LEAR CORP /DE/ - 10-Q Quarterly Report

LEAR CORPORATION
(Exact name of registrant as specified in its charter)

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 / /

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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, 2003: 67,669,698


			Page No.

Part I — Financial Information
	Item 1 — Consolidated Financial Statements
		Introduction to the Consolidated Financial Statements		3
		Consolidated Balance Sheets — September 27, 2003 (Unaudited) and December 31, 2002		4
		Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended September 27, 2003 and September 28, 2002		5
		Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended September 27, 2003 and September 28, 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			30
Part II — Other Information
	Item 6 — Exhibits and Reports on Form 8-K			31
Signatures				32

We have prepared the unaudited condensed consolidated financial statements of Lear Corporation and subsidiaries 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.

LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)


			September 27,			December 31,
			2003			2002

			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	102.5		$	91.7
	Accounts receivable			2,252.6			1,508.0
	Inventories			512.1			489.7
	Recoverable customer engineering and tooling			185.1			153.2
	Other			244.6			265.1

		Total current assets		3,296.9			2,507.7

LONG-TERM ASSETS:
	Property, plant and equipment, net			1,717.7			1,710.6
	Goodwill, net			2,897.5			2,860.4
	Other			441.3			404.3

		Total long-term assets		5,056.5			4,975.3

			$	8,353.4		$	7,483.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Short-term borrowings		$	11.3		$	37.3
	Accounts payable and drafts			2,404.8			1,966.4
	Accrued liabilities			1,195.0			1,037.6
	Current portion of long-term debt			4.4			3.9

		Total current liabilities		3,615.5			3,045.2

LONG-TERM LIABILITIES:
	Long-term debt			2,042.2			2,132.8
	Other			665.4			642.7

		Total long-term liabilities		2,707.6			2,775.5

STOCKHOLDERS’ EQUITY:
	Common stock, $.01 par value, 150,000,000 shares authorized; 71,719,033 shares issued as of September 27, 2003 and 70,099,988 shares issued as of December 31, 2002			0.7			0.7
	Additional paid-in capital			998.9			943.6
	Common stock held in treasury, 4,306,785 shares as of September 27, 2003 and 4,362,330 shares as of December 31, 2002, at cost			(110.9	)		(111.4	)
	Retained earnings			1,323.9			1,075.8
	Accumulated other comprehensive loss			(182.3	)		(246.4	)

		Total stockholders’ equity		2,030.3			1,662.3

			$	8,353.4		$	7,483.0

The accompanying notes are an integral part of these consolidated balance sheets.

LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share data)


		Three Months Ended				Nine Months Ended

		September 27,		September 28,		September 27,		September 28,
		2003		2002		2003		2002

Net sales		$	3,491.5	$	3,337.4	$	11,491.4	$	10,664.2
Cost of sales			3,187.8		3,053.1		10,525.9		9,778.0
Selling, general and administrative expenses			140.6		125.4		428.8		389.9
Interest expense			44.0		51.6		144.7		159.2
Other expense, net			13.4		14.6		40.6		46.1


	Income before provision for income taxes and cumulative effect of a change in accounting principle		105.7		92.7		351.4		291.0
Provision for income taxes			29.6		31.1		103.3		97.5


	Income before cumulative effect of a change in accounting principle		76.1		61.6		248.1		193.5
Cumulative effect of a change in accounting principle, net of tax			—		—		—		298.5


Net income (loss)		$	76.1	$	61.6	$	248.1	$	(105.0	)


Basic net income (loss) per share:

	Income before cumulative effect of a change in accounting principle	$	1.13	$	0.94	$	3.74	$	2.97
	Cumulative effect of a change in accounting principle		—		—		—		4.58

Basic net income (loss) per share		$	1.13	$	0.94	$	3.74	$	(1.61	)

Diluted net income (loss) per share:
	Income before cumulative effect of a change in accounting principle	$	1.10	$	0.91	$	3.65	$	2.89
	Cumulative effect of a change in accounting principle		—		—		—		4.46

