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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/ / Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended or
/X/ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from July 1, 1993 to
December 31, 1993.
COMMISSION FILE NUMBER: 33-52565
LEAR SEATING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3479398
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21557 TELEGRAPH ROAD, SOUTHFIELD, MI 48034
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 810-746-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of February 15, 1994, the aggregate market value of all shares of common
stock held by non-affiliates of the registrant was $0.
As of February 15, 1994, the number of shares outstanding of the registrant's
Common Stock, par value $.01 per share, was 1,176,448 shares.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
PAGE NUMBER
OR
REFERENCE
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PART I
ITEM 1. Business............................................................. 1
ITEM 2. Properties........................................................... 14
ITEM 3. Legal proceedings.................................................... 16
ITEM 4. Submission of matters to a vote of security holders.................. 16
PART II
ITEM 5. Market for registrant's common equity and related stockholder
matters.............................................................. 17
ITEM 6. Selected financial data.............................................. 18
ITEM 7. Management's discussion and analysis of financial condition and
results of operations................................................ 19
ITEM 8. Financial statements and supplementary data.......................... 27
ITEM 9. Changes in and disagreements with accountants on accounting and
financial disclosure................................................. 61
PART III
ITEM 10. Directors and executive officers of the registrant................... 61
ITEM 11. Executive compensation............................................... 64
ITEM 12. Security ownership of certain beneficial owners and management....... 73
ITEM 13. Certain relationships and related transactions....................... 74
PART IV
ITEM 14. Exhibits, financial statement schedules, and reports on Form 8-K..... 77
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EXPLANATORY NOTES
On March 8, 1994, the Company filed a Registration Statement on Form S-1
(the "Registration Statement") with the Securities and Exchange Commission
relating to the public offering of 9,375,000 shares of the Company's Common
Stock, $.01 par value per share ("Common Stock"), in the United States and
internationally (the "Offerings"). Prior to the commencement of the Offerings,
it is contemplated that a 33-for-1 split of the Company's outstanding Common
Stock will be effected (the "Stock Split"), and the Registration Statement,
which as of the filing date of this Form 10-K has not yet been declared
effective, assumes the consummation of the Stock Split. However, the information
contained in this Form 10-K has not been adjusted to reflect the Stock Split.
As used in this Form 10-K, unless the context otherwise requires, the
"Company" or "Lear" refers to Lear Seating Corporation and its consolidated
subsidiaries after giving effect to the Merger (as defined herein).
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PART I
ITEM 1 -- BUSINESS
GENERAL
The Company is the largest independent supplier of automobile and light
truck seat systems in North America and is one of the largest independent
suppliers of such systems and components worldwide. The Company's principal
products include finished automobile and light truck seat systems, automobile
and light truck seat frames, seat covers and other seat components. The
Company's seat systems, which are designed, manufactured and assembled at the
Company's manufacturing facilities, are shipped to customer assembly plants on a
just-in-time ("JIT") basis for installation in vehicles near the end of the
assembly process. This JIT process enables the Company to optimize inventory
turnover and deliver products to its customers on as little as 90 minutes
notice. In the twelve months ended December 31, 1993, approximately 70% of
Lear's net sales were generated from sales in the United States and Canada, with
the balance of sales being primarily in Europe and Mexico. The Company's present
customers include 16 original equipment manufacturers ("OEMs"), the most
significant of which are Ford, General Motors, Chrysler, Volvo, Volkswagen, Saab
and Mazda.
The Company's net sales have grown rapidly from approximately $159.8
million in the fiscal year ended June 30, 1983 to approximately $1.8 billion in
the fiscal year ended June 30, 1993, a ten-year average compound annual growth
rate of approximately 27.1%. The Company has expanded its operations to
facilitate such growth primarily through capital expenditures necessary to
construct or acquire new facilities and to enhance existing facilities. This
growth in sales is attributable primarily to the trend in the automotive
industry to "outsource" more of its requirements for automotive components,
particularly high cost components such as seat systems. Outsourcing has been
increased in response to competitive pressures on OEMs to improve quality and
reduce capital needs and the costs of labor, overhead and inventory. The
outsourced market for automobile and light truck seat systems in North America
is approximately 65% of the total North American seat systems market
(approximately 83% taking into account future seating programs that have been
awarded).
In addition to outsourcing the production of seat systems, OEMs
increasingly are transferring the primary responsibility for design, engineering
and quality control of these products to suppliers, such as Lear, with proven
design, engineering and JIT program management and manufacturing capabilities.
Suppliers that design, engineer, manufacture and conduct quality control testing
are generally referred to as "Tier I" suppliers. The Company believes that early
involvement in the design and engineering of new seating products as a Tier I
supplier affords the Company a competitive advantage in securing new business
and provides its customers with significant cost reduction opportunities through
the coordination of the design, development and manufacturing processes.
The Company has enhanced its design and engineering capabilities by
building two technical centers and making other investments to upgrade its
capabilities. The Company is continuing this process of investing to
substantially improve all aspects of its safety and functional testing and
comfort assessment capabilities. An example of the Company's design and
engineering capabilities is the development of the Company's patented SureBond
process, which bonds seat covers to foam pads, minimizing the need for sewing.
"See Business -- Manufacturing." The Company believes its enhanced design and
engineering capabilities have contributed to the increase in the Company's North
American Content per Vehicle (as defined herein) from $12 to $98 between the
fiscal years ended June 30, 1983 and 1993.
As a result of the Company's demonstrated capabilities as a full-service
Tier I supplier, it has captured more than one-third of the outsourced market
for automobile and light truck seat systems and seat components in North America
and has become a leading supplier to this market in Europe. The Company's
reputation with OEMs for timely delivery, customer service and quality products
at competitive prices has resulted in many of the Company's facilities winning
recognition awards from its customers.
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The Company's continued expansion as a Tier I supplier has resulted in new
business which recently has begun or will begin production over the next
eighteen months. Such business includes new passenger car and light truck
programs for the Dodge Ram Pick-up Truck, the Ford Mustang, the Ford Windstar
Minivan, the BMW 3 Series and all Jaguar models, as well as the GM Opel Omega,
the Chevrolet Cavalier and the Oldsmobile Aurora. In addition, in December 1993,
the Company was awarded the seat system assembly responsibility for the Ford
Taurus/Mercury Sable vehicle lines for seat systems scheduled to begin
production in 1995. Ford Taurus has been the best selling car line in the United
States for the past two years. As a result of this new business, the Company
expects to construct several new seat facilities, which typically involve an
upfront cost of between $6.0 million and $9.0 million per facility for owned
facilities and between $1.0 million and $6.0 million per facility for leased
facilities.
On November 1, 1993, the Company significantly expanded its operations in
North America by purchasing certain portions of Ford's North American seat cover
and seat systems business (the "NAB") for $173.4 million in cash (after giving
effect to an adjustment in the purchase price for changes in NAB working
capital) and approximately $10.5 million in notes payable to Ford or its
affiliates (the "NAB Acquisition"). The NAB consists of an integrated United
States and Mexican operation which produces seat covers for approximately 80% of
Ford's North American vehicle production and manufactures seat systems for
Ford's Crown Victoria and Grand Marquis vehicles. For the twelve months ended
December 31, 1993, and after giving effect to the pro forma adjustments related
to the NAB Acquisition, gross sales, EBITDA (as defined herein) and operating
income of the NAB were approximately $572.7 million, $49.0 million and $37.9
million, respectively.
In connection with the NAB Acquisition, the Company entered into a
five-year supply agreement with Ford covering models for which the NAB produces
seat covers and seat systems, establishing the Company as Ford's leading seat
systems supplier. In addition, the Company believes that, as a result of the NAB
Acquisition, its relationship with Ford will be enhanced, enabling Lear to be
more involved in the planning and design of seat systems and related products
for future vehicle models.
Lear believes that the same competitive pressures that contributed to the
rapid expansion of its business in North America will require auto makers in
Europe to outsource more of their seating requirements. The outsourced market
for automobile and light truck seat systems in Europe is approximately 41% of
the total European seat systems market. Over the past four years, the Company
has aggressively pursued expansion in Europe both with its existing and new
customers. As a result of its efforts, the Company has been awarded significant
business in Sweden, Germany, Austria and England from General Motors-Adam Opel,
Saab, Volvo, Chrysler, Volkswagen and Jaguar. Consequently, the Company's net
sales in Europe have grown from approximately $145.5 million in the fiscal year
ended June 30, 1991 to approximately $432.5 million in the fiscal year ended
June 30, 1993.
The Company also has positioned itself as the leading supplier of seat
systems and seat components in Mexico through its ownership of Central de
Industrias S.A. de C.V. ("CISA"), the largest independent automotive seat
systems manufacturer in Mexico serving Mexican domestic producers. As a result
of its presence in Mexico, the Company believes that it will benefit from the
growing activity of United States-based and German-based OEMs in Mexico. The
Company also believes that it will benefit from the additional business
opportunities resulting from the passage of the North American Free Trade
Agreement ("NAFTA").
On December 31, 1993, Lear Holdings Corporation ("Holdings"), the parent of
the Company, merged with and into the Company (the "Merger"), and the separate
corporate existence of Holdings ceased on that date. Unless the context
otherwise indicates, all information contained herein is presented as if the
Merger had occurred as of the date or as of the beginning of the period
indicated.
In February 1994, the Company also changed its fiscal year end from June 30
to December 31, effective December 31, 1993.
The Company is the successor to a seat frame manufacturing business founded
in 1917 that served as a supplier to General Motors and Ford from its inception.
Holdings was organized in August 1988 to effect the
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leveraged acquisition (the "1988 Acquisition") of all of the outstanding common
stock of Lear Seating Corporation (formerly known as Lear Siegler Seating Corp.)
and certain other subsidiaries of Lear Siegler Holdings Corp. comprising its
seating group (the companies acquired being collectively referred to herein as
the "Seating Group").
The Company's principal executive offices are located at 21557 Telegraph
Road, Southfield, Michigan 48034. Its telephone number at that location is (810)
746-1500. The Company was incorporated in Delaware on January 13, 1987.
BUSINESS STRATEGY
To take advantage of additional business opportunities, the Company has
positioned itself as a global Tier I supplier of entire seat systems to OEMs.
Tier I status typically means that the supplier is awarded the seat program for
a particular vehicle in the early stages of the vehicle's design. The Tier I
supplier becomes responsible for total seat program management, including
design, development, component sourcing, quality assurance procedures,
manufacture and delivery to the OEM's assembly plant. The OEM benefits from
lower costs, improved quality, timely delivery and the administrative
convenience of being able to treat seating as a single component instead of as
numerous individual components. The Company believes that its early involvement
in the design and engineering of new seat products as a Tier I supplier affords
the Company a competitive advantage in securing new business. The Company has
become a significant Tier I supplier by implementing a strategy based upon the
following elements:
- Strong Relationships with the OEMs. The Company's management has
developed strong relationships with its OEM customers which allow Lear to
identify business opportunities and react to customer needs in the early stages
of vehicle design. The Company works closely with OEMs in designing and
engineering seat systems and maintains an excellent reputation with the OEMs for
timely delivery and customer service and for providing world class quality at a
competitive price. Many of the Company's facilities have won awards from OEMs
and others, including the General Motors Mark of Excellence Award, the General
Motors Supplier of the Year Award, the General Motors Top Supplier Award in
Mexico, the Ford Q-1 Award at 15 plants, the General Motors of Europe 1991 and
1992 Supplier of the Year Award, the Chrysler Quality Excellence Award, the Saab
100% Supplier Performance Award and the Mazda Most Valuable Supplier Award.
