Lear Corp. plans to emerge from bankruptcy protection Monday with a message from Chief Executive
Bob Rossiter: "We are a tighter, leaner company that will never make some of the mistakes we made in the past."
The Southfield, Mich., company, which produces seats and electronics for automobiles, expects to emerge from bankruptcy court on Monday, just four months after it filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Despite concerns voiced earlier in the year suggesting there would be no bankruptcy financing available for auto suppliers, Mr. Rossiter managed to line up creditors and lenders willing to fund a $500 million debtor-in-possession facility and exchange billions in debt for new equity.
Lear and many of the other key players in the U.S. supply industry avoided the dire prospects predicted for the auto-supply chain earlier this year. At least 50 auto suppliers have filed for bankruptcy protection in 2009, but many of them have managed to quickly regain footing and avoid liquidation even though the U.S. auto-supply chain is operating at about 46% of its actual production capacity, according to the Original Equipment Suppliers Association.
"There has been significant progress in recent months to recognize and protect the [suppliers] that will continue to provide the foundation beneath any [auto maker] looking forward to surviving this crisis," CSM world-wide supply-chain analyst John Eaton said in a recent research report. Billions in aid from the U.S. Treasury Department, and an unexpected, albeit limited, source of DIP financing has helped salvage many of the larger parts makers.
On Monday, Lear is expected to post a $100 million operating profit and $100 million in positive free cash flow for the third quarter, as well as announce that its new business backlog for the next three years has swelled to $1.4 billion, or 25% higher than it was in January, according to a spokesman.
For Mr. Rossiter, who has been at Lear's helm since 2003, the challenge has never been about proving that his company has a strong core. His challenge has been posting sustained earnings growth while relying heavily on U.S. auto makers that often oblige suppliers to take price reductions, shoulder material cost increases, and incur mountains of debt in order to win supply contracts.
It was a pile of debt, much of which was related to a business it hasn't owned since mid-decade, that landed Lear in bankruptcy court.
The auto supplier divested its interiors business—which relied on the extremely low-margin production of injection-molded plastic parts—to billionaire investor Wilbur Ross.
As a part of that deal, Lear agreed to keep about $2 billion of that business's debt. "We were carrying this $2 billion in debt that we had no sales on," Mr. Rossiter said in an interview Friday.
By last November, after the meltdown of the credit markets and a nosedive in U.S. auto sales, Mr. Rossiter said it was clear that the company would have to do something about its debt load.
Rather than wait for government funding or request significant bailouts from its customers, Mr. Rossiter tried his luck with bankruptcy and creditors, making it clear that "we are more realistic about our approach...we want a fair return for what we give."
Lear expects its stock to resume trading on the New York Stock Exchange upon the company's emergence from bankruptcy court. Mr. Rossiter said the equity, which is mostly owned by the creditors who backed the Chapter 11 filing, is expected to be valued at $1.9 billion, a level not seen since mid-2008. "We think we fixed the business and we're going to come out with investment-grade metrics," Mr. Rossiter said.
Under Mr. Rossiter, Lear increasingly has moved operations to lower-cost markets and won business in markets outside the U.S., including Asia and Europe. Its most recent achievement was scoring the seating business for the Fiat 500 compact car that
Fiat SpA plans to make in Mexico and sell in the U.S.
But despite deep retooling, Lear has made one annual profit in the past four fiscal years. Standard & Poor's Ratings Services, in a news release issued late Friday about its expectations for Lear's credit ratings, estimated that 37% of Lear's 2008 sales are based on deliveries to General Motors Co. and
Ford Motor Co. A quarter of its seat sales are to GM. S&P expects to assign a "B" credit rating to Lear's corporate credit and view it with a "stable outlook."
Analysts expect Lear's court-protected debt restructuring, which will lower interest payments, to help drive profits. Lear also reworked supply and labor contracts in bankruptcy court in order to cut costs and fortify pricing. "Based on the capital structure under the plan of reorganization, the new company will have reduced its debt by more than 75% from pre-bankruptcy levels," S&P credit analyst Lawrence Orlowski wrote in the release.
"We assume Lear's global sales for 2010 will grow 12%," Mr. Orlowski added. Still, the supplier is likely to face major challenges. "We believe the new Lear's business risk profile after emergence will be weak, largely because of volatile auto production levels, high fixed costs, fierce competition, and severe pricing pressures that characterize the global auto supplier industry," Mr. Orlowski said.
