e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 3, 2010.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-11311
LEAR CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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13-3386776
(I.R.S. Employer Identification No.) |
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21557 Telegraph Road, Southfield, MI
(Address of principal executive offices)
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48033
(Zip code) |
(248) 447-1500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 of 15(d) of the Securities and Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
As of May 12, 2010, the number of shares outstanding of the registrant’s common stock was
46,688,247 shares.
LEAR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED APRIL 3, 2010
INDEX
2
LEAR CORPORATION
PART I — FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the condensed consolidated financial statements of Lear Corporation and
subsidiaries, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are
adequate to make the information presented not misleading when read in conjunction with the
financial statements and the notes thereto included in our Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission, for the year ended December 31, 2009.
The financial information presented reflects all adjustments (consisting of normal recurring
adjustments) which are, in our opinion, necessary for a fair presentation of the results of
operations, cash flows and financial position for the interim periods presented. These results are
not necessarily indicative of a full year’s results of operations.
3
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
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Successor |
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April 3, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
1,300.4 |
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$ |
1,554.0 |
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Accounts receivable |
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1,874.3 |
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1,479.9 |
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Inventories |
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499.6 |
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447.4 |
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Other |
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337.5 |
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305.7 |
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Total current assets |
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4,011.8 |
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3,787.0 |
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LONG-TERM ASSETS: |
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Property, plant and equipment, net |
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1,005.2 |
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1,050.9 |
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Goodwill |
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609.5 |
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621.4 |
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Other |
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606.8 |
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614.0 |
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Total long-term assets |
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2,221.5 |
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2,286.3 |
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$ |
6,233.3 |
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$ |
6,073.3 |
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES: |
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Short-term borrowings |
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$ |
42.9 |
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$ |
37.1 |
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Accounts payable and drafts |
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1,802.1 |
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1,547.5 |
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Accrued liabilities |
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897.9 |
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808.1 |
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Current portion of long-term debt |
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2.9 |
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8.1 |
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Total current liabilities |
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2,745.8 |
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2,400.8 |
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LONG-TERM LIABILITIES: |
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Long-term debt |
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699.2 |
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927.1 |
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Other |
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547.0 |
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563.6 |
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Total long-term liabilities |
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1,246.2 |
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1,490.7 |
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EQUITY: |
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Series A convertible preferred stock, 100,000,000 shares authorized;
10,896,250 shares issued as of April 3, 2010 and December 31, 2009;
5,174,247 and 9,881,303 shares outstanding as of April 3, 2010 and
December 31, 2009, respectively |
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213.7 |
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408.1 |
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Common stock, $0.01 par value, 300,000,000 shares authorized;
44,365,551 and 36,954,733 shares issued and outstanding as of
April 3, 2010 and December 31, 2009, respectively |
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0.4 |
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0.4 |
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Additional paid-in capital, including warrants to purchase common stock |
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1,886.7 |
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1,685.7 |
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Common stock held in treasury, 27,162 shares as of
April 3, 2010, at cost |
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(1.8 |
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— |
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Retained earnings (deficit) |
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62.3 |
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(3.8 |
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Accumulated other comprehensive loss |
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(26.6 |
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(1.3 |
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Lear Corporation stockholders’ equity |
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2,134.7 |
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2,089.1 |
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Noncontrolling interests |
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106.6 |
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92.7 |
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Equity |
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2,241.3 |
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2,181.8 |
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$ |
6,233.3 |
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$ |
6,073.3 |
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The accompanying notes are an integral part of these condensed consolidated balance sheets.
4
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share data)
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Three Months Ended |
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Successor |
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Predecessor |
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April 3, |
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April 4, |
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2010 |
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2009 |
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Net sales |
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$ |
2,938.5 |
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$ |
2,168.3 |
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Cost of sales |
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2,683.7 |
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2,243.0 |
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Selling, general and administrative expenses |
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127.9 |
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112.1 |
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Amortization of intangible assets |
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6.7 |
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1.1 |
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Interest expense |
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19.0 |
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56.4 |
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Other expense, net |
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21.0 |
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12.8 |
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Consolidated income (loss) before provision for income taxes |
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80.2 |
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(257.1 |
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Provision for income taxes |
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6.4 |
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5.7 |
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Consolidated net income (loss) |
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73.8 |
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(262.8 |
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Less: Net income attributable to noncontrolling interests |
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7.7 |
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2.0 |
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Net income (loss) attributable to Lear |
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$ |
66.1 |
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$ |
(264.8 |
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Basic net income (loss) per share attributable to Lear |
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$ |
1.58 |
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$ |
(3.42 |
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Diluted net income (loss) per share attributable to Lear |
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$ |
1.22 |
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$ |
(3.42 |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
LEAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
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Three Months Ended |
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Successor |
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Predecessor |
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April 3, 2010 |
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April 4, 2009 |
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Cash Flows from Operating Activities: |
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Consolidated net income (loss) |
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$ |
73.8 |
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$ |
(262.8 |
) |
Adjustments to reconcile consolidated net income (loss)
to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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58.5 |
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65.6 |
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Net change in recoverable customer engineering, development
and tooling |
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2.0 |
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6.3 |
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Net change in working capital items |
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(99.5 |
) |
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(53.6 |
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Net change in sold accounts receivable |
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— |
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(138.5 |
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Other, net |
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4.1 |
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46.2 |
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Net cash provided by (used in) operating activities |
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38.9 |
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(336.8 |
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Cash Flows from Investing Activities: |
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Additions to property, plant and equipment |
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(34.8 |
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(20.7 |
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Other, net |
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4.1 |
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8.4 |
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Net cash used in investing activities |
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(30.7 |
) |
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(12.3 |
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Cash Flows from Financing Activities: |
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Proceeds from the issuance of senior notes |
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694.5 |
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— |
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First lien credit agreement repayments |
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(375.0 |
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— |
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Second lien credit agreement repayments |
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(550.0 |
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— |
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Other long-term debt repayments, net |
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(1.7 |
) |
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(1.3 |
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Short-term debt borrowings (repayments), net |
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5.6 |
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(2.8 |
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Payment of debt issuance costs |
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(16.3 |
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(7.8 |
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Dividends paid to noncontrolling interests |
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— |
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(3.2 |
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Increase in drafts |
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0.4 |
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1.5 |
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Net cash used in financing activities |
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(242.5 |
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(13.6 |
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Effect of foreign currency translation |
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(19.3 |
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4.9 |
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Net Change in Cash and Cash Equivalents |
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(253.6 |
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(357.8 |
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Cash and Cash Equivalents as of Beginning of Period |
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1,554.0 |
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1,592.1 |
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Cash and Cash Equivalents as of End of Period |
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$ |
1,300.4 |
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$ |
1,234.3 |
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Changes in Working Capital Items: |
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Accounts receivable |
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$ |
(418.3 |
) |
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$ |
(22.2 |
) |
Inventories |
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(60.0 |
) |
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58.7 |
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Accounts payable |
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291.9 |
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(132.3 |
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Accrued liabilities and other |
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86.9 |
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42.2 |
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Net change in working capital items |
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$ |
(99.5 |
) |
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$ |
(53.6 |
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Supplementary Disclosure: |
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Cash paid for interest |
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$ |
29.1 |
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$ |
32.4 |
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Cash paid for income taxes |
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$ |
5.2 |
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$ |
24.0 |
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The accompanying notes are an integral part of these condensed consolidated statements.
6
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Lear Corporation (“Lear” and together with consolidated subsidiaries, the “Company”) and its
affiliates design and manufacture complete automotive seat systems and related components, as well
as electrical power management systems. Lear’s main customers are automotive original equipment
manufacturers. Lear operates facilities worldwide.
On November 9, 2009, Lear and certain of its U.S. and Canadian subsidiaries emerged from bankruptcy
proceedings under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). In accordance
with the provisions of FASB Accounting Standards CodificationTM (“ASC”) 852,
“Reorganizations,” Lear adopted fresh-start accounting upon its emergence from Chapter 11
bankruptcy proceedings and became a new entity for financial reporting purposes as of November 7,
2009. Accordingly, the consolidated financial statements for the reporting entity subsequent to
emergence from Chapter 11 bankruptcy proceedings (the “Successor”) are not comparable to the
consolidated financial statements for the reporting entity prior to emergence from Chapter 11
bankruptcy proceedings (the “Predecessor”). The “Company,” when used in reference to the period
subsequent to emergence from Chapter 11 bankruptcy proceedings, refers to the Successor, and when
used in reference to periods prior to emergence from Chapter 11 bankruptcy proceedings, refers to
the Predecessor. For further information, see Note 1, “Basis of Presentation,” and Note 2,
“Reorganization under Chapter 11,” to the consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The accompanying condensed consolidated financial statements include the accounts of Lear, a
Delaware corporation, and the wholly owned and less than wholly owned subsidiaries controlled by
Lear. In addition, Lear consolidates variable interest entities in which it bears a majority of
the risk of the entities’ potential losses or stands to gain from a majority of the entities’
expected returns and generally has voting control over these entities as well. Investments in
affiliates in which Lear does not have control, but does have the ability to exercise significant
influence over operating and financial policies, are accounted for under the equity method.
Certain amounts in the prior period’s financial statements have been reclassified to conform to the
presentation used in the quarter ended April 3, 2010.
(2) Restructuring Activities
In 2005, the Company initiated a three-year restructuring strategy to (i) eliminate excess capacity
and lower the operating costs of the Company, (ii) streamline the Company’s organizational
structure and reposition its business for improved long-term profitability and (iii) better align
the Company’s manufacturing footprint with the changing needs of its customers. In light of
industry conditions and customer announcements, the Company expanded this strategy, and through the
end of 2009, the Company incurred pretax restructuring costs of $672.2 million. In the first
quarter of 2010, the Company continued to restructure its global operations and to aggressively
reduce its costs. The Company expects accelerated restructuring actions and related investments to
continue for the next few years.
Restructuring costs include employee termination benefits, fixed asset impairment charges and
contract termination costs, as well as other incremental costs resulting from the restructuring
actions. These incremental costs principally include equipment and personnel relocation costs.
The Company also incurs incremental manufacturing inefficiency costs at the operating locations
impacted by the restructuring actions during the related restructuring implementation period.
Restructuring costs are recognized in the Company’s consolidated financial statements in accordance
with accounting principles generally accepted in the United States (“GAAP”). Generally, charges
are recorded as elements of the restructuring strategy are finalized.
In the first quarter of 2010, the Company recorded charges of $12.7 million in connection with its
restructuring actions. These charges consist of $12.5 million recorded as cost of sales and $0.2
million recorded as selling, general and administrative expenses. The first quarter 2010 charges
consist of employee termination benefits of $8.3 million, asset impairment charges of $2.6 million
and other related costs of $1.8 million. Employee termination benefits were recorded based on
existing union and employee contracts, statutory requirements and completed negotiations. Asset
impairment charges relate to the disposal of buildings, leasehold improvements and machinery and
equipment with carrying values of $2.6 million in excess of related estimated fair values.
7
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of 2010 activity is shown below (in millions):
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Accrual as of |
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2010 |
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Utilization |
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Accrual as of |
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January 1, 2010 |
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Charges |
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Cash |
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Non-cash |
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April 3, 2010 |
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Initial Restructuring Strategy: |
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Employee termination benefits |
|
$ |
11.2 |
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$ |
— |
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$ |
(0.1 |
) |
|
$ |
— |
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$ |
11.1 |
|
Contract termination costs |
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2.0 |
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— |
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— |
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— |
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2.0 |
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13.2 |
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— |
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(0.1 |
) |
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— |
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13.1 |
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Other Restructuring Initiatives: |
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Employee termination benefits |
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68.6 |
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8.3 |
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(42.8 |
) |
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|
— |
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|
34.1 |
|
Asset impairments |
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— |
|
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|
2.6 |
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|
— |
|
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(2.6 |
) |
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— |
|
Contract termination costs |
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|
1.3 |
|
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|
— |
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|
— |
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— |
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|
1.3 |
|
Other related costs |
|
|
— |
|
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|
1.8 |
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(1.8 |
) |
|
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— |
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— |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
69.9 |
|
|
|
12.7 |
|
|
|
(44.6 |
) |
|
|
(2.6 |
) |
|
|
35.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83.1 |
|
|
$ |
12.7 |
|
|
$ |
(44.7 |
) |
|
$ |
(2.6 |
) |
|
$ |
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. Finished goods and work-in-process inventories include material, labor and
manufacturing overhead costs. A summary of inventories is shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
April 3, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Raw materials |
|
$ |
415.1 |
|
|
$ |
378.7 |
|
Work-in-process |
|
|
28.8 |
|
|
|
26.1 |
|
Finished goods |
|
|
55.7 |
|
|
|
42.6 |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
499.6 |
|
|
$ |
447.4 |
|
|
|
|
|
|
|
|
(4) Property, Plant and Equipment
Property, plant and equipment is stated at cost; however, as a result of the adoption of
fresh-start accounting, property, plant and equipment was re-measured at estimated fair value as of
November 7, 2009 (for further information, see Note 3, “Fresh-Start Accounting,” to the
consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009). Depreciable property is depreciated over the estimated useful lives of
the assets, using principally the straight-line method. A summary of property, plant and equipment
is shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
April 3, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Land |
|
$ |
109.9 |
|
|
$ |
114.9 |
|
Buildings and improvements |
|
|
359.0 |
|
|
|
358.4 |
|
Machinery and equipment |
|
|
619.6 |
|
|
|
608.3 |
|
Construction in progress |
|
|
3.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
1,092.4 |
|
|
|
1,086.1 |
|
Less – accumulated depreciation |
|
|
(87.2 |
) |
|
|
(35.2 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
$ |
1,005.2 |
|
|
$ |
1,050.9 |
|
|
|
|
|
|
|
|
Depreciation expense was $51.8 million and $64.5 million in the three months ended April 3, 2010
and April 4, 2009, respectively.
Costs associated with the repair and maintenance of the Company’s property, plant and equipment are
expensed as incurred. Costs associated with improvements which extend the life, increase the
capacity or improve the efficiency or safety of the Company’s property, plant and equipment are
capitalized and depreciated over the remaining life of the related asset.
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in
accordance with GAAP. If impairment indicators exist, the Company performs the required impairment
analysis by comparing the undiscounted cash flows expected to be generated by the long-lived assets
to the related net book values. If the net book value exceeds the undiscounted cash flows, an
8
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
impairment loss is measured and recognized. The Company does not believe that there were any
indicators that would have resulted in additional long-lived asset impairment charges as of April
3, 2010. The Company will, however, continue to assess the impact of any significant industry
events and long-term automotive production estimates on the realization of its long-lived assets.
(5) Goodwill
A summary of the changes in the carrying amount of goodwill, all of which relates to the seating
systems segment, for the three months ended April 3, 2010, is shown below (in millions):
| |
|
|
|
|
|
Balance as of January 1, 2010 |
|
$ |
621.4 |
|
Foreign currency translation |
|
|
(11.9 |
) |
|
|
|
|
Balance as of April 3, 2010 |
|
$ |
609.5 |
|
|
|
|
|
Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment
testing is required more often than annually if an event or circumstance indicates that an
impairment is more likely than not to have occurred. In conducting its impairment testing, the
Company compares the fair value of each of its reporting units to the related net book value. If
the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and
recognized. The Company conducts its annual impairment testing as of the first day of the fourth
quarter.
The Company does not believe that there were any indicators that would have resulted in goodwill
impairment charges as of April 3, 2010. The Company will, however, continue to assess the impact
of any significant industry events and long-term automotive production estimates on its recorded
goodwill.
