the Company's participation in that plan,
including administrative fees, totaled $4,100, $3,877 and $3,871 for the
years ended December 31, 1998, 1997 and 1996, respectively.
25
UT AUTOMOTIVE, INC. 23
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
17. OTHER INCOME, NET
Other income includes the following:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
Interest income $ 4,118 $ 6,309 $ 6,018
Royalty income 2,550 2,794 3,612
Gain (loss) on fixed asset dispositions (4,861) (227) 156
Foreign exchange gains (losses) (5,970) (4,328) 262
Equity in earnings of investees 3,986 1,439 2,553
Gain on disposition of business unit - - 78,000
Other 1,671 4,693 5,556
------- ------- -------
$ 1,494 $10,680 $96,157
======= ======= =======
Interest income includes $2,179, $4,037 and $2,994 earned on transactions
with UTC affiliates in 1998, 1997 and 1996, respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of those financial instruments included in the following
categories:
CASH AND CASH EQUIVALENTS, ACCOUNTS AND NOTES RECEIVABLE AND SHORT-TERM
BORROWINGS
The carrying amount approximates fair value because of the short maturity
of those instruments.
RECEIVABLES DUE AFTER ONE YEAR
The long-term receivables generally relate to refundable taxes in foreign
jurisdictions and customer reimbursable tooling. It is not practicable to
estimate the future timing of receipts to determine the current fair
value of these amounts.
DEBT
The fair value of the Company's debt is estimated to approximate book
value based on current market rates available to the Company.
FOREIGN EXCHANGE CONTRACTS
The fair values are estimated based on the amount the Company would
receive or pay to terminate the agreements at the reporting dates, and
approximated the carrying amount at December 31, 1998 and 1997.
26
UT AUTOMOTIVE, INC. 24
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
19. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
The Company and its combined affiliates occupy space and use certain
equipment under lease arrangements. Rental commitments at December 31,
1998 under long-term noncancelable operating leases are as follows:
LAND, MACHINERY,
BUILDINGS AND TOOLS AND
OFFICE SPACE EQUIPMENT
1999 $ 9,807 $ 2,381
2000 8,518 1,493
2001 8,401 840
2002 8,248 394
2003 6,641 264
After 2003 4,963 209
----------- ----------
$ 46,578 $ 5,581
=========== ==========
Rent expense totaled $22,660, $19,507 and $19,602 for the years ended
December 31, 1998, 1997 and 1996, respectively.
PURCHASE COMMITMENTS
In the normal course of business, the Company enters into commitments for
the purchase of certain raw materials and components utilized in its
manufacturing process. These agreements are generally for one year or
less and management believes the required purchases are not in excess of
anticipated needs.
ENVIRONMENTAL
The Company is subject to federal, state, local and foreign laws and
regulations relating to environmental matters. These laws provide for
control of pollutants released into the air, water and ground and require
responsible parties to undertake remediation of hazardous waste disposal
sites.
Although it is not presently possible to estimate the exact timing and
ultimate amount of future expenditures for environmental remediation, the
Company has recorded environmental liabilities of approximately $72,000
and $81,000 as of December 31, 1998 and 1997, respectively. Accrued
liabilities include $11,500 and $10,347 for the current portion of the
estimated cleanup expenditures at December 31, 1998 and 1997,
respectively. The balance of spending anticipated to be incurred in
future years is shown as a component of other long-term liabilities.
Liabilities with cash flows that are fixed or reliably determinable of
approximately $31,300 have been recorded at their discounted value of
$18,050 at December 31, 1998 utilizing a 7.5% interest rate. Other assets
in the accompanying combined balance sheets include approximately $26,300
and $30,300 at December 31, 1998 and 1997, respectively, expected to be
recoverable under indemnification agreements. Legal proceedings have been
instituted on behalf of a subsidiary of the Company against its
historical insurers seeking insurance coverage for remediation and
related expenditures. These proceedings are expected to last several
years. Potential insurance reimbursements are not recorded based upon the
uncertainty of collection.
27
27
UT AUTOMOTIVE, INC. 25
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
19. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Management believes that the ultimate resolution of these environmental
matters should not have a material adverse effect on the combined
financial position of the Company. However, it is possible that the
Company's results of operations and cash flows in certain future
quarterly or annual periods could be materially affected.
WARRANTY
The Company provides its customers with product quality assurances
considered by management to be standard in the industry. The Company
accrues for these costs when such obligations are probable and the
amounts can be reasonably estimated. Warranty reserves approximated
$48,100 and $43,800 at December 31, 1998 and 1997, respectively.
