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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 SEPTEMBER 26, 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) 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 October 31, 1998: 66,681,084
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1998
INDEX
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Part I - Financial Information: Page No.
- ------------------------------- --------
Item 1 - Consolidated Financial Statements
Introduction to the Consolidated Financial Statements 3
Consolidated Balance Sheets - September 26, 1998 and
December 31, 1997 4
Consolidated Statements of Income - Three and Nine Month Periods
ended September 26, 1998 and September 27, 1997 5
Consolidated Statements of Cash Flows - Nine Month Periods
ended September 26, 1998 and September 27, 1997 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 18
Signatures 19
- ----------
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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 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 26, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 32.7 $ 12.9
Accounts receivable, net 1,299.2 1,065.8
Inventories 332.7 231.4
Recoverable customer engineering and tooling 227.3 152.6
Other 173.6 152.2
-------- --------
2,065.5 1,614.9
-------- --------
LONG-TERM ASSETS:
Property, plant and equipment, net 1,132.1 939.1
Goodwill, net 2,002.0 1,692.3
Other 279.7 212.8
-------- --------
3,413.8 2,844.2
--------- --------
$5,479.3 $4,459.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 45.9 $ 37.9
Accounts payable 1,473.7 1,186.5
Accrued liabilities 767.2 620.5
Current portion of long-term debt 10.8 9.1
-------- --------
2,297.6 1,854.0
-------- --------
LONG-TERM LIABILITIES:
Deferred national income taxes 71.1 61.7
Long-term debt 1,466.3 1,063.1
Other 334.7 273.3
-------- --------
1,872.1 1,398.1
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized;
67,190,489 issued at September 26, 1998 and
66,872,188 issued at December 31, 1997 .7 .7
Additional paid-in capital 855.2 851.9
Notes receivable from sale of common stock (.1) (.1)
Less- Common stock held in treasury at cost (18.3) (.1)
510,230 shares at September 26, 1998 and
10,230 shares at December 31, 1997
Retained earnings 535.9 401.3
Minimum pension liability adjustment (.5) (.5)
Cumulative translation adjustment (63.3) (46.2)
-------- --------
1,309.6 1,207.0
-------- --------
$5,479.3 $4,459.1
======== ========
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 26, September 27, September 26, September 27,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $1,946.5 $1,635.9 $6,153.6 $5,199.2
Cost of sales 1,784.5 1,460.6 5,559.8 4,632.5
Selling, general and administrative expenses 80.1 71.2 238.6 204.5
Amortization of goodwill 12.8 10.3 35.8 29.7
--------- --------- --------- ---------
Operating income 69.1 93.8 319.4 332.5
Interest expense 29.0 22.7 79.2 76.6
Other expense, net 4.5 8.6 18.0 21.4
--------- --------- --------- ---------
Income before provision for national income
taxes and extraordinary item 35.6 62.5 222.2 234.5
Provision for national income taxes 14.0 25.9 87.6 94.9
--------- --------- --------- ---------
Net income before extraordinary item 21.6 36.6 134.6 139.6
Extraordinary loss on early extinguishment of debt - (1.0) - (1.0)
--------- --------- --------- ---------
Net income $ 21.6 $ 35.6 $ 134.6 $ 138.6
========= ========= ========= =========
Basic net income per share:
Income before extraordinary item $ .32 $ .55 $ 2.01 $ 2.11
Extraordinary loss - (.01) - (.01)
--------- --------- --------- ---------
Basic net income per share $ .32 $ .54 $ 2.01 $ 2.10
========= ========= ========= =========
Diluted net income per share:
Income before extraordinary item $ .32 $ .53 $ 1.97 $ 2.04
Extraordinary loss - (.01) - (.01)
--------- --------- --------- ---------
Diluted net income per share $ .32 $ .52 $ 1.97 $ 2.03
========= ========= ========= =========
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 26, September 27,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $134.6 $138.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 163.7 133.0
Extraordinary loss - 1.0
Other, net (55.0) (10.9)
Change in working capital items, net (46.6) (40.7)
------- ------
Net cash provided by operating activities 196.7 221.0
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (236.9) (113.1)
Acquisitions, net of cash acquired (307.5) (348.1)
Other, net 1.8 1.4
------- -------
Net cash used in investing activities (542.6) (459.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net 398.2 180.4
Change in cash overdrafts, net (2.4) 36.6
Short-term borrowings, net 7.7 4.8
Proceeds from sale of common stock 3.3 1.4
Purchase of treasury stock (18.2) -
