1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 3, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ----------------------
COMMISSION FILE NUMBER: 1-11311
LEAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3386776
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21557 TELEGRAPH ROAD, SOUTHFIELD, MI 48086-5008
(Address of principal executive offices) (zip code)
(248) 447-1500
(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 as of April 30, 1999: 66,823,502
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED APRIL 3, 1999
INDEX
Part I - Financial Information: Page No.
- ------------------------------- --------
Item 1 - Consolidated Financial Statements
Introduction to the Consolidated Financial Statements 3
Consolidated Balance Sheets - April 3, 1999 and
December 31, 1998 4
Consolidated Statements of Income - Three Month Periods
Ended April 3, 1999 and March 28, 1998 5
Consolidated Statements of Cash Flows - Three Month Periods
Ended April 3, 1999 and March 28, 1998 6
Notes to the Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
(included in Item 2)
Part II - Other Information:
- ----------------------------
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
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LEAR CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO THE CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the condensed consolidated financial statements of Lear
Corporation and subsidiaries, 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. We believe 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 our
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
for the period ended December 31, 1998.
The financial information presented reflects all adjustments (consisting only of
normal recurring adjustments) which are, in our opinion, 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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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
================================================================================================================
April 3, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24.6 $ 30.0
Accounts receivable, net 1,482.3 1,373.9
Inventories 321.3 349.6
Recoverable customer engineering and tooling 239.1 221.4
Other 243.4 223.1
- ----------------------------------------------------------------------------------------------------------------
Total current assets 2,310.7 2,198.0
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM ASSETS:
Property, plant and equipment, net 1,183.2 1,182.3
Goodwill, net 1,990.9 2,019.8
Other 298.9 277.2
- ----------------------------------------------------------------------------------------------------------------
Total long-term assets 3,473.0 3,479.3
- ----------------------------------------------------------------------------------------------------------------
$ 5,783.7 $ 5,677.3
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 80.3 $ 82.7
Accounts payable and drafts 1,728.5 1,600.8
Accrued liabilities 811.4 797.5
Current portion of long-term debt 14.7 16.5
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 2,634.9 2,497.5
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Deferred national income taxes 42.9 39.0
Long-term debt 1,411.6 1,463.4
Other 397.1 377.4
- ----------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,851.6 1,879.8
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized;
67,247,442 issued at April 3, 1999 and
67,194,314 issued at December 31, 1998 .7 .7
Additional paid-in capital 860.0 859.3
Note receivable from sale of common stock (.1) (.1)
Less - Common stock held in treasury, 510,230 shares at cost (18.3) (18.3)
Retained earnings 555.0 504.7
Accumulated other comprehensive income (100.1) (46.3)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,297.2 1,300.0
- ----------------------------------------------------------------------------------------------------------------
$ 5,783.7 $ 5,677.3
================================================================================================================
The accompanying notes are an integral part of these balance sheets.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
==========================================================================================================
Three Months Ended
- ----------------------------------------------------------------------------------------------------------
April 3, March 28,
1999 1998
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
Net sales $ 2,687.2 $ 2,032.1
Cost of sales 2,468.5 1,831.9
Selling, general and administrative expenses 84.3 78.0
Amortization of goodwill 14.0 11.5
- ----------------------------------------------------------------------------------------------------------
Operating income 120.4 110.7
Interest expense 30.1 24.7
Other expense, net 7.9 8.0
- ----------------------------------------------------------------------------------------------------------
Income before provision for national income taxes 82.4 78.0
Provision for national income taxes 32.1 30.7
- ----------------------------------------------------------------------------------------------------------
Net income $ 50.3 $ 47.3
==========================================================================================================
Basic net income per share $ .75 $ .71
==========================================================================================================