- Product Technology and Product Design Capability. Lear has made
substantial investments in product technology and product design capability to
support its products, including the building of two technical centers (one in
the United States in 1988 and one in Europe in 1991) and upgrading the Company's
computer aided design/computer aided manufacturing ("CAD/CAM") systems. In
addition, the Company is in the process of investing approximately $6.0 million
to substantially broaden its engineering capabilities, including all aspects of
safety and functional testing and comfort assessment. The Company's strong
product focus and global business base provide it access to worldwide seat
technology. The Company's participation with customers in the early phases of
product design, including participation at its ten remote engineering sites
located near customers, enables it to improve the quality of the product and to
meet target costs. Furthermore, the Company has established formal programs
which provide for an ongoing review of product design and production in order to
establish the means of obtaining additional cost improvement. An example of the
Company's product technology and product design capability is the development of
its SureBond process, which was patented in 1987. Sales of seat systems using
the SureBond process accounted for approximately 35% of the Company's net sales
for the twelve months ended December 31, 1993. See "Business -- Manufacturing."
- Lean Manufacturing Philosophy. Lear has adopted a "lean manufacturing"
philosophy that seeks to eliminate waste and inefficiency in its own operations
and in those of its customers. The Company believes that it provides superior
quality seating products at lower costs than the OEMs. The Company, whose
facilities are linked by computer directly to those of its suppliers and
customers, receives components from its suppliers, and delivers seat systems and
components to its customers on a JIT basis, which minimizes inventories and
fixed costs and enables the Company to deliver products on as little as 90
minutes notice. In the twelve months ended December 31, 1993, the Company's
overall annual inventory turnover rate was 36 times (excluding the
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effects of the NAB Acquisition) and up to 150 times in the case of certain of
the Company's JIT plants. The Company also minimizes fixed costs by using the
existing suppliers to the OEMs and the OEMs themselves for certain components
instead of attempting to produce such components itself. In cases where one of
the Company's manufacturing facilities is underutilized, the Company is able to
redistribute products to increase facility utilization.
Typically, the upfront cost of constructing a new seat systems facility is
between $6.0 and $9.0 million per facility for owned facilities and between $1.0
million and $6.0 million per facility for leased facilities. The principal costs
in starting a new seat systems facility arise from the acquisition of the land,
construction of the building and installation of conveyor systems. Because most
seat assembly work is manual and does not require complex equipment, capital
costs are relatively low.
Another example of the Company's "lean manufacturing" philosophy is the
establishment of a "Champion Program" in the fiscal year ended June 30, 1993
whereby individual members of management are responsible for working with a
specific vendor to aggressively reduce costs. The success of the program has
allowed the Company to negotiate on-going cost reduction agreements with many of
its customers. The Champion Program has been expanded since June 30, 1993 to
European suppliers as well as to product and manufacturing design.
NAB ACQUISITION
On November 1, 1993, Lear significantly strengthened its position in the
North American automotive seating market by purchasing the NAB from Ford for
$173.4 million in cash (after giving effect to an adjustment in the purchase
price for changes in NAB working capital) and approximately $10.5 million in
notes payable to Ford or its affiliates. The NAB Acquisition included the
machinery, equipment, real property and other assets used in the operations of
the NAB as well as the stock of Favesa S.A. de C.V. ("Favesa"), an operation
located in Juarez, Mexico.
The NAB consists of an integrated United States and Mexican operation which
produces seat covers for approximately 80% of Ford's North American vehicle
production and manufactures seat systems for Ford's Crown Victoria and Grand
Marquis vehicles. The Company's United States and Canadian revenues as a
percentage of total net sales would have been approximately 68% had the NAB
Acquisition not occurred versus 75% had the NAB Acquisition occurred on the
first day of calendar year 1993. The cost structure of the NAB is very similar
to the Company's current business in that costs are largely variable and,
therefore, responsive to demand. Prior to the NAB Acquisition, the Company
outsourced a significant portion of its seat cover requirements. The expansion
of the Company's seat cover business allows the Company better control over the
costs and quality of one of the critical components of a seat system. Because of
the Company's belief in its ability to produce seat covers and seat systems at
attractive margins, the NAB Acquisition is expected to improve the Company's
operating performance.
For the twelve months ended December 31, 1993, after giving pro forma
effect to the NAB Acquisition, gross sales, EBITDA and operating income of the
NAB were approximately $572.7 million, $49.0 million and $37.9 million,
respectively.
In connection with the NAB Acquisition, the Company entered into a
five-year supply agreement with Ford covering models for which the NAB currently
produces seat covers and seat systems at agreed upon prices. The Company also
assumed during the term of the supply agreement primary engineering
responsibility for a substantial portion of Ford's car models. As a result, the
NAB Acquisition establishes the Company as Ford's leading seat systems supplier
and strengthens the Company's relationship with one of its two largest customers
and the world's second largest automobile manufacturer. In addition, the Company
believes that because of the NAB Acquisition it will be further integrated by
Ford into the planning and design of seat systems and related products for
future vehicle models. On a pro forma basis, after giving effect to the NAB
Acquisition, the Company's net sales in the twelve months ended December 31,
1993 to Ford and General Motors were approximately equal. The NAB Acquisition
also provides the Company with a prototype for enhancing its relationships with
OEMs in a manner that allows OEMs to take better advantage of the
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Company's engineering, design and manufacturing expertise than is currently
afforded under conventional supply agreements.
The sale of the NAB was conducted on an auction basis in which Ford
determined that the Company was one of only two qualified final bidders based
upon technical resources, capabilities and expertise in automotive and light
truck seat systems. The selection of the Company as the successful bidder
highlights the Company's position as a leading supplier of quality seat systems.
The NAB incorporates both U.S. and Mexican operations. The manufacture of
seat covers and seat systems takes place in Juarez, Mexico at the NAB's
maquiladora subsidiary, Favesa. Favesa's maquiladora status allows the NAB to
produce seat systems and seat covers in Mexico for sale in the United States
without paying import or export duties as raw materials and finished goods cross
the United States/Mexican border. To maintain its maquiladora status, Favesa
must return its production to the United States, where it is sold by the NAB.
This maquiladora arrangement is in direct contrast to the Company's other
Mexican subsidiary, CISA, a non-maquiladora operation, whose sales are almost
entirely to Mexican plants. The Company believes that the passage of NAFTA will
present additional business opportunities as current maquiladora operations are
allowed to produce product for use in Mexico.
PRODUCTS
Lear's products have evolved from the Company's many years of experience in
the seat frame market where it has been a major supplier to General Motors and
Ford since its inception in 1917. The seat frame has structural and safety
requirements which make it the basis for overall seat design and was the logical
first step to the Company's emergence as a dominant supplier of entire seat
systems.
All of the Company's products are manufactured using JIT manufacturing
techniques, and most of the Company's products, including all seat systems, are
delivered to the OEMs on a JIT basis. The JIT concept, first broadly utilized by
Japanese automobile manufacturers, is the cornerstone of the Company's
manufacturing and supply strategy. This strategy involves many of the principles
of the Japanese system, but was redeveloped for compatibility with the greater
volume requirements and geographic distances of the North American market. The
Company first developed JIT operations in the early 1980s at its seat frame
manufacturing plants in Morristown, Tennessee and Kitchener, Ontario. These
plants previously operated under traditional manufacturing practices, resulting
in relatively low inventory turnover rates, significant scrap and rework, a high
level of indirect labor costs and long production set-up times. As a result of
JIT manufacturing techniques, the Company has been able to consolidate plants,
increase capacity and significantly increase inventory turnover, quality and
productivity.
The JIT principles first developed at Lear's seat frame plants in 1983 were
next applied to the Company's growing seat systems business. The Company's
seating plants are typically no more than 30 minutes from its customers'
assembly plants and manufacture seats for delivery to the customer's facility in
as little as 90 minutes. Orders for the Company's seats are received on a weekly
basis, pursuant to blanket purchase orders for annual requirements. These orders
detail the customer's needs for the ensuing week. In addition, on each work day,
constant computer and other communication is maintained between personnel at the
Company's plants and personnel at the customer's plants to keep production
current with the customer's demand.
The following is the approximate composition by product category of the
Company's net sales in the twelve months ended December 31, 1993, after giving
pro forma effect to the NAB Acquisition: seat systems, 73%; seat covers, 14%;
seat frames, 8%; and seat components, 5%.
- Seat Systems. The seat systems business consists of the manufacture,
assembly and supply of entire seating requirements for a vehicle or assembly
plant. The Company produces seat systems for automobiles and light trucks that
are fully finished and ready to be installed in a vehicle. Included within the
Company's seat systems production are high performance seats for luxury versions
of the OEMs' specialty cars, such as the Chevrolet Corvette, the Ford Taurus
SHO, the Mercury Cougar XR7, the Ford Thunderbird Super Coupe, the Ford Mustang
GT and the Dodge Viper. High performance seats are fully assembled seats,
ergonomically
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designed by the Company to achieve maximum passenger comfort. They have a wide
range of manual and power comfort features such as lumbar supports, cushion and
back bolsters and leg and thigh supports that are typically used to provide
product differentiation for specialty vehicles. As OEMs continue to view seat
systems as a distinguishing marketing feature, the advanced features
incorporated initially in high performance seats are more frequently becoming
standard features in a wider variety of later production vehicles.
The market for seat systems developed as a result of North American
automobile manufacturers' need to restructure assembly plant methods in response
to vigorous foreign competition in the early 1980's. The Company was positioned
to take advantage of this growing market through its long standing relationships
with customers. These relationships have been fostered through the Company's
performance in seat frame manufacturing over the years and its demonstrated
ability to supply and manage total seat systems. The Company believes that its
position in the seat systems market will improve as seats with advanced features
become an increasingly important criterion for distinguishing between competing
vehicle models. Seat systems are shipped to customers in the order in which they
are installed in vehicles.
The Company's major seat systems customers include Ford, General Motors,
Chrysler, Volvo, Volkswagen, Saab and Mazda. In addition, through its joint
ventures with NHK Spring Co., Ltd., the Company supplies seat systems to SIA (a
joint venture between Fuji Heavy Industries (Subaru) and Isuzu) and to CAMI (a
joint venture between Suzuki and General Motors). The Company and its affiliates
serve assembly plants for these customers through 22 different dedicated JIT
facilities.