(6) Long-Term Debt
A summary of long-term debt and the related weighted average interest rates is shown below (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
April 3, 2010 |
|
|
December 31, 2009 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
Long-Term |
|
|
Average |
|
|
Long-Term |
|
|
Average |
|
| |
|
Debt |
|
|
Interest Rate |
|
|
Debt |
|
|
Interest Rate |
|
7.875% Senior Notes due 2018 |
|
$ |
347.4 |
|
|
|
8.00 |
% |
|
$ |
— |
|
|
|
N/A |
|
8.125% Senior Notes due 2020 |
|
|
347.1 |
|
|
|
8.25 |
% |
|
|
— |
|
|
|
N/A |
|
First Lien Credit Agreement |
|
|
— |
|
|
|
N/A |
|
|
|
375.0 |
|
|
|
7.50 |
% |
Second Lien Credit Agreement |
|
|
— |
|
|
|
N/A |
|
|
|
550.0 |
|
|
|
9.00 |
% |
Other |
|
|
7.6 |
|
|
|
0.55 |
% |
|
|
10.2 |
|
|
|
2.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
702.1 |
|
|
|
|
|
|
|
935.2 |
|
|
|
|
|
Less – Current portion |
|
|
(2.9 |
) |
|
|
|
|
|
|
(8.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
699.2 |
|
|
|
|
|
|
$ |
927.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
On March 26, 2010, the Company issued $350 million in aggregate principal amount at maturity of
unsecured 7.875% senior notes due 2018 (the “2018 Notes”) and $350 million in aggregate principal
amount at maturity of unsecured 8.125% senior notes due 2020 (the “2020 Notes” and together with
the 2018 Notes, the “Notes”), yielding gross proceeds of $694.5 million (net proceeds were $681.4
million, after giving effect to the payment of underwriting costs of $13.1 million). The 2018
Notes were priced at 99.276% of par, resulting in a yield to maturity of 8.00%, and the 2020 Notes
were priced at 99.164% of par, resulting in a yield to maturity of 8.25%. The Notes were offered
and sold pursuant to the Company’s shelf registration statement on Form S-3 filed with the
Securities and Exchange Commission on March 22, 2010. The net proceeds from the issuance of the
Notes, together with existing cash on hand, were used to repay in full an aggregate amount of
$925.0 million of term loans provided under the Company’s first and second lien credit agreements.
Interest is payable on the Notes on March 15 and September 15 of each year, beginning September 15,
2010. The 2018 Notes mature on March 15, 2018, and the 2020 Notes mature on March 15, 2020.
The Company may redeem all or part of the Notes, at its option, at any time on or after March 15,
2014, in the case of the 2018 Notes, and March 15, 2015, in the case of the 2020 Notes, at the
redemption prices set forth below, plus accrued and unpaid interest to the redemption date.
9
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| |
|
|
|
|
|
|
|
|
| Twelve-Month Period Commencing March 15, |
|
2018 Notes |
|
|
2020 Notes |
|
2014 |
|
|
103.938 |
% |
|
|
N/A |
|
2015 |
|
|
101.969 |
% |
|
|
104.063 |
% |
2016 |
|
|
100.0 |
% |
|
|
102.708 |
% |
2017 |
|
|
100.0 |
% |
|
|
101.354 |
% |
2018 and thereafter |
|
|
100.0 |
% |
|
|
100.0 |
% |
Prior to March 15, 2013, the Company may redeem up to 35% of the original aggregate principal
amount of the 2018 Notes and the 2020 Notes at a price equal to 107.875% and 108.125%,
respectively, of the principal amount thereof, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds of one or more equity offerings, provided that at least 65% of the
original aggregate principal amount of each series of Notes remains outstanding after the
redemption. The Company may also redeem all or part of the Notes at any time prior to March 15,
2014, in the case of the 2018 Notes, and March 15, 2015, in the case of the 2020 Notes, at a price
equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption
date and a “make-whole” premium. In addition, the Company may redeem up to 10% of the original
aggregate principal amount of each series of Notes during any 12-month period prior to March 15,
2014, in the case of the 2018 Notes, and March 15, 2015, in the case of the 2020 Notes, at a price
equal to 103% of the principal amount thereof, plus accrued and unpaid interest to the redemption
date.
Subject to certain limitations, in the event of a change of control of the Company, the Company
will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the
principal amount of the Notes, plus accrued and unpaid interest to the date of purchase.
The Notes are senior unsecured obligations. The Company’s obligations under the Notes are fully
and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain
domestic subsidiaries, which are directly or indirectly 100% owned by Lear (Note 18, “Supplemental
Guarantor Condensed Consolidating Financial Statements”).
The indenture governing the Notes contains restrictive covenants that, among other things, limit
the ability of the Company and its subsidiaries to: (i) incur additional debt, (ii) pay dividends
and make other restricted payments, (iii) create or permit certain liens, (iv) issue or sell
capital stock of the Company’s restricted subsidiaries, (v) use the proceeds from sales of assets
and subsidiary stock, (vi) create or permit restrictions on the ability of the Company’s restricted
subsidiaries to pay dividends or make other distributions to the Company, (vii) enter into
transactions with affiliates, (viii) enter into sale and leaseback transactions and
(ix) consolidate or merge or sell all or substantially all of the Company’s assets. The foregoing
limitations are subject to exceptions as set forth in the Notes. In addition, if in the future the
Notes have an investment grade credit rating from both Moody’s Investors Service and Standard &
Poor’s Ratings Services and no default has occurred and is continuing, certain of these covenants
will, thereafter, no longer apply to the Notes for so long as the Notes have an investment grade
credit rating by both rating agencies. As of April 3, 2010, the Company was in compliance with all
covenants under the indenture governing the Notes.
The indenture governing the Notes contains customary events of default that include, among other
things (subject in certain cases to customary grace and cure periods): (i) non-payment of principal
or interest, (ii) breach of certain covenants contained in the indenture governing the Notes, (iii)
failure to pay certain other indebtedness or the acceleration of certain other indebtedness prior
to maturity if the total amount of such indebtedness unpaid or accelerated exceeds $100 million or
its foreign currency equivalent, (iv) the rendering of a final and nonappealable judgment for the
payment of money in excess of $100 million or its foreign currency equivalent that is not timely
paid or its enforcement stayed, (v) the failure of the guarantees by the subsidiary guarantors to
be in full force and effect in all material respects and (vi) certain events of bankruptcy or
insolvency. Generally, if an event of default occurs (subject to certain
exceptions), the trustee or the holders of at least 25% in aggregate principal amount of the then
outstanding Notes of any series may declare all of the Notes of such series to be due and payable
immediately.
First and Second Lien Credit Agreements
In connection with the Company’s emergence from Chapter 11 bankruptcy proceedings, the Company
entered into a first lien credit agreement and a second lien credit agreement in the fourth quarter
of 2009. As of December 31, 2009, the Company had $375.0 million and $550.0 million of term loans
outstanding under the first lien credit agreement and the second lien credit agreement,
respectively.
10
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Effective March 19, 2010, the Company entered into an amendment and restatement of the first lien
credit agreement (as amended, restated or otherwise modified, the “first lien credit agreement”),
which provides for a $110 million revolving credit facility (the “Revolving Credit Facility”). The
Revolving Credit Facility permits borrowings for general corporate and working capital purposes and
the issuance of letters of credit. The commitments under the Revolving Credit Facility expire on
March 19, 2013.
Advances under the Revolving Credit Facility bear interest at a variable rate per annum equal to
(i) LIBOR, as adjusted for certain statutory reserves, plus an adjustable margin based on the
Company’s corporate rating, 4.25% as of the date of this Report, payable on the last day of each
applicable interest period but in no event less frequently than quarterly, or (ii) the Adjusted
Base Rate (as defined in the first lien credit agreement) plus an adjustable margin based on the
Company’s corporate rating, 3.25% as of the date of this Report, payable quarterly.
The Revolving Credit Facility contains various customary representations, warranties and covenants
by the Company, including, without limitation, (i) covenants regarding maximum leverage and minimum
interest coverage, (ii) limitations on the amount of capital expenditures, (iii) limitations on
fundamental changes involving the Company or its subsidiaries and (iv) limitations on indebtedness
and liens. As of April 3, 2010, there were no borrowings outstanding under the Revolving Credit
Facility, and the Company was in compliance with all covenants set forth in the agreement governing
the Revolving Credit Facility.
Also on March 19, 2010, the Company amended the first lien credit agreement, which facilitated,
among other things, the issuance of the Notes and in connection therewith, permitted the
application of the net proceeds of such Notes offering to prepay amounts outstanding under the
second lien credit agreement and the application of the Company’s existing cash on hand to prepay
remaining amounts outstanding under the second lien credit agreement. The amendment also provides
for the repurchase of certain amounts of the Notes and for a limited amount of cash dividend
payments or repurchases of the Company’s common stock, when certain terms and conditions are met.
As discussed above, the Company used the net proceeds from the issuance of the Notes, together with
its existing cash on hand, to repay in full all amounts outstanding under the term loans provided
under the Company’s first and second lien credit agreements. In connection with the issuance of
the Notes, the repayment of the term loans and the related amendments to the first lien credit
agreement, the Company recognized a loss on the extinguishment of debt of $11.8 million, resulting
from the write-off of unamortized debt issuance costs, and paid debt issuance costs of $16.3
million. The loss on the extinguishment of debt is recorded in other expense, net. See Note 9,
“Other Expense, Net.”
(7) Pension and Other Postretirement Benefit Plans
Net Periodic Benefit Cost
The components of the Company’s net periodic benefit cost are shown below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension |
|
|
Other Postretirement |
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
| |
|
Successor |
|
|
Predecessor |
|
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
2.1 |
|
|
$ |
2.4 |
|
|
$ |
0.3 |
|
|
$ |
0.6 |
|
Interest cost |
|
|
12.4 |
|
|
|
11.1 |
|
|
|
2.2 |
|
|
|
2.8 |
|
Expected return on plan assets |
|
|
(13.7 |
) |
|
|
(9.7 |
) |
|
|
— |
|
|
|
— |
|
Amortization of actuarial loss |
|
|
— |
|
|
|
1.5 |
|
|
|
— |
|
|
|
0.1 |
|
Amortization of transition obligation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
Amortization of prior service cost (credit) |
|
|
— |
|
|
|
1.4 |
|
|
|
— |
|
|
|
(1.8 |
) |
Curtailment loss |
|
|
— |
|
|
|
37.3 |
|
|
|
— |
|
|
|
— |
|
Settlement (gain) loss |
|
|
(0.1 |
) |
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
Special termination benefits |
|
|
— |
|
|
|
20.2 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
0.7 |
|
|
$ |
64.7 |
|
|
$ |
2.5 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2009, the Company recorded pension plan curtailment losses and special
termination benefits of $57.1 million resulting from employee terminations associated with the
Company’s restructuring activities.
11
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Contributions
Employer contributions to the Company’s domestic and foreign pension plans for the three months
ended April 3, 2010, were $2.8 million, in aggregate. Based on minimum funding requirements, the
Company expects required additional contributions of $25 to $30 million, in aggregate, to its
domestic and foreign pension plans in 2010. The Company may elect to make contributions in excess
of minimum funding requirements in response to investment performance and changes in interest
rates, to achieve funding levels required by the Company’s defined benefit plan arrangements or
when the Company believes it is financially advantageous to do so and based on its other capital
requirements.
In addition, contributions to the Company’s defined contribution retirement program for its
salaried employees, determined as a percentage of each covered employee’s eligible compensation,
are expected to be approximately $10 million in 2010.
New Legislation
In March 2010, the Patient Protection and Affordable Care Act and the Health Care Education and
Affordability Reconciliation Act (the “Acts”) were signed into law. The Acts contain provisions
which could impact the Company’s accounting for retiree medical benefits in future periods. The
Company has completed an initial assessment of the Acts, and based on the analysis to date, the
provisions of the Acts which are reasonably determinable are not expected to have a material impact
on the Company’s other postretirement benefit plans. Accordingly, a remeasurement of the Company’s
postretirement benefit obligation is not required at this time. The Company will continue to
assess the provisions of the Acts and may consider plan amendments in future periods to respond to
the provisions of the Acts.
(8) Cost of Sales and Selling, General and Administrative Expenses
Cost of sales includes material, labor and overhead costs associated with the manufacture and
distribution of the Company’s products. Distribution costs include inbound freight costs,
purchasing and receiving costs, inspection costs, warehousing costs and other costs of the
Company’s distribution network. Selling, general and administrative expenses include selling,
engineering and development and administrative costs not directly associated with the manufacture
and distribution of the Company’s products.
(9) Other Expense, Net
Other expense, net includes non-income related taxes, foreign exchange gains and losses, discounts
and expenses associated with the Company’s factoring facilities, gains and losses related to
derivative instruments and hedging activities, equity in net income (loss) of affiliates, gains and
losses on the sales of assets and other miscellaneous income and expense. A summary of other
expense, net is shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Other expense |
|
$ |
22.3 |
|
|
$ |
27.2 |
|
Other income |
|
|
(1.3 |
) |
|
|
(14.4 |
) |
|
|
|
|
|
|
|
Other expense, net |
|
$ |
21.0 |
|
|
$ |
12.8 |
|
|
|
|
|
|
|
|
For the three months ended April 3, 2010, other expense includes a loss on the extinguishment of
debt of $11.8 million, resulting from the write-off of unamortized debt issuance costs, and foreign
exchange losses of $7.5 million. For the three months ended April 4, 2009, other expense includes
equity in net loss of affiliates of $19.2 million and losses of $3.0 million related to derivative
instruments and hedging activities, while other income includes foreign exchange gains of $11.0
million.
(10) Income Taxes
The provision for income taxes was $6.4 million in the first quarter of 2010, representing an
effective tax rate of 8.0% on pretax income of $80.2 million, as compared to $5.7 million in the
first quarter of 2009, representing an effective tax rate of negative 2.2% on a pretax loss of
$257.1 million.
In the first quarter of 2010, the provision for income taxes was impacted by the mix of earnings
among tax jurisdictions, as well as a tax benefit of $17.7 million, including interest, related to
reductions in recorded tax reserves. The provision was also impacted by a portion of the Company’s
restructuring charges and other expenses, for which no tax benefit was provided as the charges were
incurred in certain countries for which no tax benefit is likely to be realized due to a history of
operating losses in those countries. In
12
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the first quarter of 2009, the provision for income taxes primarily relates to profitable foreign
operations, as well as withholding taxes on royalties and dividends paid by the Company’s foreign
subsidiaries. In addition, the Company incurred losses in several countries that provided no tax
benefits due to valuation allowances on its deferred tax assets in those countries. The provision
was also impacted by a portion of the Company’s restructuring charges, for which no tax benefit was
provided as the charges were incurred in certain countries for which no tax benefit is likely to be
realized due to a history of operating losses in those countries. Additionally, the provision was
impacted by tax benefits of $9.6 million, including interest, related to reductions in recorded tax
reserves and tax expense of $5.5 million related to the establishment of valuation allowances in
certain foreign subsidiaries. Excluding these items, the effective tax rate in the first quarters
of 2010 and 2009 approximated the U.S. federal statutory income tax rate of 35% adjusted for income
taxes on foreign earnings, losses and remittances, foreign and U.S. valuation allowances, tax
credits, income tax incentives and other permanent items.
Further, the Company’s current and future provision for income taxes is significantly impacted by
the initial recognition of and changes in valuation allowances in certain countries, particularly
the United States. The Company intends to maintain these allowances until it is more likely than
not that the deferred tax assets will be realized. The Company’s future income taxes will include
no tax benefit with respect to losses incurred and no tax expense with respect to income generated
in these countries until the respective valuation allowances are eliminated. Accordingly, income
taxes are impacted by the U.S. and foreign valuation allowances and the mix of earnings among
jurisdictions.
In connection with the Company’s emergence from Chapter 11 bankruptcy proceedings, the Company was
able to retain a significant portion of its U.S. net operating loss, capital loss and tax credit
carryforwards (collectively, the “Tax Attributes”). However, Internal Revenue Code (“IRC”)
Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to
utilize its Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income
in the event of a change in ownership. The Company’s emergence from Chapter 11 bankruptcy
proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation
under the IRC is based on the value of the corporation as of the emergence date. As a result, the
Company’s future U.S. taxable income may not be fully offset by the Tax Attributes if such income
exceeds its annual limitation, and the Company may incur a tax liability with respect to such
income. In addition, subsequent changes in ownership for purposes of the IRC could further
diminish the value of the Company’s Tax Attributes.
The Company operates in multiple jurisdictions throughout the world, and its tax returns are
periodically audited or subject to review by both domestic and foreign tax authorities. As a
result of the conclusion of current examinations and the expiration of the statute of limitations
in several jurisdictions, the Company decreased the amount of its gross unrecognized tax benefits,
excluding interest and penalties, by $11.5 million, all of which impacted the effective tax rate in
the three months ended April 3, 2010. During the next twelve months, it is reasonably possible
that, as a result of audit settlements, the conclusion of current examinations and the expiration
of the statute of limitations in several jurisdictions, the Company may decrease the amount of its
gross unrecognized tax benefits, excluding interest and penalties, by approximately $12.0 million,
all of which, if recognized, would impact its effective tax rate. The gross unrecognized tax
benefits subject to potential decrease involve issues related to transfer pricing, tax credits and
various other tax items in several jurisdictions. However, as a result of ongoing examinations,
tax proceedings in certain countries, additions to the gross unrecognized tax benefits for
positions taken and interest and penalties, if any, arising in the future, it is not possible to
estimate the potential net increase or decrease to the Company’s gross unrecognized tax benefits
during the next twelve months.