Diluted net income per share $ .75 $ .69
==========================================================================================================
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)
==========================================================================================================
Three Months Ended
- ----------------------------------------------------------------------------------------------------------
April 3, March 28,
1999 1998
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50.3 $ 47.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 62.3 54.9
Other, net (16.2) (22.8)
Change in working capital items 47.3 (167.6)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 143.7 (88.2)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (71.6) (48.2)
Acquisitions (59.0) -
Other, net - .5
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (130.6) (47.7)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net (33.8) 149.9
Short-term borrowings, net (.4) (7.2)
Other, net .7 2.6
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (33.5) 145.3
- ----------------------------------------------------------------------------------------------------------
Effect of foreign currency translation 15.0 (4.0)
NET CHANGE IN CASH AND CASH EQUIVALENTS (5.4) 5.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30.0 12.9
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24.6 $ 18.3
- ----------------------------------------------------------------------------------------------------------
CHANGES IN WORKING CAPITAL:
Accounts receivable $ (134.9) $ (205.6)
Inventories 27.2 (16.0)
Accounts payable 176.4 45.3
Accrued liabilities and other (21.4) 8.7
- ----------------------------------------------------------------------------------------------------------
$ 47.3 $ (167.6)
==========================================================================================================
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 34.4 $ 29.6
==========================================================================================================
Cash paid for income taxes $ 16.0 $ 26.0
==========================================================================================================
The accompanying notes are an integral part of these statements.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Lear
Corporation, a Delaware corporation, and its wholly-owned and majority-owned
subsidiaries. Investments in less than majority-owned businesses are generally
accounted for under the equity method. Certain items in prior year's quarterly
financial statements have been reclassified to conform with the presentation
used in the quarter ended April 3, 1999.
(2) 1999 ACQUISITIONS
Peregrine
On April 1, 1999, the Company acquired certain assets of Peregrine
Windsor, Inc. ("Peregrine"), a division of Peregrine Incorporated. Peregrine
produces just-in-time seat assemblies and door panels for several General Motors
models.
Polovat / Ovatex
In February 1999, the Company acquired Polovat and the automotive business
of Ovatex. Polovat and Ovatex automotive supply flooring and acoustic products
for the automotive market. The acquired operations have three plants in Poland
and two in Italy and employ more than 600 people.
(3) 1998 ACQUISITION
Delphi Seating
In September 1998, the Company purchased the seating business of Delphi
Automotive Systems, a division of General Motors Corporation ("Delphi Seating"),
for approximately $250 million. Delphi Seating was a leading supplier of seat
systems to General Motors with 16 locations in 10 countries.
The Delphi Seating 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 Delphi Seating have been included in the consolidated
financial statements since the date of acquisition.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following pro forma financial data is presented to illustrate the
estimated effects of the Delphi Seating acquisition, as if the transaction had
occurred as of January 1, 1998.
(Unaudited; in millions, except per share data):
========================================================================================
Three Months Ended
March 28, 1998
- ----------------------------------------------------------------------------------------
Net sales $ 2,255.9
Net income 43.0
Diluted income per share .63
========================================================================================
The pro forma information above does not purport to be indicative of the
results that actually would have been achieved if the operations were combined
during the periods presented, and is not intended to be a projection of future
results or trends.
(4) RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, the Company began to implement a
restructuring plan designed to lower its cost structure and improve the
long-term competitive position of the Company. As a result of this
restructuring plan, the Company recorded pre-tax charges of $133.0 million,
consisting of $110.5 million of restructuring charges and $22.5 million of
other charges. Included in this total are the costs to consolidate the
Company's European operations of $78.9 million, charges resulting from the
consolidation of certain manufacturing and administrative operations in North
and South America of $31.6 million, other asset impairment charges of $15.0
million and contract termination fees and other of $7.5 million.