Diluted net income (loss) per share		$	1.10	$	0.91	$	3.65	$	(1.57	)

LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)


				Nine Months Ended

				September 27,			September 28,
				2003			2002

Cash Flows from Operating Activities:
Net income (loss)				$	248.1		$	(105.0	)
	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			234.7			223.0
		Net change in recoverable customer engineering and tooling			(40.5	)		20.5
		Net change in working capital items			80.3			(51.8	)
		Other, net			27.9			12.3

			Net cash provided by operating activities before net change in sold accounts receivable		550.5			397.5
Net change in sold accounts receivable					(190.9	)		(27.4	)

			Net cash provided by operating activities		359.6			370.1

Cash Flows from Investing Activities:
Additions to property, plant and equipment					(214.2	)		(173.3	)
Cost of acquisitions, net of cash acquired					(12.4	)		(10.7	)
Other, net					31.5			18.0

			Net cash used in investing activities		(195.1	)		(166.0	)

Cash Flows from Financing Activities:
Issuance of senior notes					—			250.3
Long-term debt repayments, net					(126.1	)		(538.4	)
Short-term debt borrowings (repayments), net					(28.4	)		21.6
Proceeds from sale of common stock					42.5			47.4
Purchase of treasury stock					(1.1	)		—
Increase (decrease) in drafts					(33.5	)		29.6
Other, net					—			0.6

			Net cash used in financing activities		(146.6	)		(188.9	)

Effect of foreign currency translation					(7.1	)		(16.4	)

Net Change in Cash and Cash Equivalents					10.8			(1.2	)
Cash and Cash Equivalents at Beginning of Period					91.7			87.6

Cash and Cash Equivalents at End of Period				$	102.5		$	86.4

Changes in Working Capital Items:
Accounts receivable				$	(454.5	)	$	(300.7	)
Inventories					(4.3	)		(55.1	)
Accounts payable					365.1			111.1
Accrued liabilities and other					174.0			192.9

				$	80.3		$	(51.8	)

Supplementary Disclosure:
Cash paid for interest				$	103.8		$	120.2

Cash paid for income taxes				$	140.5		$	122.4

LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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.

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 stock 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 has been 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.” 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						Nine Months Ended

	September 27,			September 28,			September 27,			September 28,
	2003			2002			2003			2002

Net income (loss), as reported	$	76.1		$	61.6		$	248.1		$	(105.0	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of tax		1.6			0.5			3.2			2.2
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(5.8	)		(6.2	)		(16.8	)		(14.3	)

Net income (loss), pro forma	$	71.9		$	55.9		$	234.5		$	(117.1	)

Net income (loss) per share:
Basic — as reported	$	1.13		$	0.94		$	3.74		$	(1.61	)
Basic — pro forma	$	1.07		$	0.85		$	3.54		$	(1.80	)
Diluted — as reported	$	1.10		$	0.91		$	3.65		$	(1.57	)
Diluted — pro forma	$	1.04		$	0.83		$	3.45		$	(1.75	)

During the third quarter of 2003, the Company acquired an additional 53% of the common equity of Hanyil Co., Ltd., a publicly traded supplier of automotive seats in Korea, for $9.4 million. The Company previously held a 29% equity stake in Hanyil Co., Ltd. The acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed have been included in the consolidated balance sheet as of September 27, 2003. The operating results of the Hanyil Co., Ltd. have been included in the consolidated statements of operations since the date of acquisition. The operating results of the Company, after giving pro forma effect to this acquisition, are not materially different from reported results.

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 September 27, 2003, the restructuring plan was complete.

LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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):

Property, plant and equipment is stated at cost. Depreciable property is depreciated over the estimated useful lives of the assets, principally using the straight-line method. A summary of property, plant and equipment is shown below (in millions):

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(Mark One)

/X/		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		OR

/ /		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware (State or other jurisdiction of incorporation or organization) 21557 Telegraph Road, Southfield, MI (Address of principal executive offices)		13-3386776 (I.R.S. Employer Identification No.) 48034 (zip code)


Commission file number:		1-11311