New Legislation
The Patient Protection and Affordable Care Act and the Health Care Education and Affordability
Reconciliation Act described above in Note 7, “Pension and Other Postretirement Benefit Plans,”
will reduce the tax deduction available to the Company to the extent of any Medicare Part D subsidy
received. Although the Acts do not take effect until 2012, the Company is required to recognize
the tax impact in the financial statements in the period in which the Acts were signed. Due to the
full valuation allowance recorded against deferred tax assets in the United States, the Acts will
not impact the Company’s 2010 effective tax rate.
(11) Net Income (Loss) Per Share Attributable to Lear
Basic net income (loss) per share attributable to Lear is computed using the weighted average
common shares outstanding during the period. Common shares issuable upon the satisfaction of
certain conditions pursuant to a contractual agreement, such as those common shares contemplated as
part of the Company’s emergence from Chapter 11 bankruptcy proceedings, are considered common
shares outstanding and are included in the computation of basic net income (loss) per share.
Diluted net income (loss) per share attributable to Lear includes the dilutive effect of common
stock equivalents using the average share price during the period. A
13
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
summary of net income (loss) attributable to Lear for diluted net income (loss) per share
attributable to Lear (in millions) and shares outstanding is shown below:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, 2010 |
|
|
April 4, 2009 |
|
Net income (loss) attributable to Lear |
|
$ |
66.1 |
|
|
$ |
(264.8 |
) |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
41,880,977 |
|
|
|
77,450,328 |
|
Dilutive effect of common stock equivalents |
|
|
12,119,785 |
|
|
|
— |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
54,000,762 |
|
|
|
77,450,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
attributable to Lear |
|
$ |
1.22 |
|
|
$ |
(3.42 |
) |
The effect of certain common stock equivalents, including options, restricted stock units,
performance units and stock appreciation rights, were excluded from the computation of weighted
average diluted shares outstanding for the three months ended April 4, 2009, as inclusion would
have resulted in antidilution. In addition, shares issuable upon conversion of the Company’s
outstanding zero-coupon convertible debt were excluded from the computation of weighted average
diluted shares outstanding for the three months ended April 4, 2009, as inclusion would have
resulted in antidilution. A summary of these options and their exercise prices, as well as these
restricted stock units, performance units and stock appreciation rights, is shown below:
| |
|
|
|
|
| |
|
Predecessor |
|
| |
|
Three Months Ended |
|
| |
|
April 4, 2009 |
|
Options |
|
|
|
|
Antidilutive options |
|
|
1,071,325 |
|
Exercise price |
|
$ |
22.12 — $55.33 |
|
Restricted stock units |
|
|
926,243 |
|
Performance units |
|
|
92,929 |
|
Stock appreciation rights |
|
|
2,386,515 |
|
(12) Comprehensive Income (Loss) and Equity (Deficit)
Comprehensive income (loss) is defined as all changes in the Company’s net assets except changes
resulting from transactions with stockholders. It differs from net income (loss) in that certain
items recorded in equity (deficit) are included in comprehensive income (loss).
14
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of comprehensive income (loss) and reconciliations of equity (deficit), Lear Corporation
stockholders’ equity (deficit) and noncontrolling interests for the three months ended April 3,
2010 and April 4, 2009, are shown below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
Three Months Ended April 3, 2010 |
|
|
Three Months Ended April 4, 2009 |
|
| |
|
|
|
|
|
Attributable |
|
|
|
|
|
|
|
|
|
|
Attributable |
|
|
|
|
| |
|
|
|
|
|
to Lear |
|
|
Non- |
|
|
|
|
|
|
to Lear |
|
|
Non- |
|
| |
|
|
|
|
|
Corporation |
|
|
controlling |
|
|
Equity |
|
|
Corporation |
|
|
controlling |
|
| |
|
Equity |
|
|
Stockholders |
|
|
Interests |
|
|
(Deficit) |
|
|
Stockholders |
|
|
Interests |
|
Beginning equity balance |
|
$ |
2,181.8 |
|
|
$ |
2,089.1 |
|
|
$ |
92.7 |
|
|
$ |
247.7 |
|
|
$ |
198.9 |
|
|
$ |
48.8 |
|
Stock-based compensation transactions |
|
|
4.8 |
|
|
|
4.8 |
|
|
|
— |
|
|
|
2.9 |
|
|
|
2.9 |
|
|
|
— |
|
Dividends paid to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3.2 |
) |
|
|
— |
|
|
|
(3.2 |
) |
Transactions with affiliates |
|
|
6.5 |
|
|
|
— |
|
|
|
6.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
73.8 |
|
|
|
66.1 |
|
|
|
7.7 |
|
|
|
(262.8 |
) |
|
|
(264.8 |
) |
|
|
2.0 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
7.4 |
|
|
|
7.4 |
|
|
|
— |
|
Derivative instruments and hedging activities |
|
|
14.3 |
|
|
|
14.3 |
|
|
|
— |
|
|
|
2.2 |
|
|
|
2.2 |
|
|
|
— |
|
Foreign currency translation adjustment |
|
|
(40.0 |
) |
|
|
(39.7 |
) |
|
|
(0.3 |
) |
|
|
(35.6 |
) |
|
|
(36.0 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
(25.6 |
) |
|
|
(25.3 |
) |
|
|
(0.3 |
) |
|
|
(26.0 |
) |
|
|
(26.4 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
48.2 |
|
|
|
40.8 |
|
|
|
7.4 |
|
|
|
(288.8 |
) |
|
|
(291.2 |
) |
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending equity (deficit) balance |
|
$ |
2,241.3 |
|
|
$ |
2,134.7 |
|
|
$ |
106.6 |
|
|
$ |
( 41.4 |
) |
|
$ |
(89.4 |
) |
|
$ |
48.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13) Pre-Production Costs Related to Long-Term Supply Agreements
The Company incurs pre-production engineering and development (“E&D”) and tooling costs related to
the products produced for its customers under long-term supply agreements. The Company expenses all
pre-production E&D costs for which reimbursement is not contractually guaranteed by the customer.
In addition, the Company expenses all pre-production tooling costs related to customer-owned tools
for which reimbursement is not contractually guaranteed by the customer or for which the customer
has not provided a non-cancelable right to use the tooling. During the first quarters of 2010 and
2009, the Company capitalized $31.3 million and $34.8 million, respectively, of pre-production E&D
costs for which reimbursement is contractually guaranteed by the customer. In addition, during the
first quarters of 2010 and 2009, the Company capitalized $33.1 million and $32.6 million,
respectively, of pre-production tooling costs related to customer-owned tools for which
reimbursement is contractually guaranteed by the customer or for which the customer has provided a
non-cancelable right to use the tooling. These amounts are included in other current and long-term
assets in the accompanying condensed consolidated balance sheets. During the first quarters of
2010 and 2009, the Company collected $69.3 million and $70.9 million, respectively, of cash related
to E&D and tooling costs.
The classification of recoverable customer engineering, development and tooling costs related to
long-term supply agreements is shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
April 3, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Current |
|
$ |
40.3 |
|
|
$ |
38.5 |
|
Long-term |
|
|
68.6 |
|
|
|
76.8 |
|
|
|
|
|
|
|
|
Recoverable customer engineering,
development and tooling |
|
$ |
108.9 |
|
|
$ |
115.3 |
|
|
|
|
|
|
|
|
(14) Legal and Other Contingencies
As of April 3, 2010 and December 31, 2009, the Company had recorded reserves for pending legal
disputes, including commercial disputes and other matters, of $18.7 million and $18.8 million,
respectively. Such reserves reflect amounts recognized in accordance with GAAP and typically
exclude the cost of legal representation. Product liability and warranty reserves are recorded
separately from legal liabilities, as described below.
15
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Commercial Disputes
The Company is involved from time to time in legal proceedings and claims, including, without
limitation, commercial or contractual disputes with its customers, suppliers and competitors.
These disputes vary in nature and are usually resolved by negotiations between the parties.
On January 26, 2004, the Company filed a patent infringement lawsuit against Johnson Controls Inc.
and Johnson Controls Interiors LLC (together, the “JCI Parties”) in the U.S. District Court for the
Eastern District of Michigan alleging that the JCI Parties’ garage door opener products infringed
certain of the Company’s radio frequency transmitter patents (which complaint was dismissed and
subsequently re-filed by the Company in September 2004). The Company is seeking a declaration that
the JCI Parties infringe its patents and an order enjoining the JCI Parties from further infringing
those patents by making, selling or offering to sell their garage door opener products, as well as
an award of compensatory damages, attorney fees and costs. The JCI Parties counterclaimed seeking a
declaration that the subject patents are invalid and unenforceable and that the JCI Parties are not
infringing these patents, as well as an award of attorney fees and costs. The JCI Parties have also
filed motions for summary judgment asserting that their garage door opener products do not infringe
the Company’s patents and that one of the Company’s patents is invalid and unenforceable. In
November 2007, the court issued an opinion and order granting, in part, and denying, in part, the
JCI Parties’ motion for summary judgment on one of the Company’s patents and denying the JCI
Parties’ motion to hold the patent unenforceable. The court’s opinion did not address the other two
patents involved in this matter. On March 11, 2010, the court issued an opinion and order granting
the JCI Parties’ motion for summary judgment on two of the three patents-in-suit, U.S. Patent No.
Re 36,181 and U.S. Patent No. Re 36,752. This order leaves for trial by jury the issue of whether
the JCI Parties’ infringed the third patent-in-suit, U.S. Patent No. 5,731,756. A trial date with
respect to this matter has not yet been scheduled.
On June 13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit against the Company and
Ford Motor Company (“Ford”) in the U.S. District Court for the Northern District of Illinois
alleging patent infringement (from which Ford was subsequently dismissed) (the “Chamberlain
Matter”). Two counts were asserted against the Company based upon two Chamberlain rolling-code
garage door opener system patents (Patent Nos. 6,154,544 and 6,810,123). The Company denies that it
has infringed these patents and further contends that these patents are invalid and/or
unenforceable. The Chamberlain lawsuit was filed in connection with the marketing of the Company’s
universal garage door opener system, which competes with a product offered by Johnson Controls
Interiors LLC (“JCI”). JCI obtained technology from Chamberlain to operate its product. In October
2005, Chamberlain filed an amended complaint and joined JCI as a plaintiff. The Company filed an
answer and counterclaim seeking a declaration that the patents were not infringed and were invalid,
as well as an award of attorney fees and costs. Chamberlain and JCI are seeking a declaration that
the Company infringes Chamberlain’s patents and an order enjoining the Company from making, selling
or offering to sell products which, they allege, infringe Chamberlain’s patents, as well as an
award of compensatory and treble damages and attorney fees and costs. On August 12, 2008, a new
patent (Patent No. 7,412,056) was issued to Chamberlain relating to the same technology as the
patents disputed in this lawsuit. On August 19, 2008, Chamberlain and JCI filed a second amended
complaint against the Company alleging patent infringement with respect to the new patent and
seeking the same types of relief. The Company filed an answer and counterclaim seeking a
declaration that its products are non-infringing and that the new patent is invalid and
unenforceable due to inequitable conduct, as well as an award of attorney fees and costs. On April
16, 2009, the court denied the Company’s motions for summary judgment with respect to the three
patents and ordered the Company to produce additional discovery related to infringement. On June
19, 2009, the Company moved for a protective order from further discovery requested by Chamberlain
and JCI. On June 26, 2009, JCI moved for summary judgment with respect to the ‘544 and ‘056
patents, and on July 9, 2009, the court denied these motions without prejudice as a result of the
Company’s Chapter 11 bankruptcy proceedings.
Since the Company’s emergence from Chapter 11 bankruptcy proceedings, the Chamberlain Matter is
proceeding to determine liability, and if liability is found, the total amount of the compensable
damages relating to the pre-petition period and the post-petition period, if any. Pursuant to the
Company’s joint plan of reorganization and a stipulation filed with the bankruptcy court among the
Company, Chamberlain and JCI, the Company has agreed to reserve common stock and warrants issued
under the joint plan of reorganization, sufficient to provide recoveries for an allowed claim of up
to $50 million for pre-petition damages. This reserve is not a loss contingency reserve determined
in accordance with GAAP and does not reflect a determination by the Company or the bankruptcy court
that Chamberlain or JCI is entitled to any recovery.
Following the Company’s emergence from Chapter 11 bankruptcy proceedings, litigation in the
Chamberlain Matter resumed, and on March 18, 2010, the Company filed two motions for summary
judgment on non-infringement. In response, Chamberlain and JCI filed cross-motions for summary
judgment on infringement. The Company has filed its reply in support of its motions for summary
judgment on non-infringement, and its response to the cross-motions by Chamberlain and JCI is due
May 20, 2010. Fact discovery is
16
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
scheduled to close on June 18, 2010, and expert discovery is
scheduled to close on August 27, 2010. The parties can then move for summary judgment on subjects
other than non-infringement by September 10, 2010.
On September 12, 2008, a consultant that the Company retained filed an arbitration action against
the Company seeking royalties under the parties’ Joint Development Agreement (“JDA”) for the
Company’s sales of its garage door opener products. The Company denies that it owes the consultant
any royalty payments under the JDA. No dates have been set in this matter, and the Company intends
to vigorously defend this matter.
On August 6, 2009, Lear Automotive France (“Lear France”), a wholly owned subsidiary of the
Company, was served with a writ by Proma France before the Orléans Commercial Court. Proma France
is a sub-contractor of Lear France in connection with its manufacture of seating parts. Proma
France claims that Lear France must indemnify it for damages allegedly arising from Lear France
obtaining advantageous pricing without providing Proma France with a written guarantee of purchase
volumes. Proma France is seeking damages of € 9.6 million ($12.9 million based on exchange rates in
effect as of April 3, 2010). Lear France intends to assert defenses against the claims in this
matter, including that the issue is covered by a settlement agreement previously entered into by
Lear France and Proma France on March 6, 2007. The Company believes that the action by Proma France
is without merit and intends to vigorously defend this matter. On September 23, 2009, Proma France
filed an insolvency proceeding with the Commercial Court of Orléans.
Product Liability and Warranty Matters
In the event that use of the Company’s products results in, or is alleged to result in, bodily
injury and/or property damage or other losses, the Company may be subject to product liability
lawsuits and other claims. Such lawsuits generally seek compensatory damages, punitive damages and
attorney fees and costs. In addition, the Company is a party to warranty-sharing and other
agreements with certain of its customers related to its products. These customers may pursue
claims against the Company for contribution of all or a portion of the amounts sought in connection
with product liability and warranty claims. The Company can provide no assurance that it will not
experience material claims in the future or that it will not incur significant costs to defend such
claims. In addition, if any of the Company’s products are, or are alleged to be, defective, the
Company may be required or requested by its customers to participate in a recall or other
corrective action involving such products. Certain of the Company’s customers have asserted claims
against the Company for costs related to recalls or other corrective actions involving its
products.
In certain instances, allegedly defective products may be supplied by tier II suppliers. The
Company may seek recovery from its suppliers of materials or services included within the Company’s
products that are associated with product liability and warranty claims. The Company carries
insurance for certain legal matters, including product liability claims, but such coverage may be
limited. The Company does not maintain insurance for product warranty or recall matters. Future
dispositions with respect to the Company’s product liability claims that were subject to compromise
under the Chapter 11 bankruptcy proceedings will be satisfied out of a common stock and warrant
reserve established for that purpose.
The Company records product warranty reserves based on its individual customer agreements. Product
warranty reserves are recorded for known warranty issues when amounts related to such issues are
probable and reasonably estimable.
A summary of the changes in reserves for product liability and warranty claims for the three months
ended April 3, 2010, is shown below (in millions):
| |
|
|
|
|
|
Balance as of January 1, 2010 |
|
$ |
26.5 |
|
Expense, net |
|
|
15.7 |
|
Settlements |
|
|
(2.9 |
) |
Foreign exchange and other |
|
|
(3.1 |
) |
|
|
|
|
Balance as of April 3, 2010 |
|
$ |
36.2 |
|
|
|
|
|
Environmental Matters
The Company is subject to local, state, federal and foreign laws, regulations and ordinances which
govern activities or operations that may have adverse environmental effects and which impose
liability for clean-up costs resulting from past spills, disposals or other releases of hazardous
wastes and environmental compliance. The Company’s policy is to comply with all applicable
environmental laws and to maintain an environmental management program based on ISO 14001 to ensure
compliance with this standard. However, the Company currently is, has been and in the future may
become the subject of formal or informal enforcement actions or procedures.