The Company's seat systems sales for the twelve months ended December 31,
1993 broke down into the following vehicle categories: 47% light truck, 22%
mid-size, 13% full size, 8% luxury, 6% compact and 4% sport vehicles. These
vehicles included the Chevrolet/GMC Suburban, the Chevrolet/GMC Pick-up Truck,
the Ford Explorer, the Oldsmobile Delta 88, the Buick LeSabre, the Chevrolet
Lumina, the Buick Regal, the Mercury Cougar XR7, the Saab 9000 and the Chevrolet
Corvette. As part of the NAB Acquisition, the Company has also assumed seat
systems responsibility for the Ford Crown Victoria and the Mercury Grand Marquis
and has assumed Tier I engineering responsibilities for the Ford Escort, the
Lincoln Town Car, the Mercury Tracer and the Mercury Grand Marquis.
As a result of its product technology and product design strengths, the
Company can provide ergonomic designs which offer styling flexibility at low
cost. In addition, the Company is able to incorporate many convenience features
and safety improvements into its seat designs, such as storage armrests, rear
seat fold down panels, integrated restraint systems and child restraint seats.
Lear's position as a market leader in seat systems is largely attributable
to seating programs on new vehicle models launched in the past five years. The
Company believes that supplying seating for these new vehicle models will
provide it with a long-term revenue stream throughout the lives of these models.
The Company is currently working with customers in the development of a number
of seat systems products to be introduced by automobile manufacturers in the
late 1990's, which it expects will lead to an increase in outsourcing
opportunities in the future. The Company has been awarded several new programs
which have recently begun or are scheduled to begin production in the fiscal
years ending December 31, 1994 through 1996. Such business includes new
passenger car and light truck programs for the Dodge Ram Pick-up Truck, the Ford
Mustang, the Ford Windstar Minivan, the BMW 3 Series, all Jaguar models, as well
as the GM Opel Omega, the Chevrolet Cavalier and the Oldsmobile Aurora. In
addition, in December 1993, the Company was awarded the seat system assembly
responsibility for the Ford Taurus/Mercury Sable vehicle lines for seat systems
scheduled to begin production in early 1995. Ford Taurus has been the best
selling car line in the United States for the past two years. See "Business --
General" for additional information on new business scheduled to begin
production in the next eighteen months.
- Seat Covers. Lear produces seat covers at its Fairhaven, Michigan and
Saltillo, Mexico facilities, which deliver seat covers primarily to other
Company plants. In addition, pursuant to the NAB Acquisition, the Company
acquired a portion of Ford's North American seat cover and seat systems business
and is producing approximately 80% of the seat covers for Ford's North American
vehicles. After the NAB Acquisition, the Company's major external customers for
seat covers are Ford and other independent suppliers. The expansion of the
Company's seat cover business allows the Company better control over the
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costs and quality of one of the critical components of a seat system. Typically,
seat covers comprise approximately 30% of the aggregate cost of a seat system.
- Seat Frames. Lear produces steel and aluminum seat frames for passenger
cars and light and medium trucks. Seat frames are primarily manufactured using
precision stamped, tubular steel and aluminum components joined together by
highly automated, state-of-the-art welding and assembly techniques. The
manufacture of seat frames must meet strict customer specified safety standards.
The Company's seat frames are either delivered to its own plants where they
become part of a completed seat that is sold to the OEM customer, to
customer-operated assembly plants or to other independent seating suppliers
where they are used in the manufacture of assembled seating systems.
The Company's product development engineers continue to advance its
technological position with such innovative material applications as aluminum
and plastic frames and new seat designs which dramatically reduce seat weight
while increasing usable automotive vehicle interior space or increasing safety.
- Seat Components. The Company designs and manufactures plastic storage
armrests for inclusion in seat systems at its plant in Mendon, Michigan.
Vehicles in which these components are found are the Dodge Ram Pick-up Truck,
the Ford F-Series Pick-up Truck, the Buick LeSabre and the Oldsmobile Delta 88.
The Company also manufactures decorative, painted and assembled injection molded
components at the Mendon facility that are used in automotive vehicle interiors.
MANUFACTURING
Lear has developed a comprehensive manufacturing philosophy for seat
systems that allows it to make optimal use of its manufacturing facilities in a
high volume market. This concept, based on JIT manufacturing techniques, was
developed in the early 1980's to meet the requirements of its customers seeking
to reduce costs and improve quality. The Company has over ten years of
experience in JIT management and manufacturing. See "Business -- Products."
Seat and component assembly techniques fall into two major categories,
traditional assembly methods (in which fabric is affixed to a frame using
velcro, wire or other material) and more advanced bonding processes. There are
two bonding techniques employed by the Company, the Company's patented SureBond
process, a technique in which fabric is affixed to the underlying foam padding
using adhesives, and the Company's licensed foam-in-place process, in which foam
is injected into a fabric cover. The SureBond process has several major
advantages when compared to traditional methods, including design flexibility,
increased quality and lower cost. The SureBond process, unlike alternative
bonding processes, results in a more comfortable seat in which air can circulate
freely. The SureBond process, moreover, is reversible, so that seat covers that
are improperly installed can be removed and repositioned properly with minimal
materials cost. In addition, the SureBond process is not capital intensive when
compared to competing technologies.
The seat assembly process begins with pulling the requisite components from
inventory. Inventory at each plant is kept at a minimum, with each component's
requirement monitored on a daily basis. This allows the plant to devote the
maximum space to production, but also requires precise forecasts of the day's
output. Seats are assembled by three or four person teams, then tested and
packaged for shipment. The Company operates its own specially designed trailer
fleet that accommodates the off-loading of vehicle seats at the assembly plant.
Lear obtains steel, aluminum and foam chemicals used in its seat systems
from various producers under various supply arrangements. Leather, fabric and
purchased components generally are purchased from various suppliers under
contractual arrangements typically lasting no longer than one year. All such
materials are readily available. Some of the purchased components are obtained
through the Company's own customers.
CUSTOMERS
Lear serves the worldwide automobile and light truck market, which produces
over 30 million vehicles annually. The outsourced market for automobile and
light truck seat systems in North America is
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approximately 65% of the total North American seat systems market, which total
market is estimated to have annual revenues of approximately $6.0 billion. The
outsourced market for seat systems in Europe is approximately 41% of the total
European seat systems market, which total market is estimated to have annual
revenues of approximately $3.6 billion. The Company believes that the same
competitive pressures that contributed to the rapid expansion of its business in
North America since 1983 will continue to encourage auto makers in the North
American and the European markets to outsource more of their seating
requirements. Over the past three years, the Company has aggressively pursued
expansion in Europe, both with its existing and new customers. Approximately
65%, 70% and 75% of Lear's net revenues were from sales in the United States and
Canada in the fiscal years ended June 30, 1993, 1992 and 1991, respectively,
with the balance of sales in Europe and Mexico. On a pro forma basis, as if the
NAB Acquisition had occurred at the beginning of the twelve months ended
December 31, 1993, net revenues in the United States and Canada would have
amounted to approximately 75% of the Company's total net revenues in the twelve
months ended December 31, 1993.
The Company's OEM customers currently include Ford, General Motors,
Chrysler, Volvo, Volkswagen, Saab, Mazda, BMW, Jaguar, Audi, Subaru, Isuzu,
Suzuki, Daimler-Benz, Renault and Peugeot. For additional information regarding
customers and foreign and domestic operations and sales, see Note 15,
"Geographic Segment Data," to the consolidated financial statements of the
Company included in this report on Form 10-K.
In the past six years, in the course of retooling and reconfiguring plants
for new models and model changeovers, OEMs have eliminated seating production
from certain of their facilities, thereby committing themselves to purchasing
seat systems and components from outside suppliers. During this period, the
Company became a supplier of these products for a significant number of new
models, many on a JIT basis.
The purchase of seat systems on a JIT basis has allowed the Company's
customers to realize a competitive advantage as a result of (i) a reduction in
labor costs since suppliers like the Company generally enjoy lower direct labor
rates, (ii) the elimination of working capital and personnel costs associated
with the production of seat systems by the OEM, (iii) a reduction in net
overhead expenses and capital investment due to the availability of
approximately 60,000 to 80,000 square feet of plant space for expansion of other
manufacturing operations which was previously associated with seat production at
the OEM facilities and (iv) a reduction in transaction costs because of the
customer's ability to deal with a limited number of sophisticated system
suppliers as opposed to numerous individual component suppliers. In addition,
the Company offers improved quality and on-going cost reductions to its
customers through design improvements and its Champion Program.
The Company receives blanket purchase orders from its customers that
normally cover annual requirements for seats to be supplied for a particular
vehicle model. Such supply relationships typically extend over the life of the
model, which is generally four to seven years, and do not require the purchase
by the customer of any minimum number of seats. In order to reduce its reliance
on any one model, the Company produces
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complete seat systems and components for a broad cross-section of both new and
more established models. Vehicles with seat systems sold by the Company and its
affiliates in the indicated locations include:
UNITED STATES AND CANADA:
OEM/MODELS OEM/MODELS
FORD: GENERAL MOTORS:
Ford Crown Victoria Buick LeSabre
Ford Explorer Sports Bucket, Buick Park Avenue
Eddie Bauer & Limited Edition Buick Regal
Ford F-Series Pick-up Truck Chevrolet Corvette
Ford Lightning Pick-up Truck Chevrolet Lumina
Ford Mustang GT & LX Chevrolet Blazer/GMC Yukon
Ford Probe Chevrolet C/K Pick-up Truck
Ford Ranger Supercab/STX Chevrolet Kodiak
Ford Taurus SHO Chevrolet Sport Van
Ford Thunderbird SC Chevrolet/GMC G-Van
Ford Windstar Minivan Chevrolet/GMC Pick-up Truck
Mercury Cougar XR7 Chevrolet/GMC Suburban
Mercury Grand Marquis GMC Rally/Vandura Van
CHRYSLER: GMC Sierra Crew Cab
Dodge Dakota Pick-up Truck GMC Sierra Pick-up Truck
Dodge Ram Charger GMC Top Kick
Dodge Ram Pick-up Truck Oldsmobile Delta 88
Dodge Viper FUJI/ISUZU:
CAMI -- GENERAL MOTORS/SUZUKI: Isuzu Trucks
Geo Metro Subaru Legacy
Geo Tracker HYUNDAI:
Suzuki Sidekick Sonata
Suzuki Swift
EUROPE:
OEM/MODELS OEM/MODELS
GENERAL MOTORS: SAAB:
Opel Astra Saab 900
Opel Calibra Saab 9000
Opel Corsa VOLVO:
Opel Omega 800 Series
Opel Senator 900 Series
Opel Vectra JAGUAR:
CHRYSLER: XJS
Eurostar Minivan XJ6
MEXICO:
OEM/MODELS OEM/MODELS
FORD: GENERAL MOTORS:
Ford Escort Chevrolet S-10 Blazer
Ford F-Series Chevrolet Cavalier
Ford Thunderbird VOLKSWAGEN:
Mercury Cougar Beetle
Mercury Grand Marquis Golf
Mercury Tracer Jetta
CHRYSLER: Vanagon Minivan
Club Cab Pick-up Truck
Dodge Ram Pick-up Truck
Because of the economic benefits inherent in the JIT manufacturing process
and the costs associated with reversing a decision to purchase seat systems from
an outside supplier, the Company believes that automobile manufacturers' level
of commitment to purchasing seating from outside suppliers, particularly on a
JIT basis, will increase. However, under the contracts currently in effect in
the United States between each of General Motors, Ford and Chrysler with the
United Automobile, Aerospace and Agricultural Implement Workers of America (the
"UAW"), in order for any of such manufacturers to obtain components that it
currently
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produces itself from external sources, it must first notify the UAW of such
intention. If the UAW objects to the proposed outsourcing, some agreement will
have to be reached between the UAW and the OEM. Factors that will normally be
taken into account by the UAW and the OEM include whether the proposed new
supplier is technologically more advanced than the OEM, cost and whether the OEM
will be able to reassign union members whose jobs are being displaced to other
jobs within the same factories. As part of its long-term agreement with General
Motors, the Company operates its Grand Rapids, Michigan facility with General
Motors employees and reimburses General Motors for the wages of such employees
on the basis of the Company's employee wage structure. The Company is
negotiating with General Motors to expand this program to other facilities. The
Company enters into these arrangements to enhance its relationship with its
customers.