Other, net - (3.9)
------- ------
Net cash provided by financing activities 388.6 219.3
------- ------
Effect of foreign currency translation (22.9) 2.4
------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 19.8 (17.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12.9 26.0
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32.7 $ 8.9
======= ======
CHANGES IN WORKING CAPITAL, NET OF IMPACT OF ACQUISITIONS:
Accounts receivable $(160.4) $(106.6)
Inventories (52.5) 1.8
Accounts payable 210.6 17.0
Accrued liabilities and other (44.3) 47.1
------- -------
$ (46.6) $ (40.7)
======= =======
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 86.8 $ 88.2
======= =======
Cash paid for income taxes $ 73.1 $ 78.6
======= =======
The accompanying notes are an integral part of these statements.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Lear
Corporation, a Delaware corporation, and its wholly-owned and majority-owned
subsidiaries. Investments in less than majority-owned businesses are generally
accounted for under the equity method. Certain items in prior year's quarterly
financial statements have been reclassified to conform with the presentation
used in the quarter ended September 26, 1998.
(2) ACQUISITIONS
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 is 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.
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, 1997.
(Unaudited; in millions, except per share data):
Three Months Ended Nine Months Ended
------------------ -----------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $2,113.7 $1,889.3 $6,822.6 $5,959.5
Net income before extraordinary item 17.1 27.2 116.9 111.0
Net income 17.1 26.2 116.9 110.0
Diluted net income per common share
before extraordinary item 0.25 0.39 1.71 1.62
Diluted net income per common share 0.25 0.38 1.71 1.61
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.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Chapman
In May, 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 Houthhalen, Belgium.
Pianfei
In May, 1998, the Company acquired Gruppo Pianfei S.r.L. ("Pianfei").
Pianfei produces door panels, headliners and plastic interior components at six
facilities located throughout Italy.
Strapazzini
In May, 1998, the Company acquired Strapazzini Resine S.r.L.
("Strapazzini"). Strapazzini produces instrument panels, door panels, sunshades,
consoles and pillar trim at two facilities located in Italy.
(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):
September 26, December 31,
1998 1997
---- ----
Raw materials $240.6 $165.7
Work-in-process 28.5 22.5
Finished goods 63.6 43.2
------ ------
$332.7 $231.4
====== ======
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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):
September 26, December 31,
1998 1997
---- ----
Land $ 66.5 $ 60.5
Buildings and improvements 397.1 345.9
Machinery and equipment 1,218.7 974.2
-------- --------
Total property, plant and equipment 1,682.3 1,380.6
Less accumulated depreciation (550.2) (441.5)
-------- --------
Net property, plant and equipment $1,132.1 $ 939.1
======== ========
(5) LONG-TERM DEBT
Long-term debt is comprised of the following (in millions):
September 26, December 31,
1998 1997
---- ----
Credit agreement $ 963.8 $ 647.7
Other 177.3 88.5
-------- --------
1,141.1 736.2
Less- Current portion (10.8) (9.1)
-------- --------
1,130.3 727.1
9 1/2% Subordinated Notes 200.0 200.0
8 1/4% Subordinated Notes 136.0 136.0
-------- --------
$1,466.3 $1,063.1
======== ========
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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 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 Nine Months Ended
------------------ -----------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares outstanding 67,066,641 66,505,443 67,041,616 66,121,201
Dilutive effect of stock options 1,094,591 1,876,065 1,222,966 2,048,858
---------- ---------- ---------- ----------
Diluted shares outstanding 68,161,232 68,381,508 68,264,582 68,170,059
========== ========== ========== ==========
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 is as follows (in millions):
Three Months Ended Nine Months Ended
------------------ -----------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
---- ---- ---- ----
Net income 21.6 35.6 134.6 138.6
Other comprehensive income:
Foreign currency translation adjustment (12.4) (18.1) (17.1) (45.1)
Minimum pension liability adjustment - - - -
Other comprehensive income (12.4) (18.1) (17.1) (45.1)
----- ----- ----- -----
Comprehensive income 9.2 17.5 117.5 93.5
===== ===== ===== =====
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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 26, 1998 VS. THREE MONTHS ENDED SEPTEMBER 27, 1997.