OTHER
The Company also has other commitments and contingent liabilities related
to legal proceedings and other matters arising out of the normal course
of business. Management believes that resolution of these matters will
not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
20. SEGMENT FINANCIAL DATA
The Company and its subsidiaries design, develop, manufacture and sell
products, classified in four principle operating segments. The Company's
operating segments were generally determined on the basis of geographic
regions and product segments.
Electrical Systems-Americas products include electrical distribution,
electronic and eletromechanical systems and components such as wire
assemblies, control modules, switches, actuators, relays, terminals and
connectors, smart junction boxes, power network boxes, in addition to,
starter motors and wiper systems, manufactured principally in North
America.
Interior Systems International products include instrument panels,
modular headliners, door panels, door and sidewall trim, painted and
decorated trim components, exterior mirrors and acoustic and sealing
products, manufactured principally in the United States.
European Managed Operations products include electrical distribution,
electronic and eletromechanical systems and components such as wire
assemblies, control modules, switches, actuators, relays, terminals and
connectors, smart junction boxes, power network boxes, in addition to
fractional horsepower DC motors, analog and digital auto amplifiers and
video modules, manufactured principally in Europe.
Asia Pacific Operations products include electronic and eletromechanical
systems and components such as wire assemblies, control modules, in
addition to fractional horsepower DC motors, manufactured principally in
Asia.
28
UT AUTOMOTIVE, INC. 26
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
20. SEGMENT DATA (CONTINUED)
Operating segment and geographic data include the results of all majority
owned subsidiaries, consistent with the management reporting of these
businesses. For two subsidiaries, minority shareholders have rights,
which under the provisions of EITF 96-16, overcome the presumption of
consolidation. In the Company's consolidated results, these subsidiaries
are accounted for using the equity method of accounting. Adjustments to
reconcile segment reporting to consolidated results are included in
"Headquarters, Eliminations, Other", which also includes corporate
support administration centers and, for comparability purposes, the
impact of the steering wheels operations and divestiture in 1996.
Operating profits are comprised of income before interest expense, taxes
and minority interests.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------------
1998 1997 1996
NET SALES
Electrical Systems America $ 1,353,148 $ 1,434,480 $ 1,470,915
Interior Systems International 566,420 583,514 628,287
European Managed Operations 1,023,622 953,931 930,520
Asia Pacific Operations 16,284 11,471 2,714
Headquarters, Eliminations, Other (59,137) (56,091) 53,144
----------- ----------- -----------
Total net sales $ 2,900,337 $ 2,927,305 $ 3,085,580
=========== =========== ===========
OPERATING PROFITS
Electrical Systems America $ 164,185 $ 190,240 $ 198,108
Interior Systems International 21,734 3,666 (2,070)
European Managed Operations 83,541 80,496 79,156
Asia Pacific Operations (1,499) 37 (4,858)
Headquarters, Eliminations, Other (107,193) (113,837) (85,364)
----------- ----------- -----------
Total operating profits $ 160,768 $ 160,602 $ 184,972
=========== =========== ===========
CAPITAL EXPENDITURES
Electrical Systems America $ 69,720 $ 56,200 $ 44,242
Interior Systems International 40,977 29,291 30,380
European Managed Operations 71,448 64,468 54,481
Asia Pacific Operations 367 548 1,739
Headquarters, Eliminations, Other 10,390 10,519 6,450
----------- ----------- -----------
Total capital expenditures $ 192,902 $ 161,026 $ 137,292
=========== =========== ===========
DEPRECIATION AND AMORTIZATION
Electrical Systems America $ 43,741 $ 47,825 $ 49,295
Interior Systems International 22,164 20,727 20,783
European Managed Operations 41,897 40,031 36,125
Asia Pacific Operations 497 597 555
Headquarters, Eliminations, Other 15,991 18,139 20,369
----------- ----------- -----------
Total depreciation and amortization $ 124,290 $ 127,319 $ 127,127
=========== =========== ===========
29
UT AUTOMOTIVE, INC. 27
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
20. SEGMENT DATA (CONTINUED)
A substantial portion of the Company's revenues and assets are
attributable to international operations. The Company has significant
manufacturing facilities in Italy, Spain, Honduras, the Philippines and
Mexico.