The restructuring plan is progressing as scheduled, and there have been
no significant changes to the original restructuring plan. The following table
summarizes the restructuring and other charges (in millions):
- ------------------------------------------------------------------------------
Original Utilized Balance
Accrual Cash Noncash April 3
1999
- ------------------------------------------------------------------------------
European Operations
Consolidation $ 78.9 $ 3.4 $11.9 $63.6
North and South
America Operations
Consolidation 31.6 15.9 6.5 9.2
Write-Down of
Long-Lived Assets 15.0 -- 15.0 --
Contract Termination
and Other 7.5 7.2 -- 0.3
- ------------------------------------------------------------------------------
Total $ 133.0 $ 26.5 $33.4 $73.1
- ------------------------------------------------------------------------------
(5) 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):
=================================================================================================
April 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Raw materials $ 230.9 $ 253.9
Work-in-process 25.0 23.8
Finished goods 65.4 71.9
- -------------------------------------------------------------------------------------------------
Inventories $ 321.3 $ 349.6
=================================================================================================
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is 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):
=================================================================================================
April 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Land $ 75.0 $ 70.6
Buildings and improvements 408.1 429.6
Machinery and equipment 1,303.7 1,197.8
Construction in progress 9.5 78.4
- -------------------------------------------------------------------------------------------------
Total property, plant and equipment 1,796.3 1,776.4
Less - accumulated depreciation (613.1) (594.1)
- --------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 1,183.2 $ 1,182.3
==================================================================================================
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LONG-TERM DEBT
Long-term debt is comprised of the following (in millions):
=================================================================================================
April 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Credit agreement $ 921.9 $ 970.3
Other 168.4 173.6
- -------------------------------------------------------------------------------------------------
1,090.3 1,143.9
Less - Current portion 14.7 16.5
- -------------------------------------------------------------------------------------------------
1,075.6 1,127.4
- -------------------------------------------------------------------------------------------------
9 1/2% Subordinated Notes 200.0 200.0
8 1/4% Subordinated Notes 136.0 136.0
- -------------------------------------------------------------------------------------------------
336.0 336.0
- -------------------------------------------------------------------------------------------------
Long-term debt $ 1,411.6 $ 1,463.4
=================================================================================================
(8) FINANCIAL INSTRUMENTS
Certain foreign currency contracts entered into by the Company qualify for
hedge accounting as only firm foreign currency commitments 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.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) FINANCIAL ACCOUNTING STANDARDS
Net Income Per Share
Basic net income per share is computed using the weighted average common
shares outstanding during the period. Diluted net income per share is computed
using the average share price during the period when calculating the dilutive
effect of stock options. Shares outstanding for the periods presented were as
follows:
=================================================================================================
Three Months Ended
- -------------------------------------------------------------------------------------------------
April 3, March 28,
1999 1998
- -------------------------------------------------------------------------------------------------
Weighted average shares outstanding 66,709,148 66,965,473
Dilutive effect of stock options 835,038 1,482,563
- -------------------------------------------------------------------------------------------------
Diluted shares outstanding 67,544,186 68,448,036
=================================================================================================
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. Comprehensive income for the periods is as follows (in
millions):
=================================================================================================
Three Months Ended
- -------------------------------------------------------------------------------------------------
April 3, March 28,
1999 1998
- -------------------------------------------------------------------------------------------------
Net income $ 50.3 $ 47.3
Other comprehensive income:
Foreign currency translation adjustment (53.8) (11.7)
- --------------------------------------------------------------------------------------------------
Other comprehensive income (53.8) (11.7)
- --------------------------------------------------------------------------------------------------
Comprehensive income $ (3.5) $ 35.6
==================================================================================================
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) SEGMENT REPORTING
The Company is organized based on customer-focused and geographic
divisions. Each division reports their results from operations and makes
requests for capital expenditures directly to the chief operating decision
making group. Under this organizational structure, the Company's operating
segments have been aggregated into one reportable segment. This aggregated
segment consists of eight divisions, each with separate management teams. The
Other category includes the corporate office, geographic headquarters,
technology division and elimination of intercompany activities, none of which
meet the requirements of being classified as an operating segment.