The Company's contracts with its major customers generally provide for an
annual productivity price reduction and, in some cases, provide for the recovery
of increases in material and labor costs. Cost reduction through design changes,
increased productivity and similar programs with the Company's suppliers have
generally offset changes in selling prices. The Company's cost structure is
comprised of a high percentage of variable costs. The Company believes that this
structure provides it with additional flexibility during economic cycles.
General Motors and Ford, the two largest automobile and light truck
manufacturers in the world, are also the Company's two largest customers,
accounting for 45% and 28%, respectively, of the Company's net sales during the
twelve months ended December 31, 1993. After giving pro forma effect to the NAB
Acquisition, the Company's net sales to General Motors and Ford for the twelve
months ended December 31, 1993 were approximately equal.
MARKETING AND SALES
Lear markets its products by maintaining strong relationships with its
customers fostered during its 76-year history through strong technical and
product development capabilities, reliable delivery of high quality products,
strong customer service, innovative new products and a competitive cost
structure. Close personal communication with automobile manufacturers from the
corporate to the plant level is an integral part of the Company's marketing
strategy. Automobile manufacturers have increasingly reduced their number of
suppliers as part of their move to purchase systems rather than discrete
components. This process favors suppliers, like the Company, with established
ties to automobile manufacturers and the demonstrated ability to adapt to the
new competitive environment in the automotive industry.
The Company's sales are originated almost entirely by its sales staff. This
marketing effort is augmented by design and manufacturing engineers who work
closely with automobile manufacturers from the preliminary design to the
manufacture and supply of a seating system. Manufacturers have increasingly
looked to suppliers like the Company to assume responsibility for the
introduction of product innovation, shorten the development cycle of new models,
decrease tooling investment and labor costs, reduce the number of costly design
changes in the early phases of production and improve seat comfort and
functionality. Once the Company is engaged to develop the design for the seating
of a specific vehicle model, it is also generally engaged to supply the vehicle
with seating when it goes into production. The Company has responded to this
trend by improving its engineering and technical capabilities and building
technical centers in the United States in 1988 and in Europe in 1991 at a cost
of approximately $8.0 million in the aggregate. The Company is also currently in
the process of investing approximately $6.0 million in developing full-scope
engineering capabilities, including all aspects of safety and functional testing
and comfort assessment. In addition, the Company has established ten remote
engineering sites in close proximity to several of its OEM customers to enhance
customer relationships and design activity. As part of the NAB Acquisition, the
Company is assuming, during the five-year term of the supply agreement entered
into in connection with the NAB Acquisition, responsibility for a substantial
portion of Ford's seat systems design capability and, accordingly, is building a
75,000 square foot dedicated engineering facility in Dearborn, Michigan to
service Ford products.
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TECHNOLOGY
Lear conducts advanced product design and development at its technical
centers in Southfield, Michigan and Rietberg, Germany. At the technical centers,
the Company tests its products to determine compliance with applicable safety
standards, the products' quality and durability, response to environmental
conditions and user wear and tear. In the past, the Company has developed a
number of designs for innovative seat features which it has patented, including
ergonomic features such as adjustable lumbar supports and bolster systems and
adjustable thigh supports. In addition, the Company incorporates many
convenience, comfort and safety features into its seat designs, including
storage armrests, rear seat fold down panels, integrated restraint systems and
child restraint seats. The Company has recently invested to further upgrade its
CAD/CAM systems including three-dimensional color graphics, customer
telecommunications and direct interface with customer CAD systems. Research and
development costs incurred in connection with the development of new products
and manufacturing methods (not including additional research and development
costs paid for by the customer) amounted to approximately $16.2 million, $18.2
million, $11.4 million, $7.9 million for the twelve months ended December 31,
1993 and the fiscal years ended June 30, 1993, 1992 and 1991, respectively.
Lear uses its patented SureBond process (the patent for which has
approximately 10 years remaining) in bonding seat cover materials to the foam
pads used in certain of its seats. The SureBond process is used to bond a
pre-shaped cover to the underlying foam to minimize the need for sewing and
achieve new seating shapes, such as concave shapes, which were previously
difficult to manufacture.
The Company, through its wholly-owned subsidiary, Progress Pattern Corp.
("Progress Pattern"), produces patterns and tooling for use in the automotive
casting industry. Its capabilities include foundry and vacuum form tooling,
porous mold design and lost foam tooling production. The pattern operation is
also integral to the Company's seating design programs, including independent
product design and development, contract design, engineering services,
manufacturing feasibility and engineering cost studies. Progress Pattern also
manufactures production tooling for the Company's plastic and foam molding
operations. In addition to providing support for the Company's continuing seat
design, Progress Pattern provides services to its own customers, including Ford
and General Motors. It produced the casting tooling for the General Motors
Saturn engine.
The Company holds a number of mechanical and design patents covering its
automotive seating products and has numerous applications for patents currently
pending. In addition, the Company holds several trademarks relating to various
manufacturing processes. The Company also licenses its technology to a number of
seating manufacturers.
The Company has and will continue to dedicate resources to research and
development to maintain its position as a leading developer of technology in the
automotive seating industry.
JOINT VENTURES AND MINORITY INTERESTS
Lear conducts a portion of its business through joint ventures in order to
facilitate the exchange of technical information and the establishment of
business relationships with foreign automakers. The joint ventures in which the
Company participates include: (i) General Seating of America, a joint venture
with NHK Spring Co., Ltd. of Japan in which the Company has a 35% interest,
which supplies trimmed seating to SIA (a joint venture between Fuji Heavy
Industries (Subaru) and Isuzu) and (ii) General Seating of Canada Limited, a
joint venture with NHK Spring Co., Ltd. of Japan in which the Company has a 35%
interest, which supplies trimmed seating from a plant in Woodstock, Ontario to
CAMI (a joint venture between Suzuki and General Motors). In addition, the
Company has a 31% interest in Probel, S.A., a Brazilian automotive seat
component and furniture manufacturer, and a 20% interest in Pacific Trim Corp.
Ltd., a Thai manufacturer of automotive vehicle seat systems and seat covers.
See Note 7, "Investments in Affiliates," to the consolidated financial
statements of the Company included in this report on Form 10-K.
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COMPETITION
Lear is one of the two primary suppliers in the outsourced North American
seat systems market. The Company's main independent competitor is Johnson
Controls, Inc., and it competes, to a lesser extent, with Douglas & Lomason
Company and Magna International, Inc. The Company's major independent
competitors in Europe, besides Johnson Controls, Inc., are Bertrand Faure
(headquartered in France) and Keiper Recaro (headquartered in Germany). The
Company also competes with the OEMs' in-house seating suppliers. The Company
competes on the basis of technical expertise, reliability, quality and price.
The Company believes its technical resources, product design capabilities and
customer responsiveness are the key factors that allow it to compete
successfully in the seat system market.
SEASONALITY
Lear's principal operations are directly related to the automotive
industry. Consequently the Company may experience seasonal fluctuation to the
extent automotive vehicle production slows, including times such as the summer
months when plants close for model year changeovers and vacation and around
Christmas when plants close for approximately 1.5 weeks. Historically, the
Company's sales have been the strongest in the second calendar quarter. However,
in the twelve months ended December 31, 1993, net sales in the fourth calendar
quarter exceeded the second calendar quarter due to the NAB Acquisition and new
programs which the Company began during 1993. Net sales for the twelve months
ended December 31, 1993 by calendar quarter broke down as follows: first
quarter, 23.4%; second quarter, 25.0%; third quarter, 20.5%; and fourth quarter,
31.1%. Operating profit of the Company has historically been strongest in the
second calendar quarter and the weakest in the third calendar quarter. See Note
16, "Quarterly Financial Data," in the consolidated financial statements
included elsewhere in this report on Form 10-K.
EMPLOYEES
After giving effect to the NAB Acquisition, the Company employs
approximately 4,600 persons in the United States, 10,000 in Mexico, 1,500 in
Canada, 1,400 in Germany, 800 in Sweden, 90 in Austria and 80 in France. Of
these, about 2,700 are salaried employees and the balance are paid on an hourly
basis. Approximately 9,600 of the Company's employees are members of unions. The
Company has collective bargaining agreements with several unions including the
UAW; National Automobile, Aerospace and Agricultural Implement Workers Union of
Canada; the Textile Workers of Canada; the Confederation of Mexican Workers; the
International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of
America; and the International Association of Machinists and Aerospace Workers,
AFL-CIO, and its Local Lodge PM 2811 of Detroit and vicinity. Each of the
Company's facilities has a separate contract with the union which represents the
workers employed there, with each such contract having an expiration date
independent of the Company's other labor contracts. The Company has experienced
some labor disputes at its plants, none of which has significantly disrupted
production or had a materially adverse effect on its operations. The Company has
been able to resolve all such labor disputes and believes its relations with its
employees are good.
ENVIRONMENTAL
The Company is subject to various laws, regulations and ordinances which
govern activities such as discharges to the air and water, as well as handling
and disposal practices for solid and hazardous wastes and which impose costs and
damages associated with spills, disposal or other releases of hazardous
substances. The Company believes that it is in substantial compliance with such
requirements. Management does not believe that it will incur compliance costs
pursuant to such requirements that would have a material adverse effect on the
Company's consolidated financial position or future results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Environmental Matters."
