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 June 28, 2003
OR
| o |
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 | ||
| (State or other jurisdiction of | 13-3386776 | |
| 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 such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
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 31, 2003: 67,172,773
LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 2003
INDEX
| Page No. | ||||||
Part I — Financial Information |
||||||
Item 1 - Consolidated Financial Statements |
||||||
Introduction to the Consolidated Financial Statements |
3 | |||||
Consolidated Balance Sheets -
June 28, 2003 (Unaudited) and December 31, 2002 |
4 | |||||
Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended June 28, 2003 and June 29, 2002 |
5 | |||||
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 28, 2003 and June 29, 2002 |
6 | |||||
Notes to the Consolidated Financial Statements |
7 | |||||
Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
20 | |||||
| Item 3 - Quantitative and Qualitative Disclosures about Market Risk (included in Item 2) Item 4 - Controls and Procedures | 29 | |||||
Part II — Other Information
|
||||||
Item 4 - Submission of Matters to a Vote of Security Holders |
30 | |||||
Item 6 - Exhibits and Reports on Form 8-K |
31 | |||||
Signatures |
32 | |||||
Certifications |
33 | |||||
2
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 accounting principles generally accepted in the United States 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, 2002.
The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations and cash flows and statements of financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.
3
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
| June 28, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
ASSETS |
||||||||||
CURRENT ASSETS: |
||||||||||
Cash and cash equivalents |
$ | 103.1 | $ | 91.7 | ||||||
Accounts receivable |
2,306.3 | 1,508.0 | ||||||||
Inventories |
484.8 | 489.7 | ||||||||
Recoverable customer engineering and tooling |
174.9 | 153.2 | ||||||||
Other |
230.6 | 265.1 | ||||||||
Total current assets |
3,299.7 | 2,507.7 | ||||||||
LONG-TERM ASSETS: |
||||||||||
Property, plant and equipment, net |
1,735.1 | 1,710.6 | ||||||||
Goodwill, net |
2,899.2 | 2,860.4 | ||||||||
Other |
431.0 | 404.3 | ||||||||
Total long-term assets |
5,065.3 | 4,975.3 | ||||||||
| $ | 8,365.0 | $ | 7,483.0 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
CURRENT LIABILITIES: |
||||||||||
Short-term borrowings |
$ | 35.1 | $ | 37.3 | ||||||
Accounts payable and drafts |
2,466.2 | 1,966.4 | ||||||||
Accrued liabilities |
1,218.7 | 1,037.6 | ||||||||
Current portion of long-term debt |
3.9 | 3.9 | ||||||||
Total current liabilities |
3,723.9 | 3,045.2 | ||||||||
LONG-TERM LIABILITIES: |
||||||||||
Long-term debt |
2,054.4 | 2,132.8 | ||||||||
Other |
675.0 | 642.7 | ||||||||
Total long-term liabilities |
2,729.4 | 2,775.5 | ||||||||
STOCKHOLDERS’ EQUITY: |
||||||||||
Common stock, $.01 par value, 150,000,000 shares authorized; 70,568,590 shares issued
as of June 28, 2003 and 70,099,988 shares issued as of December 31, 2002 |
0.7 | 0.7 | ||||||||
Additional paid-in capital |
956.8 | 943.6 | ||||||||
Common stock held in treasury, 4,306,785 shares as of June 28, 2003 and
4,362,330 shares as of December 31, 2002, at cost |
(110.9 | ) | (111.4 | ) | ||||||
Retained earnings |
1,247.8 | 1,075.8 | ||||||||
Accumulated other comprehensive loss |
(182.7 | ) | (246.4 | ) | ||||||
Total stockholders’ equity |
1,911.7 | 1,662.3 | ||||||||
| $ | 8,365.0 | $ | 7,483.0 | |||||||
The accompanying notes are an integral part of these consolidated balance sheets.