17
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has been named as a potentially responsible party at several third-party landfill sites
and is engaged in the cleanup of hazardous waste at certain sites owned, leased or operated by the
Company, including several properties acquired in its 1999 acquisition of UT Automotive, Inc. (“UT
Automotive”). Certain present and former properties of UT Automotive are subject to
environmental liabilities which may be significant. The Company obtained agreements and
indemnities with respect to certain environmental liabilities from United Technologies Corporation
(“UTC”) in connection with its acquisition of UT Automotive. UTC manages and directly funds these
environmental liabilities pursuant to its agreements and indemnities with the Company.
As of April 3, 2010 and December 31, 2009, the Company had recorded reserves for environmental
matters of $2.7 million. While the Company does not believe that the environmental liabilities
associated with its current and former properties will have a material adverse impact on its
business, financial position, results of operations or cash flows, no assurance can be given in
this regard.
Other Matters
Although the Company records reserves for legal disputes, product liability and warranty claims and
environmental and other matters in accordance with GAAP, the ultimate outcomes of these matters are
inherently uncertain. Actual results may differ significantly from current estimates.
The Company is involved from time to time in various other legal proceedings and claims, including,
without limitation, commercial and contractual disputes, intellectual property matters, personal
injury claims, tax claims and employment matters. Although the outcome of any legal matter cannot
be predicted with certainty, the Company does not believe that any of these other legal proceedings
or claims in which the Company is currently involved, either individually or in the aggregate, will
have a material adverse impact on its business, financial position, results of operations or cash
flows.
(15) Segment Reporting
The Company has two reportable operating segments: seating systems and electrical power management
systems. The seating systems segment includes seat systems and related components. The electrical
power management systems segment includes traditional wiring and power management systems, as well
as emerging high-power and hybrid electrical systems. The Other category includes unallocated
costs related to corporate headquarters, geographic headquarters and the elimination of
intercompany activities, none of which meets the requirements of being classified as an operating
segment.
The Company evaluates the performance of its operating segments based primarily on (i) revenues
from external customers, (ii) income (loss) before interest, other expense and income taxes
(“segment earnings”) and (iii) cash flows, being defined as segment earnings less capital
expenditures plus depreciation and amortization. A summary of revenues from external customers and
other financial information by reportable operating segment is shown below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor - Three Months Ended April 3, 2010 |
|
| |
|
|
|
|
|
Electrical |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Power |
|
|
|
|
|
|
|
| |
|
Seating |
|
|
Management |
|
|
|
|
|
|
|
| |
|
Systems |
|
|
Systems |
|
|
Other |
|
|
Consolidated |
|
Revenues from external customers |
|
$ |
2,313.5 |
|
|
$ |
625.0 |
|
|
$ |
— |
|
|
$ |
2,938.5 |
|
Segment earnings (1) |
|
|
149.6 |
|
|
|
25.6 |
|
|
|
(55.0 |
) |
|
|
120.2 |
|
Depreciation and amortization |
|
|
36.2 |
|
|
|
20.9 |
|
|
|
1.4 |
|
|
|
58.5 |
|
Capital expenditures |
|
|
22.3 |
|
|
|
11.7 |
|
|
|
0.8 |
|
|
|
34.8 |
|
Total assets |
|
|
3,554.8 |
|
|
|
1,047.7 |
|
|
|
1,630.8 |
|
|
|
6,233.3 |
|
18
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Predecessor - Three Months Ended April 4, 2009 |
|
| |
|
|
|
|
|
Electrical Power |
|
|
|
|
|
|
|
| |
|
Seating |
|
|
Management |
|
|
|
|
|
|
|
| |
|
Systems |
|
|
Systems |
|
|
Other |
|
|
Consolidated |
|
Revenues from external customers |
|
$ |
1,752.7 |
|
|
$ |
415.6 |
|
|
$ |
— |
|
|
$ |
2,168.3 |
|
Segment earnings (1) |
|
|
(75.3 |
) |
|
|
(67.6 |
) |
|
|
(45.0 |
) |
|
|
(187.9 |
) |
Depreciation and amortization |
|
|
38.1 |
|
|
|
24.0 |
|
|
|
3.5 |
|
|
|
65.6 |
|
Capital expenditures |
|
|
10.5 |
|
|
|
10.1 |
|
|
|
0.1 |
|
|
|
20.7 |
|
Total assets |
|
|
3,397.9 |
|
|
|
1,342.4 |
|
|
|
1,698.6 |
|
|
|
6,438.9 |
|
|
|
|
| (1) |
|
See definition above |
| |
| |
|
For the three months ended April 3, 2010, segment earnings include restructuring charges of $7.2
million, $5.2 million and $0.3 million in the seating systems and electrical power management
systems segments and in the other category, respectively. For the three months ended April 4,
2009, segment earnings include restructuring charges of $94.7 million, $15.1 million and $0.8
million in the seating systems and electrical power management systems segments and in the other
category, respectively. See Note 2, “Restructuring Activities.” |
A reconciliation of consolidated segment earnings to consolidated income (loss) before provision
for income taxes is shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Segment earnings |
|
$ |
120.2 |
|
|
$ |
(187.9 |
) |
Interest expense |
|
|
19.0 |
|
|
|
56.4 |
|
Other expense, net |
|
|
21.0 |
|
|
|
12.8 |
|
|
|
|
|
|
|
|
Consolidated income (loss) before provision
for income taxes |
|
$ |
80.2 |
|
|
$ |
(257.1 |
) |
|
|
|
|
|
|
|
(16) Financial Instruments
The carrying values of the Company’s debt instruments vary from their fair values. The fair values
were determined by reference to the quoted market prices of these securities. As of April 3, 2010,
the aggregate carrying value of the Company’s Notes was $694.5 million, as compared to an estimated
aggregate fair value of $709.2 million. As of December 31, 2009, the aggregate carrying value of
term loans outstanding of under the first and second lien credit agreements was $925.0 million, as
compared to an estimated aggregate fair value of $932.6 million.
Certain of the Company’s Asian subsidiaries periodically factor their accounts receivable with
financial institutions. Such receivables are factored without recourse to the Company and are
excluded from accounts receivable in the accompanying condensed consolidated balance sheets. There
were no factored receivables as of April 3, 2010 and December 31, 2009.
Derivative Instruments and Hedging Activities
Forward foreign exchange, futures and option contracts — The Company uses forward foreign
exchange, futures and option contracts to reduce the effect of fluctuations in foreign exchange
rates on known foreign currency exposures. Gains and losses on the derivative instruments are
intended to offset gains and losses on the hedged transaction in an effort to reduce the earnings
volatility resulting from fluctuations in foreign exchange rates. The principal currencies hedged
by the Company include the Mexican peso and various European currencies. Forward foreign exchange,
futures and option contracts are accounted for as cash flow hedges when the hedged item is a
forecasted transaction or relates to the variability of cash flows to be received or paid. As of
April 3, 2010, contracts designated as cash flow hedges with $296.4 million of notional amount were
outstanding with maturities of less than nine months. As of April 3, 2010, the fair value of these
contracts was approximately $14.3 million. As of April 3, 2010, other foreign currency derivative
contracts that did not qualify for hedge accounting with $14.8 million of notional amount were
outstanding. These foreign currency derivative contracts consist principally of cash transactions
between three and thirty days, hedges of intercompany loans and hedges of certain other balance
sheet exposures. As of April 3, 2010, the fair value of these contracts was minimal. As of
December
19
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
31, 2009, there were no foreign exchange contracts outstanding.
The fair value of outstanding foreign currency derivative contracts and the related classification
in the accompanying condensed consolidated balance sheet as of April 3, 2010, are shown below (in
millions):
| |
|
|
|
|
| |
|
Successor |
|
| |
|
April 3, |
|
| |
|
2010 |
|
Contracts qualifying for hedge accounting: |
|
|
|
|
Other current assets |
|
$ |
14.7 |
|
Other current liabilities |
|
|
(0.4 |
) |
|
|
|
|
|
|
$ |
14.3 |
|
|
|
|
|
Pretax amounts related to foreign currency derivative contracts that were recognized in and
reclassified from accumulated other comprehensive loss are shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Contracts qualifying for hedge accounting: |
|
|
|
|
|
|
|
|
Gains (losses) recognized in accumulated
other comprehensive loss |
|
$ |
16.1 |
|
|
$ |
(14.2 |
) |
(Gains) losses reclassified from accumulated
other comprehensive loss |
|
|
(1.8 |
) |
|
|
19.4 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14.3 |
|
|
$ |
5.2 |
|
|
|
|
|
|
|
|
Interest rate swap and other derivative contracts — Historically, the Company used interest rate
swap and other derivative contracts to manage its exposure to fluctuations in interest rates.
Interest rate swap and other derivative contracts which fix the interest payments of certain
variable rate debt instruments or fix the market rate component of anticipated fixed rate debt
instruments were accounted for as cash flow hedges. Interest rate swap contracts which hedge the
change in fair value of certain fixed rate debt instruments were accounted for as fair value
hedges. As of April 3, 2010, and December 31, 2009, there were no interest rate contracts
outstanding. The Company will continue to evaluate, and may use derivative financial instruments,
including forwards, futures, options, swaps and other derivative contracts to manage its exposures
to fluctuations in interest rates in the future.
Pretax amounts related to interest rate contracts that were recognized in and reclassified from
accumulated other comprehensive loss are shown below (in millions):
| |
|
|
|
|
| |
|
Predecessor |
|
| |
|
April 4, |
|
| |
|
2009 |
|
Contracts qualifying for hedge accounting: |
|
|
|
|
Losses recognized in accumulated other
comprehensive loss |
|
$ |
(8.2 |
) |
Losses reclassified from accumulated other
comprehensive loss |
|
|
6.1 |
|
|
|
|
|
Comprehensive loss |
|
$ |
(2.1 |
) |
|
|
|
|
Commodity swap contracts — Historically, the Company used derivative instruments to reduce its
exposure to fluctuations in certain commodity prices. These derivative instruments were utilized
to hedge forecasted inventory purchases and to the extent that they qualified and met hedge
accounting criteria, they were accounted for as cash flow hedges. Commodity swap contracts that
were not designated as cash flow hedges were marked to market with changes in fair value recognized
immediately in the condensed consolidated statements of operations. See Note 9, “Other Expense,
Net.” As of April 3, 2010 and December 31, 2009, there were no commodity swap contracts
outstanding. The Company will continue to evaluate, and may use derivative financial instruments,
including forwards, futures, options, swaps and other derivative contracts to manage its exposures
to fluctuations in commodity prices in the future.
20
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pretax amounts related to commodity swap contracts that were recognized in and reclassified from
accumulated other comprehensive loss are shown below (in millions):
| |
|
|
|
|
| |
|
Predecessor |
|
| |
|
April 4, |
|
| |
|
2009 |
|
Contracts qualifying for hedge accounting: |
|
|
|
|
Gains recognized in accumulated other
comprehensive loss |
|
$ |
1.8 |
|
Losses reclassified from accumulated other
comprehensive loss |
|
|
1.1 |
|
|
|
|
|
Comprehensive income |
|
$ |
2.9 |
|
|
|
|
|
As of April 3, 2010, net gains of approximately $14.3 million related to the Company’s derivative
instruments and hedging activities were recorded in accumulated other comprehensive loss. During
the three months ended April 3, 2010 and April 4, 2009, net gains (losses) of approximately $1.8
million and ($26.6) million, respectively, related to the Company’s hedging activities were
reclassified from accumulated other comprehensive loss into earnings. During the twelve month
period ending April 2, 2011, the Company expects to reclassify into earnings net gains of
approximately $14.3 million recorded in accumulated other comprehensive loss as of April 3, 2010.
Such gains will be reclassified at the time that the underlying hedged transactions are realized.
During the three months ended April 3, 2010 and April 4, 2009, amounts recognized in the
accompanying condensed consolidated statements of operations related to changes in the fair value
of cash flow and fair value hedges excluded from the Company’s effectiveness assessments and the
ineffective portion of changes in the fair value of cash flow and fair value hedges were not
material.
Fair Value Measurements
In accordance with GAAP, fair value is an exit price, defined as a market-based measurement that
represents the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. Fair value measurements are based on one or more
of the following three valuation techniques:
| |
|
|
|
|
|
|
|
Market:
|
|
This approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. |
|
|
|
|
|
|
|
Income:
|
|
This approach uses valuation techniques to convert future amounts to a single
present value amount based on current market expectations. |
|
|
|
|
|
|
|
Cost:
|
|
This approach is based on the amount that would be required to replace the
service capacity of an asset (replacement cost). |
Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described
above into a three-tier fair value hierarchy as follows:
| |
|
|
|
Level 1:
|
|
Observable inputs, such as quoted market prices in active markets for
identical assets or liabilities that are accessible at the measurement date. |
Level 2:
|
|
Inputs, other than quoted market prices included in Level 1, that are
observable either directly or indirectly for the asset or liability. |
Level 3:
|
|
Unobservable inputs that reflect the entity’s own assumptions about the exit
price of the asset or liability. Unobservable inputs may be used if there is little or
no market data for the asset or liability at the measurement date. |
The Company discloses fair value measurements and the related valuation techniques and fair value
hierarchy level for its assets and liabilities that are measured or disclosed at fair value.
Items measured at fair value on a recurring basis — Fair value measurements and the related
valuation techniques and fair value hierarchy level for the Company’s assets and liabilities
measured or disclosed at fair value on a recurring basis as of April 3, 2010, are shown below (in
millions):
21
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Asset |
|
|
Valuation |
|
|
|
|
|
|
|
|
|
|
| |
|
Frequency |
|
|
(Liability) |
|
|
Technique |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
derivative
contracts |
|
Recurring |
|
$ |
14.3 |
|
|
Market/Income |
|
$ |
— |
|
|
$ |
14.3 |
|
|
$ |
— |
|
The Company determines the fair value of its derivative contracts using quoted market prices to
calculate the forward values and then discounts such forward values to the present value. The
discount rates used are based on quoted bank deposit or swap interest rates. If a derivative
contract is in a net liability position, these discount rates are adjusted by an estimate of the
credit spread that would be applied by market participants purchasing these contracts from the
Company’s counterparties. To estimate this credit spread, the Company uses significant assumptions
and factors other than quoted market rates, which would result in the classification of its
derivative liabilities within Level 3 of the fair value hierarchy. As of April 3, 2010, there were
no derivative contracts that were classified within Level 3 of the fair value hierarchy. In
addition, there were no transfers in and out of Level 3 during the first quarter of 2010 as there
were no derivative contracts outstanding at December 31, 2009.
Items measured at fair value on a non-recurring basis — In addition to items that are measured at
fair value on a recurring basis, the Company measures certain assets and liabilities at fair value
on a non-recurring basis, which are not included in the table above. As these non-recurring fair
value measurements are generally determined using unobservable inputs, these fair value
measurements are classified within Level 3 of the fair value hierarchy. For further information on
assets and liabilities measured at fair value on a non-recurring basis, see Note 2,
“Restructuring.”
(17) Accounting Pronouncements
Financial Instruments and Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) amended ASC 860, “Transfers and Servicing,” with
Accounting Standards Update (“ASU”) 2009-16, “Accounting for Transfers of Financial Assets,” to,
among other things, eliminate the concept of qualifying special purpose entities, provide
additional sale accounting requirements and require enhanced disclosures. The provisions of this
update are effective for annual reporting periods beginning after November 15, 2009. The effects
of adoption were not significant because the Company’s previous asset-backed securitization
facility expired in 2008. The Company will assess the impact of this update on any future
securitizations.
The FASB amended ASC 820, “Fair Value Measurements and Disclosures,” with ASU 2010-06, “Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” to
require additional disclosures regarding fair value measurements, including the amount and reasons
for transfers between levels within the fair value hierarchy and more detailed information
regarding the inputs and valuation techniques used in determining the fair value of assets and
liabilities classified as Level 2 or Level 3 within the fair value hierarchy. In addition, this
update clarifies previous guidance related to the level at which fair value disclosures should be
disaggregated. With the exception of additional disclosures related to activity within Level 3 of
the fair value hierarchy, which are effective for fiscal years beginning after December 15, 2010,
the provisions of this update are effective as of January 1, 2010. The effects of adoption were
not significant. For further information, see Note 16, “Financial Instruments.”