The following table presents revenues and other financial information by
business segment (in millions):
==========================================================================================================
Three Months Ended April 3, 1999
- ----------------------------------------------------------------------------------------------------------
Automotive
Interiors Other Consolidated
- ----------------------------------------------------------------------------------------------------------
Revenues $ 2,684.8 $ 2.4 $ 2,687.2
EBITA 172.7 (38.3) 134.4
Depreciation 45.8 2.5 48.3
Capital expenditures 68.9 2.7 71.6
Total assets 3,981.4 1,802.3 5,783.7
==========================================================================================================
==========================================================================================================
Three Months Ended March 28,1998
- ----------------------------------------------------------------------------------------------------------
Automotive
Interiors Other Consolidated
- ----------------------------------------------------------------------------------------------------------
Revenues $ 2,030.0 $ 2.1 $ 2,032.1
EBITA 160.0 (37.8) 122.2
Depreciation 40.9 2.5 43.4
Capital expenditures 43.3 4.9 48.2
Total assets 3,170.8 1,566.0 4,736.8
==========================================================================================================
(11) SUBSEQUENT EVENTS
Acquisition of UT Automotive
On May 4, 1999, Lear acquired UT Automotive, Inc., a wholly-owned
operating segment of United Technologies Corporation, for approximately $2.3
billion, subject to certain post-closing adjustments. UT Automotive was 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.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Sale of Electric Motor Systems
On May 7, 1999, Lear entered into a definitive purchase agreement with
Johnson Electric Holdings Limited to sell the recently acquired Electric Motor
Systems ("EMS") business for $310 million, subject to certain post-closing
adjustments. Lear acquired the EMS business in the acquisition of UT Automotive.
EMS is a supplier of industrial and automotive electric motors and starter
motors for small gasoline engines. EMS had 1998 sales of $351 million and has
approximately 3,300 employees operating at locations in 10 countries.
Consummation of the sale is contingent upon expiration or termination of
applicable waiting periods provided under the Hart-Scott-Rodino Antitrust
Improvements Act, applicable foreign competition act approvals and certain other
customary conditions.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1999 VS. THREE MONTHS ENDED MARCH 28, 1998.
Net sales in the quarter ended April 3, 1999 were $2.7 billion, exceeding
net sales in the quarter ended March 28, 1998 by $.7 billion, or 32.2%. Net
sales in the first quarter of 1999 benefited from acquisitions, which
collectively accounted for $.4 billion of the increase, and a combination of new
business and production increases in North America and Europe. Partially
offsetting this increase in sales were unfavorable exchange rate fluctuations in
North America, South America and South Africa and lower sales in our South
American operations.
Gross profit and gross margin were $219 million and 8.1% in the first
quarter of 1999 as compared to $200 million and 9.9% in the comparable period of
1998. Gross profit in the current quarter reflects the contribution of
acquisitions, new sport utility and truck programs in North America and new seat
programs in Europe. The decline in gross margin in the first quarter of 1999, as
compared to the first quarter of 1998, is due primarily to the dilutive impact
of acquisitions.
Selling, general and administrative expenses, including research and
development, as a percentage of net sales decreased to 3.1% in the first quarter
of 1999 as compared to 3.8% in the same period of 1998. Expenses as a percentage
of sales benefitted primarily from operating leverage provided by a higher sales
base and restructuring efforts initiated in the fourth quarter of 1998. The
increase in actual expenditures relative to 1998 was due to the inclusion of
operating expenses incurred as a result of acquisitions as well as research,
development and administrative expenses necessary to support established and
potential business opportunities.
Operating income and operating margin were $120 million and 4.5% in the
first quarter of 1999 as compared to $111 million and 5.4% in the comparable
period of 1998. Operating profit in the current quarter reflects the
contribution of acquisitions, new sport utility and truck programs in North
America and new seat programs in Europe. The decline in operating margin in the
first quarter of 1999, as compared to the first quarter of 1998, is due
primarily to the dilutive impact of acquisitions.
Interest expense in the first quarter of 1999 increased by $5 million to
$30 million as compared to the same period in 1998. Interest expense resulting
from debt incurred to finance recent acquisitions was partially offset by
reduced interest rates in the United States and Europe.
Other expenses, which include state and local taxes, foreign currency
exchange, minority interests in consolidated subsidiaries, equity in net income
of affiliates and other non-operating expenses, was essentially unchanged at
approximately $8 million.
