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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 28, 1998
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.
Approximate number of shares of Common Stock, $0.01 par value per
share, outstanding at April 30, 1998: 67,090,907
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 28, 1998
INDEX
Part I - Financial Information: Page No.
Item 1 - Consolidated Financial Statements
Introduction to the Consolidated Financial Statements 3
Consolidated Balance Sheets - March 28, 1998 and
December 31, 1997 4
Consolidated Statements of Income - Three Month Periods
ended March 28, 1998 and March 29, 1997 5
Consolidated Statements of Cash Flows - Three Month
Periods ended March 28, 1998 and March 29, 1997 6
Notes to the Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II - Other Information:
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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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, 1997.
The financial information presented reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of the results of operations and 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)
March 28, Dec. 31,
1998 1997
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18.3 $ 12.9
Accounts receivable, net 1,264.1 1,065.8
Inventories 246.6 231.4
Recoverable customer engineering and tooling 195.0 152.6
Other 169.6 152.2
-------- --------
1,893.6 1,614.9
-------- --------
LONG-TERM ASSETS:
Property, plant and equipment, net 943.5 939.1
Goodwill, net 1,669.0 1,692.3
Other 230.7 212.8
-------- --------
2,843.2 2,844.2
-------- --------
$4,736.8 $4,459.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 30.6 $ 37.9
Accounts payable 1,221.5 1,186.5
Accrued liabilities 682.4 620.5
Current portion of long-term debt 12.4 9.1
-------- --------
1,946.9 1,854.0
-------- --------
LONG-TERM LIABILITIES:
Deferred national income taxes 67.3 61.7
Long-term debt 1,202.7 1,063.1
Other 274.8 273.3
-------- --------
1,544.8 1,398.1
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized;
67,068,019 issued at March 28, 1998 and
66,872,188 issued at December 31, 1997 .7 .7
Additional paid-in capital 854.4 851.9
Notes receivable from sale of common stock (.1) (.1)
Less- Common stock held in treasury, 10,230 shares at cost (.1) (.1)
Retained earnings 448.6 401.3
Minimum pension liability adjustment (.5) (.5)
Cumulative translation adjustment (57.9) (46.2)
-------- --------
1,245.1 1,207.0
-------- --------
$4,736.8 $4,459.1
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
March 28, March 29,
1998 1997
---- ----
(Unaudited)
Net sales $ 2,032.1 $ 1,724.0
Cost of sales 1,831.9 1,546.1
Selling, general and administrative expenses 78.0 66.1
Amortization of goodwill 11.5 9.7
--------- ---------
Operating income 110.7 102.1
Interest expense 24.7 27.2
Other expense, net 8.0 5.5
--------- ---------
Income before provision for
national income taxes 78.0 69.4
Provision for national income taxes 30.7 27.5
--------- ---------
Net income $ 47.3 $ 41.9
========= =========
Basic net income per share $ .71 $ .64
========= =========
Diluted net income per share $ .69 $ .62
========= =========
The accompanying notes are an integral part of these consolidated statements.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
Three Months Ended
------------------------------
March 28, March 29,
1998 1997
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47.3 $ 41.9
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 54.9 43.5
Other, net (22.8) (4.6)
Change in working capital items (214.5) (36.5)
------- -------
Net cash provided by (used in) operating activities (135.1) 44.3
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (48.2) (32.6)
Other, net .5 (3.1)
------- -------
Net cash used in investing activities (47.7) (35.7)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net 149.9 (52.6)
Short-term borrowings, net (7.2) 1.1
Increase (decrease) in cash overdrafts 46.9 17.1
Other, net 2.6 1.3
------- -------
Net cash provided by (used in) financing activities 192.2 (33.1)
------- -------
Effect of foreign currency translation (4.0) 14.8
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5.4 (9.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12.9 26.0
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18.3 $ 16.3
======= =======
CHANGES IN WORKING CAPITAL:
Accounts receivable $(205.6) $(126.0)
Inventories (16.0) 6.9
Accounts payable (1.6) 64.9
Accrued liabilities and other 8.7 17.7
------- -------
$(214.5) $ (36.5)
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 29.6 $ 36.5
======= =======
Cash paid for income taxes $ 26.0 $ 20.5
======= =======
The accompanying notes are an integral part of these consolidated 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) 1998 ACQUISITIONS
Delphi Automotive Systems
The Company has entered into a letter of intent to acquire the seating
business of Delphi Automotive Systems ("Delphi Seating"), a division of General
Motors Corporation. Delphi Seating is a leading supplier of seat systems to
General Motors. The acquisition is expected to close in the second quarter of
1998. However, there can be no assurance that the acquisition will be
consummated.
Chapman
In April, 1998, the Company acquired the A.W. Chapman Ltd. and A.W.
Chapman Belgium NV subsidiaries ("Chapman") of the Rodd Group Limited. Chapman
produces seat tracks, mechanisms and seat height adjusters at plants in Bicester
and Shepperton in the U.K. and in Houthalen, Belgium.
Gruppo Pianfei S.r.L.
