Lear Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 1.13 | About: Lear Corporation (LEA)

Lear (NYSE:LEA)

Q4 2012 Earnings Call

February 01, 2013 9:00 am ET

Executives

Ed Lowenfeld

Matthew J. Simoncini - Chief Executive Officer, President and Director

Jeffrey H. Vanneste - Chief Financial Officer and Senior Vice President

Shari L. Burgess - Vice President and Treasurer

Analysts

Itay Michaeli - Citigroup Inc, Research Division

Rod Lache - Deutsche Bank AG, Research Division

John Murphy - BofA Merrill Lynch, Research Division

Ravi Shanker - Morgan Stanley, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

Emmanuel Rosner - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Colin Langan - UBS Investment Bank, Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Adam Brooks - Sidoti & Company, LLC

Operator

Good morning, ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation Fourth Quarter and Full Year Earnings Call. [Operator Instructions] I would now like to turn the call over to Ed Lowenfeld, Vice President, Investor Relations. Please go ahead Mr. Lowenfeld.

Ed Lowenfeld

Thank you, Martina. Good morning, everyone, and thank you for joining as for our fourth quarter and full year 2012 earnings call. Our earnings press release was filed this morning with the Securities and Exchange Commission, and materials for our earnings call are posted on our website, lear.com, through the Investor Relations link.

Today's presenters are Matt Simoncini, President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership.

Before we begin, I'd like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide titled Investor Information at the beginning of the presentation materials and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information at the end of the presentation materials.

Slide 3 shows the agenda for today's review. First, Matt Simoncini will provide a company overview. Next, Jeff Vanneste will cover our fourth quarter and full year financial results for 2012 and outlook for 2013, then Matt will come back with some wrap-up comments. Following the formal presentation, we will be happy take your questions. Now please turn to Slide #4, and I'll hand it over to Matt.

Matthew J. Simoncini

Thanks, Ed, and good morning. Despite a challenging industry environment in Europe, Lear posted strong financial results in the fourth quarter with the improvement in sales, earnings and free cash flow. Sales in the fourth quarter were $3.7 billion, up 6% from a year ago, reflecting the benefit in new business and the Guilford acquisition, partially offset by adverse impact of foreign exchange. Lower production in Europe was largely offset by increased productions in other regions of the world. Adjusted earnings per share was $1.48 per share, up 17% from a year ago, and free cash flow was $219 million.

Our Electrical business continues its rapid growth and achieved a quarterly sales record of $959 million in the fourth quarter. Adjusted margins improved to 8.4% from 6.3% last year, as the business continues to benefit from sales growth, market share gains and cost benefits from our improved footprint.

We continue to return cash to shareholders. In the fourth quarter, we returned $64 million to shareholders through a combination of share repurchases and dividends. Since the inception of these programs in the first quarter of 2011, we have returned $608 million to our shareholders.

Moving to the full year. 2012 marked our third consecutive year of higher revenue and earnings per share, where revenues of $14.6 billion and earnings per share of $5.49 per share.

As outlined on Slide 5, our sales are well balanced by region and by customer. We have made steady progress diversifying our sales over the last several years, with over 60% of our total sales in 2012 coming from outside of North America. The Asia Pacific region continues to grow, representing 17% of our consolidated worldwide sales. In addition, we have $1.7 billion in sales at our core nonconsolidated joint venture, further diversifying our sales profile.

Slide 6 shows our growth in key emerging markets. Our consolidated sales in China, Brazil, India and Russia have more than doubled over the past several years from $1.2 billion in 2008 to $2.7 billion in 2012. This represents an annual growth rate of 23% versus the industry growth in these markets of 17%.

Lear's total sales in China, including nonconsolidated sales of approximately $950 million, are $2.4 billion. Since 2008, total sales in China have tripled.

Slide 7 shows our 3-year sales backlog, which is unchanged from what we reported at the Detroit Auto Show last month. As a reminder, our backlog only includes awarded programs, net of loss business and programs rolling off. We do not include pursued or high-confidence new business or nonconsolidated sales. The backlog is based on specific car line volumes and foreign exchange assumptions by country.

Our backlog for the 2013 through 2015 period stands at $1.8 billion. The backlog continues to represent further diversification of our sales, as 55% is in our Seating business and 45% is in EPMS. We are growing our sales in all regions of the world. For 2015, there's still open sourcing, so we do expect that number to increase as new programs are awarded over the next several months.

Slide 8 provides an update on our share repurchase program. During the fourth quarter, we purchased 1.2 million shares of stock for a total of $50 million. We have been repurchasing shares since early 2011. Through the end of 2012, we have invested approximately $500 million to repurchase 11.5 million shares or about 11% of our shares since the program began.