RECENT DEVELOPMENTS
On March 8, 1994, the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission relating to the offering of
9,375,000 shares of the Company's Common Stock, $.01 par
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value per share ("Common Stock"), in the United States and internationally (the
"Offerings"). Of the 9,375,000 shares being offered, 6,250,000 shares are being
offered by the Company and 3,125,000 shares are being offered by a stockholder
of the Company (the "Selling Stockholder"). The Company will not receive any of
the proceeds from the sale of Common Stock by the Selling Stockholder. In
connection with the Offerings, the Company's Certificate of Incorporation will
be amended and restated (as so amended and restated, the "Restated Certificate
of Incorporation") to, among other things, increase the authorized capital of
the Company. Immediately prior to the commencement of the Offerings, it is
contemplated that a 33-for-1 split of the Company's Common Stock will be
effected.
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ITEM 2 -- PROPERTIES
The Company's operations are conducted through 60 facilities, including
four facilities acquired as part of the NAB Acquisition and six facilities
operated by the Company's less than majority-owned affiliates. The Company's
management is headquartered in Southfield, Michigan. The headquarters building,
which accommodates both the main office and the technical center, was completed
in June 1988. Twenty-two of the plants are dedicated to providing seat systems
to nearby assembly plants. The others focus on the production for a combination
of seat systems and other seating products. Substantially all owned facilities
secure borrowings under the Company's various debt agreements.
The Company's facilities are located in appropriately designed buildings
which are kept in good repair with sufficient capacity to handle present
volumes. The Company has designed its facilities to provide for efficient JIT
manufacturing of its products. No facility is materially underutilized.
Management believes substantially all of the Company's property and equipment is
in good condition and that it has sufficient capacity to meet its current and
expected manufacturing and distribution needs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Capital Expenditures."
The following table provides certain information regarding the Company's 60
operating facilities, including five facilities currently under construction:
BUILDING
OWNED/ SQUARE LEASE
FACILITY LEASED FEET FUNCTION EXPIRATION
- ----------------------------------- ------ -------- ------------------------------- ---------------
UNITED STATES:
Southfield, MI..................... O 70,000 administrative offices and --
technical center
Detroit, MI........................ O 156,800 manufacture of seat systems --
Romulus I, MI...................... O 89,600 manufacture of seat systems --
Romulus II, MI..................... O 88,200 manufacture of seat systems --
Fenton, MI......................... O 75,800 manufacture of seat systems --
Morristown, TN..................... O 235,900 manufacture of seat components --
Lorain, OH......................... L 42,100 manufacture of seat systems July 1998
Mendon, MI......................... O 168,500 manufacture of seat components --
and other plastic products
Southfield, MI..................... O 65,000 manufacture of seat tooling --
Grand Rapids, MI................... (1) 66,560 manufacture of seat frames --
Southfield, MI..................... O 19,000 technical center --
Louisville, KY..................... L 72,000 manufacture of seat systems January 1995
Janesville, WI..................... O 120,000 manufacture of seat systems --
Fairhaven, MI...................... L 68,603 manufacture of seat covers July 1995
Dearborn, MI....................... L 22,250 engineering offices July 1997
Flint, MI.......................... L 10,083 engineering offices August 1996
Warren, MI......................... L 17,500 engineering offices March 1997
Dearborn, MI....................... L(2) 23,483 engineering offices March 1995
Duncan, SC......................... L(3) 38,926 manufacture of seat systems 10 years from
completion
Lordstown, OH...................... O(3) 96,000 manufacture of seat systems --
Pontiac, MI........................ L(3) 101,600 manufacture of seat systems August 1997
CANADA:
Kitchener, Ontario................. O 343,044 manufacture of seat frames --
Ajax, Ontario...................... O 120,000 manufacture of seat systems --
Whitby, Ontario.................... O 187,400 manufacture of seat systems --
Cowansville, Quebec................ L 50,750 manufacture of seat systems (4)
Oakville, Ontario.................. O 90,000 manufacture of seat systems --
St. Thomas, Ontario................ L(3) 100,000 manufacture of seat systems January 2005
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BUILDING
OWNED/ SQUARE LEASE
FACILITY LEASED FEET FUNCTION EXPIRATION
- ----------------------------------- ------ -------- ------------------------------- ---------------
EUROPE:
Meaux, France...................... O 48,300 manufacture of seat components --
Paris, France...................... L 2,500 administrative offices January 1995
Blere, France...................... O 14,300 manufacture of wire components --
Rietberg, Germany.................. O 193,143 manufacture of seat components --
Rietberg, Germany.................. O 17,635 technical center --
Quakenbruck, Germany............... O 139,500 manufacture of seat components --
Gustavsburg, Germany............... L 177,000 manufacture of seat systems June 2002
Eisenach, Germany.................. O 77,500 manufacture of seat systems --
Schwalbach, Germany................ L 10,500 administrative offices October 1996
Koflach, Austria................... L 63,307 manufacture of seat systems January 1995
Trollhattan, Sweden................ L 135,102 manufacture of seat systems December 1996
Bengtsfors, Sweden................. L 246,726 manufacture of seat systems September 2007
Coventry, England.................. L(5) 22,000 manufacture of seat systems May 1994
MEXICO:
Saltillo I......................... L 91,025 manufacture of seat covers January 1998
Saltillo II........................ L(3) 43,000 manufacture of seat systems July 1994
Mexico City........................ L 6,880 administrative offices June 1997
Tlahuac............................ O 339,000 manufacture of seat components --
L 8,900 warehouse June 1997
Naucalpan.......................... L 66,000 manufacture of seat systems August 1994
Cuautitlan......................... L 75,000 manufacture of seat systems (4)
Puebla............................. L 81,000 manufacture of seat systems (4)
Hermosillo......................... O 121,000 manufacture of seat systems --
Atoto.............................. L 18,275 manufacture of seat systems June 1996
Rio Bravo.......................... O(6) 202,700 manufacture of seat covers --
San Lorenzo........................ O(6) 287,000 manufacture of seat covers --
La Cuesta.......................... O(6) 392,500 manufacture of seat covers --
Omega.............................. L(7) 270,000 manufacture of seat systems November 1994
AFFILIATES OR MINORITY INTERESTS:
Woodstock, Ontario; Canada......... O(8) 120,000 manufacture of seat systems --
Frankfort, Indiana................. O(8) 82,000 manufacture of seat systems --
Khorat; Thailand................... L(8) 30,000 manufacture of seat covers and --
seat systems
Suzano, Sao Paulo; Brazil.......... O(8) 344,448 manufacture of seat components --
Ipiranga, Sao Paulo; Brazil........ L(8) 355,212 manufacture of seat components --
Jaguare, Sao Paulo; Brazil......... L(8) 96,876 manufacture of seat components --
- -------------------------
(1) This facility is operated for General Motors.
(2) A new 75,000 square foot engineering facility is currently under
construction.
(3) Facility currently under construction.
(4) Currently leased on a month-to-month basis pending agreement on a longer
lease term.
(5) A new 42,000 square foot manufacturing facility is currently under
construction, which will be dedicated to the manufacture of seat systems.
(6) Acquired as part of the NAB Acquisition.
(7) On March 15, 1994, the Company exercised an option to cause Ford to purchase
this facility along with a facility in El Jarudo, Mexico in consideration of
Ford cancelling $19.9 million of indebtedness owed by Favesa to Ford. At
that time, the Company vacated the El Jarudo facility and entered into a
lease of the Omega facility which expires on the earlier of November 30,
1994 or the date the Company vacates the Omega facility.
(8) Owned or leased by affiliates or minority interests of the Company.
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ITEM 3 -- LEGAL PROCEEDINGS
Management of the Company does not believe that any of the litigation in
which the Company is currently engaged, either individually or in the aggregate,
will have a material effect on the Company's consolidated financial position or
future results of operations.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites where liability has not been
determined. The Company also may incur indemnification obligations for cleanup
at two sites which are the subject of Superfund proceedings. Management believes
that the Company is, or may be, responsible for less than one percent, if any,
of the total costs at each site. The Company has set aside reserves which
management believes are adequate to cover any such potential liabilities.
Management believes that such matters will not result in liabilities that will
have a material adverse effect on the Company's consolidated financial position
or future results of operations.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 20, 1993, the holders of a majority of the outstanding Common
Stock of Lear Holdings Corporation ("Holdings") approved, by written consent,
the merger (the "Merger") of Holdings with and into the Company, effective as of
December 31, 1993. Pursuant to the Merger, each share of capital stock of
Holdings was exchanged for a like share of capital stock of the Company, and the
Company assumed all of Holdings' contractual and other rights and obligations.
In addition, the directors of Holdings became the directors of the Company upon
consummation of the Merger.
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PART II
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is subject to restrictions on sale and transfer
and there is no established public trading market for the Company's Common
Stock. However, on March 8, 1994, the Company filed a Registration Statement on
Form S-1 relating to an initial public offering of its Common Stock. See
"Business -- Recent Developments."
To date, the Company has never paid a cash dividend on its Common Stock.
Any payment of dividends in the future is dependent upon the financial
condition, capital requirements, earnings of the Company and other factors.
However, the Company currently intends to retain all future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Also the Company
is subject to certain contractual restrictions on the payment of dividends. See
Note 9 to the consolidated financial statements included in Item 8 herein for
information concerning such restrictions.
On February 15, 1994, there were 38 holders of record of the Company's
Common Stock.
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ITEM 6 -- SELECTED FINANCIAL DATA
The following income statement and balance sheet data were derived from the
consolidated financial statements of the Company. The consolidated financial
statements of the Company for the nine months ended June 30, 1989, for each of
the fiscal years ended June 30, 1990, 1991, 1992 and 1993 and for the twelve and
six months ended December 31, 1993 have been audited by Arthur Andersen & Co.
The consolidated financial statements of the Company for the six months ended
January 2, 1993 are unaudited; however, in the Company's opinion, reflect all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and results of operations of the Company
for such period. In February 1994 the Company changed its fiscal year end from
June 30 to December 31 effective December 31, 1993. The results of operations
for any interim period are not necessarily indicative of results of operations
for a full year. The selected financial data below should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company."