Consolidation of Variable Interest Entities
The FASB amended ASC 810, “Consolidations,” with ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities.” This update significantly changes the
model for determining whether an entity is the primary beneficiary and should thus consolidate a
variable interest entity. In addition, this update requires additional disclosures and an ongoing
assessment of whether a variable interest entity should be consolidated. The provisions of this
update are effective for annual reporting periods beginning after November 15, 2009. The Company
has ownership interests in consolidated and non-consolidated variable interest entities. The
effects of adoption were not significant.
22
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18) Supplemental Guarantor Condensed Consolidating Financial Statements
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Successor – April 3, 2010 |
|
| |
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
| |
|
Lear |
|
|
Guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
(Unaudited; in millions) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
676.5 |
|
|
$ |
0.1 |
|
|
$ |
623.8 |
|
|
$ |
— |
|
|
$ |
1,300.4 |
|
Accounts receivable |
|
|
26.7 |
|
|
|
296.5 |
|
|
|
1,551.1 |
|
|
|
— |
|
|
|
1,874.3 |
|
Inventories |
|
|
5.4 |
|
|
|
187.3 |
|
|
|
306.9 |
|
|
|
— |
|
|
|
499.6 |
|
Other |
|
|
30.8 |
|
|
|
21.8 |
|
|
|
284.9 |
|
|
|
— |
|
|
|
337.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
739.4 |
|
|
|
505.7 |
|
|
|
2,766.7 |
|
|
|
— |
|
|
|
4,011.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
97.3 |
|
|
|
152.6 |
|
|
|
755.3 |
|
|
|
— |
|
|
|
1,005.2 |
|
Goodwill |
|
|
23.5 |
|
|
|
303.9 |
|
|
|
282.1 |
|
|
|
— |
|
|
|
609.5 |
|
Investments in subsidiaries |
|
|
998.0 |
|
|
|
874.0 |
|
|
|
— |
|
|
|
(1,872.0 |
) |
|
|
— |
|
Other |
|
|
81.9 |
|
|
|
36.9 |
|
|
|
488.0 |
|
|
|
— |
|
|
|
606.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
1,200.7 |
|
|
|
1,367.4 |
|
|
|
1,525.4 |
|
|
|
(1,872.0 |
) |
|
|
2,221.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,940.1 |
|
|
$ |
1,873.1 |
|
|
$ |
4,292.1 |
|
|
$ |
(1,872.0 |
) |
|
$ |
6,233.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
42.9 |
|
|
$ |
— |
|
|
$ |
42.9 |
|
Accounts payable and drafts |
|
|
70.3 |
|
|
|
415.6 |
|
|
|
1,316.2 |
|
|
|
— |
|
|
|
1,802.1 |
|
Accrued liabilities |
|
|
90.4 |
|
|
|
163.5 |
|
|
|
644.0 |
|
|
|
— |
|
|
|
897.9 |
|
Current portion of long-term debt |
|
|
— |
|
|
|
— |
|
|
|
2.9 |
|
|
|
— |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
160.7 |
|
|
|
579.1 |
|
|
|
2,006.0 |
|
|
|
— |
|
|
|
2,745.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
694.5 |
|
|
|
— |
|
|
|
4.7 |
|
|
|
— |
|
|
|
699.2 |
|
Intercompany accounts, net |
|
|
(1,167.7 |
) |
|
|
136.4 |
|
|
|
1,031.3 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
117.9 |
|
|
|
89.9 |
|
|
|
339.2 |
|
|
|
— |
|
|
|
547.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
(355.3 |
) |
|
|
226.3 |
|
|
|
1,375.2 |
|
|
|
— |
|
|
|
1,246.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lear Corporation stockholders’ equity |
|
|
2,134.7 |
|
|
|
1,067.7 |
|
|
|
804.3 |
|
|
|
(1,872.0 |
) |
|
|
2,134.7 |
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
106.6 |
|
|
|
— |
|
|
|
106.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
2,134.7 |
|
|
|
1,067.7 |
|
|
|
910.9 |
|
|
|
(1,872.0 |
) |
|
|
2,241.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,940.1 |
|
|
$ |
1,873.1 |
|
|
$ |
4,292.1 |
|
|
$ |
(1,872.0 |
) |
|
$ |
6,233.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18) Supplemental Guarantor Condensed Consolidating Financial Statements – (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Successor – December 31, 2009 |
|
| |
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
| |
|
Lear |
|
|
Guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
584.9 |
|
|
$ |
0.1 |
|
|
$ |
969.0 |
|
|
$ |
— |
|
|
$ |
1,554.0 |
|
Accounts receivable |
|
|
23.5 |
|
|
|
206.0 |
|
|
|
1,250.4 |
|
|
|
— |
|
|
|
1,479.9 |
|
Inventories |
|
|
4.0 |
|
|
|
166.0 |
|
|
|
277.4 |
|
|
|
— |
|
|
|
447.4 |
|
Other |
|
|
25.9 |
|
|
|
15.0 |
|
|
|
264.8 |
|
|
|
— |
|
|
|
305.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
638.3 |
|
|
|
387.1 |
|
|
|
2,761.6 |
|
|
|
— |
|
|
|
3,787.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
97.0 |
|
|
|
160.1 |
|
|
|
793.8 |
|
|
|
— |
|
|
|
1,050.9 |
|
Goodwill |
|
|
23.5 |
|
|
|
303.9 |
|
|
|
294.0 |
|
|
|
— |
|
|
|
621.4 |
|
Investments in subsidiaries |
|
|
1,133.2 |
|
|
|
1,104.8 |
|
|
|
— |
|
|
|
(2,238.0 |
) |
|
|
— |
|
Other |
|
|
84.3 |
|
|
|
31.8 |
|
|
|
497.9 |
|
|
|
— |
|
|
|
614.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
1,338.0 |
|
|
|
1,600.6 |
|
|
|
1,585.7 |
|
|
|
(2,238.0 |
) |
|
|
2,286.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,976.3 |
|
|
$ |
1,987.7 |
|
|
$ |
4,347.3 |
|
|
$ |
(2,238.0 |
) |
|
$ |
6,073.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
37.1 |
|
|
$ |
— |
|
|
$ |
37.1 |
|
Accounts payable and drafts |
|
|
37.3 |
|
|
|
335.1 |
|
|
|
1,175.1 |
|
|
|
— |
|
|
|
1,547.5 |
|
Accrued liabilities |
|
|
97.6 |
|
|
|
100.4 |
|
|
|
610.1 |
|
|
|
— |
|
|
|
808.1 |
|
Current portion of long-term debt |
|
|
3.8 |
|
|
|
— |
|
|
|
4.3 |
|
|
|
— |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
138.7 |
|
|
|
435.5 |
|
|
|
1,826.6 |
|
|
|
— |
|
|
|
2,400.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
921.2 |
|
|
|
— |
|
|
|
5.9 |
|
|
|
— |
|
|
|
927.1 |
|
Intercompany accounts, net |
|
|
(1,291.9 |
) |
|
|
67.9 |
|
|
|
1,224.0 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
119.2 |
|
|
|
92.2 |
|
|
|
352.2 |
|
|
|
— |
|
|
|
563.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
(251.5 |
) |
|
|
160.1 |
|
|
|
1,582.1 |
|
|
|
— |
|
|
|
1,490.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lear Corporation stockholders’ equity |
|
|
2,089.1 |
|
|
|
1,392.1 |
|
|
|
845.9 |
|
|
|
(2,238.0 |
) |
|
|
2,089.1 |
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
92.7 |
|
|
|
— |
|
|
|
92.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
2,089.1 |
|
|
|
1,392.1 |
|
|
|
938.6 |
|
|
|
(2,238.0 |
) |
|
|
2,181.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,976.3 |
|
|
$ |
1,987.7 |
|
|
$ |
4,347.3 |
|
|
$ |
(2,238.0 |
) |
|
$ |
6,073.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18) Supplemental Guarantor Condensed Consolidating Financial Statements – (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Successor – For the Three Months Ended April 3, 2010 |
|
| |
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
| |
|
Lear |
|
|
Guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
(Unaudited; in millions) |
|
|
|
|
|
Net sales |
|
$ |
57.2 |
|
|
$ |
1,070.0 |
|
|
$ |
2,662.9 |
|
|
$ |
(851.6 |
) |
|
$ |
2,938.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
71.5 |
|
|
|
975.5 |
|
|
|
2,488.3 |
|
|
|
(851.6 |
) |
|
|
2,683.7 |
|
Selling, general and administrative expenses |
|
|
46.6 |
|
|
|
18.2 |
|
|
|
63.1 |
|
|
|
— |
|
|
|
127.9 |
|
Amortization of intangible assets |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
6.3 |
|
|
|
— |
|
|
|
6.7 |
|
Intercompany charges |
|
|
1.9 |
|
|
|
(3.7 |
) |
|
|
1.8 |
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
6.5 |
|
|
|
4.0 |
|
|
|
8.5 |
|
|
|
— |
|
|
|
19.0 |
|
Other intercompany (income) expense, net |
|
|
(28.3 |
) |
|
|
10.1 |
|
|
|
18.2 |
|
|
|
— |
|
|
|
— |
|
Other expense, net |
|
|
15.6 |
|
|
|
0.1 |
|
|
|
5.3 |
|
|
|
— |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
income (loss) before income taxes and equity in net income of subsidiaries |
|
|
(56.9 |
) |
|
|
65.7 |
|
|
|
71.4 |
|
|
|
— |
|
|
|
80.2 |
|
Provision (benefit) for income taxes |
|
|
1.3 |
|
|
|
— |
|
|
|
5.1 |
|
|
|
— |
|
|
|
6.4 |
|
Equity in net income of subsidiaries |
|
|
(124.3 |
) |
|
|
(63.1 |
) |
|
|
— |
|
|
|
187.4 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
|
66.1 |
|
|
|
128.8 |
|
|
|
66.3 |
|
|
|
(187.4 |
) |
|
|
73.8 |
|
Less: Net income attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
7.7 |
|
|
|
— |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Lear |
|
$ |
66.1 |
|
|
$ |
128.8 |
|
|
$ |
58.6 |
|
|
$ |
(187.4 |
) |
|
$ |
66.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Predecessor – For the Three Months Ended April 4, 2009 |
|
| |
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
| |
|
Lear |
|
|
Guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
(Unaudited; in millions) |
|
|
|
|
|
Net sales |
|
$ |
57.5 |
|
|
$ |
670.0 |
|
|
$ |
1,984.1 |
|
|
$ |
(543.3 |
) |
|
$ |
2,168.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
59.1 |
|
|
|
665.8 |
|
|
|
2,061.4 |
|
|
|
(543.3 |
) |
|
|
2,243.0 |
|
Selling, general and administrative expenses |
|
|
38.9 |
|
|
|
15.8 |
|
|
|
57.4 |
|
|
|
— |
|
|
|
112.1 |
|
Amortization of intangible assets |
|
|
— |
|
|
|
0.1 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
1.1 |
|
Intercompany charges |
|
|
3.1 |
|
|
|
(6.2 |
) |
|
|
3.1 |
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
38.9 |
|
|
|
8.5 |
|
|
|
9.0 |
|
|
|
— |
|
|
|
56.4 |
|
Other intercompany (income) expense, net |
|
|
72.8 |
|
|
|
36.9 |
|
|
|
(109.7 |
) |
|
|
— |
|
|
|
— |
|
Other (income) expense, net |
|
|
(10.8 |
) |
|
|
1.4 |
|
|
|
22.2 |
|
|
|
— |
|
|
|
12.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
loss before income taxes and equity in net loss of subsidiaries |
|
|
(144.5 |
) |
|
|
(52.3 |
) |
|
|
(60.3 |
) |
|
|
— |
|
|
|
(257.1 |
) |
Provision for income taxes |
|
|
— |
|
|
|
— |
|
|
|
5.7 |
|
|
|
— |
|
|
|
5.7 |
|
Equity in net loss of subsidiaries |
|
|
120.3 |
|
|
|
69.6 |
|
|
|
— |
|
|
|
(189.9 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss |
|
|
(264.8 |
) |
|
|
(121.9 |
) |
|
|
(66.0 |
) |
|
|
189.9 |
|
|
|
(262.8 |
) |
Less: Net income attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Lear |
|
$ |
(264.8 |
) |
|
$ |
(121.9 |
) |
|
$ |
(68.0 |
) |
|
$ |
189.9 |
|
|
$ |
(264.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18) Supplemental Guarantor Condensed Consolidating Financial Statements – (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Successor – For the Three Months Ended April 3, 2010 |
|
| |
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
| |
|
Lear |
|
|
Guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
(Unaudited; in millions) |
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(12.4 |
) |
|
$ |
105.4 |
|
|
$ |
(54.1 |
) |
|
$ |
— |
|
|
$ |
38.9 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(3.4 |
) |
|
|
(4.5 |
) |
|
|
(26.9 |
) |
|
|
— |
|
|
|
(34.8 |
) |
Other, net |
|
|
(1.1 |
) |
|
|
— |
|
|
|
5.2 |
|
|
|
— |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(4.5 |
) |
|
|
(4.5 |
) |
|
|
(21.7 |
) |
|
|
— |
|
|
|
(30.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of senior notes |
|
|
694.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
694.5 |
|
First lien credit agreement repayments |
|
|
(375.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(375.0 |
) |
Second lien credit agreement repayments |
|
|
(550.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(550.0 |
) |
Other long-term debt repayments, net |
|
|
— |
|
|
|
— |
|
|
|
(1.7 |
) |
|
|
— |
|
|
|
(1.7 |
) |
Short-term debt borrowings, net |
|
|
— |
|
|
|
— |
|
|
|
5.6 |
|
|
|
— |
|
|
|
5.6 |
|
Payment of debt issuance costs |
|
|
(16.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16.3 |
) |
Increase in drafts |
|
|
0.1 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
0.4 |
|
Change in intercompany accounts |
|
|
355.2 |
|
|
|
(100.9 |
) |
|
|
(254.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
108.5 |
|
|
|
(100.9 |
) |
|
|
(250.1 |
) |
|
|
— |
|
|
|
(242.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
(19.3 |
) |
|
|
— |
|
|
|
(19.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
91.6 |
|
|
|
— |
|
|
|
(345.2 |
) |
|
|
— |
|
|
|
(253.6 |
) |
Cash and Cash Equivalents as of Beginning of Period |
|
|
584.9 |
|
|
|
0.1 |
|
|
|
969.0 |
|
|
|
— |
|
|
|
1,554.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents as of End of Period |
|
$ |
676.5 |
|
|
$ |
0.1 |
|
|
$ |
623.8 |
|
|
$ |
— |
|
|
$ |
1,300.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Predecessor – For the Three Months Ended April 4, 2009 |
|
| |
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
| |
|
Lear |
|
|
Guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
| |
|
|
|
|
|
(Unaudited; in millions) |
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(87.1 |
) |
|
$ |
(127.0 |
) |
|
$ |
(122.7 |
) |
|
$ |
— |
|
|
$ |
(336.8 |
) |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(0.1 |
) |
|
|
(3.9 |
) |
|
|
(16.7 |
) |
|
|
— |
|
|
|
(20.7 |
) |
Other, net |
|
|
2.7 |
|
|
|
(2.0 |
) |
|
|
7.7 |
|
|
|
— |
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
2.6 |
|
|
|
(5.9 |
) |
|
|
(9.0 |
) |
|
|
— |
|
|
|
(12.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt repayments, net |
|
|
— |
|
|
|
— |
|
|
|
(1.3 |
) |
|
|
— |
|
|
|
(1.3 |
) |
Short-term debt repayments, net |
|
|
— |
|
|
|
— |
|
|
|
(2.8 |
) |
|
|
— |
|
|
|
(2.8 |
) |
Payment of debt issuance costs |
|
|
(7.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7.8 |
) |
Dividends paid to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
(3.2 |
) |
|
|
— |
|
|
|
(3.2 |
) |
Increase in drafts |
|
|
1.2 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
1.5 |
|
Change in intercompany accounts |
|
|
(886.4 |
) |
|
|
132.4 |
|
|
|
754.0 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(893.0 |
) |
|
|
132.4 |
|
|
|
747.0 |
|
|
|
— |
|
|
|
(13.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
4.9 |
|
|
|
— |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(977.5 |
) |
|
|
(0.5 |
) |
|
|
620.2 |
|
|
|
— |
|
|
|
(357.8 |
) |
Cash and Cash Equivalents as of Beginning of Period |
|
|
1,310.6 |
|
|
|
0.6 |
|
|
|
280.9 |
|
|
|
— |
|
|
|
1,592.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents as of End of Period |
|
$ |
333.1 |
|
|
$ |
0.1 |
|
|
$ |
901.1 |
|
|
$ |
— |
|
|
$ |
1,234.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
LEAR CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(18) Supplemental Guarantor Condensed Consolidating Financial Statements – (continued)
Basis of Presentation — Certain of Lear’s domestic 100% owned subsidiaries (the “Guarantors”) have
jointly and severally unconditionally guaranteed, on a senior unsecured basis, the performance and
the full and punctual payment when due, whether at stated maturity, by acceleration or otherwise,
of the Company’s obligations under the Revolving Credit Facility and the indenture governing the
Notes, including the Company’s obligations to pay principal, premium, if any, and interest with
respect to the Notes. The senior notes consist of $350 million in aggregate principal amount of
7.875% senior notes due 2018 and $350 million in aggregate principal amount of 8.125% senior notes
due 2020. The Guarantors include Lear #50 Holdings, LLC, Lear Argentine Holdings Corporation #2,
Lear Automotive Dearborn, Inc., Lear Automotive Manufacturing, LLC, Lear Corporation (Germany)
Ltd., Lear Corporation EEDS and Interiors, Lear Corporation Global Development, Inc., Lear EEDS
Holdings, LLC, Lear European Operations Corporation, Lear Holdings, LLC, Lear Investments Company,
L.L.C., Lear Mexican Holdings Corporation, Lear Mexican Holdings, L.L.C., Lear Mexican Seating
Corporation, Lear Operations Corporation, Lear Seating Holdings Corp. #50, Lear South American
Holdings Corporation, Lear Trim L.P. and Renosol Seating, LLC. In lieu of providing separate
financial statements for the Guarantors, the Company has included the supplemental guarantor
condensed consolidating financial statements above. These financial statements reflect the
Guarantors listed above for all periods presented. Management does not believe that separate
financial statements of the Guarantors are material to investors. Therefore, separate financial
statements and other disclosures concerning the Guarantors are not presented.
