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 JULY 3, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
COMMISSION FILE NUMBER: 1-11311
LEAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3386776
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21557 TELEGRAPH ROAD, SOUTHFIELD, MI 48086-5008
(Address of principal executive offices) (zip code)
(248) 447-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes |X| No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of Common Stock, $0.01 par value per share,
outstanding as of July 30, 1999: 66,823,502
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LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JULY 3, 1999
INDEX
Part I - Financial Information: Page No.
- ------------------------------- --------
Item 1 - Consolidated Financial Statements
Introduction to the Consolidated Financial Statements 3
Consolidated Balance Sheets - July 3, 1999 and
December 31, 1998 4
Consolidated Statements of Income - Three and Six Month Periods
Ended July 3, 1999 and June 27, 1998 5
Consolidated Statements of Cash Flows - Six Month Periods
Ended July 3, 1999 and June 27, 1998 6
Notes to the Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3 - Quantitative and Qualitative Disclosures about Market
Risk (included in Item 2)
Part II - Other Information:
- ----------------------------
Item 4 - Submission of Matters to a Vote of Securities Holders 23
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
- ----------
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LEAR CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO THE CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the condensed consolidated financial statements of Lear
Corporation and subsidiaries, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. We believe that the disclosures
are adequate to make the information presented not misleading when read in
conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
for the period ended December 31, 1998.
The financial information presented reflects all adjustments (consisting
only of normal recurring adjustments) which are, in our opinion, necessary for
a fair presentation of the results of operations and statements of financial
position for the interim periods presented. These results are not necessarily
indicative of a full year's results of operations.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------
July 3, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32.3 $ 30.0
Accounts receivable, net 1,968.0 1,373.9
Inventories 481.1 349.6
Recoverable customer engineering and tooling 302.0 221.4
Other 418.5 223.1
- ----------------------------------------------------------------------------------------------------------------
Total current assets 3,201.9 2,198.0
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM ASSETS:
Property, plant and equipment, net 1,810.3 1,182.3
Goodwill, net 3,315.5 2,019.8
Other 375.7 277.2
- ----------------------------------------------------------------------------------------------------------------
Total long-term assets 5,501.5 3,479.3
- ----------------------------------------------------------------------------------------------------------------
$ 8,703.4 $ 5,677.3
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 64.4 $ 82.7
Accounts payable and drafts 2,030.4 1,600.8
Accrued liabilities 1,418.9 797.5
Current portion of long-term debt 13.5 16.5
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 3,527.2 2,497.5
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Deferred national income taxes 95.2 39.0
Long-term debt 3,273.3 1,463.4
Other 454.1 377.4
- ----------------------------------------------------------------------------------------------------------------
Total long-term liabilities 3,822.6 1,879.8
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 authorized;
67,521,805 issued at July 3, 1999 and
67,194,314 issued at December 31, 1998 .7 .7
Additional paid-in capital 860.0 859.3
Note receivable from sale of common stock (.1) (.1)
Less - Common stock held in treasury, 510,230 shares at cost (18.3) (18.3)
Retained earnings 629.8 504.7
Accumulated other comprehensive income (118.5) (46.3)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,353.6 1,300.0
- ----------------------------------------------------------------------------------------------------------------
$ 8,703.4 $ 5,677.3
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these balance sheets.
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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------------------------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,233.6 $ 2,175.0 $ 5,920.8 $ 4,207.1
Cost of sales 2,894.4 1,943.4 5,362.9 3,775.3
Selling, general and administrative expenses 129.1 80.5 213.4 158.5
Amortization of goodwill 19.3 11.5 33.3 23.0
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 190.8 139.6 311.2 250.3
Interest expense 60.2 25.5 90.3 50.2
Other expense, net 7.3 5.5 15.2 13.5
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision for national income taxes 123.3 108.6 205.7 186.6
Provision for national income taxes 48.5 42.9 80.6 73.6
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 74.8 $ 65.7 $ 125.1 $ 113.0
- ---------------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.12 $ .98 $ 1.87 $ 1.69
- ---------------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 1.10 $ .96 $ 1.85 $ 1.65
- ---------------------------------------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------------------
Six Months Ended
- ----------------------------------------------------------------------------------------------------------
July 3, June 27,
1999 1998
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 125.1 $ 113.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 150.1 106.5
Other, net (57.4) (67.3)
Change in working capital items 91.7 (118.2)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 309.5 34.0
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (162.6) (125.1)
Cost of acquisitions, net of cash acquired (2,277.6) (101.1)
Proceeds from disposition of business segment 310.0 -
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,130.2) (226.2)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt, net 1,825.6 191.8
Short-term borrowings, net (17.5) 13.7
Other, net .7 2.9
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,808.8 208.4
- ----------------------------------------------------------------------------------------------------------
Effect of foreign currency translation 14.2 (.9)
NET CHANGE IN CASH AND CASH EQUIVALENTS 2.3 15.3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30.0 12.9
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32.3 $ 28.2
- ----------------------------------------------------------------------------------------------------------
CHANGES IN WORKING CAPITAL, NET OF EFFECTS OF ACQUISITIONS:
Accounts receivable $ (234.2) $ (225.4)
Inventories 11.1 (16.6)
Accounts payable 226.0 93.4
Accrued liabilities and other 88.8 30.4
- ----------------------------------------------------------------------------------------------------------
$ 91.7 $ (118.2)
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ 56.7 $ 49.5
- ----------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ 49.4 $ 41.2
- ----------------------------------------------------------------------------------------------------------
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 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 July 3, 1999.
2. 1999 ACQUISITIONS/DISPOSITIONS
Acquisition of UT Automotive
On May 4, 1999, Lear acquired UT Automotive, Inc., a wholly-owned
operating segment of United Technologies Corporation, for approximately $2.2
billion, net of cash acquired. Subsequent to July 3, 1999, Lear paid an
additional $74 million to United Technologies Corporation in settlement of
certain post-closing adjustments. UT Automotive was a supplier of electrical,
electronic, motor and interior products and systems to the global automotive
industry. Headquartered in Dearborn, Michigan, UT Automotive had annual sales of
approximately $3 billion, 44,000 employees and 90 facilities located in 18
countries.