NINE TWELVE SIX SIX
MONTHS YEAR YEAR YEAR YEAR MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, JANUARY 2, DECEMBER 31,
1989 1990 1991 1992 1993 1993(1) 1993 1993(1)
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS(2))
OPERATING DATA:
Net sales........... $807,365 $1,067,878 $1,085,319 $1,422,740 $1,756,510 $1,950,288 $ 811,440 $1,005,218
Gross profit........ 81,632 104,707 101,429 115,641 152,499 170,215 54,519 72,235
Selling, general and
administrative
expenses.......... 18,477 28,247 41,596 50,074 61,898 62,717 26,847 27,666
Incentive stock and
other compensation
expense(3)........ 1,107 1,353 1,353 (12) -- 18,016 -- 18,016
Amortization........ 10,174 13,838 13,810 8,746 9,548 9,929 4,374 4,755
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
Operating income.... 51,874 61,269 44,670 56,833 81,053 79,553 23,298 21,798
Interest expense,
net............... 50,982 61,184 61,676 55,158 47,832 45,656 26,943 24,767
Other expense,
net(4)............ 2,141 4,044 2,144 5,837 5,260 9,180 2,676 6,596
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
Income (loss) before
taxes on income
and extraordinary
items............. (1,249) (3,959) (19,150) (4,162) 27,961 24,717 (6,321) (9,565)
Income taxes........ 7,409 16,630 14,019 12,968 17,847 26,864 4,450 13,467
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
Net income (loss)
before
extraordinary
items............. (8,658) (20,589) (33,169) (17,130) 10,114 (2,147) (10,771) (23,032)
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
Extraordinary
items(5).......... -- -- -- (5,100) -- (11,684) -- (11,684)
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
Net income (loss)... $ (8,658) $ (20,589) $ (33,169) $ (22,230) $ 10,114 $ (13,831) $ (10,771) $ (34,716)
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
-------- ---------- ---------- ---------- ---------- ------------ ----------- ------------
Net income (loss)
per share before
extraordinary
items............. $ (16.35) $ (41.18) $ (66.36) $ (20.36) $ 8.33 $ (2.00) $ (10.20) $ (21.41)
Net income (loss)
per share......... $ (16.35) $ (41.18) $ (66.36) $ (26.42) $ 8.33 $ (12.86) $ (10.20) $ (32.27)
Weighted average
shares
outstanding....... 529,640 500,000 499,803 841,464 1,213,608 1,075,758 1,055,660 1,075,758
BALANCE SHEET DATA:
Current assets...... $200,002 $ 223,212 $ 213,806 $ 282,864 $ 325,199 $ 433,584 $ 308,464
Total assets........ 734,582 747,583 729,670 799,884 820,209 1,114,291 809,859
Current
liabilities....... 201,117 254,514 287,111 344,169 374,950 505,717 367,782
Long-term debt...... 433,336 402,800 386,655 348,331 321,116 498,324 331,930
Common stock subject
to limited
redemption rights,
net............... 1,770 1,795 1,770 3,465 3,885 12,435 3,885
Stockholders'
equity............ 48,876 35,292 4,335 49,317 75,101 43,210 53,506
OTHER DATA:
EBITDA(6)........... $ 74,826 $ 94,252 $ 81,428 $ 91,807 $ 121,707 $ 122,112 $ 43,259 $ 43,664
Capital
expenditures...... $ 11,353 $ 14,906 $ 20,892 $ 27,926 $ 31,595 $ 45,915 $ 14,669 $ 28,989
Number of
facilities(7)..... 30 33 40 45 48 61 45 61
North American
Content per
Vehicle(8)........ $ 67 $ 77 $ 84 $ 94 $ 98 $ 112 $ 100 $ 133
North American
vehicle production
(in
millions)(9)...... 10.8 12.4 11.2 12.2 13.6 13.7 5.9 6.1
Inventory Turnover
Ratio(10)......... 27.4 25.6 30.3 36.7 36.0
- -------------------------
(1) On July 1, 1993, the Company adopted SFAS 106 (as defined herein). As a
result, the twelve months and six months ended December 31, 1993 represent
the first periods during which the Company began to incur additional
expense associated with the adoption of SFAS 106. The additional expense
for each of these periods was $3,273.
(2) Except per share data and North American Content per Vehicle.
(3) Includes a one-time charge of $18,016, of which $14,474 is non-cash, for
the twelve and six months ended December 31, 1993 for incentive stock and
other compensation expense (see Note 14 "Warrants, Stock Options and Common
Stock Subject to Redemption" in the consolidated financial statements
included elsewhere in this report on Form 10-K).
(4) Consists of foreign currency exchange gain or loss, minority interest in
net income of subsidiaries, equity (income) loss of affiliates, state and
local taxes and other expense.
(5) The extraordinary items result from the prepayment of debt.
(6) "EBITDA" is operating income plus depreciation and amortization. EBITDA
does not represent and should not be considered as an alternative to net
income or cash flow from operations as determined by generally accepted
accounting principles.
(7) Includes facilities operated by the Company's less than majority-owned
affiliates and facilities under construction.
(8) "North American Content per Vehicle" is the Company's net sales in North
America divided by total North American vehicle production.
(9) "North American vehicle production" includes car and light truck production
in the United States, Canada and Mexico estimated from industry sources.
(10) "Inventory Turnover Ratio" is cost of goods sold divided by average
inventory. The Inventory Turnover Ratio for the twelve months ended
December 31, 1993 excludes the NAB, which was acquired by the Company on
November 1, 1993.
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ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
RESULTS OF OPERATIONS
Lear has expanded its net revenues at an annual compound growth rate of
approximately 27.1% during the period from July 1, 1983 to June 30, 1993. Since
the fiscal year ended June 30, 1990, the Company has increased its net sales by
64.5% by building upon its existing business in the United States and Canada and
significantly expanding its operations in Europe and Mexico.
As a result of significant new business added since the fiscal year ended
June 30, 1990, the Company has experienced substantial upfront costs for new
programs and new facilities. Such costs consist of administrative expenses in
Europe, engineering and design expenses for new seating programs and new
facility costs, including pre-production expenses and inefficiencies incurred
until the customer reaches normal operating levels. New business which has been
added since the fiscal year ended June 30, 1990 includes seat systems for the
GM-Suburban, Saab, Volvo, GM-Opel (2 facilities), Chrysler-Europe, Hyundai and
Volkswagen-Mexico, as well as a seat cover manufacturing facility in Mexico. The
Company expenses such non-recurring pre-production expenses as they are
incurred.
The Company's financial results in the fiscal year ended June 30, 1993
improved over prior fiscal years as a result of improved operating efficiencies
obtained at new facilities which impacted prior fiscal year results unfavorably
and strong performance at established facilities. Together these facilities
offset new program costs associated with the Dodge Ram Pick-up Truck, the Ford
Mustang, the Ford Windstar Minivan and the GM Opel Omega and facility costs
relating to new programs for BMW and Jaguar, which have begun production since
the end of the fiscal year ended June 30, 1993 or will begin production in
calendar year 1994.
The Company's financial results for the fiscal year ended June 30, 1993 do
not include the NAB Acquisition. After giving effect to the NAB Acquisition, the
Company's net sales, EBITDA and operating income for the fiscal year ended June
30, 1993 were approximately $2.2 billion, $171.7 million and $119.8 million,
respectively. See "Business -- NAB Acquisition."
Results for the six months ended December 31, 1993 do not include the NAB
for periods prior to November 1, 1993 and do include additional expense due to
the adoption by the Company of the prospective method of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Post-retirement
Benefits Other than Pensions" ("SFAS 106"). The implementation of SFAS 106 had
an unfavorable impact in the six months ended December 31, 1993 on gross profit
of $2.9 million, operating income of $3.3 million and net income of $3.3
million. See the consolidated financial statements of the Company included
elsewhere in this report on Form 10-K.
The Company's financial results for the twelve and six months ended
December 31, 1993 include a one-time charge of $18.0 million for compensation
expense for past services of certain key management employees, of which $14.5
million was non-cash. Accelerated vesting of incentive management stock options
under the 1992 Stock Option Plan and the issuance of the remaining options under
the 1992 Stock Option Plan to 66 individuals resulted in the one-time non-cash
charge of $14.5 million. Also included in the one-time charge was $3.5 million
of cash compensation expense. The $3.5 million payment was made to 28 of the
Management Investors (as defined herein) in order to assist such individuals in
achieving some liquidity, which in certain instances will enable such
individuals to repay debt incurred in connection with the 1988 Acquisition
without necessitating the sale of any Common Stock.
The Company's performance is dependent on automotive vehicle production,
which is seasonal in nature. The third calendar quarter is historically the
Company's weakest quarter due to the impact of customer plant shutdowns for
vacation and model changeover which affect automotive production in both North
America and Europe. See Note 16 to the consolidated financial statements of the
Company included elsewhere in this report on Form 10-K.
In February 1994, the Company changed its fiscal year end from June 30 to
December 31, effective December 31, 1993.
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23
The following chart shows operating results of the Company by principal
geographic area:
GEOGRAPHIC OPERATING RESULTS
SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JANUARY 2, DECEMBER 31,
1991 1992 1993 1993 1993
---------- ---------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
NET SALES:
United States...................... $ 468,808 $ 597,160 $ 765,652 $ 335,669 $ 551,211
Canada............................. 349,931 403,351 372,045 164,861 168,613
Europe............................. 145,540 268,175 432,546 218,055 189,337
Mexico............................. 121,040 154,054 186,267 92,855 96,057
---------- ---------- ---------- ----------- ------------
Net sales..................... $1,085,319 $1,422,740 $1,756,510 $ 811,440 $1,005,218
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
OPERATING INCOME (LOSS):
United States...................... $ 6,181 $ 32,002 $ 51,752 $ 17,550 $ 27,081
Canada............................. 35,303 14,695 15,308 1,808 12,128
Europe............................. (3,667) 2,952 (3,907) (1,847) (7,608)
Mexico............................. 8,206 7,172 17,900 5,787 8,213
Unallocated corporate expense(1)... (1,353) 12 -- -- (18,016)
---------- ---------- ---------- ----------- ------------
Operating income.............. $ 44,670 $ 56,833 $ 81,053 $ 23,298 $ 21,798
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
- ---------------
(1) Unallocated corporate expense consists of incentive stock option expense and
other one-time compensation expense.
Six Months Ended December 31, 1993 Compared With Six Months Ended January 2,
1993.
Net sales of $1,005.2 million in the six months ended December 31, 1993
surpassed the six months ended January 2, 1993 by $193.8 million or 23.9%
despite the effect of depressed automotive vehicle sales on existing seating
programs in Europe. Net sales benefitted from the purchase of the NAB on
November 1, 1993, new business in the United States and Europe and incremental
volume on established domestic seating programs.
Net sales in the United States of $551.2 million in the six months ended
December 31, 1993 increased by $215.5 million or 64.2% from the comparable
period in the prior year, reflecting $86.0 million in sales from the NAB
Acquisition, improved domestic car and truck production on established seating
programs, incremental sales from new seat programs, including the Dodge Ram
Pick-up Truck and the Ford Mustang, and sales generated by a new lead vendor
program under which the Company assumed management of components for a seat
program with Ford.
Net sales in Canada for the six months ended December 31, 1993 of $168.6
million exceeded sales during the comparable period in the prior year by $3.8
million or 2.3%, reflecting modest vehicle production increases on established
General Motors seat programs. Net sales were adversely impacted by downtime
associated with a General Motors plant conversion necessary for a replacement
mid-size passenger car model introduction. Production for that replacement
program is scheduled to begin in the first quarter of 1994.
