Lear Corporation, based in Southfield, Mich., makes interiors for automobiles. It has three high-yield issues outstanding totaling $1.65 billion, making it the largest automotive parts issuer in mainstream high-yield. With a rating of (Ba1/BB+), a number of high-yield analysts say the company has a good shot at becoming investment-grade.
Is getting an investment-grade rating a primary objective and how long do you think it would take?
I became cfo over a year ago and we set out five very specific financial objectives and one of those was to become an investment-grade company. We did a lot toward that end during 2002, and looking ahead to 2003 we see another year of strong free cash flow to the tune of around $400 million that will put us clearly inside of the targets [Standard & Poor's] has made public for Lear. Moody's [Investors Service] does not put out public financial targets for companies. There are events outside of Lear that we can't control and everybody knows that with the geopolitical situation at the moment and how that may impact the auto industry. The short version is that I think that's probably the biggest question mark overhanging our timing with respect to receiving investment grade rating frankly from both ratings agencies.
Moody's hasn't made a public statement, but is there anything you can say about your conversations with them?
We are in continuous conversations with both ratings agencies and we see them formally anywhere between two and four times a year and take them through all the details of what's going on with Lear. Moody's most recently has also been positive on the way we are managing the company and our ability to continue to focus on the balance sheet.
Do you need to pay down additional debt or is it simply a question of meeting cash flow targets?
The rating agencies by and large have moved away from a debt-to-cap type of target and have really moved toward a funds flow type of target. Certainly throughout 2003, the overwhelming majority of the free cash flow is going to be used to reduce debt.
Has the United Technologies acquisition been successfully integrated?
Absolutely fully integrated. And, I think it has proven to be one of, if not the most, strategic acquisitions of Lear's 17 major acquisitions.
Your loss of an investment-grade rating after the acquisition in 1999 upset some high-grade investors at the time. Do you feel that's still an issue for some?
That was something that basically came to market and was closed in a relatively short period of time and the strategic benefits we believe far outweighed any short term negative consequences that that might have. I think the proof is now starting to show up in our new business backlog, which is at an all time high of $4 billion. Some people may not have viewed that as strategically as we did initially, but I think by and large that's behind us at this point
You have said in the past that you don't plan any further acquisitions. Is that still the case or have your plans changed?
No significant acquisitions are on the horizon in the near term. We will continue to do small acquisitions primarily with Asian OEMs (original equipment manufacturers) and those could be anything from small investments in the keiretsus [oem-owned parts businesses], joint venture opportunities, maybe larger joint venture opportunities or even buying small suppliers that are located in Asia Pacific today. Those will primarily be financed through the sale of non-core assets. We may end up using some of our free cash flow but it would be inside of $75 million even if we do that [an acquisition] this year. As we look forward into 2004, I think there's a natural evolution for the company to look at maybe larger acquisitions and those would be primarily focused on expanding our global footprint with respect to electronics. We'd be interested in looking at electronics type of companies in Europe specifically and with respect to Asia Pacific we'd be looking to almost any type of acquisition within the automotive interior that was economically attractive. But one point I'd like to make is that once we achieve investment grade we intend to stay there, so these acquisitions would be financed in such a way as to not negatively impact our balance sheet or take us out of an investment-grade status.
How would you finance these acquisitions?
I think there would be a mix of debt, equity and equity derivatives used to finance any acquisitions. We would work closely with the banks and the ratings agencies and our other stakeholders and make certain that everyone understands the economic benefits of doing a transaction and financing it in such a way that makes sense for everyone.