The UT Automotive 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 sheet. The
operating results of UT Automotive have been included in the consolidated
financial statements of the Company since the date of acquisition. The purchase
price, excluding the subsequent settlement, and related allocation were as
follows (in millions):
- ------------------------------------------------------------------------------------------------------------
Consideration paid to former owner, net of cash acquired of $83.5 million $ 2,216.5
Debt assumed 9.0
Estimated fees and expenses 8.2
- ------------------------------------------------------------------------------------------------------------
Cost of acquisition $ 2,233.7
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment $ 633.0
Value assigned to assets sold (EMS) 310.0
Net working capital 1.5
Other assets purchased and liabilities assumed (20.0)
Goodwill 1,309.2
- ------------------------------------------------------------------------------------------------------------
Total cost allocation $ 2,233.7
- ------------------------------------------------------------------------------------------------------------
The purchase price and related allocation may be revised up to one year
from the date of acquisition. The Company can provide no assurances as to
whether any revisions to the original purchase price allocation will be
significant. Adjustments to the purchase price and related allocation may occur
as a result of obtaining more information regarding property valuations,
liabilities assumed, the outcome of final negotiations with the former owner and
revisions of preliminary estimates of fair values made at the date of purchase.
Additionally, the Company has not finalized a plan for the restructuring of the
acquired operations. The activities being considered include potential plant
closings and the termination or relocation of employees. The net effect of the
adjustments described above will be reported as an adjustment to the purchase
price and related allocation described above. See Note 4 for pro forma financial
information.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Acquisition of Peregrine
On April 1, 1999, the Company acquired certain assets of Peregrine
Windsor, Inc. ("Peregrine"), a division of Peregrine Incorporated. Peregrine
produces just-in-time seat assemblies and door panels for several General Motors
models. The results of Peregrine are not included in the pro forma financial
information provided in Note 4 as the amounts would be immaterial.
Acquisition of Polovat/Ovatex
In February 1999, the Company acquired Polovat and the automotive business
of Ovatex. Polovat and Ovatex supply flooring and acoustic products for the
automotive market. The acquired operations have three plants in Poland and two
plants in Italy and employ more than 600 people. The results of Polovat and
Ovatex are not included in the pro forma financial information provided in Note
4 as the amounts would be immaterial.
Sale of Electric Motor Systems
On June 25, 1999, Lear completed the sale of the recently acquired
Electric Motor Systems ("EMS") business to Johnson Electric Holdings Limited for
$310 million, subject to certain post-closing adjustments. Lear acquired the EMS
business in conjunction with the acquisition of UT Automotive. The EMS business
was sold for an amount that was approximately equal to the fair value which had
been allocated to the EMS business at the date of acquisition. As such, no gain
or loss on the sale was recognized. Although the sale of the EMS business
qualified as a discontinued operation, the results of the EMS business
operations during the ownership period were not material and are included in
other expense, net. See Note 4 for pro forma financial information.
3. 1998 ACQUISITION
Delphi Seating
In September 1998, the Company purchased the seating business of Delphi
Automotive Systems, a division of General Motors Corporation ("Delphi Seating"),
for approximately $250 million. Delphi Seating was a leading supplier of seat
systems to General Motors with 16 locations in 10 countries.
The Delphi Seating acquisition was accounted for as a purchase, and
accordingly, the assets purchased and liabilities assumed in the acquisition
have been reflected in the accompanying consolidated balance sheets. The
operating results of Delphi Seating have been included in the consolidated
financial statements since the date of acquisition. The purchase price and
related allocation may be revised up to one year from the date of acquisition,
as a result of obtaining more information regarding property valuations,
liabilities assumed, outcomes of final negotiations with the former owner,
revisions of preliminary estimates of fair values and finalization of
restructuring plans. While there may be revisions, the Company does not know
whether there will be a material change as additional information on issues such
as those noted above is not available at this time. The final purchase price and
related allocation will be completed by the end of August 1999. See Note 4 for
pro forma financial information.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information is presented to illustrate
the estimated effects of the Transactions, as if such Transactions had occurred
as of January 1, 1998.
The Transactions are:
- the acquisition of Delphi's automotive seating business;
- the acquisition of UT Automotive;
- the sale of EMS and the application of the proceeds therefrom;
- the amendment and restatement of the Company's existing senior credit
facility in connection with the acquisition of UT Automotive;
- borrowings under the Company's new senior credit facilities, which it
entered into in May 1999, in connection with the acquisition of UT
Automotive; and
- the offering and sale of the Company's 7.96% Senior Notes due 2005 and 8.11%
Senior Notes due 2009 and the application of the net proceeds therefrom.
(Unaudited; in millions, except per share data):
FOR THE THREE MONTHS ENDED JULY 3, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Operating and Delphi Operating and Elimination Operating and
Lear UTA Financing Seating Financing of EMS Financing
Historical Historical(1) Adjustments Historical(2) Adjustments Historical(1) Adjustments Pro Forma
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $3,233.6 $ 249.4 $ - $ - $ - $ (12.6) $ - $3,470.4
Net income 74.8 11.6 (10.4)(3) - - (.7) 1.0 (5) 76.3
Basic net income per share 1.12 1.14
Diluted net income per share 1.10 1.12
FOR THE THREE MONTHS ENDED JUNE 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Operating and Delphi Operating and Elimination Operating and
Lear UTA Financing Seating Financing of EMS Financing
Historical Historical(1) Adjustments Historical(2) Adjustments Historical(1) Adjustments Pro Forma
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $2,175.0 $ 739.6 $ - $ 284.1 $ - $ (95.9) $ - $3,102.8
Net income 65.7 24.7 (32.0)(3) (52.1) 17.6(4) (4.1) 3.1(5) 22.9
Basic net income per share .98 .34
Diluted net income per share .96 .33
FOR THE SIX MONTHS ENDED JULY 3, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Operating and Delphi Operating and Elimination Operating and
Lear UTA Financing Seating Financing of EMS Financing
Historical Historical(1) Adjustments Historical(2) Adjustments Historical(1) Adjustments Pro Forma
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $5,920.8 $ 979.5 $ - $ - $ - $ (45.2) $ - $6,855.1
Net income 125.1 39.1 (40.6)(3) - - (1.9) 4.2 (5) 125.9
Basic net income per share 1.87 1.88
Diluted net income per share 1.85 1.86
FOR THE SIX MONTHS ENDED JUNE 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Operating and Delphi Operating and Elimination Operating and
Lear UTA Financing Seating Financing of EMS Financing
Historical Historical(1) Adjustments Historical(2) Adjustments Historical(1) Adjustments Pro Forma
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $4,207.1 $1,456.0 $ - $ 507.9 $ - $(190.2) $ - $5,980.8
Net income 113.0 53.0 (63.9)(3) (101.7) 34.3 (4) (6.4) 6.2 (5) 34.5
Basic net income per share 1.69 .51
Diluted net income per share 1.65 .50
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) The UTA and EMS historical information for the 1999 periods represent
amounts derived from the unaudited results of operations from the beginning
of the respective periods to May 4, 1999, the date Lear acquired UTA. The
UTA and EMS historical information for the 1998 periods represents amounts
derived from the unaudited results of operations for the three months ended
June 27, 1998 and the six months ended June 27, 1998. Certain amounts have
been reclassified to conform to Lear's presentation.