Geographic segment information follows:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
NET SALES
North American operations $1,873,957 $1,944,614 $2,148,356
International operations
Europe 1,001,978 942,289 928,177
Asia Pacific 114,573 118,916 87,592
Other 46,990 34,740 13,966
Eliminations (137,161) (113,254) (92,511)
---------- ---------- ----------
Total net sales $2,900,337 $2,927,305 $3,085,580
========== ========== ==========
DECEMBER 31,
----------------------
1998 1997
LONG-LIVED ASSETS
North American operations $ 749,119 $727,183
International operations
Europe 237,976 206,380
Asia Pacific 29,704 26,193
Other 26,019 19,640
---------- --------
Total $1,042,818 $979,396
========== ========
30
UT AUTOMOTIVE, INC. 28
(WHOLLY-OWNED BY UNITED TECHNOLOGIES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
20. SEGMENT DATA (CONTINUED)
SALES
Sales by operating segment or by geographic area include intersegment
sales as well as sales and transfers between geographic areas, which are
generally made at prices approximating those that the selling entity is
able to obtain on external sales. Other international sales include sales
of products produced by the Company's Philippine operations, which are
generally sold to U.S. customers.
Sales from United States operations include export sales as follows:
DECEMBER 31,
----------------------------
1998 1997 1996
Europe $ 62,921 $ 71,438 $ 70,552
Asia Pacific 5,607 13,581 7,117
Other 144,084 97,371 83,622
-------- -------- --------
$212,612 $182,390 $161,291
======== ======== ========
ELIMINATIONS
Eliminations made in reconciling geographic area data with the related
combined amounts include sales and transfers between geographic areas,
unrealized profits in inventory and similar items.
LONG-LIVED ASSETS
Long-lived assets include net fixed assets and net goodwill which can be
attributed to the specific geographic regions.
21. SUBSEQUENT EVENTS
In March 1999, UTC entered into an agreement to sell the Company to Lear
Corporation for approximately $2,300,000, subject to certain adjustments.
Consummation of the sale is subject to customary conditions of closing.
The financial statements do not give effect to this transaction.
31
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
B. Unaudited Pro Forma Consolidated Financial Statements.
The following unaudited pro forma consolidated statement of operations
of Lear for the year ended December 31, 1998 was prepared to illustrate the
effects of the completion of the acquisition of Delphi Seating, which was
completed on September 1, 1998, the UT Automotive acquisition, the amendment and
restatement of our prior senior credit facility and borrowings under our new
credit facilities (collectively, the "Transactions"), as if such Transactions
had occurred on January 1, 1998.
The following unaudited pro forma consolidated balance sheet
(collectively with the unaudited pro forma consolidated statement of operations,
the "Pro Forma Statements") was prepared as if the Transactions had occurred as
of December 31, 1998. The Pro Forma Statements are not necessarily indicative of
the results that actually would have been achieved if the Transactions reflected
therein had been completed on the dates indicated or the results which may be
attained in the future.
The pro forma adjustments are based upon available information and upon
certain assumptions that we believe are reasonable. The Pro Forma Statements
exclude the estimated effects related to our planned refinancing of the $1.4
billion interim term loan. The Pro Forma Statements and accompanying notes
should be read in conjunction with the historical financial statements of Lear,
UT Automotive and Delphi Seating, including the notes thereto.
32
32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
=========================================================================================================================
Operating and Delphi Pro Forma
Lear UT Automotive Financing Seating as
Historical Historical(1) Adjustments Pro Forma Pro Forma (2) Adjusted
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Net sales $ 9,059.4 $ 2,900.3 $ - $11,959.7 $ 669.0 $12,628.7
Cost of sales 8,198.0 2,365.4 - 10,563.4 651.2 11,214.6
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 861.4 534.9 - 1,396.3 17.8 1,414.1
Selling, general and
administrative expenses 337.0 362.7 - 699.7 41.5 741.2
Restructuring and other charges 133.0 - - 133.0 - 133.0
Amortization 49.2 13.0 20.2 (3) 82.4 3.2 85.6
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 342.2 159.2 (20.2) 481.2 (26.9) 454.3
Interest expense 110.5 22.2 140.4 (4) 273.1 9.1 282.2
Other (income)/expense, net 22.3 (.6) - 21.7 (6.1) 15.6
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 209.4 137.6 (160.6) 186.4 (29.9) 156.5
Income taxes 93.9 57.5 (49.1)(5) 102.3 (11.9) 90.4
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 115.5 $ 80.1 $(111.5) 84.1 $ (18.0) $ 66.1
===========================================================================================================================
Diluted net income per share $ 1.70 $ .97
Weighted average shares
outstanding (in millions) 68.0 68.0
EBITDA (6) $ 561.9 $ 283.5 - $ 845.4 $ (14.8) $ 830.6
===========================================================================================================================
(1) The UT Automotive historical information represents amounts derived from
the audited results of operations for UT Automotive's fiscal year ended
December 31, 1998. Certain amounts have been reclassified to conform to
Lear's presentation.