Net sales increased by 19.0% to $1.9 billion in the third quarter of 1998
as compared to $1.6 billion in the third quarter of 1997. Net sales for the
quarter ended September 26, 1998 benefited from acquisitions, which collectively
accounted for $323 million of the increase and new business introduced in North
America and Europe. Partially offsetting the increase in sales were reduced
market demand on certain mature programs and the adverse impact of the General
Motors work stoppage in North America.
Net sales in the United States and Canada of $1.1 billion in the third
quarter of 1998 exceeded the comparable period in the prior year by $69 million,
or 6.7%. Net sales in the current quarter benefited from new truck and passenger
car programs introduced by domestic automotive manufacturers and $119 million
from acquisitions. The General Motors work stoppage adversely impacted net sales
by approximately $100 million in the third quarter of 1998. Also offsetting the
increase in net sales were reduced volumes on mature programs.
Net sales in Europe of $.6 billion in the third quarter of 1998 exceeded
the comparable period in the prior year by $228 million, or 55.9%. Net sales in
the current quarter benefited by $185 million from acquisitions. The remaining
increase in net sales was the result of new passenger car programs, partially
offset by reduced volumes on certain mature programs and foreign exchange
fluctuations.
Net sales of $.2 billion in the remaining geographic regions in which the
Company operates, consisting of Mexico, South America, the Asia/Pacific Rim
region and South Africa, increased by $13 million, or 6.9%, as compared to the
third quarter of 1997 primarily due to acquisitions.
Gross profit and gross margin were $162 million and 8.3% for the third
quarter of 1998 as compared to $175 million and 10.7% for the third quarter of
1997. Gross profit and gross margin in the third quarter of 1998 declined in
relation to prior year due to the impact of the General Motors work stoppage and
business expansion costs in many of the regions of the world. Partially
offsetting the decrease in gross profit was the contribution of acquisitions.
Selling, general and administrative expenses, including research and
development, decreased as a percentage of net sales to 4.1% in the third quarter
of 1998 as compared to 4.4% in the prior period. The increase in actual
expenditures was due to the integration of engineering and administrative
expenses from acquisitions and research, development and administrative expenses
required to support existing and potential new business opportunities.
Interest expense increased by $6 million to $29 million in the third
quarter of 1998. The increase in interest expense is due to interest on
borrowings incurred to finance acquisitions.
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Other expenses for the three months ended September 26, 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, decreased by $4 million to $5 million primarily due to
reduced state and local taxes.
Net income for the third quarter of 1998 was $22 million, or $.32 per
share, as compared to $36 million, or $.52 per share in the third quarter of
1997. The decrease in earnings per share of $.20 was primarily caused by the
General Motors work stoppage. The provision for income taxes in the current
quarter was $14 million, or an effective tax rate of 39.3%, as compared to $26
million, or an effective tax rate of 41.4%, in the prior period.
NINE MONTHS ENDED SEPTEMBER 26, 1998 VS. NINE MONTHS ENDED SEPTEMBER 27, 1997.
Net sales increased by 18.4% to $6.2 billion for the first nine months of
1998 as compared to $5.2 billion for the first nine months of 1997. The increase
in net sales of $954 million was primarily the result of acquisitions, which
collectively accounted for $842 million of the increase. The remaining increase
in net sales was the result of new business introduced in North America and
Europe, partially offset by the net impact of customer work stoppages in North
America and reduced market demand for certain mature programs.