(2) The Delphi Seating historical information represents amounts derived from
the unaudited results of operations for the three months ended June 27,
1998 and the six months ended June 27, 1998. The Delphi Seating historical
information for the 1999 periods is included in the Lear historical
information.
(3) The Operating and Financing Adjustments that resulted from the acquisition
of UTA include:
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
July 3, 1999 June 27, 1998 July 3, 1999 June 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of goodwill from the acquisition of UTA (over 40 years) $ 1.7 $ 5.8 $ 6.3 $ 11.6
Incremental interest expense incurred as a result of 13.4 40.3 52.8 80.5
the acquisition of UTA
Impact on tax provision due to incremental interest expense (4.7) (14.1) (18.5) (28.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net impact of adjustments on net income $(10.4) $ (32.0) $(40.6) $(63.9)
- -----------------------------------------------------------------------------------------------------------------------------------
(4) The Delphi Seating pro forma financial data does not reflect the
anticipated results of certain activities and actions that the Company
feels will benefit continuing operations, such as operating losses of
certain plants that will not be incurred in the future as they were closed
prior to the acquisition, capitalization of fixed asset purchases which
were expensed by the former owner, a charge related to the employee
benefit obligations not assumed by the Company and the elimination of
certain charges that had previously been allocated by the former owner.
The anticipated benefit to net income of such actions is estimated to be
approximately $27.7 million for the three months ended June 27, 1998 and
$54.0 million for the six months ended June 27, 1998.
The Operating and Financing Adjustments that resulted from the acquisition of
Delphi Seating include:
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 27, 1998 June 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of goodwill from the acquisition of Delphi Seating (over 40 years) $ 1.2 $ 2.4
Incremental interest expense incurred as a result of the acquisition of Delphi Seating 3.3 6.5
Impact on tax provision due to utilization of domestic Delphi losses against
Lear pre-tax income (22.1) (43.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net impact of adjustments on net income $ 17.6 $ 34.3
- -----------------------------------------------------------------------------------------------------------------------------------
(5) The Operating and Financing Adjustments that resulted from the sale of EMS
include:
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
July 3, 1999 June 27, 1998 July 3, 1999 June 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Reduction of interest expense incurred as a result of the sale of EMS $ (1.6) $ (4.8) $ (6.4) $ (9.6)
Impact on tax provision due to reduction of interest expense .6 1.7 2.2 3.4
- -----------------------------------------------------------------------------------------------------------------------------------
Net impact of adjustments on net income $ 1.0 $ 3.1 $ 4.2 $ 6.2
- -----------------------------------------------------------------------------------------------------------------------------------
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.
5. 1998 RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, the Company began to implement a
restructuring plan designed to lower its cost structure and improve the
long-term competitive position of the Company. As a result of this restructuring
plan, the Company recorded pre-tax charges of $133.0 million, consisting of
$110.5 million of restructuring charges and $22.5 million of other charges.
Included in this total are the costs to consolidate the Company's European
operations of $78.9 million, charges resulting from the consolidation of certain
manufacturing and administrative operations in North and South America of $31.6
million, other asset impairment charges of $15.0 million and contract
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
termination fees and other of $7.5 million. The impaired assets, included in
other charges, consist of a valuation allowance on the collectibility of a note
receivable from a South American supplier of $6.5 million, the write-down of
equipment to fair market value of $5.6 million and the write-down of costs
related to the termination of an information systems project of $2.9 million.
The restructuring plan is progressing as scheduled, and there have been no
significant changes to the original restructuring plan. The plan originally
called for the termination of approximately 3,200 employees, of which 2,561 have
been terminated as of July 3, 1999. In addition, the plan originally called for
the closure of 20 facilities, of which 8 have been closed as of July 3, 1999.