Net sales in Europe of $189.3 million in the six months ended December 31,
1993 declined in relation to the six months ended January 2, 1993 by $28.7
million or 13.2% due to reduced vehicle production requirements for carryover
seating programs in Sweden and Finland and unfavorable exchange rate
fluctuations. Partially offsetting the decrease in sales was additional volume
on established seating programs in Germany and Austria.
20
24
Net sales in Mexico of $96.1 million increased in the six month period
ended December 31, 1993 compared to the six month period ended January 2, 1993
due to increased production activity on existing Volkswagen and Chrysler
programs.
Gross profit (net sales less cost of sales) and gross margin (gross profit
as a percentage of net sales) were $72.2 million and 7.2% for the six month
period ended December 31, 1993 as compared to $54.5 million and 6.7% for the
prior comparable period. Gross profit and gross margin in the six month period
ended December 31, 1993 benefitted from the overall increase in North American
automotive production, productivity improvement programs, favorable Canadian
exchange rate fluctuations and the NAB Acquisition. Partially offsetting the
increase in gross profit were reduced capacity utilization in Europe, facility
pre-production costs for seating programs in Canada, England and Germany, the
devaluation of the Swedish krona and severance costs associated with the
downsizing of German component operations. The adoption of SFAS 106 had an
unfavorable impact on gross profit in the six month period ended December 31,
1993 of $2.9 million.
Selling, general and administrative expenses decreased to 2.8% of net sales
for the six months ended December 31, 1993 as compared to 3.3% for the
comparable period in the prior year. While expenditures for the more recent
period increased 3.1%, or $0.8 million, over the earlier period, an increase in
sales led to an overall decrease in these expenses as a percentage of sales.
Primarily contributing to the increase in selling, general and administrative
expenses in the six month period ended December 31, 1993 were design,
development and pre-production costs relating to a new BMW seating program
scheduled to be launched in mid-1994.
Operating income and operating margin (operating income as a percentage of
net sales), before the one-time charge of $18.0 million for incentive stock and
other compensation expense, were $39.1 million and 3.9% for the six months ended
December 31, 1993 compared to $23.3 million and 2.9% during the comparable
period in the prior year. The increase in operating income was due largely to an
overall increase in net sales in North America, including an increase in net
sales as a result of the NAB Acquisition and productivity improvements, which
offset lower margin contribution in Europe and the adoption of SFAS 106.
Non-cash depreciation and amortization charges were $21.9 million and $19.9
million for the six months ended December 31, 1993 and January 2, 1993,
respectively.
Interest expense for the six month period ended December 31, 1993 decreased
by $2.2 million from the comparable period in the prior year primarily due to
the refinancing of certain subordinated and senior debt at lower interest rates,
lower European interest rates, reduced borrowings in Canada and Europe and
reduced amortization of financing fees due to the early extinguishment of debt.
See Note 3, "1994 Refinancing -- Subsequent Event," to the Company's
consolidated financial statements included elsewhere in this report on Form
10-K.
Other expense for the six months ended December 31, 1993, including state
and local taxes, foreign exchange loss, minority interest in income of
subsidiaries and equity in income of affiliates, increased in comparison to the
comparable period in the prior year due to the $4.0 million write-off of
equipment associated with a discontinued Volkswagen program in Germany and
non-seating related assets in the United States.
A loss of $5.0 million, before extraordinary items and the one-time charge
of $18.0 million for incentive stock and other compensation expense, was
recognized for the six months ended December 31, 1993 as compared to a net loss
of $10.8 million in the prior comparable period. The net loss in the six months
ended December 31, 1993 reflects a $13.5 million provision for national income
taxes of which approximately $8.7 million relates to foreign operations. For the
six month period ended December 31, 1993, the Company recognized a net loss of
$34.7 million after giving effect to an extraordinary item for the early
extinguishment of debt of $11.7 million and the one-time charge of $18.0 million
for incentive stock and other compensation expense. The extraordinary item was
comprised of unamortized deferred financing fees expense and a call premium
resulting from the redemption of the 14% Subordinated Debentures, net of related
tax effects.
21
25
Fiscal Year Ended June 30, 1993 Compared With Fiscal Years Ended June 30, 1992
And 1991
Net sales of $1.8 billion in the fiscal year ended June 30, 1993 represents
the Company's twelfth consecutive year of increased sales. Net sales increased
$333.8 million or 23.5% over the fiscal year ended June 30, 1992 and $671.2
million or 61.8% as compared to the fiscal year ended June 30, 1991. Net sales
in the fiscal year ended June 30, 1993 as compared to the fiscal year ended year
ended June 30, 1992 benefitted from new business in the United States and
Europe, full year production of a second facility in Sweden for Volvo, of which
the Company assumed control in November 1991, and incremental volume on domestic
and Mexican programs. In comparison to the fiscal year ended June 30, 1991, net
sales increased in the fiscal year ended June 30, 1992 by $337.4 million or
31.1% due to the contribution of new business in North America and Europe,
volume increases in domestic and foreign carryover programs, including
production of replacement programs, and the acquisition of existing operations
from Saab and Volvo to handle new programs.
Gross profit and gross margin were $152.5 million and 8.7% in the fiscal
year ended June 30, 1993, $115.6 million and 8.1% in the fiscal year ended June
30, 1992 and $101.4 million and 9.3% in the fiscal year ended June 30, 1991.
Gross profit and gross margin in the fiscal year ended June 30, 1993 surpassed
that of the prior fiscal year due to the benefit of incremental volume,
including production of new business programs, productivity improvement programs
and improved operating performance at new facilities in North America, Europe
and Mexico. Partially offsetting the increase in gross profit were participation
in customer cost reduction programs, plant shutdown costs at a dedicated
facility in Finland, nonrecurring favorable foreign exchange effect on sales and
a retroactive price increase recognized in the first and second quarters of the
fiscal year ended June 30, 1992. Gross profit in the fiscal year ended June 30,
1992 increased as compared to the fiscal year ended June 30, 1991 as the overall
growth in sales activity coupled with productivity improvements more than offset
customer cost reduction programs. Comparing the same periods, gross margin
declined as a result of the incurrence of start-up costs at several new
facilities.
Selling, general and administrative expenses as a percentage of net sales
remained unchanged at 3.5% in the fiscal year ended June 30, 1993 as compared to
the prior fiscal year. The increase in actual expenses was largely the result of
increased research and development costs for future seating programs in the
United States, Canada and Europe. Further contributing to the increase in
expenses were administrative support expenses for Mexican operations and costs
associated with the establishment of customer business units in North America.
In comparison to the fiscal year ended June 30, 1991, selling, general and
administrative expenses in the fiscal year ended June 30, 1992 increased due to
design and development costs for future seat systems and technical and
administrative support for new and existing European and Mexican operations.
Operating income and operating margin were $81.1 million and 4.6% in the
fiscal year ended June 30, 1993, $56.8 million and 4.0% in the fiscal year ended
June 30, 1992 and $44.7 million and 4.1% in the fiscal year ended June 30, 1991.
The growth in operating income in the fiscal year ended June 30, 1993 as
compared to the prior fiscal year was due to incremental volume on established
seating programs and improved performance at new seat and seat cover facilities.
Partially offsetting the increase in operating income were pre-production and
facility costs for programs to be introduced after June 30, 1993, plant shutdown
costs and nonrecurring prior fiscal year adjustments noted above. As compared to
the fiscal year ended June 30, 1991, operating income in the fiscal year ended
June 30, 1992 increased due to the benefit of vehicle production increases by
automotive manufacturers on established programs in North America and Europe
which offset customer cost reduction programs and start-up costs associated with
the introduction of new seat systems within established business programs.
Non-cash depreciation and amortization charges were $40.7 million in the fiscal
year ended June 30, 1993, $35.0 million in the fiscal year ended June 30, 1992
and $36.8 million in the fiscal year ended June 30, 1991.
Interest expense in the fiscal year ended June 30, 1993 declined in
relation to the fiscal year ended June 30, 1992 and the fiscal year ended June
30, 1991 due to lower interest rates on bank debt, refinancing of certain
subordinated debt at a lower interest rate and the application of funds received
from the capital infusions initiated on September 27, 1991 and July 30, 1992.
See Notes 4 and 5 of the consolidated financial statements of the Company
included in this report on Form 10-K for additional information regarding these
transactions.
22
26
Other expense, including state and local taxes, foreign exchange gain or
loss, minority interests and equity in income of affiliates, decreased in the
fiscal year ended June 30, 1993 in comparison to the fiscal year ended June 30,
1992 as reduced income derived from joint ventures accounted for under the
equity method coupled with the Company's write-off of its $1.7 million
investment in Probel S.A., a Brazilian company, were more than offset by the
expense portion of nonrecurring capitalization and related costs of $3.2 million
associated with the 1991 Transactions (as defined under "Certain Relationships
and Related Transactions") which were incurred in the fiscal year ended June 30,
1992. Other expense in the fiscal year ended June 30, 1992 increased in
comparison to the fiscal year ended June 30, 1991 due to costs related to the
1991 Transactions.
Net income of $10.1 million was realized in the fiscal year ended June 30,
1993 as compared to a net loss of $22.2 million in the fiscal year ended June
30, 1992. The net income of $10.1 million in the fiscal year ended June 30, 1993
reflects an $11.9 million provision for foreign national income taxes as
compared to an $8.2 million provision in the fiscal year ended June 30, 1992. In
comparison to a net loss of $33.2 million in the fiscal year ended June 30,
1991, the net loss of $22.2 million in the fiscal year ended June 30, 1992
reflects a $13.0 million provision for national income taxes as compared to a
provision of $14.0 million in the previous fiscal year and to a $5.1 million
extraordinary loss on the early retirement of debt.
United States Operations
Net sales in the United States were $765.7 million, $597.2 million and
$468.8 million in the fiscal years ended June 30, 1993, 1992 and 1991,
respectively. Net sales in the fiscal year ended June 30, 1993 surpassed the
fiscal year ended June 30, 1992 due to improved domestic car and truck
production on established seating programs in the second half of the fiscal year
ended June 30, 1993 coupled with a new Ford passenger car program and the
attainment of targeted production levels for a General Motors truck program
introduced in the fall of 1991. Net sales in the fiscal year ended June 30, 1992
reflect vehicle production increases from the prior fiscal year's depressed
operating levels by OEMs on certain established seating programs and the launch
of a new General Motors truck program.
Operating income and operating margin were $51.8 million and 6.8% in the
fiscal year ended June 30, 1993, $32.0 million and 5.4% in the fiscal year ended
June 30, 1992 and $6.2 million and 1.3% in the fiscal year ended June 30, 1991.
The growth in operating income and operating margin was due to the benefits
derived from incremental volume on established and new seating programs,
productivity improvements and improved operating performance at new seat systems
and seat cover facilities. Partially offsetting the increase in operating income
were participation in customer cost reduction programs and preproduction costs
associated with a new seating program scheduled to begin production in mid-1994.