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Net income for the first quarter of 1999 was $50 million, or $.75 per
share, as compared to $47 million, or $.69 per share, in the prior year's first
quarter. The provision for income taxes in the current quarter was $32 million,
or an effective tax rate of 39.0% as compared to $31 million, or an effective
tax rate of 39.4%, in the prior year. Diluted net income per share increased in
the first quarter of 1999 by 8.7%.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $144 million of cash flow in the first
quarter of 1999 compared to a net use of $88 for the same period in 1998. The
variance was primarily due to timing differences in working capital cash flows.
Working capital was a source of $47 million in 1999 and a use of $168 million in
1998. The difference between years relates primarily to the timing of our fiscal
quarter end, with the 1998 quarter ending prior to significant regularly
scheduled accounts receivable payments.
Net income increased by 6%, from $47 million to $50 million, as a result of
new business and contributions from acquisitions. In addition, non-cash
depreciation and goodwill amortization charges were $62 million in 1999 and $55
million in 1998, with the increase due to the 1998 acquisitions of Delphi
Seating and Chapman.
Net cash used in investing activities increased from $48 million in the
first quarter of 1998 to $131 million in 1999. The first quarter 1999
investments in Peregrine, Polovat and Ovatex were $59 million in the aggregate.
Capital expenditures increased from $48 million in the first three months of
1998 to $72 million in the first quarter of 1999 as a result of new programs and
the on-going capital programs at acquired companies. We currently anticipate
approximately $350 million in additional capital expenditures during the
remaining three quarters of 1999, including investments in property, plant and
equipment associated with the second quarter acquisition of UT Automotive.
As of April 3, 1999, we had $922 million outstanding under our $2.1 billion
senior credit facility and $52 million committed under outstanding letters of
credit, resulting in approximately $1.1 billion unused and available. The senior
credit facility matures on September 30, 2001 and may be used for general
corporate purposes. In addition to debt outstanding under our senior credit
facility, we had $504 million of long-term debt outstanding as of April
3, 1999, consisting primarily of $336 million of subordinated notes due between
2002 and 2006.
The purchase price for the UT Automotive acquisition of $2.3 billion
(subject to post-closing adjustments) was financed through borrowings under our
primary credit facilities. In connection with the UT Automotive acquisition, we
amended and restated our $2.1 billion senior credit facility and entered into
new senior credit facilities. The new senior credit facilities consisted of a
new $500 million revolving credit facility which matures on May 4, 2004, a new
$500 million term loan having scheduled amortization beginning on October 31,
2000 and a final maturity of May 4, 2004 and a new $1.4 billion interim term
loan maturing on May 3, 2000. On May 18, 1999, we issued $1.4 billion aggregate
principal amount of senior notes, the proceeds of which were used to repay the
interim term loan. The offering included $800 million in aggregate principal
amount of 10-year notes bearing interest at a rate of 8.11% and $600 million in
aggregate principal amount of six-year notes bearing interest at a rate of
7.96%. The senior notes have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration under the Securities Act and applicable state securities laws or
available exemptions from such registration requirements. We also expect to use
the anticipated proceeds of $310 million from the proposed sale of EMS to repay
the borrowings under our primary credit facilities.
Our primary credit facilities are guaranteed by certain of our significant
domestic subsidiaries and secured by the pledge of all or a portion of the
capital stock of certain of our significant subsidiaries. The senior notes are
guaranteed by the same subsidiaries that guarantee our primary credit
facilities. The guarantees and stock pledges may be released under certain
circumstances. For more information regarding the terms of our primary credit
facilities, please refer to the agreements relating to such facilities which
were filed as exhibits to our Current Report on Form 8-K dated May 4, 1999.
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As a result of the additional leverage we incurred in the UT
Automotive acquisition, Standard and Poor's and Moody's Investors Service each
reduced our senior unsecured bank rating one level from BBB-/Baa3 to BB+/Ba1,
respectively. Our subordinated notes were also downgraded from BB+/Ba2 to
BB-/Ba3.
We believe that cash flows from operations and available credit facilities
will be sufficient to meet our debt service obligations, projected capital
expenditures and working capital requirements.