(2) The Delphi Seating pro forma information reflects (i) Delphi Seating
historical unaudited results of operations for the period from January 1,
1998 through September 1, 1998, the date on which Delphi Seating was
acquired by Lear and (ii) adjustments to reflect the elimination of net
sales between Delphi Seating and Lear, estimated interest on borrowings to
finance the acquisition of Delphi Seating, amortization of goodwill from
the acquisition of Delphi Seating, income tax effects of the adjustments
and the elimination of items with no continuing impact on Lear's results of
operations, including the capitalization of fixed asset purchases which
were accounted for as impaired assets by Delphi Seating, operating losses
at plants which were not included in the acquisition, a charge related to
the employee benefit obligations not assumed by Lear and the elimination of
certain expenses allocated from the parent.
(3) The adjustment to amortization represents the following:
=========================================================================================================================
Year Ended
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Amortization of goodwill from the acquisition of UT Automotive (over 40 years) $ 33.2
Elimination of the historical goodwill amortization of UT Automotive (13.0)
- ---------------------------------------------------------------------------------------------------------------------------
$ 20.2
=========================================================================================================================
(4) The adjustment to interest expense represents the following:
=========================================================================================================================
Year Ended
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Estimated interest on borrowings under our primary credit facilities to finance
the UT Automotive acquisition $ 145.7
Other changes in interest expense, commitment fees and amortization of
deferred finance fees due to the new credit facilities and the amendment and restatement
of our prior senior credit facility 15.0
Elimination of interest expense on UT Automotive intercompany debt retired upon acquisition (20.3)
- ---------------------------------------------------------------------------------------------------------------------------
$ 140.4
===========================================================================================================================
(5) Reflects the income tax effects of the operating and financing adjustments.
(6) "EBITDA" is operating income plus depreciation and amortization. EBITDA
does not represent and should not be considered as an alternative to net
income or cash flow from operations as determined by generally accepted
accounting principles. EBITDA includes the effect of the $133 million
restructuring and other charges ($92.5 million or $1.36 per diluted share,
after tax).
33
33
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
===========================================================================================================================
Acquisition Operating and
Lear UT Automotive and Valuation Financing
Historical Historical(1) of UT Automotive(2) Adjustments Pro Forma
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
ASSETS
Current Assets:
Cash and cash equivalents $ 30.0 $ 43.4 $(2,312.9) $2,312.9(4) $ 73.4
Accounts receivable, net 1,373.9 575.2 - - 1,949.1
Inventories 349.6 170.7 - - 520.3
Recoverable customer engineering and tooling 221.4 - - - 221.4
Other current assets 223.1 70.0 - - 293.1
- -----------------------------------------------------------------------------------------------------------------------
2,198.0 859.3 (2,312.9) 2,312.9 3,057.1
- -----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,182.3 709.7 - - 1,892.0
- -----------------------------------------------------------------------------------------------------------------------
Goodwill and other intangibles, net 2,019.8 333.1 993.5 - 3,346.4
Other 277.2 85.3 (26.7)(3) 18.6(5) 354.4
- -----------------------------------------------------------------------------------------------------------------------
$ 5,677.3 $ 1,987.4 $(1,346.1) $2,331.5 $ 8,650.1
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 82.7 $ 7.8 $ - $ - $ 90.5
Accounts payable and drafts 1,600.8 377.0 - - 1,977.8
Accrued liabilities 797.5 193.5 (15.2)(3) - 975.8
Current portion of long-term debt 16.5 1.6 - - 18.1
- -----------------------------------------------------------------------------------------------------------------------
2,497.5 579.9 (15.2) - 3,062.2
Long-Term Liabilities:
Long-term debt 1,463.4 5.2 - 2,331.5(6) 3,800.1
Deferred national income taxes 39.0 38.4 - - 77.4
Other 377.4 98.9 (65.9)(3) - 410.4
- -----------------------------------------------------------------------------------------------------------------------
1,879.8 142.5 (65.9) 2,331.5 4,287.9
Stockholders' Equity 1,300.0 1,265.0 (1,265.0) - 1,300.0
- -----------------------------------------------------------------------------------------------------------------------
$ 5,677.3 $ 1,987.4 $(1,346.1) $ 2,331.5 $8,650.1
=======================================================================================================================
(1) The UT Automotive historical information represents amounts obtained from
the audited balance sheet of UT Automotive as of December 31, 1998.
Certain amounts have been reclassified to conform to Lear's presentaion.