4
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions; except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 28, | June 29, | June 28, | June 29, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net sales |
$ | 4,101.2 | $ | 3,792.2 | $ | 7,999.9 | $ | 7,326.8 | |||||||||
Cost of sales |
3,748.0 | 3,462.9 | 7,338.1 | 6,724.9 | |||||||||||||
Selling, general and administrative expenses |
141.5 | 132.9 | 288.2 | 264.5 | |||||||||||||
Interest expense |
48.3 | 51.9 | 100.7 | 107.6 | |||||||||||||
Other expense, net |
14.7 | 16.0 | 27.2 | 31.5 | |||||||||||||
Income before provision for income taxes and
cumulative effect of a change in accounting principle |
148.7 | 128.5 | 245.7 | 198.3 | |||||||||||||
Provision for income taxes |
44.6 | 43.0 | 73.7 | 66.4 | |||||||||||||
Income before cumulative effect of a change in
accounting principle |
104.1 | 85.5 | 172.0 | 131.9 | |||||||||||||
Cumulative effect of a change in accounting principle, net of tax |
— | — | — | 298.5 | |||||||||||||
Net income (loss) |
$ | 104.1 | $ | 85.5 | $ | 172.0 | $ | (166.6 | ) | ||||||||
Basic net income (loss) per share: |
|||||||||||||||||
Income before cumulative effect of a change in
accounting principle |
$ | 1.58 | $ | 1.31 | $ | 2.61 | $ | 2.03 | |||||||||
Cumulative effect of a change in accounting principle |
— | — | — | 4.59 | |||||||||||||
Basic net income (loss) per share |
$ | 1.58 | $ | 1.31 | $ | 2.61 | $ | (2.56 | ) | ||||||||
Diluted net income (loss) per share: |
|||||||||||||||||
Income before cumulative effect of a change in
accounting principle |
$ | 1.54 | $ | 1.27 | $ | 2.55 | $ | 1.97 | |||||||||
Cumulative effect of a change in accounting principle |
— | — | — | 4.46 | |||||||||||||
Diluted net income (loss) per share |
$ | 1.54 | $ | 1.27 | $ | 2.55 | $ | (2.49 | ) | ||||||||
The accompanying notes are an integral part of these consolidated statements.
5
LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
| Six Months Ended | |||||||||||
| June 28, | June 29, | ||||||||||
| 2003 | 2002 | ||||||||||
Cash Flows from Operating Activities: |
|||||||||||
Net income (loss) |
$ | 172.0 | $ | (166.6 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|||||||||||
Cumulative effect of a change in accounting principle, net of tax |
— | 298.5 | |||||||||
Depreciation |
152.1 | 147.7 | |||||||||
Net change in recoverable customer engineering and tooling |
(28.6 | ) | 16.1 | ||||||||
Net change in working capital items |
57.3 | (13.5 | ) | ||||||||
Other, net |
44.1 | 23.9 | |||||||||
Net cash provided by operating activities before net change in sold accounts
receivable |
396.9 | 306.1 | |||||||||
Net change in sold accounts receivable |
(139.6 | ) | (5.8 | ) | |||||||
Net cash provided by operating activities |
257.3 | 300.3 | |||||||||
Cash Flows from Investing Activities: |
|||||||||||
Additions to property, plant and equipment |
(137.3 | ) | (102.5 | ) | |||||||
Other, net |
10.5 | (1.3 | ) | ||||||||
Net cash used in investing activities |
(126.8 | ) | (103.8 | ) | |||||||
Cash Flows from Financing Activities: |
|||||||||||
Issuance of senior notes |
— | 250.3 | |||||||||
Long-term debt repayments, net |
(113.0 | ) | (456.1 | ) | |||||||
Short-term debt repayments, net |
(5.2 | ) | (45.2 | ) | |||||||
Proceeds from sale of common stock |
11.1 | 45.8 | |||||||||
Purchase of treasury stock |
(1.1 | ) | — | ||||||||
Increase (decrease) in drafts |
(13.1 | ) | 31.6 | ||||||||
Net cash used in financing activities |
(121.3 | ) | (173.6 | ) | |||||||
Effect of foreign currency translation |
2.2 | (10.8 | ) | ||||||||
Net Change in Cash and Cash Equivalents |
11.4 | 12.1 | |||||||||
Cash and Cash Equivalents at Beginning of Period |
91.7 | 87.6 | |||||||||
Cash and Cash Equivalents at End of Period |
$ | 103.1 | $ | 99.7 | |||||||
Changes in Working Capital Items: |
|||||||||||
Accounts receivable |
$ | (552.3 | ) | $ | (330.7 | ) | |||||
Inventories |
23.7 | 5.4 | |||||||||
Accounts payable |
401.3 | 220.3 | |||||||||
Accrued liabilities and other |
184.6 | 91.5 | |||||||||
| $ | 57.3 | $ | (13.5 | ) | |||||||
Supplementary Disclosure: |
|||||||||||
Cash paid for interest |
$ | 93.7 | $ | 102.9 | |||||||
Cash paid for income taxes |
$ | 84.9 | $ | 76.6 | |||||||
The accompanying notes are an integral part of these consolidated statements.