OTHER MATTERS
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign laws, regulations and
ordinances, which govern activities or operations that may have adverse
environmental effects and which impose liability for the costs of cleaning up
certain damages resulting from past spills, disposal or other releases of
hazardous substances. Our policy is to comply with all applicable
environmental laws and maintain procedures to ensure compliance. However, we
have been, and in the future may become, the subject of formal or informal
enforcement actions or procedures. We currently are engaged in the cleanup of
hazardous substances at certain sites owned, leased or operated by us,
including certain properties acquired in the UT Automotive acquisition.
Certain present and former properties of UT Automotive are subject to
environmental liabilities which may be significant. Lear obtained certain
agreements and indemnities with respect to possible environmental liabilities
from United Technologies Corporation in connection with Lear's acquisition of
UT Automotive. While we do not believe that the environmental liabilities
associated with present and former UT Automotive properties will have a
material adverse effect on our business, results of operations or financial
condition, no assurances can be given in this regard.
We have been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("Superfund"), for the cleanup of contamination from hazardous
substances at five Superfund sites where liability has not been completely
determined and two sites where we have received offers to settle their
responsibility for less than $10,000.
ACCOUNTING POLICIES
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for fiscal years beginning after June 15,
1999. It requires all derivative instruments to be recorded in the balance sheet
at their fair value. Changes in the fair value of derivative instruments are
required to be recorded each period in current earnings or accumulated other
comprehensive income, depending on whether the derivative instruments are
designated as part of a hedge transaction. We do not expect the effects of the
adoption to be significant.
YEAR 2000
We are currently working to resolve the potential impact of the year 2000
("Y2K") on the processing of time-sensitive information by our computerized
information systems. Any of our programs that have time-sensitive software may
recognize the year "00" as 1900 rather than the year 2000. This could result in
miscalculations, classification errors or system failures.
State of Readiness
In 1996, we began a program to assess the impact of the Y2K issue on the
software and hardware used in our operations and have identified various areas
to focus our Y2K compliance efforts. These areas include business computer
systems, manufacturing and warehousing systems, end-user computing, technical
infrastructure and environmental systems, research and development facilities
and supplier and service providers. Our Y2K program phases include assessment
and planning, remediation, testing and implementation.
For business, manufacturing and end-user systems, we are in the process of
remediation and testing. We are utilizing internal personnel as well as
third-party services to assist in our efforts. At many sites, particularly in
Europe, we are implementing new Y2K compliant systems. We have corrected, or are
in the process of correcting, Y2K issues at many other sites. We are also
reviewing our technical infrastructure, environmental systems, and R&D
facilities on a site-by-site basis, many times with the aid of equipment
manufacturers. Most of the systems used in these areas are new and Y2K
compliant. Others will be replaced as part of our ongoing site
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upgrade project. Among our supplier base, we are monitoring the progress of each
of our key suppliers with questionnaires and site reviews, where appropriate,
along with the aid of industry information. We will make a determination of the
appropriate level of dependence among our supplier base.
Y2K Costs
Based on current estimates, we do not expect costs of addressing the Y2K
issue to have a material adverse effect on our financial position, results of
operations or cash flows in future periods. We currently estimate that our
historical and future costs (excluding UT Automotive) will be $10 to $20 million
for Y2K compliance. This includes $5 to $10 million directly attributable to
correcting non-compliant systems and another $5 to $10 million for ongoing
system improvements which will be Y2K compliant. We will have incurred these
costs over the period from mid-1996 through the end of 1999. Although we have
not specifically identified Y2K remediation costs in the past, we estimate
our Y2K remediation expenditures incurred through April 3, 1999 have been
approximately $5 million. In addition, we expect to incur an additional $10 to
$15 million to address UT Automotive's Y2K issues. Y2K projects have not
materially deferred our implementation of other information technology projects.
Y2K Risks
Our reasonable worst-case scenario with respect to the Y2K issue is the
failure of a key system at one or more of our facilities or at the facilities of
one or more of our key suppliers or customers that causes shipments of our
products to customers to be temporarily interrupted. This could result in our
missing build schedules with our customers, which in turn could lead to lost
sales and profits for us and our customers. We may also be adversely affected by
general economic disruptions caused by the Y2K issue even in circumstances where
our systems and the systems of our suppliers and customers are Y2K compliant. We
cannot assure you that Y2K issues will not have a material adverse effect on our
business, results of operations or financial condition.