As of December 31, 2009, the supplemental guarantor condensed consolidating financial statements
have been restated to reflect certain changes to the equity investments of the Guarantors.
Distributions — There are no significant restrictions on the ability of the Guarantors to make
distributions to the Company.
Selling, General and Administrative Expenses — Corporate and division selling, general and
administrative expenses are allocated to the operating subsidiaries based on various factors, which
estimate usage of particular corporate and division functions, and in certain instances, other
relevant factors, such as the revenues or the number of employees of the Company’s subsidiaries.
During the three months ended April 3, 2010 and April 4, 2009, ($0.6) million and $0.7 million,
respectively, of corporate selling, general and administrative expenses were allocated (to) from
Lear.
Long-Term Debt of Lear and the Guarantors — A summary of long-term debt of Lear and the Guarantors
on a combined basis is shown below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
April 4, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2009 |
|
Senior notes |
|
$ |
694.5 |
|
|
$ |
— |
|
First lien credit agreement – term loan |
|
|
— |
|
|
|
375.0 |
|
Second lien credit agreement – term loan |
|
|
— |
|
|
|
550.0 |
|
|
|
|
|
|
|
|
|
|
|
694.5 |
|
|
|
925.0 |
|
Less – current portion |
|
|
— |
|
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
$ |
694.5 |
|
|
$ |
921.2 |
|
|
|
|
|
|
|
|
27
LEAR CORPORATION
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
We were incorporated in Delaware in 1987 and are one of the world’s largest automotive suppliers
based on net sales. We supply our products to every major automotive manufacturer in the world.
We supply automotive manufacturers with complete automotive seat systems and electrical power
management systems. Our strategy is to leverage our global presence and expand our low-cost
footprint, focus on our core capabilities, effect selective vertical integration and investments in
technology and enhance and diversify our strong customer relationships through operational
excellence.
Industry Overview
Demand for our products is directly related to the automotive vehicle production of our major
customers. Automotive sales and production can be affected by general economic or industry
conditions, labor relations issues, fuel prices, regulatory requirements, government initiatives,
trade agreements, availability and cost of credit and other factors. Our operating results are
also significantly impacted by the overall commercial success of the vehicle platforms for which we
supply particular products, as well as our relative profitability on these platforms. In addition,
it is possible that customers could elect to manufacture components internally that are currently
produced by external suppliers, such as us. The loss of business with respect to any vehicle model
for which we are a significant supplier, or a decrease in the production levels of any such models,
could have a material adverse impact on our operating results. In addition, larger cars and light
trucks, as well as vehicle platforms that offer more features and functionality, such as luxury,
sport utility and crossover vehicles, typically have more content and, therefore, tend to have a
more significant impact on our operating results.
The global automotive industry is characterized by significant overcapacity and fierce competition
among automotive manufacturers. We expect these challenging industry conditions to continue in the
foreseeable future. The automotive industry in 2009 was severely affected by the turmoil in the
global credit markets and the economic recession in the U.S. and global economies. These
conditions had a dramatic impact on consumer vehicle demand in 2009, resulting in the lowest per
capita sales rates in the United States in half a century and lower global automotive production
for the second consecutive year following six consecutive years of steady growth. The first
quarter of 2010 saw a significant improvement in industry production volumes globally. North
American light vehicle industry production increased by approximately 72% from a year ago levels to
2.9 million units. European light vehicle industry production increased by approximately 32% from
a year ago levels to 4.4 million units.
The majority of our sales continues to be derived from automotive manufacturers in North America
and Europe. Many of these customers have experienced declines in market share in their traditional
markets. Our ability to maintain and improve our financial performance in the future will depend,
in part, on our ability to continue to diversify our sales on a customer, product and geographic
basis to reflect the market overall.
Our customers require us to reduce our prices and, at the same time, assume significant
responsibility for the design, development and engineering of our products. Our profitability is
largely dependent on our ability to achieve product cost reductions through restructuring actions,
manufacturing efficiencies, product design enhancement and supply chain management. We also seek
to enhance our profitability by investing in technology, design capabilities and new product
initiatives that respond to the needs of our customers and consumers. We continually evaluate
operational and strategic alternatives to align our business with the changing needs of our
customers, improve our business structure and lower our operating costs.
Our material cost as a percentage of net sales was 68.2% in the first quarter of 2010, as compared
to 69.0% in 2009 and 69.3% in 2008. Raw material, energy and commodity costs have been extremely
volatile over the past several years. Unfavorable industry conditions have also resulted in
financial distress within our supply base and an increase in the risk of supply disruption. We
have developed and implemented strategies to mitigate the impact of higher raw material, energy and
commodity costs, which include cost reduction actions, such as the selective in-sourcing of
components, the continued consolidation of our supply base, longer-term purchase commitments and
the selective expansion of low-cost country sourcing and engineering, as well as value engineering
and product benchmarking. However, these strategies, together with commercial negotiations with
our customers and suppliers, typically offset only a portion of the adverse impact. These costs
remain volatile and could have an adverse impact on our operating results in the foreseeable
future. See “— Forward-Looking Statements” and Item 1A, “Risk Factors — High raw material costs
could continue to have an adverse impact on our profitability,” in our Annual Report on Form 10-K
for the year ended December 31, 2009.
28
LEAR CORPORATION
Financial Measures
In evaluating our financial condition and operating performance, we focus primarily on earnings
growth and cash flows, as well as return on investment. In addition to maintaining and expanding
our business with our existing customers in our more established markets, our expansion plans are
focused on emerging markets. Asia, in particular, continues to present significant growth
opportunities, as major global automotive manufacturers implement production expansion plans and
local automotive manufacturers aggressively expand their operations to meet long-term demand in
this region. We currently have twelve joint ventures in China and several other joint ventures
dedicated to serving Asian automotive manufacturers. In addition, we have aggressively pursued
this strategy by selectively increasing our vertical integration capabilities and expanding our
component manufacturing capacity in Mexico, Eastern Europe, Africa and Asia. Furthermore, we have
expanded our low-cost engineering capabilities in China, India and the Philippines.
Our success in generating cash flow will depend, in part, on our ability to manage working capital
efficiently. Working capital can be significantly impacted by the timing of cash flows from sales
and purchases. Historically, we have generally been successful in aligning our vendor payment
terms with our customer payment terms. However, our ability to continue to do so may be adversely
impacted by the unfavorable financial results of our suppliers and adverse automotive industry
conditions, as well as our financial results. In addition, our cash flow is impacted by our
ability to manage our inventory and capital spending efficiently. We utilize return on investment
as a measure of the efficiency with which assets are deployed to increase earnings. Improvements
in our return on investment will depend on our ability to maintain an appropriate asset base for
our business and to increase productivity and operating efficiency.
Restructuring
In 2005, we initiated a three-year restructuring strategy to (i) eliminate excess capacity and
lower our operating costs, (ii) streamline our organizational structure and reposition our business
for improved long-term profitability and (iii) better align our manufacturing footprint with the
changing needs of our customers. In light of industry conditions and customer announcements, we
expanded this strategy, and through the end of 2009, we incurred pretax restructuring costs of
approximately $672 million and related manufacturing inefficiency charges of approximately $68
million.
In the first quarter of 2010, we incurred additional restructuring costs of approximately $13
million and related manufacturing inefficiency charges of approximately $1 million, as we continued
to restructure our global operations and aggressively reduce our costs. We expect accelerated
restructuring actions and related investments to continue for the next few years.
Financing Transactions
On March 26, 2010, we issued $350 million in aggregate principal amount at maturity of senior
unsecured notes due 2018 with a coupon of 7.875% and a yield to maturity of 8.00% and $350 million
in aggregate principal amount at maturity of senior notes unsecured notes due 2020 with a coupon of
8.125% and a yield to maturity of 8.25%, yielding gross proceeds of $695 million (net proceeds were
$681 million, after giving effect to the payment of underwriting costs of $13 million). The net
proceeds from the issuance of the notes, together with existing cash on hand, were used to repay in
full an aggregate amount of $925 million of term loans provided under our first and second lien
credit agreements. In connection with these transactions, we recognized a loss on the
extinguishment of debt of approximately $12 million, resulting from the write-off of unamortized
debt issuance costs. For further information, see Note 6, “Long-Term Debt,” to the accompanying
condensed consolidated financial statements included in this Report.
Other Matters
In the first quarter of 2009, we incurred fees and expenses related to our capital restructuring of
$6 million.
In the first quarter of 2010, we recognized tax benefits of $18 million related to reductions in
recorded tax reserves. In the first quarter of 2009, we recognized tax benefits of $10 million
related to reductions in recorded tax reserves, as well as tax expense of $5 million related to the
establishment of valuation allowances in certain foreign subsidiaries.
29
LEAR CORPORATION
As discussed above, our results for the first quarters of 2010 and 2009 reflect the following items
(in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Costs related to restructuring actions, including manufacturing
inefficiencies of $1 million in 2010 and $5 million in 2009 |
|
$ |
14 |
|
|
$ |
115 |
|
Fees and expenses related to capital restructuring
and other related matters |
|
|
4 |
|
|
|
6 |
|
Loss on extinguishment of debt |
|
|
12 |
|
|
|
— |
|
Tax benefits, net |
|
|
(18 |
) |
|
|
(5 |
) |
For further information regarding these items, see “— Restructuring” and Note 2, “Restructuring
Activities,” and Note 10, “Income Taxes,” to the condensed consolidated financial statements
included in this Report.
This section includes forward-looking statements that are subject to risks and uncertainties. For
further information regarding other factors that have had, or may have in the future, a significant
impact on our business, financial condition or results of operations, see “— Forward-Looking
Statements” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended
December 31, 2009, as supplemented below in Part II — Item 1A, “Risk Factors,” in this Report.
RESULTS OF OPERATIONS
As a result of our emergence from Chapter 11 bankruptcy proceedings on November 9, 2009, and the
adoption of fresh-start accounting on November 7, 2009, in accordance with FASB Accounting
Standards CodificationTM (“ASC”) 852, “Reorganizations,” Lear is considered a new entity
for financial reporting purposes. Accordingly, our financial statements for the first quarter of
2010 are designated “Successor” and our financial statements for the first quarter of 2009 are
designated “Predecessor.” The effects of emergence and fresh-start accounting did not have a
material impact on the comparability of our results of operations between the periods, except as
discussed below.
A summary of our operating results as a percentage of net sales is shown below (dollar amounts in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, 2010 |
|
|
April 4, 2009 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seating systems |
|
$ |
2,313.5 |
|
|
|
78.7 |
% |
|
$ |
1,752.7 |
|
|
|
80.8 |
% |
Electrical power management systems |
|
|
625.0 |
|
|
|
21.3 |
|
|
|
415.6 |
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
2,938.5 |
|
|
|
100.0 |
|
|
|
2,168.3 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
254.8 |
|
|
|
8.7 |
|
|
|
(74.7 |
) |
|
|
(3.4 |
) |
Selling, general and administrative expenses |
|
|
127.9 |
|
|
|
4.4 |
|
|
|
112.1 |
|
|
|
5.2 |
|
Amortization of intangible assets |
|
|
6.7 |
|
|
|
0.2 |
|
|
|
1.1 |
|
|
|
0.1 |
|
Interest expense |
|
|
19.0 |
|
|
|
0.7 |
|
|
|
56.4 |
|
|
|
2.6 |
|
Other expense, net |
|
|
21.0 |
|
|
|
0.7 |
|
|
|
12.8 |
|
|
|
0.6 |
|
Provision for income taxes |
|
|
6.4 |
|
|
|
0.2 |
|
|
|
5.7 |
|
|
|
0.2 |
|
Net income
attributable to noncontrolling interests |
|
|
7.7 |
|
|
|
0.3 |
|
|
|
2.0 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Lear |
|
$ |
66.1 |
|
|
|
2.2 |
% |
|
$ |
(264.8 |
) |
|
|
(12.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 3, 2010 vs. Three Months Ended April 4, 2009
Net sales in the first quarter of 2010 were $2.9 billion, as compared to $2.2 billion in the first
quarter of 2009, an increase of $770 million or 36.0%. Improved global vehicle production volumes
and the impact of net foreign exchange rate fluctuations positively impacted net sales by $646
million and $131 million, respectively.
Gross profit (loss) and gross margin were $255 million and 8.7% in the quarter ended April 3, 2010,
as compared to ($75) million and (3.4%) in the quarter ended April 4, 2009. Improved global
vehicle production volumes positively impacted gross profit by $162 million. Gross profit also
benefited from favorable operating performance and the benefit of operational restructuring
actions. These increases were partially offset by the impact of selling price reductions. In
addition, gross profit includes operational restructuring costs of $14 million in the first quarter
of 2010, as compared to $109 million in the first quarter of 2009.
30
LEAR CORPORATION
Selling, general and administrative expenses, including engineering and development expenses, were
$128 million in the three months ended April 3, 2010, as compared to $112 million in the three
months ended April 4, 2009. The increase in selling, general and administrative expenses was
primarily due to an increase in compensation-related costs and engineering and development
expenses, partially offset by reduced costs related to our restructuring actions in the first
quarter of 2010 and fees and expenses related to our capital restructuring incurred in the first
quarter of 2009. As a percentage of net sales, selling, general and administrative expenses
declined to 4.4% in the first quarter of 2010, as compared to 5.2% in the first quarter of 2009, as
net sales increased at a more rapid rate than selling, general and administrative expenses.
Amortization of intangible assets was $7 million in the first quarter of 2010, as compared to $1
million in the first quarter of 2009, as a result of intangible assets recognized in connection
with the adoption of fresh-start accounting in 2009.
Interest expense was $19 million in the first quarter of 2010, as compared to $56 million in the
first quarter of 2009. The decrease in interest expense was due to lower borrowing levels in 2010
and costs incurred in connection with our prior year primary credit facility in 2009.
Other expense, which includes non-income related taxes, foreign exchange gains and losses,
discounts and expenses associated with our factoring facilities, gains and losses related to
derivative instruments and hedging activities, equity in net income (loss) of affiliates, gains and
losses on the sales of assets and other miscellaneous income and expense, was $21 million in the
first three months of 2010, as compared to $13 million in the first three months of 2009. The
increase in other expense between periods was primarily due to unfavorable foreign exchange and the
write-off of unamortized debt issuance costs of $12 million resulting from the repayment of term
loans outstanding under the first lien credit agreement in the first quarter of 2010. These
increases were partially offset by an improvement in the performance of our equity affiliates.
