1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
COMMISSION FILE NUMBER: 1-11311
LEAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3386776
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
21557 TELEGRAPH ROAD, SOUTHFIELD, MI 48086-5008
(Address of principal executive offices) (zip code)
(248) 746-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of Common Stock, $0.01 par value per share, outstanding
as of October 31, 1997: 66,831,138
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1997
INDEX
Part I - Financial Information: Page No.
- ------------------------------- --------
Item 1 - Consolidated Financial Statements
Introduction to the Consolidated Financial Statements 3
Consolidated Balance Sheets - September 27, 1997 and
December 31, 1996 4
Consolidated Statements of Income - Three and Nine Month Periods
ended September 27, 1997 and September 28, 1996 5
Consolidated Statements of Cash Flows - Nine Month Periods
ended September 27, 1997 and September 28, 1996 6
Notes to the Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II - Other Information:
- ----------------------------
Item 6 - Exhibits and 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
The condensed consolidated financial statements of Lear Corporation and
subsidiaries (the "Company") have been prepared by Lear Corporation, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make
the information presented not misleading when read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission for
the period ended December 31, 1996.
The financial information presented reflects all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations and statements
of financial position for the interim periods presented. These results are not
necessarily indicative of a full year's results of operations.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
September 27, December 31,
1997 1996
--------------- ------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 8.9 $ 26.0
Accounts receivable, net 1,048.2 909.6
Inventories 218.7 200.0
Recoverable customer engineering and tooling 130.5 113.9
Other 102.1 97.9
------------ -----------
1,508.4 1,347.4
------------ -----------
LONG-TERM ASSETS:
Property, plant and equipment, net 918.6 866.3
Goodwill, net 1,685.6 1,448.2
Other 178.1 154.9
------------ -----------
2,782.3 2,469.4
------------ -----------
$ 4,290.7 $ 3,816.8
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 21.5 $ 10.3
Accounts payable 1,062.0 960.5
Accrued liabilities 588.9 520.2
Current portion of long-term debt 9.0 8.3
------------ -----------
1,681.4 1,499.3
------------ -----------
LONG-TERM LIABILITIES:
Deferred national income taxes 41.8 49.6
Long-term debt 1,225.5 1,054.8
Other 221.5 194.4
------------ -----------
1,488.8 1,298.8
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized;
66,721,738 issued at September 27, 1997 and
65,586,129 issued at December 31, 1996 .7 .7
Additional paid-in capital 842.3 834.5
Notes receivable from sale of common stock (.1) (.6)
Less- Common stock held in treasury, 10,230 shares at cost (.1) (.1)
Retained earnings 332.7 194.1
Minimum pension liability adjustment (1.0) (1.0)
Cumulative translation adjustment (54.0) (8.9)
------------ -----------
1,120.5 1,018.7
------------ -----------
$ 4,290.7 $ 3,816.8
============ ===========
The accompanying notes are an integral part of these balance sheets.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
------------------ -----------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 1,635.9 $ 1,505.6 $ 5,199.2 $ 4,530.1
Cost of sales 1,460.6 1,361.9 4,632.5 4,098.9
Selling, general and administrative expenses 71.2 56.9 204.5 149.2
Amortization of goodwill 10.3 9.3 29.7 24.0
---------- ---------- ----------- ----------
Operating income 93.8 77.5 332.5 258.0
Interest expense 22.7 28.4 76.6 75.9
Other expense, net 8.6 7.6 21.4 14.6
---------- ---------- ------------ ----------
Income before provision for national income
taxes and extraordinary item 62.5 41.5 234.5 167.5
Provision for national income taxes 25.9 16.7 94.9 66.8
---------- ---------- ----------- ----------
Net income before extraordinary item 36.6 24.8 139.6 100.7
Extraordinary loss on early extinguishment
of debt (1.0) - (1.0) -
---------- ---------- ----------- ----------
Net income $ 35.6 $ 24.8 $ 138.6 $ 100.7
========== ========== =========== ==========
Net income before extraordinary item per
common share $ .53 $ .37 $ 2.04 $ 1.62
Extraordinary loss per common share (.01) - (.01) -
---------- ---------- ----------- ----------
Net income per common share $ .52 $ .37 $ 2.03 $ 1.62
========== ========== =========== ==========
The accompanying notes are an integral part of these statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN MILLIONS)
Nine Months Ended
-----------------