(2) Assumes a purchase price of $2,312.9 million which consists of
$2,300.0 million to acquire all of the common stock of UT Automotive and
$12.9 million to pay estimated fees and expenses related to the acquisition
of UT Automotive. The acquisition of UT Automotive was accounted for using
the purchase method of accounting, and the total purchase price was
allocated first to assets and liabilities based on their respective fair
values, with the remainder ($1,326.6 million) allocated to goodwill. The
adjustment to stockholders' equity reflects the elimination of UT
Automotive's equity. The allocation of the purchase price above is based on
historical costs and management's estimates which may differ from the final
allocation due to appraisals of fixed assets and the finalization of plans
of restructuring.
(3) Represents the elimination of certain items which are being retained by the
seller of UT Automotive.
(4) Reflects proceeds of borrowings under our primary credit facilities of
$2,312.9 million.
(5) Reflects the capitalization of fees incurred in establishing our new credit
facilities of $18.6 million.
(6) Reflects the effects of the Transactions as follows:
===========================================================================================================================
Borrowings under our primary credit facilities to finance the acquisition of UT
Automotive $ 2,312.9
Borrowings under our primary credit facilities to pay fees and expenses incurred
in establishing the new credit facilities 18.6
- ---------------------------------------------------------------------------------------------------------------------------
$ 2,331.5
===========================================================================================================================
34
34
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
C. Exhibits
10.1 Amended and Restated Credit and Guarantee Agreement, dated as
of May 4, 1999, among Lear, Lear Corporation Canada Ltd., the
Foreign Subsidiary Borrowers (as defined therein), the Lenders
Party thereto, Bankers Trust Company and Bank of America National
Trust & Savings Association, as Co-Syndication Agents, The Bank of
Nova Scotia, as Documentation Agent and Canadian Administrative
Agent, and The Chase Manhattan Bank, as General Administrative
Agent;
10.2 Interim Term Loan Agreement, dated as of May 4, 1999, among
Lear, the Lenders parties thereto, Citicorp USA, Inc. and Credit
Suisse First Boston, as Co-Syndication Agents, Deutsche Bank AG New
York Branch, as Documentation Agent, the other Agents named
therein, and The Chase Manhattan Bank, as Administrative Agent;
10.3 Revolving Credit and Term Loan Agreement, dated as of May 4,
1999, among Lear, certain of its Foreign Subsidiaries, the Lenders
parties thereto, Citicorp USA, Inc. and Morgan Stanley Senior
Funding, Inc., as Co-Syndication Agents, Toronto Dominion (Texas),
Inc., as Documentation Agent, the other Agents named therein, and
The Chase Manhattan Bank, as Administrative Agent;
10.4 Stock Purchase Agreement dated as of March 16, 1999 by and between
Nevada Bond Investment Corp. II and Lear Corporation (incorporated
by reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated March 16, 1999).
23.1 Consent of PricewaterhouseCoopers LLP
53
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LEAR CORPORATION
/s/ Donald J. Stebbins
-------------------------------
Donald J. Stebbins
Senior Vice President and
Chief Financial Officer
May 6, 1999
36
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Amended and Restated Credit and Guarantee Agreement,
dated as of May 4, 1999, among Lear, Lear Corporation
Canada Ltd., the Foreign Subsidiary Borrowers (as defined
therein), the Lenders party thereto, Bankers Trust Company
and Bank of America National Trust & Savings Association,
as Co-Syndication Agents, The Bank of Nova Scotia, as
Documentation Agent and Canadian Administrative Agent, and
The Chase Manhattan Bank, as General Administrative Agent.
10.2 Interim Term Loan Agreement, dated as of May 4, 1999,
among Lear, the Lenders parties thereto. Citicorp USA, Inc.
and Credit Suisse First Boston, as Co-Syndication Agents,
Deutsche Bank AG New York Branch, as Documentation Agent,
the other Agents named therein, and The Chase Manhattan
Bank, as Administrative Agent.
10.3 Revolving Credit and Term Loan Agreement, dated as of
May 4, 1999, among Lear, certain of its Foreign
Subsidiaries, the Lenders parties thereto, Citicorp USA,
Inc. and Morgan Stanley Senior Funding, Inc., as
Co-Syndication Agents, Toronto Dominion (Texas), Inc., as
Documentation Agent, the other Agents named therein, and
The Chase Manhattan Bank, as Administrative Agent.
10.4 Stock Purchase Agreement dated as of March 16, 1999
by and between Nevada Bond Investment Corp. II and Lear
Corporation (incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K dated March 16,
1999).
23.1 Consent of PricewaterhouseCoopers LLP
36