The provision for income taxes was $6 million for the first quarter of 2010, representing an
effective tax rate of 8.0% on pretax income of $80 million, as compared to $6 million for the first
quarter of 2009, representing an effective tax rate of (2.2%) on a pretax loss of $257 million. In
the first quarter of 2010, the provision for income taxes was impacted by the mix of earnings among
tax jurisdictions, as well as a tax benefit of $18 million, including interest, related to
reductions in recorded tax reserves. The provision was also impacted by a portion of our
restructuring charges and other expenses, for which no tax benefit was provided as the charges were
incurred in certain countries for which no tax benefit is likely to be realized due to a history of
operating losses in those countries. In the first quarter of 2009, the provision for income taxes
primarily relates to profitable foreign operations, as well as withholding taxes on royalties and
dividends paid by our foreign subsidiaries. In addition, we incurred losses in several countries
that provided no tax benefits due to valuation allowances on our deferred tax assets in those
countries. The provision was also impacted by a portion of our restructuring charges, for which no
tax benefit was provided as the charges were incurred in certain countries for which no tax benefit
is likely to be realized due to a history of operating losses in those countries. Additionally,
the provision was impacted by tax benefits of $10 million, including interest, related to
reductions in recorded tax reserves and tax expense of $5 million related to the establishment of
valuation allowances in certain foreign subsidiaries. Excluding these items, the effective tax rate
in the first quarters of 2010 and 2009 approximated the U.S. federal statutory income tax rate of
35% adjusted for income taxes on foreign earnings, losses and remittances, foreign and U.S.
valuation allowances, tax credits, income tax incentives and other permanent items.
Further, our current and future provision for income taxes is significantly impacted by the initial
recognition of and changes in valuation allowances in certain countries, particularly the United
States. We intend to maintain these allowances until it is more likely than not that the deferred
tax assets will be realized. Our future income taxes will include no tax benefit with respect to
losses incurred and no tax expense with respect to income generated in these countries until the
respective valuation allowances are eliminated. Accordingly, income taxes are impacted by the U.S.
and foreign valuation allowances and the mix of earnings among jurisdictions.
Net income (loss) attributable to Lear in the first quarter of 2010 was $66 million, or $1.22 per
diluted share, as compared to ($265) million, or ($3.42) per diluted share, in the first quarter of
2009, for the reasons described above.
Reportable Operating Segments
We have two reportable operating segments: seating systems, which includes seat systems and related
components, and electrical power management systems, which includes traditional wiring and power
management systems, as well as emerging high-power and hybrid electrical systems. The financial
information presented below is for our two reportable operating segments and our other category for
the periods presented. The other category includes unallocated costs related to corporate
headquarters, geographic headquarters and the elimination of intercompany activities, none of which
meets the requirements of being classified as an operating segment. Corporate and geographic
headquarters costs include various support functions, such as information technology, purchasing,
corporate finance, legal, executive administration and human resources. Financial measures
regarding each segment’s income (loss)
31
LEAR CORPORATION
before interest expense, other expense and provision for
income taxes (“segment earnings”) and segment earnings divided by net sales (“margin”) are not
measures of performance under accounting principles generally accepted in the United States
(“GAAP”). Segment earnings and the related margin are used by management to evaluate the
performance of our reportable operating segments. Segment earnings should not be considered in
isolation or as a substitute for net income (loss) attributable to Lear, net cash provided by (used
in) operating activities or other statement of operations or cash flow statement data prepared in
accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings,
as we determine it, may not be comparable to related or similarly titled measures reported by other
companies. For a reconciliation of consolidated segment earnings to consolidated income (loss)
before provision for income taxes, see Note 15, “Segment Reporting,” to the condensed consolidated
financial statements included in this Report.
Seating Systems
A summary of financial measures for our seating systems segment is shown below (dollar amounts in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
2,313.5 |
|
|
$ |
1,752.7 |
|
Segment earnings (1) |
|
|
149.6 |
|
|
|
(75.3 |
) |
Margin |
|
|
6.5 |
% |
|
|
(4.3 |
)% |
|
|
|
| (1) |
|
See definition above. |
Seating systems net sales were $2.3 billion in the first quarter of 2010, as compared to $1.8
billion in the first quarter of 2009, an increase of $561 million or 32.0%. Improved global
vehicle production volumes and the impact of net foreign exchange rate fluctuations positively
impacted net sales by $503 million and $113 million, respectively. Segment earnings, including
restructuring costs, and the related margin on net sales were $150 million and 6.5% in the first
three months of 2010, as compared to $($75) million and (4.3%) in the first three months of 2009.
Improved global vehicle production volumes positively impacted segment earnings. The benefit of
our restructuring and other operating performance actions were largely offset by the impact of
selling price reductions. In addition, in the first quarter of 2010, we incurred costs of $8
million related to our restructuring actions, as compared to $99 million in 2009.
Electrical Power Management Systems
A summary of financial measures for our electrical power management systems segment is shown below
(dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
625.0 |
|
|
$ |
415.6 |
|
Segment earnings (1) |
|
|
25.6 |
|
|
|
(67.6 |
) |
Margin |
|
|
4.1 |
% |
|
|
(16.3 |
)% |
|
|
|
| (1) |
|
See definition above. |
Electrical power management systems net sales were $625 million in the first quarter of 2010, as
compared to $416 million in the first quarter of 2009, an increase of $209 million or 50.4%.
Improved global vehicle production volumes, the impact of new business and the impact of net
foreign exchange rate fluctuations positively impacted net sales by $143 million, $66 million and
$18 million, respectively. Segment earnings, including restructuring costs, and the related margin
on net sales were $26 million and 4.1% in the first three months of 2010, as compared to ($68)
million and (16.3%) in the first three months of 2009. Improved global vehicle production volumes
and the benefit of our restructuring and other operating performance actions positively impacted
segment earnings. These increases were partially offset by the impact of selling price reductions.
In addition, in the first quarter of 2010, we incurred costs of $6 million related to our
restructuring actions, as compared to $15 million in the first quarter of 2009.
Other
A summary of financial measures for our other category, which is not an operating segment, is shown
below (dollar amounts in millions):
32
LEAR CORPORATION
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
Successor |
|
|
Predecessor |
|
| |
|
April 3, |
|
|
April 4, |
|
| |
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
— |
|
|
$ |
— |
|
Segment earnings (1) |
|
|
(55.0 |
) |
|
|
(45.0 |
) |
Margin |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
| (1) |
|
See definition above. |
Our other category includes unallocated corporate and geographic headquarters costs, as well as the
elimination of intercompany activity. Corporate and geographic headquarters costs include various
support functions, such as information technology, purchasing, corporate finance, legal, executive
administration and human resources. Segment earnings related to our other category were ($55)
million in the first three months of 2010, as compared to ($45) million in the first three months
of 2009, primarily due to an increase in compensation-related costs, partially offset by fees and
expenses related to our capital restructuring incurred in the first quarter of 2009.
RESTRUCTURING
In 2005, we initiated a three-year restructuring strategy to (i) eliminate excess capacity and
lower our operating costs, (ii) streamline our organizational structure and reposition our business
for improved long-term profitability and (iii) better align our manufacturing footprint with the
changing needs of our customers. In light of industry conditions and customer announcements, we
expanded this strategy, and through the end of 2009, we incurred pretax restructuring costs of
approximately $672 million and related manufacturing inefficiency charges of approximately $68
million. In the first quarter of 2010, we continued to restructure our global operations and to
aggressively reduce our costs. We expect accelerated restructuring actions and related investments
to continue for the next few years.
Restructuring costs include employee termination benefits, fixed asset impairment charges and
contract termination costs, as well as other incremental costs resulting from the restructuring
actions. These incremental costs principally include equipment and personnel relocation costs. We
also incur incremental manufacturing inefficiency costs at the operating locations impacted by the
restructuring actions during the related restructuring implementation period. Restructuring costs
are recognized in our consolidated financial statements in accordance with GAAP. Generally,
charges are recorded as elements of the restructuring strategy are finalized. Actual costs
recorded in our consolidated financial statements may vary from current estimates.
In the first quarter of 2010, we recorded restructuring and related manufacturing inefficiency
charges of $14 million as cost of sales in connection with our restructuring actions. Cash
expenditures related to our restructuring actions totaled $46 million in the first quarter of 2010.
The first quarter 2010 charges consist of employee termination benefits of $8 million, asset
impairment charges of $3 million and other related costs of $2 million. We also estimate that we
incurred approximately $1 million in manufacturing inefficiency costs during this period as a
result of the restructuring. Employee termination benefits were recorded based on existing union
and employee contracts, statutory requirements and completed negotiations. Asset impairment
charges relate to the disposal of buildings, leasehold improvements and machinery and equipment
with carrying values of $3 million in excess of related estimated fair values.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund general business requirements, including working capital
requirements, capital expenditures, customer launch activity and indebtedness. In addition,
approximately 90% of the costs associated with our current restructuring strategy are expected to
require cash expenditures. Our principal source of liquidity is cash flows from operating
activities and existing cash balances. A substantial portion of our operating income is generated
by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the
combination of dividends, royalties, intercompany loan repayments and other distributions and
advances from our subsidiaries to provide the funds necessary to meet our obligations. There are
no significant restrictions on the ability of our subsidiaries to pay dividends or make other
distributions to Lear. For further information regarding potential dividends from our non-U.S.
subsidiaries, see Note 11, “Income Taxes,” to the consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Cash Flows
Net cash provided by operating activities was $39 million in the first three months of 2010, as
compared to cash used in operating activities of $337 million in the first three months of 2009.
The increase primarily reflects higher earnings in the first quarter of 2010 and the termination of
our European accounts receivable factoring facility in the first quarter of 2009. The net change
in sold accounts receivable resulted in an increase in operating cash flow between periods of $139
million. This increase was partially offset by the net
33
LEAR CORPORATION
change in working capital, which resulted
in a decrease in operating cash flow between periods of $46 million. In the first three months of
2010, increases in accounts receivable and accounts payable resulted in a use of cash of $418
million and a source of cash of $292 million, respectively, primarily reflecting the impact of
increased production volumes.
Net cash used in investing activities was $31 million in the first three months of 2010 and $12
million in the first three months of 2009, reflecting an increase in capital expenditures of $14
million between periods. Capital expenditures in 2010 are estimated at approximately $175 million.
Net cash used in financing activities was $243 million in the first three months of 2010 and $14
million in the first three months of 2009. The increase in financing cash outflow primarily
reflects the full repayment of $925 million of term loans outstanding, partially offset by $681
million of net proceeds from the issuance of the Notes in the first quarter of 2010. For further
information regarding our 2010 financing transactions, see “— Executive Overview,” above and “—
Capitalization,” below.
Capitalization
In addition to cash provided by operating activities, we utilize uncommitted credit facilities to
fund our capital expenditures and working capital requirements at certain of our foreign
subsidiaries. We utilize uncommitted lines of credit as needed for our short-term working capital
fluctuations. As of April 3, 2010 and April 4, 2009, our outstanding short-term debt balance,
excluding borrowings outstanding under our prior year primary credit facility, was $43 million and
$40 million, respectively. For the three months ended April 3, 2010 and April 4, 2009, the
weighted average short-term interest rate on our short-term debt balances, excluding rates under
our prior year primary credit facility, was 2.8% and 4.8%, respectively. The availability of
uncommitted lines of credit may be affected by our financial performance, credit ratings and other
factors.
Senior Notes
On March 26, 2010, we issued $350 million in aggregate principal amount at maturity of unsecured
7.875% senior notes due 2018 (the “2018 Notes”) and $350 million in aggregate principal amount at
maturity of unsecured 8.125% senior notes due 2020 (the “2020 Notes” and together with the 2018
Notes, the “Notes”), yielding gross proceeds of $695 million (net proceeds were $681 million, after
giving effect to the payment of underwriting costs of $13 million). The 2018 Notes were priced at
99.276% of par, resulting in a yield to maturity of 8.00%, and the 2020 Notes were priced at
99.164% of par, resulting in a yield to maturity of 8.25%. The net proceeds from the issuance of
the Notes, together with existing cash on hand, were used to repay in full an aggregate amount of
$925 million of term loans provided under our first and second lien credit agreements.
Interest is payable on the Notes on March 15 and September 15 of each year, beginning September 15,
2010. The 2018 Notes mature on March 15, 2018, and the 2020 Notes mature on March 15, 2020. As of
April 3, 2010, we had $695 million of senior notes outstanding. Scheduled cash interest payments
on the Notes are approximately $27 million in the last nine months of 2010. As of April 3, 2010,
we were in compliance with all covenants under the indenture governing the Notes.
The Notes are senior unsecured obligations. Our obligations under the Notes are fully and
unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain domestic
subsidiaries, which are directly or indirectly 100% owned by Lear. The Notes contain certain
restrictive covenants and customary events of default.
For further information related to the Notes, including information on early redemption, covenants
and events of default, see Note 6, “Long-Term Debt,” to the condensed consolidated financial
statements included in this Report and the indenture (as amended and supplemented) governing the
Notes, which has been incorporated by reference as exhibits to this Report.
First and Second Lien Credit Agreements
In connection with our emergence from Chapter 11 bankruptcy proceedings, we entered into a first
lien credit agreement and a second lien credit agreement in the fourth quarter of 2009. The first
lien credit agreement provided for the issuance of $375 million of term loans, and the second lien
credit agreement provided for the issuance of $550 million of term loans.
Effective March 19, 2010, we entered into an amendment and restatement of the first lien credit
agreement (as amended, restated or otherwise modified, the “first lien credit agreement”), which
provides for a $110 million revolving credit facility (the “Revolving Credit Facility”). The
Revolving Credit Facility permits borrowings for general corporate and working capital purposes and
the issuance of letters of credit. The commitments under the Revolving Credit Facility expire on
March 19, 2013.
As of April 3, 2010, there were no borrowings outstanding under the Revolving Credit Facility, and
we were in compliance with all covenants set forth in the agreement governing the Revolving Credit
Facility.
34
LEAR CORPORATION
For further information related to the Revolving Credit Facility, including information on pricing,
covenants and events of default, see Note 6, “Long-Term Debt,” to the condensed consolidated
financial statements included in this Report and the amended and restated first lien credit
agreement, which has been incorporated by reference as an exhibit to this Report.
Also on March 19, 2010, we amended the first lien credit agreement, which facilitated, among other
things, the issuance of the Notes, and in connection therewith, permitted the application of the
proceeds of such offering to prepay amounts outstanding under the second lien credit agreement and
the application of our existing cash on hand to prepay remaining amounts outstanding under the
second lien credit agreement. The amendment also provides for the repurchase of certain amounts of
the Notes and for a limited amount of cash dividend payments or repurchases of our common stock,
when certain terms and conditions are met.
Contractual Obligations
As a result of the financing transactions discussed above in “— Senior Notes,” and “— First and
Second Lien Credit Agreements,” our scheduled maturities of long-term debt, including capital lease
obligations, and scheduled interest payments on the Notes as of April 3, 2010, are shown below (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
| |
|
|
Long-term debt maturities |
|
$ |
2.9 |
|
|
$ |
1.9 |
|
|
$ |
1.4 |
|
|
$ |
0.4 |
|
|
$ |
0.2 |
|
|
$ |
695.3 |
|
|
$ |
702.1 |
|
Scheduled interest payments |
|
|
27.1 |
|
|
|
56.0 |
|
|
|
56.0 |
|
|
|
56.0 |
|
|
|
56.0 |
|
|
|
252.9 |
|
|
|
504.0 |
|
| |
|
|
Total |
|
$ |
30.0 |
|
|
$ |
57.9 |
|
|
$ |
57.4 |
|
|
$ |
56.4 |
|
|
$ |
56.2 |
|
|
$ |
948.2 |
|
|
$ |
1,206.1 |
|
| |
|
|
Off-Balance Sheet Arrangements
Guarantees and Commitments
We guarantee certain of the debt of one of our unconsolidated affiliates. As of April 3, 2010, the
aggregate amount of debt guaranteed was approximately $3 million.
Accounts Receivable Factoring
Certain of our Asian subsidiaries periodically factor their accounts receivable with financial
institutions. Such receivables are factored without recourse to us and are excluded from accounts
receivable in the condensed consolidated balance sheets included in this Report. We cannot provide
any assurances that these or any other factoring facilities will be available or utilized in the
future. There were no factored receivables as of April 3, 2010 and December 31, 2009.