September 27, September 28,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 138.6 $ 100.7
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of goodwill 133.0 107.3
Amortization of deferred financing fees 2.6 2.5
Extraordinary loss 1.0 -
Other, net (13.5) (6.0)
Change in working capital items, net (40.7) (76.5)
--------- ---------
Net cash provided by operating activities 221.0 128.0
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (113.1) (100.0)
Acquisitions, net (348.1) (457.0)
Other, net 1.4 4.0
--------- ---------
Net cash used in investing activities (459.8) (553.0)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net 180.4 203.2
Increase in cash overdrafts 36.6 13.0
Short-term borrowings, net 4.8 (6.2)
Proceeds from sale of common stock, net 1.4 244.7
Other, net (3.9) (1.4)
--------- ---------
Net cash provided by financing activities 219.3 453.3
--------- ---------
Effect of foreign currency translation 2.4 (10.9)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (17.1) 17.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26.0 34.1
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8.9 $ 51.5
========= =========
CHANGES IN WORKING CAPITAL, NET OF IMPACT OF ACQUISITIONS:
Accounts receivable $(106.6) $ (130.1)
Inventories 1.8 13.9
Accounts payable 17.0 36.4
Accrued liabilities and other 47.1 3.3
--------- ---------
$(40.7) $ (76.5)
========= =========
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 88.2 $ 79.1
========= =========
Cash paid for income taxes $ 78.6 $ 63.8
========= =========
The accompanying notes are an integral part of these statements.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Lear
Corporation, a Delaware corporation, and its wholly-owned and majority-owned
subsidiaries. Investments in less than majority-owned businesses are generally
accounted for under the equity method.
(2) 1997 ACQUISITIONS
Dunlop Cox
On June 5, 1997, the Company acquired all of the outstanding shares of
common stock of Dunlop Cox Limited ("Dunlop Cox") for approximately $60 million
(the "Dunlop Cox Acquisition"). Dunlop Cox, based in Nottingham, England,
provides Lear with the ability to design and manufacture manual and
electronically-powered automotive seat adjusters. For the year ended December
31, 1996, Dunlop Cox had sales of approximately $39 million.
Keiper Car Seating
On July 31, 1997, the Company acquired certain equity and partnership
interests in Keiper Car Seating GmbH & Co. and certain of its subsidiaries and
affiliates (collectively, "Keiper") for approximately $260 million (the "Keiper
Acquisition"). Keiper was a leading supplier of automotive vehicle seat
systems with operations in Germany, Italy, Hungary, Brazil and South Africa,
with unaudited sales for the year ended December 31, 1996 of approximately $615
million.
ITT Automotive Seat Sub-Systems Unit
On August 25, 1997, the Company acquired the Automotive Seat Sub-Systems
Unit of ITT Automotive ("ITT Seat Sub-Systems"), a North American supplier of
power seat adjusters and power recliners. ITT Seat Sub-Systems had 1996 sales
to non-Lear facilities of approximately $115 million.
These acquisitions were accounted for as purchases, and accordingly, the
assets purchased and liabilities assumed have been reflected in the
accompanying balance sheet as of September 27, 1997 and the operating results
have been included since the date of each acquisition.
(3) 1996 ACQUISITIONS
Masland Acquisition
On June 27, 1996, the Company, through a wholly owned subsidiary ("PA
Acquisition Corp."), acquired 97% of the issued and outstanding shares of
common stock of Masland Corporation ("Masland") pursuant to an offer to
purchase which was commenced on May 30,
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1996. On July 1, 1996, the remaining issued and outstanding shares of common
stock of Masland were acquired and PA Acquisition Corp. merged with and into
Masland, such that Masland became a wholly-owned subsidiary of the Company. The
aggregate purchase price for the acquisition of Masland (the "Masland
Acquisition") was $475.7 million (including the assumption of $80.7 million of
Masland's existing net indebtedness and $10.0 million in fees and expenses).
Masland was a leading supplier of floor and acoustic systems to the North
American automotive market. Masland also was a major supplier of interior
luggage compartment trim components and other acoustical products which are
designed to minimize noise, vibration and harshness for passenger cars and light
trucks.
The Masland Acquisition was accounted for as a purchase, and accordingly,
the assets purchased and liabilities assumed in the acquisition have been
reflected in the accompanying consolidated balance sheets and the operating
results of Masland have been included in the consolidated financial statements
since the date of acquisition.