Operating income and operating margin in the fiscal year ended June 30, 1992
increased as compared to the fiscal year ended June 30, 1991 due to the transfer
of component production from Canada in order to benefit from lower operating
costs and incremental volume on established seating programs.
Canadian Operations
Net sales from Canadian operations were $372.0 million in the fiscal year
ended June 30, 1993, $403.4 million in the fiscal year ended June 30, 1992 and
$349.9 million in the fiscal year ended June 30, 1991. Net sales in the fiscal
year ended June 30, 1993 were adversely impacted by market demand and vehicle
inventories as General Motors announced temporary plant shutdowns and production
adjustments on existing passenger car and light truck programs. In comparison to
the fiscal year ended June 30, 1991, net sales in the fiscal year ended June 30,
1992 benefitted from incremental volume on carryover General Motors car and
truck programs and to the launch of a new Hyundai passenger car program, which
was partially offset by the transfer of component production from Canada to the
United States.
Operating income and operating margin were $15.3 million and 4.1% in the
fiscal year ended June 30, 1993, $14.7 million and 3.6% in the fiscal year ended
June 30, 1992 and $35.3 million and 10.1% in the fiscal year ended June 30,
1991. Operating income in the fiscal year ended June 30, 1993 as compared to the
prior fiscal year benefitted from productivity improvement programs, favorable
exchange rate fluctuations and improved operating performance at a new seat
facility. Partially offsetting the increase in operating income were reduced
vehicle production schedules on existing programs and engineering costs
associated with a future Ford seating program. Operating income in the fiscal
year ended June 30, 1992 declined in relation to the
23
27
fiscal year ended June 30, 1991 due to a shift in component production to the
Company's United States facilities in order to take advantage of lower operating
costs, participation in customer cost reduction programs, incremental costs
associated with the start-up of a new seat facility and to design and
development costs related to a future Ford seat system.
European Operations
Net sales in Europe were $432.5 million in the fiscal year ended June 30,
1993, $268.2 million in the fiscal year ended June 30, 1992 and $145.5 million
in the fiscal year ended June 30, 1991. Net sales in the fiscal year ended June
30, 1993 exceeded the prior fiscal year due to the addition of new operations in
Germany and Austria, the full year impact resulting from the acquisition of
facilities in Sweden and Finland and incremental volume on carryover programs in
Germany. Partially offsetting the increase in net sales were reduced vehicle
production schedules for established seating programs in Sweden and unfavorable
exchange rate fluctuations. Net sales in the fiscal year ended June 30, 1992
surpassed net sales in the prior fiscal year due to additional volume on an
existing program in Sweden and the acquisition of facilities in Sweden and
Finland in November 1991 and January 1992, respectively, while demand for
existing programs in Germany remained essentially unchanged.
The Company's European operations sustained an operating loss of $3.9
million in the fiscal year ended June 30, 1993 as compared to operating income
of $3.0 million in the fiscal year ended June 30, 1992 and an operating loss of
$3.7 million in the fiscal year ended June 30, 1991. The $6.9 million
unfavorable variance in the fiscal year ended June 30, 1993 was the result of
lower margin products introduced at an established facility in Germany,
technical and administration costs required to support European manufacturing
facilities, a retroactive price increase recognized in the first half of the
fiscal year ended June 30, 1992 and the devaluation of the Swedish krona, which
was partially offset by the favorable impact of foreign exchange rates. Also
contributing to the decrease in operating income were reserves established by
the Company for the anticipated plant shutdown costs at a dedicated facility in
Finland due to the customer transfer of production to alternative locations in
Europe. Partially offsetting the decrease in operating income was the overall
growth in sales activity, including production from new programs in Germany and
Austria and to the full year contribution of facilities in Sweden and Finland of
which the Company assumed control in the fiscal year ended June 30, 1992.
Operating income of $3.0 million in the fiscal year ended June 30, 1992
increased by $6.6 million as compared to the fiscal year ended June 30, 1991 due
to improved pricing on an existing program, incremental volume on carryover
programs and improved operating performance at an established facility in Sweden
which combined to more than offset pre-production, technical and administrative
costs necessary to support new facilities opened as a result of seating programs
awarded.
Mexican Operations
Net sales in Mexico were $186.3 million in the fiscal year ended June 30,
1993, $154.1 million in the fiscal year ended June 30, 1992 and $121.0 million
in the fiscal year ended June 30, 1991. Net sales in the fiscal year ended June
30, 1993 surpassed the fiscal year ended June 30, 1992 and the fiscal year ended
June 30, 1991 due to increased production activity on established General
Motors, Ford, Volkswagen and Chrysler programs.
Operating income and operating margin in Mexico were $17.9 million and 9.6%
in the fiscal year ended June 30, 1993, $7.2 million and 4.7% in the fiscal year
ended June 30, 1992 and $8.2 million and 6.8% in the fiscal year ended June 30,
1991. The increase in operating income and operating margin in the fiscal year
ended June 30, 1993 as compared to the prior fiscal year was due to the benefit
of additional sales, productivity improvement programs and improved
manufacturing performance at a seat cover facility. Operating income and
operating margin in the fiscal year ended June 30, 1992 declined in relation to
the fiscal year ended June 30, 1991 as a result of the Company's participation
in a customer cost reduction program and incremental start-up costs associated
with a new seat cover facility.
LIQUIDITY AND FINANCIAL CONDITION
On October 25, 1993, the Company amended and restated the Original Credit
Agreement (as amended and restated, the "Credit Agreement"), increasing the
Company's total availability to $425.0 million from
24
28
$150.0 million, reducing the Company's average bank borrowing costs by
approximately 150 basis points and enabling the Company to refinance all of its
then outstanding indebtedness under the Company's Original Credit Agreement, to
retire the GECC Mortgage Loan and to finance a portion of the NAB Acquisition.
As of December 31, 1993, and after giving effect to the 1994 Note Offering, the
Offerings and the application of the net proceeds therefrom, the Company would
have had $178.4 million outstanding under the Credit Agreement ($36.8 million of
which would have been outstanding under letters of credit), resulting in $246.6
million unused and available. The Company also had term loans outstanding in
Germany of approximately $7.6 million.
Of the $230.7 million of borrowings actually outstanding under the Credit
Agreement as of December 31, 1993, $173.4 million related to the NAB
Acquisition. The remaining $57.3 million outstanding related to the early
retirement of term debt during the calendar year 1993.
Amounts available under the Credit Agreement will be reduced by $40.0
million every six months beginning October 31, 1996, and the Credit Agreement
will expire on October 31, 1998. Excluding amounts outstanding under the Credit
Agreement which will be due upon the expiration of the Credit Agreement, the
Company's scheduled principal payments are $1.2 million in calendar year 1994,
$2.4 million in calendar year 1995 and $1.2 million in each of the next three
calendar years.
Net cash provided by operating activities increased to $94.5 million in the
fiscal year ended June 30, 1993, compared to $48.0 million and $33.5 million in
the fiscal years ended June 30, 1992 and 1991, respectively. The increase in
cash flow in the fiscal year ended June 30, 1993 reflected higher operating
earnings and reduced working capital requirements. The reduced working capital
requirements were primarily the result of improved management of inventories,
customer tooling and accounts payable. Inventories declined by 12.0% in the
fiscal year ended June 30, 1993 despite record net sales in that year.
Net cash provided by operating activities increased to $17.1 million during
the six months ended December 31, 1993. Cash flow increases resulted from
improved operating earnings and management of accounts receivable, inventories
and accounts payable, offset by the use of proceeds necessary to finance the
working capital requirement of the NAB.
During the fiscal year ended June 30, 1993 and the six months ended
December 31, 1993, cash generated from operations and funds available under the
Original Credit Agreement were sufficient to meet the Company's debt service and
capital expenditure requirements. The Company believes that cash flows from
operations and funds available from existing credit facilities (principally the
Credit Agreement) will be sufficient to meet its future debt service
obligations, projected capital expenditures and working capital requirements.
Since July 1992, the Company has taken advantage of the favorable interest
rate environment by refinancing a substantial portion of its long-term debt to
reduce its ongoing interest expense. In February 1994, the Company refinanced
$135.0 million in aggregate principal amount of its 14% Subordinated Debentures
by issuing $145.0 million aggregate principal amount of 8 1/4% Subordinated
Notes due 2002. The additional proceeds were used to pay a 5.4% call premium and
a portion of the accrued interest due on the redemption of the 14% Subordinated
Debentures. In July 1992, the Company refinanced $85.0 million in aggregate
principal amount of its 14 1/4% Senior Subordinated Discount Notes by issuing
$125.0 million aggregate principal amount of the Senior Subordinated Notes. The
additional proceeds were used to prepay $15.0 million of term loans and
temporarily reduce outstanding revolving loans under the Original Credit
Agreement and for general corporate purposes.
In the fiscal years ended June 30, 1993 and 1992, gross proceeds of $20.4
and $75.0 million, respectively, were received from the issuance of Common
Stock. The Common Stock proceeds were used to reduce borrowings under the
Original Credit Agreement in each year, as well as fund the Company's expansion.
CAPITAL EXPENDITURES
For the fiscal year ended June 30, 1993, capital expenditures of the
Company were $31.6 million. For the fiscal years ended June 30, 1992 and June
30, 1991, capital expenditures of the Company were $27.9 million
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and $20.9 million, respectively. The Company estimates that it spent, in the
aggregate, between $10.0 million and $15.0 million in the fiscal years ended
June 30, 1992 and 1993, respectively, for equipment replacement and
refurbishment. For the six months ended December 31, 1993, capital expenditures
of the Company were $29.0 million. The Company anticipates that during the
fiscal year ending December 31, 1994, capital expenditures will aggregate
approximately $60.0 million, of which approximately $35.0 million will relate to
the addition of new facilities and the completion of previously started
facilities required to support new seat systems programs. The remainder will be
used to establish new programs in existing facilities and for ongoing
maintenance requirements. The Company anticipates that cash generated from
operations and borrowings under the Credit Agreement will provide sufficient
funds for planned capital expenditures.
ENVIRONMENTAL MATTERS
The Company is subject to local, state, federal and foreign laws,
regulations and ordinances (i) which govern activities or operations that may
have adverse environmental effects and (ii) that impose liability for the costs
of cleaning up and certain damages resulting from sites of past spills, disposal
or other releases of hazardous substances. The Company currently is engaged in
the cleanup of hazardous substances at certain sites owned, leased or operated
by the Company, including soil and groundwater cleanup at its facility in
Mendon, Michigan. Management believes that the Company will not incur compliance
costs or cleanup costs at its facilities with known contamination that would
have a material adverse effect on the Company's consolidated financial position
or future results of operations.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites where liability has not been
determined. The Company also may incur indemnification obligations for cleanup
at two sites which are the subject of Superfund proceedings. Management believes
that the Company is, or may be, responsible for less than one percent, if any,
of the total costs at each site. The Company has set aside reserves which
management believes are adequate to cover any such potential liabilities.
Management believes that such matters will not result in liabil