The following table summarizes the restructuring and other charges (in
millions):
- ------------------------------------------------------------------------------------------------------------------------
Balance at
Original Utilized July 3,
Accrual Adjust. Cash Noncash 1999
- ------------------------------------------------------------------------------------------------------------------------
European Operations Consolidation:
Severance $ 43.2 $ (2.5) $ (12.0) $ - $ 28.7
Asset impairments 11.7 - - (11.7) -
Lease cancellation costs 22.1 - (.7) - 21.4
Other closure costs 1.9 - - (.6) 1.3
North and South America Operations Consolidation
Severance 20.2 2.5 (18.3) - 4.4
Asset impairments 6.5 (1.1) - (5.4) -
Lease cancellation costs 4.5 (1.6) (1.2) - 1.7
Other closure costs .4 .1 (.5) - -
Other charges:
Asset impairments 15.0 - - (15.0) -
Other 7.5 - (7.2) - .3
- ------------------------------------------------------------------------------------------------------------------------
Total $ 133.0 $ (2.6) $ (39.9) $ (32.7) $ 57.8
- ------------------------------------------------------------------------------------------------------------------------
6. RESTRUCTURING CHARGES RELATED TO 1998 ACQUISITIONS
During the second quarter of 1998, the Company began to implement a
restructuring plan designed to integrate the operations of recently acquired
Pianfei, Strapazzini and Chapman, which was finalized during the second quarter
of 1999. As a result of this restructuring plan, the Company recorded an
adjustment to the original purchase price allocation of $24.1 million,
consisting of $12.2 million of lease cancellation costs, $6.8 million of asset
impairment charges and $5.1 million of severance costs. These restructuring
plans are progressing as scheduled, and there have been no significant changes
to the original plan. The following table summarizes the restructuring activity
related to these acquisitions (in millions):
- --------------------------------------------------------------------------------------------------
Balance at
Original Utilized July 3,
Accrual Cash Noncash 1999
- --------------------------------------------------------------------------------------------------
Lease cancellation costs $ 12.2 $ (7.3) $ - $ 4.9
Asset impairment 6.8 (1.1) (3.9) 1.8
Severance 5.1 (1.5) (.3) 3.3
- --------------------------------------------------------------------------------------------------
Total $ 24.1 $ (9.9) $ (4.2) $ 10.0
- --------------------------------------------------------------------------------------------------
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. 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):
- -------------------------------------------------------------------------------------------------
July 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Raw materials $ 271.1 $ 253.9
Work-in-process 87.7 23.8
Finished goods 122.3 71.9
- -------------------------------------------------------------------------------------------------
Inventories $ 481.1 $ 349.6
- -------------------------------------------------------------------------------------------------
8. 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):
- -------------------------------------------------------------------------------------------------
July 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Land $ 88.1 $ 70.6
Buildings and improvements 569.8 429.6
Machinery and equipment 1,808.1 1,276.2
- -------------------------------------------------------------------------------------------------
Total property, plant and equipment $ 2,466.0 $ 1,776.4
Less - accumulated depreciation (655.7) (594.1)
- --------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 1,810.3 $ 1,182.3
- --------------------------------------------------------------------------------------------------
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. LONG-TERM DEBT
Long-term debt is comprised of the following (in millions):
- -------------------------------------------------------------------------------------------------
July 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Credit agreement $ 1,393.8 $ 970.3
Other 157.0 173.6
- -------------------------------------------------------------------------------------------------
1,550.8 1,143.9
Less - current portion 13.5 16.5
- -------------------------------------------------------------------------------------------------
$ 1,537.2 $ 1,127.4
- -------------------------------------------------------------------------------------------------
8.11% Senior Notes 800.0 -
7.96% Senior Notes 600.0 -
9.50% Subordinated Notes 200.0 200.0
8.25% Subordinated Notes 136.0 136.0
- --------------------------------------------------------------------------------------------------
1,736.0 336.0
- --------------------------------------------------------------------------------------------------
Long-term debt $ 3,273.3 $ 1,463.4
- --------------------------------------------------------------------------------------------------
The purchase price for the acquisition of UT Automotive was financed by
borrowings under our primary credit facilities. In connection with the
acquisition, the Company amended and restated its $2.1 billion senior credit
facility and entered into new senior credit facilities. The $2.1 billion senior
credit facility matures on September 30, 2001. The new senior credit facilities
consist of a $500 million revolving credit facility which matures on May 4,
2004, a $500 million term loan having scheduled amortization beginning on
October 31, 2000 and a final maturity on May 4, 2004, and a $1.4 billion interim
term loan, which was repaid with the proceeds from the Company's offering of its
8.11% and 7.96% Senior Notes (referred to below). The $310 million proceeds from
the sale of the Electric Motors Business were used to reduce revolving credit
borrowings under the $2.1 billion senior credit facility.
On May 18, 1999, the Company issued $1.4 billion aggregate principal
amount of Senior Notes, the proceeds of which were used to repay the interim
loan. The offering included $800 million in aggregate principal amount of
ten-year notes bearing interest at a rate of 8.11% per annum and $600 million in
aggregate principal amount of six-year notes bearing interest at a rate of 7.96%
per annum.
The Company's primary credit facilities are guaranteed by certain of its
significant domestic subsidiaries and secured by the pledge of all or a portion
of the capital stock of certain of its significant subsidiaries. The senior
notes are guaranteed by the same subsidiaries that guarantee the Company's
primary credit facilities.
10. FINANCIAL INSTRUMENTS
Certain foreign currency contracts entered into by the Company qualify for
hedge accounting as only firm foreign currency commitments are hedged. Gains and
losses from these contracts are deferred and generally recognized in cost of
sales as of the settlement date. Other foreign currency contracts entered into
by the Company, which do not receive hedge accounting treatment, are marked to
market with unrealized gains or losses recognized in other expense in the income
statement. Interest rate swaps are accounted for by recognizing interest expense
and interest income in the amount of anticipated interest payments.
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14
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. FINANCIAL ACCOUNTING STANDARDS
Net Income Per Share
Basic net income per share is computed using the weighted average common
shares outstanding during the period. Diluted net income per share is computed
using the average share price during the period when calculating the dilutive
effect of stock options. Shares outstanding for the periods presented were as
follows:
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- ------------------------------------------------------------------------------------------------------------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 66,901,059 67,089,593 66,804,126 67,028,822
Dilutive effect of stock options 1,028,863 1,359,323 921,324 1,419,690
- ------------------------------------------------------------------------------------------------------------------
Diluted shares outstanding 67,929,922 68,448,916 67,725,450 68,448,512
- ------------------------------------------------------------------------------------------------------------------
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 Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Net income $ 74.8 $ 65.7 $ 125.1 $ 113.0
Other comprehensive income:
Foreign currency translation adjustment (18.4) 7.0 (72.2) (4.7)
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income (18.4) 7.0 (72.2) (4.7)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 56.4 $ 72.7 $ 52.9 $ 108.3
- -------------------------------------------------------------------------------------------------------------------
12. SEGMENT REPORTING
The Company is organized based on customer-focused and geographic
divisions. Each division reports their results from operations and makes
requests for capital expenditures directly to the chief operating decision
making group. Under this organizational structure, the Company's operating
segments have been aggregated into one reportable segment. This aggregated
segment consists of ten divisions, each with separate management teams. The
Other category includes the corporate office, geographic headquarters,
technology division and elimination of intercompany activities, none of which
meet the requirements of being classified as an operating segment.