Borealis Acquisition
On December 10, 1996, the Company acquired all of the issued and
outstanding capital stock of Borealis Industrier, AB ("Borealis") for an
aggregate purchase price of $91.1 million (including the assumption of $18.8
million of Borealis existing net indebtedness and $1.5 million of fees and
expenses). Borealis was a supplier of instrument panels and other interior
components to the European automotive market. The Borealis acquisition was
accounted for as a purchase, and accordingly, the assets purchased and
liabilities assumed have been reflected in the accompanying balance sheets and
the operations of Borealis have been included in the consolidated financial
statements since the date of acquisition.
(4) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally using the first-in, first-out method. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead
costs. Inventories are comprised of the following (in millions):
Sept. 27, Dec. 31,
1997 1996
---------- --------
Raw materials $ 155.1 $ 124.7
Work-in-process 20.9 25.0
Finished goods 42.7 50.3
-------- --------
$ 218.7 $ 200.0
======== ========
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciable property is
depreciated over the estimated useful lives of the assets, using principally
the straight-line method. A summary of property, plant and equipment is shown
below (in millions):
Sept. 27, Dec. 31,
1997 1996
----------- -----------
Land $ 59.7 $ 52.3
Buildings and improvements 325.1 287.6
Machinery and equipment 933.5 836.8
--------- --------
Total property, plant and equipment 1,318.3 1,176.7
Less accumulated depreciation (399.7) (310.4)
--------- --------
Net property, plant and equipment $ 918.6 $ 866.3
========= ========
(6) LONG-TERM DEBT
Long-term debt is comprised of the following (in millions):
Sept. 27, Dec. 31,
1997 1996
--------- ---------
Credit agreements $ 794.9 $ 481.3
Industrial revenue bonds 30.9 22.6
Other 63.7 89.2
-------- --------
889.5 593.1
Less- Current portion (9.0) (8.3)
-------- --------
880.5 584.8
-------- --------
9 1/2 % Subordinated Notes 200.0 200.0
8 1/4 % Subordinated Notes 145.0 145.0
11 1/4 % Senior Subordinated Notes -- 125.0
-------- --------
345.0 470.0
-------- --------
$1,225.5 $1,054.8
======== ========
On July 15, 1997, the Company redeemed all of its 11 1/4% Senior
Subordinated Notes due 2000 (the "11 1/4% Notes") at par using
borrowings under its existing $1.8 billion multi-currency revolving credit
facility with a syndicate of lenders (the "Credit Agreement"). The accelerated
amortization of deferred financing fees related to the redemption of the 11
1/4% Notes was $1.6 million. This amount, net of the related tax benefit of
$ .6
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
million, has been reflected as an extraordinary loss in the consolidated
statements of income for the three and nine month periods ended September 27,
1997.
(7) COMMON SHARES OUTSTANDING
The weighted average number of shares of common stock outstanding is as
follows for the periods presented:
Three Months Ended Nine Months Ended
------------------ -----------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
---- ---- ---- ----
Primary 68,381,508 67,004,490 68,170,059 62,320,313
Fully Diluted 68,502,232 67,004,490 68,443,309 62,342,240
(8) FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments selectively to offset
exposures to market risks arising from changes in foreign exchange rates and
interest rates. Derivative financial instruments currently utilized by the
Company primarily include forward foreign exchange contracts and interest rate
swaps.
Certain foreign currency contracts entered into by the Company qualify for
hedge accounting as only firm 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.
(9) FINANCIAL ACCOUNTING STANDARDS
Earnings per Share
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which changes the calculation of earnings per share to be more
consistent with countries outside of the United States. In general, the
statement requires two calculations of earnings per share to be disclosed,
basic EPS and diluted EPS. Basic EPS is to be computed using only weighted
average shares outstanding. The Company's diluted EPS is computed using the
average share price for the
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
period when calculating the dilution of options and
warrants. This statement must be adopted by the Company in its December 31,
1997 consolidated financial statements and early adoption is not permitted. If
this statement had been adopted for the periods presented, the net income and
per share amounts would have been as follows (unaudited; in millions, except
per share data):
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
---- ---- ---- ----
Net income $ 35.6 $ 24.8 $ 138.6 $ 100.7
====== ======= ======= =======
Basic net income per share $ .54 $ .39 $ 2.10 $ 1.71
====== ======= ======= =======
Diluted net income per
share $. 52 $ .37 $ 2.03 $ 1.62
====== ======= ======= =======
Comprehensive Income
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income. Comprehensive income is defined as all changes in a
Company's net assets except changes resulting from transactions with
shareholders. It differs from net income in that certain items currently
recorded to equity would be a part of comprehensive income. Comprehensive
income must be reported in a financial statement with the cumulative total
presented as a component of equity. This statement must be adopted by the
Company in its 1998 quarterly financial statements.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 1997 VS. THREE MONTHS ENDED SEPTEMBER 28,
1996.