6
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements include the accounts of Lear Corporation (“Lear” or the “Parent”), a Delaware corporation, and the wholly-owned and majority-owned subsidiaries controlled by Lear (collectively, the “Company”). Investments in affiliates, other than wholly-owned and majority-owned subsidiaries controlled by Lear, in which Lear owns a 20% or greater interest are accounted for under the equity method.
The Company and its affiliates are involved in the design and manufacture of interior systems and components for automobiles and light trucks. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide.
(2) Stock-Based Compensation
The Company has adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” for the year ending December 31, 2003, under which compensation cost for grants of stock appreciation rights, restricted stock, restricted units, performance shares and performance units (collectively, “Incentive Units”) and stock options is determined on the basis of the fair value of the Incentive Units and options at the grant date. SFAS No. 123 will be applied prospectively to all employee awards granted after January 1, 2003, as permitted under the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” There were no employee awards granted in the first six months of 2003. The effect on net income (loss) and net income (loss) per share, as if the fair value based method had been applied to all outstanding and unvested awards in each period, is shown below (in millions, except per share data):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 28, | June 29, | June 28, | June 29, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income (loss), as reported |
$ | 104.1 | $ | 85.5 | $ | 172.0 | $ | (166.6 | ) | |||||||
Add: Stock-based employee compensation expense
included in reported net income (loss), net of tax |
1.1 | 0.6 | 1.6 | 1.7 | ||||||||||||
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax |
(5.4 | ) | (4.0 | ) | (11.0 | ) | (8.1 | ) | ||||||||
Net income (loss), pro forma |
$ | 99.8 | $ | 82.1 | $ | 162.6 | $ | (173.0 | ) | |||||||
Net income (loss) per share: |
||||||||||||||||
Basic — as reported |
$ | 1.58 | $ | 1.31 | $ | 2.61 | $ | (2.56 | ) | |||||||
Basic — pro forma |
$ | 1.51 | $ | 1.25 | $ | 2.47 | $ | (2.66 | ) | |||||||
Diluted — as reported |
$ | 1.54 | $ | 1.27 | $ | 2.55 | $ | (2.49 | ) | |||||||
Diluted — pro forma |
$ | 1.48 | $ | 1.22 | $ | 2.41 | $ | (2.59 | ) | |||||||
(3) Restructuring
In order to better align the Company’s operations and capacity in response to reductions in global automotive production volumes, the Company began to implement a restructuring plan in the fourth quarter of 2001. This restructuring plan was designed to consolidate certain operations and to improve overall efficiencies and the Company’s long-term competitive position.
As of June 28, 2003, the restructuring plan was substantially complete. There are two facilities which remain to be closed and approximately 340 employees yet to be terminated. These remaining actions are expected to be completed in 2003.
There have been no significant changes to the original restructuring plan as disclosed in the Company’s Form 10-K for the year ended December 31, 2002. A summary of the activity in the restructuring accrual is shown below (in millions):
7
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| Accrual as of | Utilized | Accrual as of | ||||||||||
| December 31, | June 28, | |||||||||||
| 2002 | Cash | 2003 | ||||||||||
Severance |
$ | 15.3 | $ | (4.7 | ) | $ | 10.6 | |||||
Lease cancellation costs |
4.4 | (0.7 | ) | 3.7 | ||||||||
Other closure costs |
5.7 | (0.4 | ) | 5.3 | ||||||||
Total |
$ | 25.4 | $ | (5.8 | ) | $ | 19.6 | |||||
(4) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. A summary of inventories is shown below (in millions):
| June 28, | December 31, | |||||||
| 2003 | 2002 | |||||||
Raw materials |
$ | 353.8 | $ | 343.4 | ||||
Work-in-process |
35.7 | 31.7 | ||||||