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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table presents revenues and other financial information by
business segment (in millions):
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended July 3, 1999 Six Months Ended July 3, 1999
- --------------------------------------------------------------------------------------------------------------------
Automotive Automotive
Interiors Other Total Interiors Other Total
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 3,231.2 $ 2.4 $ 3,233.6 $ 5,916.0 $ 4.8 $ 5,920.8
EBITA 230.8 (20.7) 210.1 403.5 (59.0) 344.5
Depreciation 66.1 2.4 68.5 111.9 4.9 116.8
Capital expenditures 90.0 1.0 91.0 158.9 3.7 162.6
Total assets 5,867.5 2,835.9 8,703.4 5,867.5 2,835.9 8,703.4
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended June 27, 1998 Six Months Ended June 27, 1998
- --------------------------------------------------------------------------------------------------------------------
Automotive Automotive
Interiors Other Total Interiors Other Total
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 2,172.5 $ 2.5 $ 2,175.0 $ 4,202.5 $ 4.6 $ 4,207.1
EBITA 191.8 (40.7) 151.1 351.8 (78.5) 273.3
Depreciation 37.6 2.5 40.1 78.5 5.0 83.5
Capital expenditures 60.9 16.0 76.9 104.2 20.9 125.1
Total assets 3,490.8 1,625.1 5,115.9 3,490.8 1,625.1 5,115.9
- --------------------------------------------------------------------------------------------------------------------
15
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 3, 1999 VS. THREE MONTHS ENDED JUNE 27, 1998.
Net sales in the quarter ended July 3, 1999 were $3.2 billion, exceeding
net sales in the quarter ended June 27, 1998 by $1.1 billion, or 48.7%. The
increase in net sales in the second quarter of 1999 was primarily the result of
acquisitions, which collectively accounted for approximately $.9 billion of the
increase, a combination of new business and production increases in North
America and Europe, and the adverse impact the General Motors work stoppages had
on net sales in the second quarter of 1998. Partially offsetting this increase
in sales were unfavorable exchange rate fluctuations in North America, Europe
and South America and lower sales in our South American operations.
Gross profit and gross margin were $339 million and 10.5% in the second
quarter of 1999 as compared to $232 million and 10.6% in the comparable period
of 1998. The increase in gross profit in the current quarter is due primarily to
the contribution of acquisitions. Other factors which contributed to the
increase in gross profit include new sport utility and truck programs in North
America, incremental volume on new and existing seat programs in Europe and the
adverse impact the General Motors work stoppages had on gross profit in the
second quarter of 1998.
Selling, general and administrative expenses, including research and
development, as a percentage of net sales increased to 4.0% in the second
quarter of 1999 as compared to 3.7% in the same period of 1998. The increase in
expenditures relative to 1998 was primarily due to the inclusion of operating
expenses incurred as a result of acquisitions. Research, development and
administrative expenses necessary to support established and potential business
opportunities also contributed to the increase. The increase was partially
offset by the restructuring efforts that were initiated in the fourth quarter of
1998.
Operating income and operating margin were $191 million and 5.9% in the
second quarter of 1999 as compared to $140 million and 6.4% in the comparable
period of 1998. The increase in operating profit in the current quarter reflects
the contribution of acquisitions, new passenger car and truck programs in North
America and in Europe and the non-recurring impact of the General Motors work
stoppage in the second quarter of 1998. The decline in operating margin in the
second quarter of 1999, as compared to the second quarter of 1998, is due
primarily to the dilutive impact of acquisitions.
Interest expense in the second quarter of 1999 increased by $35 million to
$60 million as compared to the same period in 1998. Interest expense resulting
from debt incurred to finance recent acquisitions was partially offset by
generally lower interest rates in the United States and Europe.
Other expenses, which include state and local taxes, foreign currency
exchange, minority interests in consolidated subsidiaries, equity in net income
of affiliates and other non-operating expenses, increased from $6 million in the
second quarter of 1998 to $7 million in the second quarter of 1999 due primarily
to incremental expense incurred by the acquired businesses.
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17
Net income for the second quarter of 1999 was $75 million, or $1.10 per
share, as compared to $66 million, or $.96 per share, in the comparable period
of the prior year. The provision for income taxes in the current quarter was $49
million, or an effective tax rate of 39.3% as compared to $43 million, or an
effective tax rate of 39.5%, in the prior year. Diluted net income per share
increased in the second quarter of 1999 by 14.6%.
SIX MONTHS ENDED JULY 3, 1999 VS. SIX MONTHS ENDED JUNE 27, 1998.
Net sales in the first six months of 1999 were $5.9 billion, exceeding net
sales in the first six months of 1998 by $1.7 billion, or 40.7%. The increase in
net sales as compared to the prior year was primarily the result of
acquisitions, which collectively accounted for $1.2 billion of the increase, a
combination of new business and production increases in trucks and passenger
cars in North America and in passenger cars in Europe, and the adverse impact
the General Motors work stoppages had on net sales in the comparable period of
1998. Partially offsetting this increase in sales were unfavorable exchange rate
fluctuations in North America, Europe and South America and lower sales in our
South American operations.
Gross profit and gross margin were $558 million and 9.4% in the first six
months of 1999 as compared to $432 million and 10.3% in the comparable period of
1998. The increase in gross profit in the current period is due primarily to the
contribution of acquisitions. New sport utility and truck programs in North
America and new seat programs in Europe also contributed to the gross profit
increase as well as the adverse impact the General Motors work stoppages had on
gross profit in the second quarter of 1998. The decline in gross margin in the
current period is due primarily to the dilutive impact of acquisitions.
Selling, general and administrative expenses, including research and
development, as a percentage of net sales decreased to 3.6% in the first six
months of 1999 as compared to 3.8% in the same period of 1998. The increase in
expenditures relative to 1998 was primarily due to the inclusion of operating
expenses incurred as a result of acquisitions as well as research, development
and administrative expenses necessary to support established and potential
business opportunities. Restructuring efforts that were initiated in the fourth
quarter of 1998 partially offset these additional expenditures and resulted in
the decrease as a percentage of sales.