Net sales of $1,635.9 million in the quarter ended September 27, 1997
surpassed the third quarter of 1996 by $130.3 million or 8.7%. Net sales as
compared to prior year benefited from acquisitions, which collectively
accounted for $99.3 million of the increase, and new business introduced in
North America and South America within the past year. Partially offsetting the
increase in sales were unfavorable exchange rate fluctuations in Europe and
South America. As a result of Lear's continued global presence as a total
interior supplier, the Company anticipates that foreign exchange fluctuations
will continue to impact net sales.
Net sales in the United States and Canada of $1,035.8 million in the third
quarter of 1997 exceeded the comparable period in the prior year by $22.5
million or 2.2%. Sales in the current quarter benefited from new sport utility
and truck programs introduced by domestic automotive manufacturers. Partially
offsetting the increase in sales was a modest downturn in industry build
schedules on passenger car programs.
Net sales in Europe of $408.2 million increased by $76.7 million or 23.1%
in the third quarter of 1997 as compared to the third quarter of 1996. Sales
in the quarter ended September 27, 1997 benefited from $82.2 million in sales
from acquisitions and vehicle production increases on programs in Italy,
Germany and Austria. Partially offsetting the increase in sales were
unfavorable exchange rate fluctuations in Italy, Germany and Sweden.
Net sales of $191.9 million in the third quarter of 1997 in the Company's
remaining geographic regions, consisting of Mexico, South America, the
Asia/Pacific Rim region and South Africa, surpassed the third quarter of the
prior year by $31.1 million or 19.3%. Sales in the third quarter of 1997
reflect new Volkswagen, Fiat and General Motors business operations along with
incremental volume on existing Fiat programs in South America. Partially
offsetting the increase in sales was the production phase out of a General
Motors truck program in Mexico, downtime associated with a General Motors plant
conversion in Australia and unfavorable exchange rate fluctuations in Brazil.
Gross profit (net sales less cost of sales) and gross margin (gross profit
as a percentage of net sales) were $175.3 million and 10.7% for the third
quarter of 1997 as compared to $143.7 million or 9.5% in the comparable period
in 1996. Gross profit in the current quarter reflects the benefits derived
from the overall growth in new and ongoing programs coupled with the
contribution of recent acquisitions.
Selling, general and administrative expenses, including research and
development, increased to $71.2 million, or 4.4% of net sales, in the third
quarter of 1997 as compared to $56.9 million, or 3.8% of net sales in the third
quarter of 1996. The increase in actual expenditures in 1997 was due to
additional costs incurred as a result of acquisitions, increased customer
focused
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engineering costs and administrative expenses necessary to support the global
expansion of potential business opportunities.
Operating income and operating margin (operating income as a percentage of
net sales) were $93.8 million and 5.7% in the third quarter of 1997 as compared
to $77.5 million and 5.1% in the third quarter of 1996. For the quarter ended
September 27, 1997, operating income benefited from increased market demand and
content on domestic and foreign car and light truck programs coupled with
operating income generated from acquisitions. Partially offsetting the
increase in operating income were design, development and administrative
expenses and program expenses for recently opened facilities in South America
and the Asia/ Pacific region. Non-cash depreciation and amortization charges
were $45.7 million and $39.6 million for the third quarter of 1997 and 1996,
respectively.
For the quarter ended September 27, 1997, interest expense decreased by
$5.7 million to $22.7 million as compared to the prior year due to debt
reduction from cash generation, savings due to the redemption of the Company's
11 1/4% Senior Subordinated Notes and reduced borrowing rates due to the
achievement of certain leverage ratios. Partially offsetting the above was
interest incurred on borrowings to finance acquisitions.