In April, 1998, the Company entered into a definitive agreement to
acquire Gruppo Pianfei S.r.L. ("Pianfei"). Pianfei produces door panels,
headliners and plastic interior components at six facilities located throughout
Italy. The acquisition is expected to close in the second quarter of 1998.
However, there can be no assurance that the acquisition will be consummated.
Strapazzini Resine S.r.L.
In April, 1998, the Company entered into a definitive agreement to
acquire Strapazzini Resine S.r.L. ("Strapazzini"). Strapazzini produces
instrument panels, door panels, sunshades, consoles, and pillar trim at two
facilities located in Italy. The acquisition is expected to close in the second
quarter of 1998. However, there can be no assurance that the acquisition will be
consummated.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) 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):
March 28, Dec. 31,
1998 1997
---- ----
Raw materials $174.8 $165.7
Work-in-process 39.3 22.5
Finished goods 32.5 43.2
------ ------
$246.6 $231.4
====== ======
(4) 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):
March 28, Dec. 31,
1998 1997
---- ----
Land $ 60.3 $ 60.5
Buildings and improvements 352.3 345.9
Machinery and equipment 1,007.9 974.2
-------- --------
Total property, plant and equipment 1,420.5 1,380.6
Less accumulated depreciation (477.0) (441.5)
-------- --------
Net property, plant and equipment $ 943.5 $ 939.1
======== ========
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) LONG-TERM DEBT
Long term debt is comprised of the following (in millions):
March 28, Dec. 31,
1998 1997
---- ----
Credit agreement $ 780.6 $ 647.7
Other 98.5 88.5
-------- --------
879.1 736.2
Less- Current portion (12.4) (9.1)
-------- --------
866.7 727.1
-------- --------
9 1/2% Subordinated Notes 200.0 200.0
8 1/4% Subordinated Notes 136.0 136.0
-------- --------
336.0 336.0
-------- --------
$1,202.7 $1,063.1
======== ========
(6) 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.
(7) FINANCIAL ACCOUNTING STANDARDS
Earnings per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," which was effective December
15, 1997. The statement 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 computed using only weighted average shares
outstanding. Diluted EPS is computed using the average share price for the
period when
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\ LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
calculating the dilution of stock options. Net income per share information has
been restated for all periods presented. Shares outstanding for the periods
presented were as follows:
Three Months Ended
------------------
March 28, March 29,
1998 1997
---- ----
Weighted average
shares outstanding 66,965,473 65,773,442
Dilutive effect of
stock options 1,482,563 2,273,589
--------- ---------
Diluted shares
outstanding 68,448,036 68,047,031
========== ==========
Comprehensive Income
In the first quarter of 1998, the Company adopted 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 for the periods presented is (in millions):
Three Months Ended
------------------
March 28, March 29,
1998 1997
---- ----
Net income $47.3 $41.9
----- -----
Other comprehensive income
Foreign currency translation adjustments (11.7) (26.1)
Minimum pension liability adjustment -- --
----- -----
Other Comprehensive income (11.7) (26.1)
----- -----
Comprehensive income $35.6 $15.8
===== =====
Reclassifications
Certain items in prior year's quarterly financial statements have been
reclassified to conform with the presentation used in the quarter ended March
28, 1998.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 28, 1998 VS. THREE MONTHS ENDED MARCH 29, 1997.
Net sales increased by 17.9% to $2.0 billion in the first quarter of 1998
as compared to $1.7 billion in the first quarter of 1997. Net sales for the
quarter ended March 28, 1998 benefited from acquisitions, which collectively
accounted for $265.5 million of the increase and new business introduced in
North America and Europe. Partially offsetting the increase in sales were
unfavorable exchange rate fluctuations in Europe and North America and lower
volumes on certain North American passenger car programs. As a result
of Lear's global presence, the Company anticipates that foreign exchange
fluctuations will continue to impact net sales.
Net sales in the United States and Canada of $1.2 billion in the first
quarter of 1998 remained essentially unchanged from the first quarter of 1997.
Sales in the current quarter benefited from the introduction of new Chrysler,
General Motors and Ford truck programs and $38.2 million from acquisitions.
Partially offsetting the increase in sales was a modest downturn in industry
build schedules on passenger car programs and unfavorable exchange rate
fluctuations in Canada.
Net sales in Europe of $.6 billion in the first quarter of 1998 surpassed
net sales in the comparable period in the prior year by $.2 billion, or 50.0%.
Sales in the quarter ended March 28, 1998 benefited from the contribution of
$196.5 million in net sales from acquisitions, increased market demand for
ongoing passenger car and truck programs in Austria, Italy and England, and to
new passenger car programs introduced within the past twelve months. Partially
offsetting the increase in sales were unfavorable exchange rate fluctuations in
Italy, Sweden, Germany and Austria.
Net sales of $182 million in the Company's remaining geographic regions,
consisting of Mexico, South America, Asia/Pacific Rim and South Africa,
increased by $35 million as compared to the first quarter of 1997. Sales in the
first quarter of 1998 benefited from a contribution of $30.8 million in sales
from recent acquisitions and incremental volume on established Ford passenger
car programs in Mexico.