Operating income and operating margin were $311 million and 5.3% in the
first six months of 1999 as compared to $250 million and 5.9% in the comparable
period of 1998. The increase in operating profit in the current half reflects
the contribution of acquisitions, new sport utility and truck programs in North
America, new seat programs in Europe and the non-recurring impact of the General
Motors work stoppage in the first half of 1998. The decline in operating margin
in the first half of 1999, as compared to the first half of 1998, is primarily
due to the dilutive impact of acquisitions.
Interest expense in the first six months of 1999 increased by $40 million
to $90 million as compared to the same period in 1998. Interest expense
resulting from debt incurred to finance recent acquisitions was partially offset
by generally lower interest rates in the United States and Europe.
Other expenses, which include state and local taxes, foreign currency
exchange, minority interests in consolidated subsidiaries, equity in net income
of affiliates and other non-operating expenses, increased from $15 million in
the first six months of 1998 to $16 million in the same period of 1999 due
primarily to incremental expense incurred by the acquired businesses.
17
18
Net income for the first six months of 1999 was $125 million, or $1.85 per
share, as compared to $113 million, or $1.65 per share, in the comparable period
of the prior year. The provision for income taxes in the current year was $81
million, or an effective tax rate of 39.2% as compared to $74 million, or an
effective tax rate of 39.4%, in the prior year. Diluted net income per share
increased in the first six months of 1999 by 12.1%.
LIQUIDITY AND FINANCIAL CONDITION
CASH FLOW
Operating activities generated $310 million of cash flow during the first
half of 1999 compared to $34 million for the same period in 1998. The variance
was primarily due to a reduction in the use of working capital from a use of
$118 million in 1998 to a source of $92 million in 1999. Higher levels of
accounts payable and accrued liabilities in the 1999 period were consistent with
the increased 1999 activity relating to both new programs and the GM work
stoppage, which began in the second quarter of 1998. Accounts receivable
increases were offset by the timing of the Company's fiscal quarter end, as the
1998 quarter ended prior to the receipt of significant accounts receivable
payments.
Net income increased 10.7%, from $113 million to $125 million, as a result
of contributions from acquisitions and new business. In addition, non-cash
depreciation and goodwill amortization charges were $150 million in 1999 and
$107 in 1998, with the increase due largely to the Delphi Seating and UT
Automotive acquisitions.
Net cash used in investing activities increased from $226 million in the
first six months of 1998 to $2.1 billion in 1999. The acquisition of UT
Automotive on May 4, 1999 for $2.2 billion, net of cash acquired, combined with
the first quarter 1999 investments in Peregrine, Polovat and Ovatex, resulted in
net acquisition costs of $2.3 billion. On June 25, 1999, we sold the Electric
Motor Systems business, which we acquired in the acquisition of UT Automotive,
for $310 million. Subsequent to July 3, 1999, we paid an additional $74 million
to United Technologies Corporation in settlement of certain post-closing
adjustments. The 1998 Chapman, Pianfei and Strapazzini acquisitions resulted in
a net use of funds of $101 million. Capital expenditures increased from $125
million during the first six months of 1998 to $163 million during the
comparable period in 1999 as a result of new programs and the on-going capital
expenditures at acquired companies. Based on our existing operations, we
currently anticipate approximately $250 million in additional capital
expenditures during the remainder of 1999.
The purchase price for the acquisition of UT Automotive of $2.2 billion,
net of cash acquired, was financed by borrowings under our primary credit
facilities. In connection with the acquisition, we amended and restated our $2.1
billion senior credit facility and entered into new senior credit facilities.
The $2.1 billion senior credit facility matures on September 30, 2001. The new
senior credit facilities consist of a $500 million revolving credit facility
which matures on May 4, 2004, a $500 million term loan having scheduled
amortization beginning on October 31, 2000 and a final maturity on May 4, 2004,
and a $1.4 billion interim term loan. The $310 million proceeds from the sale of
the Electric Motor Systems business were used to reduce revolving credit
borrowings under the $2.1 billion senior credit facility.
On May 18, 1999, we issued $1.4 billion aggregate principal amount of
senior notes, the proceeds of which were used to repay the interim term loan.
The offering included $800 million
18
19
in aggregate principal amount of ten-year notes bearing interest at a rate of
8.11% per annum and $600 million in aggregate principal amount of six-year notes
bearing interest at a rate of 7.96% per annum. The senior notes have not been
registered under the Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration under the Securities Act and
applicable state securities laws or available exemptions from such registration
requirements.
Our primary credit facilities are guaranteed by certain of our significant
domestic subsidiaries and secured by the pledge of all or a portion of the
capital stock of certain of our significant subsidiaries. The senior notes are
guaranteed by the same subsidiaries that guarantee our primary credit
facilities.
As of July 3, 1999, we had $1.4 billion outstanding under our primary
credit facilities and $70 million committed under outstanding letters of credit,
resulting in approximately $1.6 billion unused and available. In addition to
debt outstanding under the primary credit facilities, we had $1.9 million of
long-term debt outstanding as of July 3, 1999, consisting primarily of $1.4
billion of senior notes due between 2005 and 2009 and $336 million of
subordinated notes due between 2002 and 2006.
We believe that cash flows from operations and available credit facilities
will be sufficient to meet our debt service obligations, projected capital
expenditures and working capital requirements.
MARKET RISK SENSITIVITY
In the normal course of business, we are exposed to market risk associated
with fluctuations in foreign exchange rates and interest rates. We
conservatively manage these risks through the use of derivative financial
instruments in accordance with management's guidelines. We enter into all
hedging transactions for periods consistent with the underlying exposures. We do
not enter into derivative instruments for trading purposes.
Foreign Exchange. We enter into foreign currency forward contracts and
foreign currency option contracts to protect ourselves from adverse currency
rate fluctuations on foreign currency commitments. These commitments are
generally for terms of less than one year. The foreign currency contracts are
executed with banks that we believe are creditworthy and are denominated in
currencies of major industrialized countries. The gains and losses relating to
the foreign currency forward and option contracts are deferred and included in
the measurement of the foreign currency transaction subject to the hedge. We
believe that any gain or loss incurred on foreign currency forward contracts is
offset by the direct effects of currency movements on the underlying
transactions.
We have performed a quantitative analysis of our overall currency rate
exposure at July 3, 1999. Based on this analysis, a 10% change in currency rates
would not have a material effect on our earnings.