Other expenses for the three months ended September 27, 1997, which
include state and local taxes, foreign exchange, minority interests in
consolidated subsidiaries, equity in net income of affiliates and other
non-operating expenses, increased to $8.6 million from $7.6 million, largely as
a result of foreign exchange losses.
Net income for the third quarter of 1997 was $35.6 million, or $.52 per
share, as compared to $24.8 million, or $.37 per share in the prior year. The
provision for income taxes was $25.9 million, or an effective tax rate of
41.4%, as compared to $16.7 million, or an effective tax rate of 40.2% in the
previous year. Earnings per share increased in the third quarter of 1997 by
40.5% despite an increase in the weighted average number of shares outstanding
of approximately 1.5 million shares and an extraordinary loss of $1.0 million
related to the early retirement of debt.
NINE MONTHS ENDED SEPTEMBER 27, 1997 VS. NINE MONTHS ENDED SEPTEMBER 28, 1996.
Net sales of $5,199.2 million for the nine month period of 1997 increased
by $669.1 million or 14.8% over the comparable nine month period of 1996.
Sales as compared to prior year benefited from acquisitions, which accounted
for $533.2 million of the increase and new business introduced worldwide within
the past twelve months. Partially offsetting the increase in sales were
customer work stoppages in North America and exchange rate fluctuations in
Europe and South America.
Gross profit and gross margin improved to $566.7 million and 10.9% for the
nine month period ended September 27, 1997 as compared to $431.2 million and
9.5% a year earlier. Gross profit in the current year reflects the
contribution of acquisitions and the overall growth in production volume on
passenger car and truck seat programs by domestic and foreign automotive
manufacturers. Partially offsetting the increase in gross profit were customer
work stoppages in the second quarter of 1997.
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Selling, general and administrative expenses, including research and
development, for the nine months ended September 27, 1997 increased to
$204.5 million, or 3.9% of net sales, from $149.2 million, or 3.3% of net
sales, in the comparable period in the prior year. Actual expenditures
increased in comparison to prior year due to the inclusion of newly acquired
companies operating expenses as well as increased research and development and
administrative support expenses associated with the expansion of domestic and
international business.
Operating income and operating margin were $332.5 million and 6.4% for the
first nine months of 1997 as compared to $258.0 million and 5.7% in the prior
year. Operating income for the current year benefited from the incremental
profits generated from acquisitions along with increased industry build
schedules from domestic and foreign automotive manufacturers on new and mature
programs. Partially offsetting the increase in operating income were
engineering and administrative support expenses at North American and European
business centers and the adverse impact of General Motors and Chrysler work
stoppages. Non-cash depreciation and amortization charges were $133.0 million
and $107.3 million for the nine month period of the current and prior years,
respectively.
For the nine months ended September 27, 1997, interest expense increased
slightly from $75.9 million in the nine months ended September 28, 1996 to
$76.6 million, as interest incurred on additional debt to finance acquisitions
was offset by savings generated from the redemption of the Company's 11 1/4%
Senior Subordinated Notes and reduced borrowings rates due to the achievement
of certain leverage ratios.
Other expenses for the nine months ended September 27, 1997, increased to
$21.4 million from $14.6 million in the comparable period in 1996, due to an
increase in the provision for state and local taxes and foreign exchange
losses.
Net income for the first nine months of 1997 was $138.6 million or $2.03
per share as compared to $100.7 million or $1.62 per share in the comparable
period in 1996. Earnings per share increased in the current year by 25.3%
despite an increase in the weighted average number of shares outstanding of
approximately 6.1 million shares and an extraordinary loss of $1.0 million
related to the early retirement of debt.
LIQUIDITY AND FINANCIAL CONDITION
Lear's cash flows remained strong during the third quarter of 1997. Net
cash provided by operating activities was $221.0 million during the first nine
months of 1997 compared to $128.0 million for the same period in 1996. Net
income increased 37.6%, from $100.7 million in 1996 to $138.6 million in 1997,
as a result of acquisitions, new business and increased volume and content on
existing programs. In addition, net income included non-cash depreciation and
goodwill amortization charges of $133.0 million in 1997 and $107.3 million in
1996. Working capital, combined with cash overdrafts, remained relatively
constant for the nine months ended September 27, 1997.