Credit Ratings
The credit ratings below are not recommendations to buy, sell or hold our securities and are
subject to revision or withdrawal at any time by the assigning rating organization. Each rating
should be evaluated independently of any other rating.
Our Corporate Rating and the credit ratings of our senior unsecured debt as of the date of this
Report are shown below.
| |
|
|
|
|
| |
|
Standard & Poor’s |
|
Moody’s |
| |
|
Ratings Services |
|
Investors Service |
| |
Corporate rating
|
|
B
|
|
B1 |
Credit rating of senior unsecured debt
|
|
BB-
|
|
B1 |
Ratings outlook
|
|
Positive
|
|
Positive |
| |
Adequacy of Liquidity Sources
As of April 3, 2010, we had approximately $1.3 billion of cash and cash equivalents on hand, which
we believe will enable us to meet our liquidity needs to satisfy ordinary course business
obligations. However, our ability to continue to meet such liquidity needs is subject to, and will
be affected by, cash flows from operations, including the impact of restructuring activities,
challenging automotive industry conditions, the financial condition of our customers and suppliers
and other related factors. Additionally, as discussed in “— Executive Overview” above, an economic
downturn or a reduction in production levels could negatively impact our financial condition.
Furthermore, our future financial results will be affected by cash flows from operations, including
the impact of restructuring activities, and will also be subject to certain factors outside of our
control, including those described above in this paragraph. See “— Executive Overview” above, “—
Forward-Looking Statements” below and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K
for the year ended December 31, 2009, as supplemented below in Part II — Item 1A, “Risk Factors,”
in this Report, for further discussion of the risks and uncertainties affecting our cash flows from
operations, borrowing availability and overall liquidity.
35
LEAR CORPORATION
Market Rate Sensitivity
In the normal course of business, we are exposed to market risk associated with fluctuations in
foreign exchange rates and interest rates. We manage these risks through the use of derivative
financial instruments in accordance with management’s guidelines. We enter into all hedging
transactions for periods consistent with the underlying exposures. We do not enter into derivative
instruments for trading purposes.
Foreign Exchange
Operating results may be impacted by our buying, selling and financing in currencies other than the
functional currency of our operating companies (“transactional exposure”). We mitigate this risk
by entering into forward foreign exchange, futures and option contracts. The foreign exchange
contracts are executed with banks that we believe are creditworthy. Gains and losses related to
foreign exchange contracts are deferred where appropriate and included in the measurement of the
foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign
exchange contracts are generally offset by the direct effects of currency movements on the
underlying transactions.
Our most significant foreign currency transactional exposures relate to the Mexican peso and
various European currencies. We have performed a quantitative analysis of our overall currency
rate exposure as of April 3, 2010. The potential adverse earnings impact related to net
transactional exposures from a hypothetical 10% strengthening of the U.S. dollar relative to all
other currencies for a twelve-month period is approximately $9 million. The potential adverse
earnings impact related to net transactional exposures from a similar strengthening of the Euro
relative to all other currencies for a twelve-month period is approximately $11 million.
As of April 3, 2010, foreign exchange contracts representing $311 million of notional amount were
outstanding with maturities of less than nine months. As of April 3, 2010, the fair value of these
contracts was approximately $14 million. A 10% change in the value of the U.S. dollar relative to
all other currencies would result in a $13 million change in the aggregate fair value of these
contracts. A 10% change in the value of the Euro relative to all other currencies would result in
a $13 million change in the aggregate fair value of these contracts.
There are certain shortcomings inherent in the sensitivity analysis presented. The analysis
assumes that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or
Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings
impact to increase or decrease depending on the currency and the direction of the rate movement.
In addition to the transactional exposure described above, our operating results are impacted by
the translation of our foreign operating income into U.S. dollars (“translation exposure”). In
2009, net sales outside of the United States accounted for 84% of our consolidated net sales,
although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange
contracts to mitigate this exposure.
Interest Rates
Historically, we have used interest rate swap and other derivative contracts to manage our exposure
to variable interest rates on outstanding variable rate debt instruments indexed to United States
or European Monetary Union short-term money market rates. As of April 3, 2010, and December 31,
2009, there were no interest rate contracts outstanding. The Company will continue to evaluate,
and may use derivative financial instruments, including forwards, futures, options, swaps and other
derivative contracts to manage its exposures to fluctuations in interest rates in the future.
Commodity Prices
We have commodity price risk with respect to purchases of certain raw materials, including steel,
leather, resins, chemicals, copper and diesel fuel. Raw material, energy and commodity costs have
been extremely volatile over the past several years. In limited circumstances, we have used
financial instruments to mitigate this risk.
We have developed and implemented strategies to mitigate the impact of higher raw material, energy
and commodity costs, which include cost reduction actions, such as the selective in-sourcing of
components, the continued consolidation of our supply base, longer-term purchase commitments and
the selective expansion of low-cost country sourcing and engineering, as well as value engineering
and product benchmarking. However, these strategies, together with commercial negotiations with
our customers and suppliers, typically offset only a portion of the adverse impact. These costs
remain volatile and could have an adverse impact on our operating results in the foreseeable
future. See “— Forward-Looking Statements” below and Item 1A, “Risk Factors — High raw material
costs could continue to have an adverse impact on our profitability,” in our Annual Report on Form
10-K for the year ended December 31, 2009.
36
LEAR CORPORATION
Historically, we have used derivative instruments to reduce our exposure to fluctuations in certain
commodity prices, including copper. As of April 3, 2010, and December 31, 2009, there were no
commodity swap contracts outstanding. The Company will continue to evaluate and may use derivative
financial instruments, including forwards, futures, options, swaps and other derivative contracts
to manage its exposures to commodity prices in the future.
OTHER MATTERS
Legal and Environmental Matters
We are involved from time to time in various legal proceedings and claims, including, without
limitation, commercial and contractual disputes, product liability claims and environmental and
other matters. As of April 3, 2010, we had recorded reserves for pending legal disputes, including
commercial disputes and other matters, of $19 million. In addition, as of April 3, 2010, we had
recorded reserves for product liability claims and environmental matters of $36 million and $3
million, respectively. Although these reserves were determined in accordance with GAAP, the
ultimate outcomes of these matters are inherently uncertain, and actual results may differ
significantly from current estimates. For a description of risks related to various legal
proceedings and claims, see Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year
ended December 31, 2009. For a more complete description of our outstanding material legal
proceedings, see Note 14, “Legal and Other Contingencies,” to the condensed consolidated financial
statements included in this Report.
Significant Accounting Policies and Critical Accounting Estimates
Certain of our accounting policies require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. These
estimates and assumptions are based on our historical experience, the terms of existing contracts,
our evaluation of trends in the industry, information provided by our customers and suppliers and
information available from other outside sources, as appropriate. However, these estimates and
assumptions are subject to an inherent degree of uncertainty. As a result, actual results in these
areas may differ significantly from our estimates. For a discussion of our significant accounting
policies and critical accounting estimates, see Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Significant Accounting Policies and Critical
Accounting Estimates,” and Note 4, “Summary of Significant Accounting Policies,” to the
consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2009. There have been no significant changes in our significant accounting policies
or critical accounting estimates during the first three months of 2010.
Recently Issued Accounting Pronouncements
Financial Instruments and Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) amended ASC 860, “Transfers and Servicing,” with
Accounting Standards Update (“ASU”) 2009-16, “Accounting for Transfers of Financial Assets,” to,
among other things, eliminate the concept of qualifying special purpose entities, provide
additional sale accounting requirements and require enhanced disclosures. The provisions of this
update are effective for annual reporting periods beginning after November 15, 2009. The effects
of adoption were not significant because our previous asset-backed securitization facility expired
in 2008. We will assess the impact of this update on any future securitizations.
The FASB amended ASC 820, “Fair Value Measurements and Disclosures,” with ASU 2010-06, “Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” to
require additional disclosures regarding fair value measurements, including the amount and reasons
for transfers between levels within the fair value hierarchy and more detailed information
regarding the inputs and valuation techniques used in determining the fair value of assets and
liabilities classified as Level 2 or Level 3 within the fair value hierarchy. In addition, this
update clarifies previous guidance related to the level at which fair value disclosures should be
disaggregated. With the exception of additional disclosures related to activity within Level 3 of
the fair value hierarchy, which are effective for fiscal years beginning after December 15, 2010,
the provisions of this update are effective as of January 1, 2010. The effects of adoption were
not significant. For further information, see Note 16, “Financial Instruments,” to the condensed
consolidated financial statements included in this Report.
Consolidation of Variable Interest Entities
The FASB amended ASC 810, “Consolidations,” with ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities.” This update significantly changes the
model for determining whether an entity is the primary beneficiary and should thus consolidate a
variable interest entity. In addition, this update requires additional disclosures and an ongoing
assessment of whether a variable interest entity should be consolidated. The provisions of this
update are effective for annual
37
LEAR CORPORATION
reporting periods beginning after November 15, 2009. We have
ownership interests in consolidated and non-consolidated variable interest entities. The effects
of adoption were not significant.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements made by us or on our behalf. The words “will,” “may,” “designed to,” “outlook,”
“believes,” “should,” “anticipates,” “plans,” “expects,” “intends,” “estimates” and similar
expressions identify these forward-looking statements. All statements contained or incorporated in
this Report which address operating performance, events or developments that we expect or
anticipate may occur in the future, including statements related to business opportunities, awarded
sales contracts, sales backlog and ongoing commercial arrangements, or statements expressing views
about future operating results, are forward-looking statements. Important factors, risks and
uncertainties that may cause actual results to differ materially from anticipated results include,
but are not limited to:
| • |
|
general economic conditions in the markets in which we operate, including changes in
interest rates or currency exchange rates; |
| |
| • |
|
the financial condition and restructuring actions of our customers and suppliers; |
| |
| • |
|
changes in actual industry vehicle production levels from our current estimates; |
| |
| • |
|
fluctuations in the production of vehicles or the loss of business with respect to a
vehicle model for which we are a significant supplier; |
| |
| • |
|
disruptions in the relationships with our suppliers; |
| |
| • |
|
labor disputes involving us or our significant customers or suppliers or that otherwise
affect us; |
| |
| • |
|
the outcome of customer negotiations; |
| |
| • |
|
the impact and timing of program launch costs; |
| |
| • |
|
the costs, timing and success of restructuring actions; |
| |
| • |
|
increases in our warranty or product liability costs; |
| |
| • |
|
risks associated with conducting business in foreign countries; |
| |
| • |
|
competitive conditions impacting our key customers and suppliers; |
| |
| • |
|
the cost and availability of raw materials and energy; |
| |
| • |
|
our ability to mitigate increases in raw material, energy and commodity costs; |
| |
| • |
|
the outcome of legal or regulatory proceedings to which we are or may become a party; |
| |
| • |
|
unanticipated changes in cash flow, including our ability to align our vendor payment terms
with those of our customers; |
| |
| • |
|
our ability to access capital markets on commercially reasonable terms; |
| |
| • |
|
impairment charges initiated by adverse industry or market developments; |
| |
| • |
|
our anticipated future performance, including, without limitation, our ability to maintain
or increase revenue and gross margins, control future operating expenses and make necessary
capital expenditures; and |
| |
| • |
|
other risks, described in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for
the year ended December 31, 2009, as supplemented and updated by Part II — Item 1A, “Risk
Factors,” in this Report, and from time to time in our other Securities and Exchange
Commission filings. |
The forward-looking statements in this Report are made as of the date hereof, and we do not assume
any obligation to update, amend or clarify them to reflect events, new information or circumstances
occurring after the date hereof.
38
LEAR CORPORATION
ITEM 4 — CONTROLS AND PROCEDURES
| (a) |
|
Disclosure Controls and Procedures |
| |
| |
|
The Company has evaluated, under the supervision and with the participation of the Company’s
management, including the Company’s Chairman, Chief Executive Officer and President along with
the Company’s Senior Vice President and Chief Financial Officer, the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of
the period covered by this Report. The Company’s disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been
detected. Based on the evaluation described above, the Company’s Chairman, Chief Executive
Officer and President along with the Company’s Senior Vice President and Chief Financial
Officer have concluded that the Company’s disclosure controls and procedures were effective to
provide reasonable assurance that the desired control objectives were achieved as of the end
of the period covered by this Report. |
| |
| (b) |
|
Changes in Internal Controls over Financial Reporting |
| |
| |
|
There was no change in the Company’s internal control over financial reporting that occurred
during the fiscal quarter ended April 3, 2010, that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting. |
PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings and claims, including, without
limitation, commercial and contractual disputes, product liability claims and environmental and
other matters. In particular, we are involved in the outstanding material legal proceedings
described in Note 14, “Legal and Other Contingencies,” to the condensed consolidated financial
statements included in this Report. In addition, see Item 1A, “Risk Factors,” in our Annual Report
on Form 10-K for the year ended December 31, 2009, for a description of risks relating to various
legal proceedings and claims.
ITEM 1A — RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2009, except to supplement and update certain
of those risk factors as follows:
| |
• |
|
Our existing indebtedness and volatility in the global capital and financial markets could
restrict our business activities and have an adverse effect on our business, financial
condition and results of operations. |
| |
| |
|
|
As of April 3, 2010, we had approximately $745 million of outstanding indebtedness. We are
permitted by the terms of our notes and our other debt instruments to incur substantial
additional indebtedness. Our inability to generate sufficient cash flow to satisfy our debt
obligations, to refinance our debt obligations or to access capital and financial markets on
commercially reasonable terms could have an adverse effect on our business, financial condition
and results of operations. Additionally, the failure by us to comply with the covenants in our
debt instruments could result in a default under our indebtedness. |
39
LEAR CORPORATION
ITEM 5 – OTHER INFORMATION
| |
|
|
The Company held its Annual Meeting of Stockholders on May 13, 2010. Set forth below are the
final voting results for the proposal submitted to a vote of the stockholders. |
The appointment of the firm Ernst & Young LLP as the Company’s independent registered public
accounting firm for the year ending December 31, 2010.
| |
|
|
|
|
|
|
|
|
| For |
|
Against |
|
|
Abstain |
|
33,372,961 |
|
|
2,821,422 |
|
|
|
790,679 |
|
ITEM 6 — EXHIBITS
The exhibits listed on the “Index to Exhibits” on page 42 are filed with this Form 10-Q or
incorporated by reference as set forth below.
40
LEAR CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
LEAR CORPORATION
|
|
| Dated: May 14, 2010 |
By: |
/s/ Robert E. Rossiter
|
|
| |
|
Robert E. Rossiter |
|
| |
|
Chairman, Chief Executive Officer and President |
|
| |
| |
|
|
| |
By: |
/s/ Matthew J. Simoncini
|
|
| |
|
Matthew J. Simoncini |
|
| |
|
Senior Vice President and Chief Financial Officer |
|
41
LEAR CORPORATION
Index to Exhibits
| |
|
|
| Exhibit |
|
|
| Number |
|
Exhibit |
4.1 |
|
Indenture, dated March 26, 2010, among the Company, the subsidiary guarantors party thereto and The
Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit
4.1 to the Company’s Current Report on Form 8-K dated March 23, 2010). |
|
|
|
4.2 |
|
First Supplemental Indenture, dated March 26, 2010, among the Company, the subsidiary guarantors
party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated herein
by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated March 23, 2010). |
|
|
|
10.1 |
|
Amended and Restated Credit Agreement, dated as of March 18, 2010, among the Company, the several
lenders from time to time parties thereto, Barclays Bank PLC, as Documentation Agent, and JPMorgan
Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 19, 2010). |
|
|
|
10.2 |
|
First Amendment to Amended and Restated Credit Agreement, dated as of March 18, 2010, among the
Company, the several lenders from time to time parties thereto, Barclays Bank PLC, as Documentation
Agent, and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated
herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K dated March 19, 2010). |
|
|
|
**10.3* |
|
Lear Corporation Outside Directors Compensation Plan, amended and restated effective January 1, 2010. |
|
|
|
**10.4* |
|
Form of 2010 Restricted Stock Unit
Terms and Conditions under the Lear Corporation 2009 Long-Term Stock Incentive Plan. |
|
|
|
**10.5* |
|
Form of Performance Unit Terms and
Conditions under the Lear Corporation 2009 Long-Term Stock Incentive Plan. |
|
|
|
** 31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. |
|
|
|
** 31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
|
|
|
** 32.1 |
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
** 32.2 |
|
Certification by Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
| * |
|
Compensatory plan or arrangement. |
| |
| ** |
|
Filed herewith. |
42