Net sales in the United States and Canada of $3.6 billion in the first
nine months of 1998 exceeded the comparable period in the prior year by $237
million, or 7.0%. Net sales during the nine months ended September 26, 1998
benefited by $197 million from acquisitions. Increases in new domestic truck and
passenger car programs were partially offset by lower build schedules on certain
mature programs. Customer work stoppages had a net adverse impact on net sales
of approximately $100 million in the first nine months of 1998 as compared to
the same period in 1997.
Net sales in Europe of $1.9 billion in the first nine months of 1998
exceeded the comparable period in the prior year by $614 million or 47.0%. Net
sales for the nine months of 1998 benefited by $567 million from acquisitions.
Increases in new passenger car programs were partially offset by unfavorable
exchange rate fluctuations in Italy, Germany and Sweden.
Net sales of $.6 billion in the remaining geographic regions in which the
Company operates, consisting of Mexico, South America, the Asia/Pacific Rim
region and South Africa, increased by $104 million as compared to the nine
months ended September 27, 1997. Acquisitions contributed $77 million of the
increase with the remainder coming primarily from new programs in these regions.
Gross profit and gross margin were $594 million and 9.6% for the first
nine months of 1998 as compared to $567 million and 10.9% in the comparable
period in 1997. Gross profit in 1998 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 was the net impact of customer work stoppages
during the first nine months of 1998.
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Selling, general and administrative expenses, including research and
development, for the nine months ended September 26, 1998 remained unchanged at
3.9% as a percentage of net sales as compared to the same period in the prior
year. Actual expenditures increased due to the integration of engineering and
administrative expenses of acquired businesses.
For the nine months ended September 26, 1998, interest expense increased
by $3 million to $79 million over the comparable period in 1997 due to interest
on borrowings incurred to finance acquisitions.
Other expenses for the nine months ended September 26, 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, decreased to $18 million from $21 million in the comparable period in
1997 due to reduced state and local taxes.
Net income for the first nine months of 1998 was $135 million or $1.97 per
share as compared to $139 million, or $2.03 per share, in the comparable period
in 1997. Earnings per share for 1998 were adversely affected by approximately
$.35 per share due to the General Motors work stoppage. The provision for income
taxes in the first nine months of 1998 was $88 million, or an effective tax rate
of 39.4%, as compared to $95 million, or an effective tax rate of 40.5%, in the
prior year.
During October 1998, the Company announced it plans to take a one-time
charge, primarily related to its international operations, of approximately $125
million in the fourth quarter of 1998 as plans are finalized. The charge is for
plant consolidations and rationalizations as a result of facilities added over
the last several years primarily through acquisitions.
LIQUIDITY AND FINANCIAL CONDITION
Net cash provided by operating activities was $197 million during the
first nine months of 1998 compared to $221 million for the same period in 1997.
Net income, which remained relatively constant between periods, included
non-cash depreciation and goodwill amortization charges of $164 million in 1998
and $133 million in 1997. The increase in depreciation and amortization was
primarily due to the full year acquisition effect of Keiper Car Seating GmbH &
Co. and certain of its subsidiaries and affiliates (collectively, "Keiper
Seating"). The decrease in net cash provided by operating activities resulted
from additional reimbursable customer tooling on new programs.
Net cash used in investing activities increased to $543 million in the
first nine months of 1998 versus $460 million in 1997. The increase in funds
used for investing activities was the result of higher capital expenditures,
partially offset by funds used for acquisitions in 1998. Capital expenditures in
1998 were primarily to support new and replacement programs. The Company
currently anticipates approximately $100 million in additional capital
expenditures during the remainder of 1998. During the quarter the Company
repurchased 500,000 shares of its outstanding common stock.
On May 26, 1998 the Company entered into an amendment to its
multi-currency revolving credit facility (the "Credit Agreement") which, among
other things, increased total borrowing availability from $1.8 billion to $2.1
billion and eliminated the pledge of subsidiary stock which
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secured the facility. As of September 26, 1998, the Company had $964 million
outstanding under the Credit Agreement and $52 million committed under
outstanding letters of credit, resulting in approximately $1.1 billion unused
and available.
In addition to debt outstanding under the Credit Agreement, the Company
had $559 million of debt outstanding as of September 26, 1998, consisting
primarily of $336 million of subordinated notes due between 2002 and 2006.