Contingency Plans
As a part of our Y2K strategy, contingency plans are being developed
site-by-site and any systems requiring remediation will have one or more
contingency plans. All plans will be documented and will be executed
accordingly, if necessary. In addition, we are in the process of performing
supplier site audits.
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, (v) fluctuations in
currency exchange rates and other risks associated with doing business in
foreign countries, (vi) risks relating to the impact of Y2K issues, and (vii)
other risks detailed from time to time in the Company's Securities and Exchange
Commission filings. The Company does not intend to update these forward-looking
statements.
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LEAR CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 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).
10.2 Second 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 (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated May
4, 1999).
10.3 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 (incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K
dated May 4, 1999).
10.4 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 (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K
dated May 4, 1999).
10.5 Stock Purchase Agreement, dated as of May 7, 1999, between
Lear Corporation and Johnson Electric Holdings Limited
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated May 7, 1999).
10.6 Purchase Agreement dated as of May 13, 1999, among Lear
Corporation, Lear Operations Corporation, Lear Corporation
Automotive Holdings and Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc., Chase Securities
Inc., Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc., NationsBanc Montgomery Securities LLC,
Scotia Capital Markets (USA) Inc. and TD Securities (USA)
Inc.
10.7 Registration Rights Agreement dated as of May 18, 1999,
among Lear Corporation, Lear Operations Corporation, Lear
Corporation Automotive Holdings and Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc., Chase Securities
Inc., Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc., NationsBanc Montgomery Securities LLC,
Scotia Capital Markets (USA) Inc. and TD Securities (USA)
Inc.
10.8 Indenture dated as of May 15, 1999, among Lear Corporation
as Issuer, the Guarantors party thereto from time to time
as Guarantors and The Bank of New York as Trustee.
27.1 Financial Data Schedule for the quarter ended April 3,
1999.
99.1 Press Release of the Company dated May 18, 1999, relating
to the issuance of senior notes.
(b) The following reports on Form 8-K were filed during the quarter
ended April 3, 1999.
March 16, 1999 - Form 8-K relating to the definitive purchase
agreement to acquire UT Automotive.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAR CORPORATION
Dated: May 18, 1999 By: /s/ Donald J. Stebbins
------------------------------
Donald J. Stebbins
Senior Vice President and
Chief Financial Officer
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LEAR CORPORATION
FORM 10 -Q
EXHIBIT INDEX
FOR THE QUARTER ENDED APRIL 3, 1999
EXHIBIT
NUMBER
------
10.1 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).
10.2 Second 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
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated May 4, 1999).
10.3 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 (incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K
dated May 4, 1999).
10.4 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 (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K
dated May 4, 1999).
10.5 Stock Purchase Agreement, dated as of May 7, 1999, between
Lear Corporation and Johnson Electric Holdings Limited
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated May 7, 1999).
10.6 Purchase Agreement dated as of May 13, 1999, among Lear
Corporation, Lear Operations Corporation, Lear Corporation
Automotive Holdings and Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc., Chase Securities
Inc., Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc., NationsBanc Montgomery Securities LLC,
Scotia Capital Markets (USA) Inc. and TD Securities (USA)
Inc.
10.7 Registration Rights Agreement dated as of May 18, 1999,
among Lear Corporation, Lear Operations Corporation, Lear
Corporation Automotive Holdings and Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc., Chase Securities
Inc., Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc., NationsBanc Montgomery Securities LLC,
Scotia Capital Markets (USA) Inc. and TD Securities (USA)
Inc.
10.8 Indenture dated as of May 15, 1999, among Lear Corporation
as Issuer, the Guarantors party thereto from time to time
as Guarantors and The Bank of New York as Trustee.
27.1 Financial Data Schedule for the quarter ended April 3,
1999.
99.1 Press Release of the Company dated May 18, 1999, relating
to the issuance of senior notes.