Interest Rates. We use a combination of fixed rate debt and interest rate
swaps to manage our exposure to interest rate movements. Our exposure as a
result of variable interest rates relates primarily to outstanding floating rate
debt instruments that are indexed to U.S. or European Monetary Union short-term
money market rates. We use interest rate swap agreements
19
20
to convert variable rate debt to fixed rate debt. Net interest payments or
receipts from interest rate swaps are recorded as adjustments to interest
expense in our consolidated statements of income on an accrual basis.
We have performed a quantitative analysis of our overall interest rate
exposure at July 3, 1999. Based on this analysis, a 10% change in the average
cost of our variable rate debt would not have a material effect on our earnings.
Additional information relating to our outstanding financial instruments
is included in Note 9 (Long-Term Debt) to our Consolidated Financial
Statements.
OTHER MATTERS
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign laws, regulations and
ordinances, which govern activities or operations that may have adverse
environmental effects and which impose liability for the costs of cleaning up
certain damages resulting from past spills, disposal or other releases of
hazardous substances. Our policy is to comply with all applicable environmental
laws and maintain procedures to ensure compliance. However, we have been, and in
the future may become, the subject of formal or informal enforcement actions or
procedures. We currently are engaged in the cleanup of hazardous substances at
certain sites owned, leased or operated by us, including certain properties
acquired in the UT Automotive acquisition. Certain present and former properties
of UT Automotive are subject to environmental liabilities which may be
significant. Lear obtained certain agreements and indemnities with respect to
possible environmental liabilities from United Technologies Corporation in
connection with Lear's acquisition of UT Automotive. While we do not believe
that the environmental liabilities associated with present and former UT
Automotive properties will have a material adverse effect on our business,
results of operations or financial condition, no assurances can be given in this
regard.
We have been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("Superfund"), for the cleanup of contamination from hazardous
substances at five Superfund sites where liability has not been completely
determined and two sites where we have received offers to settle their
responsibility for less than $10,000.
ACCOUNTING POLICIES
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," which delayed the effective date of FASB Statement No. 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. FASB Statement No.
133 requires all derivative instruments to be recorded in the balance sheet at
their fair value. Changes in the fair value of derivative instruments are
required to be recorded each period in current earnings or accumulated other
comprehensive income, depending on whether the derivative instruments are
designated as part of a hedge transaction. We do not expect the effects of the
adoption to be significant.
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21
As a result of the issuance of Statement of Position 98-5 on start up
costs and the diversity of accounting practices among suppliers, the Emerging
Issues Task Force "(EITF)" is addressing the proper accounting treatment for
pre-production costs. EITF Issue No. 99-5 "Accounting for Pre-Production Costs
Related to Long-Term Supply Arrangements" was discussed at both the May 19-20,
1999 and July 22, 1999 meetings of the EITF. Based on our understanding that the
EITF has not reached a concensus on a definitive position, we are currently
unable to estimate the impact, if any, on our financial statements of any action
that may be taken by the EITF with respect to this matter.
YEAR 2000
Lear is currently working to resolve the potential impact of the year 2000
("Y2K") on the processing of time-sensitive information by our computerized
information systems. Any of our programs that have time-sensitive software may
recognize the year "00" as 1900 rather than the year 2000. This could result in
miscalculations, classification errors or system failures.
State of Readiness
In 1996, we began a program to assess the impact of the Y2K issue on the
software and hardware used in our operations and have identified various areas
to focus our Y2K compliance efforts. These areas include business computer
systems, manufacturing and warehousing systems, end-user computing, technical
infrastructure and environmental systems, research and development facilities
and supplier and service providers. Our Y2K program phases include assessment
and planning, remediation, testing and implementation.
For business, manufacturing and end-user systems, we have completed the
assessment and planning phases and have substantially completed the remediation,
testing and implementation phases. We expect the remaining remediation, testing
and implementation phases for these systems to be completed during the third
quarter of 1999. We are utilizing internal personnel as well as third-party
services to assist in our efforts. At many sites, particularly in Europe, we are
implementing new Y2K compliant systems. We have corrected, or are in the process
of correcting, Y2K issues at many other sites. We are also reviewing our
technical infrastructure, environmental systems, and R&D facilities on a
site-by-site basis, many times with the aid of equipment manufacturers. Most of
the systems used in these areas are new and Y2K compliant. Others will be
replaced as part of our ongoing site upgrade project. Among our supplier base,
we are monitoring the progress of each of our key suppliers with questionnaires
and site reviews, where appropriate, along with the aid of industry information.
We will make a determination of the appropriate level of dependence among our
supplier base.
Y2K Costs
Based on current estimates, we do not expect costs of addressing the Y2K
issue to have a material adverse effect on our financial position, results of
operations or cash flows in future periods. We currently estimate that our
historical and future costs (excluding UT Automotive) will be $10 to $20 million
for Y2K compliance. This includes $5 to $10 million directly attributable to
correcting non-compliant systems and another $5 to $10 million for ongoing
system improvements which will be Y2K compliant. We will have incurred these
costs over the period from mid-1996 through the end of 1999. Although we have
not specifically identified Y2K remediation costs in the past, we estimate our
Y2K remediation expenditures incurred through July 3, 1999 have been
approximately $6 million. In addition, we expect to incur an
21
22
additional $10 to $15 million to address UT Automotive's Y2K issues. Y2K
projects have not materially deferred our implementation of other information
technology projects.
Y2K Risks
Our reasonable worst-case scenario with respect to the Y2K issue is the
failure of a key system at one or more of our facilities or at the facilities of
one or more of our key suppliers or customers that causes shipments of our
products to customers to be temporarily interrupted. This could result in our
missing build schedules with our customers, which in turn could lead to lost
sales and profits for us and our customers. We may also be adversely affected by
general economic disruptions caused by the Y2K issue even in circumstances where
our systems and the systems of our suppliers and customers are Y2K compliant. We
cannot assure you that Y2K issues will not have a material adverse effect on our
business, results of operations or financial condition.