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
Financial Instruments
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company
anticipates adopting this standard in 1998 and does not anticipate a material
impact on the Company's financial position or results of operations when
adopted.
YEAR 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of time-sensitive information by the Company's
computerized information systems. Any of the Company's 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 ("Y2K").
State of Readiness
In 1996, the Company began a program to assess the impact of the Y2K
issue on the software and hardware used in the Company's operations and has
identified various areas to focus its Y2K compliance efforts. They include
business computer systems, manufacturing and warehousing systems, end-user
computing, technical infrastructure and environmental systems, research and
development facilities, and supplier and service provider systems. The program's
phases include assessment and planning, remediation, testing and implementation.
For business, manufacturing and end-user systems, the Company is in the
process of remediation and is utilizing internal personnel as well as
third-party services to assist in the Company's efforts. At many sites,
particularly in Europe, new Y2K compliant systems are currently being
implemented. Many other sites have been or are in the process of being
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corrected. The Company's technical infrastructure, environmental systems, and
research and development facilities are in the process of being reviewed on a
site-by-site basis, in many cases 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 the Company's ongoing site upgrade program. Among its
supplier base, the Company is monitoring the progress of each of its key
suppliers with questionnaires and site reviews where appropriate, along with the
aid of industry information. A determination will be made as to the appropriate
level of dependence the Company will place on each supplier.
Y2K Costs
Based on current estimates, costs of addressing the Y2K issue are not
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows in future periods. The Company currently
estimates that its historical and future costs for Y2K compliance will be
approximately $10 to $20 million. This includes approximately $5 to $10 million
directly attributable to correcting non-compliant systems, and an additional $5
to $10 million for ongoing system improvements which will be Y2K compliant.
These costs will have been incurred over about a three-year period beginning in
mid-year 1996 through the end of 1999. Although in the past the Company had not
specifically tracked Y2K remediation costs, it estimates that historical Y2K
expenditures incurred through September 26, 1998 were approximately $3 million.
Y2K projects have not materially deferred implementation of other information
technology projects.
Y2K Risks
The reasonable worst-case scenario for the Company with respect to the
Y2K problem is the failure of a key system or supplier system that causes
shipments of the Company's products to customers to be temporarily interrupted.
This could result in the Company missing build schedules with its customers,
which in turn could lead to lost sales and profits for the Company and its
customers. The Company has been given a favorable risk assessment for Y2K
compliance by domestic automobile manufacturers, which collectively
represented over 60% of the Company's 1997 sales revenue.
Contingency Plans
As a part of the Company's Y2K strategy, contingency plans are being
developed site-by-site and any systems requiring remediation will have one or
more contingency plans. All plans are documented and will be executed
accordingly, if necessary. The Company's internal audit staff, independent
accountants, and the Audit Committee of the Board of Directors are updated on a
regular basis as to the Y2K status. In addition, supplier site audits, where
appropriate, are to be performed in late 1998 and in 1999.
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
16
17
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 (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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18
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 26, 1998.
(b) The following reports on Form 8-K were filed during the quarter ended
September 26, 1998.
June 30, 1998-Form 8-K relating to the impact of work stoppages
at General Motors assembly plants.
August 26, 1998-Form 8-K relating to the impact of work stoppages
at General Motors assembly plants.
September 1, 1998-Form 8-K relating to the acquisition of
Delphi Automotive Systems seating business.
18
19
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 10, 1998 By: /s/Donald J. Stebbins
---------------------------------
Donald J. Stebbins
Senior Vice President and
Chief Financial Officer
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20
LEAR CORPORATION
FORM 10 -Q
EXHIBIT INDEX
FOR THE QUARTER ENDED SEPTEMBER 26, 1998
EXHIBIT
- -------
NUMBER
- ------
27.1 Financial Data Schedule for the quarter ended September 26, 1998
20
5
1,000,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-26-1998
33
0
1,299
11
333
2,066
1,682
550
5,479
2,298
1,466
0
0
1
1,309
5,479
6,154
6,154
5,560
5,560
18
0
79
222
87
135
0
0
0
135
2.01
1.97