Gross profit and gross margin were $200.2 million and 9.9% for the first
quarter of 1998 as compared to $177.9 million and 10.3% in the comparable period
in 1997. Gross profit in the current quarter reflects the contribution of
acquisitions coupled with the benefits derived from the overall growth in sales.
Partially offsetting the increase in gross profit was the impact of economic
conditions in South America and the Asia/Pacific Rim and new program and
facility costs in Europe, South America and the Asia/Pacific Rim region. Gross
margin in the first quarter of 1998 declined in relation to prior year due to
costs associated with the integration of recent acquisitions into the Company's
operations.
Selling, general and administrative expenses, including research and
development, as a percentage of net sales remained unchanged at 3.8% in the
first quarter of 1998 as compared to
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the first quarter of 1997. Actual expenditures increased due to the inclusion
of acquisition expenses and increased customer focused engineering and
expenses necessary to support domestic and international business.
For the quarter ended March 28, 1998, interest expense decreased by $2.5
million to $24.7 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, reduced interest rates in certain currencies and
lower borrowing rates due to the achievement of certain financial ratios.
Partially offsetting the above was interest incurred on borrowings to finance
acquisitions.
Other expenses for the three months ended March 28, 1998, 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 $8.0 million from $5.5 million due to foreign exchange
losses and increased minority interest expense.
Net income for the first quarter of 1998 was $47.3 million, or $.69 per
share, as compared to $41.9 million or $.62 per share in the prior year. The
provision for income taxes in the current quarter was $30.7 million, or an
effective tax rate of 39.4% as compared to $27.5 million, or an effective tax
rate of 39.6% in the previous year. Diluted earnings per share increased in the
first quarter of 1998 by 11.3% despite an increase in the weighted average
number of shares outstanding of approximately .4 million shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong during the first
quarter of 1998. Net cash used by operating activities was $135 million for the
quarter ended March 28, 1998 compared to a source of $44 million during the same
period in 1997. Net income increased by 13%, from $42 million to $47 million, as
a result of acquisitions and new business offset by the impact of foreign
exchange and lower volumes in South America and on certain North American
vehicles. In addition, depreciation and goodwill amortization charges were $55
million in 1998 and $44 million in 1997, with the increase primarily due to the
acquisitions of Keiper Car Seating GmbH & Co. and certain of its subsidiaries
and affiliates (collectively, "Keiper Seating"), Dunlop Cox and ITT
Automotive's Seat Sub-Systems Unit.
The change in working capital resulted in a net use of $215 million and
$37 million for the first quarter of 1998 and 1997, respectively. Working
capital increased during the first quarter of 1998 due primarily to the timing
of the Company's fiscal quarter end, with the quarter ending prior to
significant regularly scheduled accounts receivable collections.
Cash used in investing activities was $48 million in the first quarter
of 1998 versus $36 million in the same period of 1997. Capital expenditures
increased from $33 million in the first quarter of 1997 to $48 million in 1998
due to capital expenditures at acquired companies and new facility costs. The
Company currently anticipates approximately $200 million in additional capital
expenditures during the remainder of 1998.
As of March 28, 1998, the Company had $781 million outstanding under
its $1.8 billion multi-currency revolving credit facility (the "Credit
Agreement") and $53 committed under
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outstanding letters of credit, resulting in approximately $1.0 billion unused
and available. The Credit Agreement matures on September 30, 2001 and may be
used for general corporate purposes.
In addition to debt outstanding under the Credit Agreement, the Company
had $465 million of debt outstanding as of March 28, 1998, including short-term
borrowings, consisting primarily of $336 million of subordinated notes due
between 2002 and 2006. As of March 28, 1998, the Company had $18 million of cash
and cash equivalents. The Company's scheduled principal payments on long-term
debt are $9, $17, $7, $785 and $139 million in the remainder of 1998, 1999,
2000, 2001 and 2002, respectively. The majority of the 2001 required principal
repayments relate to the expiration of the Credit Agreement.
The company believes that cash flows from operations and available
credit facilities will be sufficient to meet its debt service obligations,
projected capital expenditures and working capital requirements.
ACCOUNTING POLICIES
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which changes the calculation of earnings per share to be more
consistent with countries outside of the United States. The Company adopted this
statement in its December 31, 1997 consolidated financial statements. The impact
of adoption on the first quarter 1998 and 1997 financial statements is disclosed
in Note 7 to its March 28, 1998 quarterly financial statements included herein.
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 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) fluctuation 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 toward
outsourcing automotive components and systems, (v) fluctuations in currency
exchange rates and (vi) 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.
27.1 Financial Data Schedule for the Quarter Ended March 28, 1998.
(b) Reports on Form 8-K.
No exhibits or reports on Form 8-K were filed during the quarter ended
March 28, 1998.
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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 11, 1998 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 MARCH 28, 1998
EXHIBIT
NUMBER
- -------
27.1 Financial Data Schedule for the Quarter Ended March 28, 1998.
16
5
1,000,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-28-1998
18
0
1,264
14
247
1,894
1,421
477
4,737
1,947
1,203
0
0
1
1,244
4,737
2,032
2,032
1,832
1,832
8
0
25
78
31
47
0
0
0
47
.71
.69