Net cash used in investing activities decreased from $553.0 million in the
first nine months of 1996 to $459.8 million for the same period in 1997. The
1996 Masland Acquisition resulted in a net use of funds of $457.0 million while
the Company's 1997 acquisitions resulted
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in an aggregate net use of $348.1 million. Capital expenditures increased from
$100.0 million to $113.1 million for the nine months ended September 27, 1997,
compared to the same period in 1996, as a result of acquisitions and to support
future programs. Approximately $55 million of additional capital expenditures
are expected for the remainder of 1997.
As of September 27, 1997, the Company had $794.9 million outstanding
under its $1.8 billion multi-currency revolving credit facility (the "Credit
Agreement"), which matures on September 30, 2001, and $53.2 million committed
under outstanding letters of credit, resulting in approximately $1.0 billion
unused and available. On July 15, 1997, the Company took advantage of the
favorable interest rate environment by redeeming $125.0 million in aggregate
principal amount of its 11 1/4% Senior Subordinated Notes due 2000 at par with
borrowings under the Credit Agreement.
In addition to debt outstanding under the Credit Agreement, the Company
had $461.1 million of debt outstanding as of September 27, 1997, consisting
primarily of $345.0 million of subordinated notes due between 2002 and 2006.
As a result of the debt incurred to acquire a portion of Keiper Car
Seating GmbH & Co. and the ITT Seat Sub-Systems Unit, Lear's total debt to
total capitalization ratio increased to 52.9% at September 27, 1997, compared
to 48.2% at June 28, 1997 and 51.3% at December 31, 1996. Excluding this
acquisition debt, Lear's total debt to total capitalization would have
improved to 46.9%.
Reflecting the improved financial position, Lear received upgrades from
both Standard and Poor's Corporation ("S&P") and Moody's Investor Service
('Moody's"). On June 27, 1997, S&P upgraded Lear's corporate rating from BB+
to BBB- and the 8 1/4% and 9 1/2% Subordinated Notes from BB- from BB+. On
August 7, 1997, Moody's upgraded it's rating on Lear's Credit Agreement from
Ba1 to Baa3 and the 8 1/4% and 9 1/2% Subordinated Notes from B1 to Ba1.
The Company believes that cash flows from operations and available credit
facilities will be sufficient to meet its debt service obligations, projected
capital expenditures and working capital requirements for the foreseeable
future.
ACCOUNTING POLICIES
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which changes the calculation of earnings per share to be more
consistent with countries outside of the United States. The Company is
required to adopt this statement in its December 31, 1997 consolidated
financial statements. If this statement had been adopted for the periods
presented, the impact on the Company's financial statements is disclosed in
Note 9 to its September 27, 1997 quarterly financial statements included
herein.
Also during 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires increased disclosure of comprehensive income
and must be adopted by the Company in its 1998 quarterly financial statements.
These requirements are
15
16
discussed in further detail in Note 9 to its September 27, 1997 quarterly
financial statements included herein.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are
cautioned that any forward-looking statements, including statements regarding
the intent, belief, or current expectations of the Company or its management,
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to, (i)
general economic conditions in the markets in which the Company operates, (ii)
fluctuations in worldwide or regional automobile and light truck production,
(iii) labor disputes involving the Company or its significant customers, (iv)
changes in practices and/or policies of the Company's significant customers
towards outsourcing automotive components and systems and (v) other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings. The Company does not intend to update these forward-looking
statements.
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17
LEAR CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule for the quarter ended September 27, 1997.
(b) Reports on Form 8-K.
No exhibits or reports on Form 8-K were filed during the quarter ended
September 27, 1997.
17
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAR CORPORATION
Dated: November 11, 1997 By: /s/ Donald J. Stebbins
--------------------------
Donald J. Stebbins
Senior Vice President and
Chief Financial Officer
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19
LEAR CORPORATION
FORM 10 -Q
EXHIBIT INDEX
FOR THE QUARTER ENDED SEPTEMBER 27, 1997
EXHIBIT NUMBER
- --------------
27.1 Financial Data Schedule for the quarter ended September 27, 1997
19
5
1,000,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-27-1997
9
0
1,048
13
219
1,508
1,318
400
4,291
1,681
1,226
0
0
1
1,120
4,291
5,199
5,199
4,633
4,633
21
0
77
235
95
140
0
1
0
139
2.03
2.03