Contingency Plans
As a part of our Y2K strategy, we are completing the development of
contingency plans on a site-by-site basis. We expect the development of all
contingency plans will be completed during the third quarter of 1999. Any key
systems requiring remediation will have one or more contingency plans. All plans
are being documented and will be executed accordingly, if necessary. In
addition, we have substantially completed the process of performing key supplier
site audits, with satisfactory results.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to, (i)
general economic conditions in the markets in which the Company operates, (ii)
fluctuations in worldwide or regional automobile and light truck production,
(iii) labor disputes involving the Company or its significant customers, (iv)
changes in practices and/or policies of the Company's significant customers
towards outsourcing automotive components and systems, (v) fluctuations in
currency exchange rates and other risks associated with doing business in
foreign countries, (vi) risks relating to the impact of Y2K issues, and (vii)
other risks detailed from time to time in the Company's Securities and Exchange
Commission filings. The Company does not intend to update these forward-looking
statements.
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23
LEAR CORPORATION
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual Meeting of Stockholders of Lear Corporation was held on May 13,
1999. At the meeting, the following matters were submitted to a vote of the
stockholders of Lear Corporation. Pursuant to the rules of the New York
Stock Exchange, there were no broker non-votes in any of the matters
described below.
(1) The election of four directors to hold office until the 2002 Annual Meeting
of Stockholders. The vote with respect to each nominee was as follows:
Nominee For Withheld
------- --- --------
David Bing 56,707,100 2,977,332
Robert E. Rossiter 57,028,164 2,656,268
Robert W. Shower 57,036,385 2,648,047
James H. Vandenberghe 57,038,152 2,646,280
(2) The approval of an amendment to the Long-Term Stock Incentive Plan
increasing (i) the number of shares of common stock available to be awarded
by 3,300,000 shares and (ii) the maximum aggregate number of shares and
share equivalent units that may be granted to any one participant during
any fiscal year to 75,000.
For Against Abstain
--- ------- -------
49,904,555 9,425,248 354,629
(3) The appointment of the firm of Arthur Andersen LLP as independent auditors
of Lear Corporation for the year ending December 31, 1999.
For Against Abstain
--- ------- --------
59,638,915 22,000 23,517
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LEAR CORPORATION
PART II -- OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Second Amended and Restated Credit and Guarantee Agreement, dated as of
May 4, 1999, among Lear, Lear Corporation Canada Ltd., the Foreign
Subsidiary Borrowers (as defined therein), the Lenders Party thereto,
Bankers Trust Company and Bank of America National Trust & Savings
Association, as Co-Syndication Agents, The Bank of Nova Scotia, as
Documentation Agent and Canadian Administrative Agent, and The Chase
Manhattan Bank, as General Administrative Agent (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated May 4, 1999).
10.2 Interim Term Loan Agreement, dated as of May 4, 1999, among Lear, the
Lenders parties thereto, Citicorp USA, Inc. and Credit Suisse First
Boston, as Co-Syndication Agents, Deutsche Bank AG New York Branch, as
Documentation Agent, the other Agents named therein, and The Chase
Manhattan Bank, as Administrative Agent (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated May 4,
1999).
10.3 Revolving Credit and Term Loan Agreement, dated as of May 4, 1999, among
Lear, certain of its Foreign Subsidiaries, the Lenders parties thereto,
Citicorp USA, Inc. and Morgan Stanley Senior Funding, Inc., as
Co-Syndication Agents, Toronto Dominion (Texas), Inc., as Documentation
Agent, the other Agents named therein, and The Chase Manhattan Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated May 4, 1999.)
10.4 Indenture dated as of May 15, 1999, among Lear Corporation as Issuer, the
Guarantors party thereto from time to time as Guarantors and The Bank of
New York as Trustee (incorporated by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 3,
1999).
27.1 Financial Data Schedule for the quarter ended July 3, 1999.
(b) The following reports on Form 8-K were filed during the quarter ended
July 3, 1999.
May 4, 1999 - Form 8-K relating to the completion of the
acquisition of UT Automotive.
May 7, 1999 - Form 8-K relating to the definitive agreement to sell
EMS.
June 25, 1999 - Form 8-K relating to the completion of the sale of
EMS.
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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: August 17, 1999 By: /s/ Donald J. Stebbins
---------------------------
Donald J. Stebbins
Senior Vice President and
Chief Financial Officer
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LEAR CORPORATION
FORM 10 -Q
EXHIBIT INDEX
FOR THE QUARTER ENDED JULY 3, 1999
EXHIBIT
NUMBER
- --------
10.1 Second Amended and Restated Credit and Guarantee Agreement, dated as of
May 4, 1999, among Lear, Lear Corporation Canada Ltd., the Foreign
Subsidiary Borrowers (as defined therein), the Lenders Party thereto,
Bankers Trust Company and Bank of America National Trust & Savings
Association, as Co-Syndication Agents, The Bank of Nova Scotia, as
Documentation Agent and Canadian Administrative Agent, and The Chase
Manhattan Bank, as General Administrative Agent (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 4,
1999).
10.2 Interim Term Loan Agreement, dated as of May 4, 1999, among Lear, the
Lenders parties thereto, Citicorp USA, Inc. and Credit Suisse First
Boston, as Co-Syndication Agents, Deutsche Bank AG New York Branch, as
Documentation Agent, the other Agents named therein, and The Chase
Manhattan Bank, as Administrative Agent (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated May 4,
1999).
10.3 Revolving Credit and Term Loan Agreement, dated as of May 4, 1999, among
Lear, certain of its Foreign Subsidiaries, the Lenders parties thereto,
Citicorp USA, Inc. and Morgan Stanley Senior Funding, Inc., as
Co-Syndication Agents, Toronto Dominion (Texas), Inc., as Documentation
Agent, the other Agents named therein, and The Chase Manhattan Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated May 4, 1999.)
10.4 Indenture dated as of May 15, 1999, among Lear Corporation as Issurer, the
Guarantors party thereto from time to time as Guarantors and The Bank of
New York as Trustee (incorporated by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 3,
1999).
27.1 Financial Data Schedule for the quarter ended July 3, 1999.
26
5
1,000,000
6-MOS
DEC-31-1999
JAN-01-1999
JUL-03-1999
32
0
1,968
15
481
3,202
2,466
656
8,703
3,527
3,273
0
0
1
1,353
8,703
5,921
5,921
5,363
5,363
15
0
90
206
81
125
0
0
0
125
1.87
1.85