Following the $800 million increase in our share repurchase authorization in January, we have a remaining authorization of $1 billion over the next 3 years. The available repurchase authorization reflects approximately 20% of our market cap at current prices. Going forward, we plan to continue to buy shares consistently subject to the company's alternative uses of capital and prevailing financial and market conditions.

Slide 9 highlights the key elements of our strategy. We have the product expertise, global reach, competitive footprint and financial flexibility to profitably grow our business. We plan to continue to invest in the emerging market and expand our low-cost component capabilities to further improve our competitiveness and to support future profitable sales growth. We're well positioned for the industry trends towards global platforms and increasing electrical content, as well as directed component sourcing.

We are evaluating certain niche acquisitions that will complement our present product offering, facilitate diversification of our sales, and further increase our component capabilities in emerging markets. No transformational acquisitions are needed or planned.

Going forward, we plan to continue to invest in our core businesses while maintaining a strong and flexible balance sheet. At the same time, we plan to continue to return cash to shareholders on a consistent basis.

Now I'll turn over to Jeff who will take you through our financial results and outlook.

Jeffrey H. Vanneste

Thanks, Matt. Slide 11 shows vehicle production in our key markets for the fourth quarter and for the full year. In the quarter, 20 million vehicles were produced globally, up 2% from 2011. As Matt mentioned, business conditions in Europe remained challenging in the fourth quarter, as industry production decreased by 8%. In North America, the recovery continued with industry production up 10%. China's production increased 4% versus last year. For the full year, global vehicle production was a record 79.7 million units, up 7% from 2011, reflecting increases in all major markets except Europe.

Slide 12 shows our financial results for the fourth quarter and full year of 2012. As previously mentioned, fourth quarter sales were up 6% to $3.7 billion. Excluding the impact of foreign exchange, Lear's sales in the quarter were up 8%. For the full year, sales were $14.6 billion, up 3%. Excluding the impact of foreign exchange, Lear's sales in 2012 were up 7%.

In the fourth quarter, pretax income before equity loss, interest and other income was $159 million, up $57 million from a year ago. For the full year, pretax income before equity income, interest and other expense was $705 million, up $26 million from 2011.

Interest expense was $10 million in the fourth quarter, down $5 million, primarily reflecting the favorable settlement of tax matters in foreign jurisdictions. For the full year, interest expense was $50 million, up $10 million, primarily reflecting the favorable settlement of a tax matter in 2011.

During the quarter, net income was impacted by $767 million in onetime tax benefits related primarily to the release of our valuation allowance in the U.S. In addition, equity and net income loss from affiliates, as well as other income expense, were also impacted by onetime items during the fourth quarter. I'll provide more details on those items on the next slide.

Slide 13 shows the impact of nonoperating items on our fourth quarter results. During the fourth quarter, we incurred $45 million of restructuring costs, primarily related to the planned closure of our Genk, Belgium facility, as well as various census-related actions. Other special items include $13 million of income, primarily reflecting insurance settlements. Excluding the impact of these items, we had core operating earnings of $191 million, up $15 million from 2011. The increase in earnings reflects new business and operating improvements, partially offset by increased product and facility launch costs, primarily in South America, and higher program development costs associated with the sales backlog.

Equity loss in the fourth quarter includes special items of $11.8 million related primarily to impairment and restructuring charges at one of our noncore joint ventures. Other income in the fourth quarter includes special items of $14.2 million, reflecting insurance settlements.

Net income in the fourth quarter includes tax benefits of $767 million, primarily related to the value -- through the reversal of the valuation allowance on our deferred tax assets in the U.S. Adjusted for restructuring and other special items, net income attributable to Lear in the fourth quarter was $145 million, and diluted earnings per share was $1.48.

Slide 14 provides a summary of free cash flow. We generated $219 million of free cash flow in the fourth quarter and $291 million for the full year. We finished the year with cash of $1.4 billion.

Capital expenditures were $439 million in 2012, up $113 million from 2011, reflecting increased investment in component capabilities and the emerging markets.

Slide 15 provides a tax update. As mentioned previously, in the fourth quarter, based on our profitability in the U.S. over the past 3 years and our outlook for continued profitability, we released a significant portion of our valuation allowance related to our deferred taxes in the U.S. This resulted in a onetime tax benefit of $739 million. And in 2013, we expect a more normalized effective tax rate of approximately 30%.

We continue to have global tax attributes in excess of $1.1 billion, which will reduce our cash taxes for the next several years. Approximately 45% of the tax attributes relate to the U.S., with the remainder in foreign countries. These tax attributes can be used to offset approximately $3.6 billion of future taxable income. The vast majority of our tax attributes either have no expiration date or a 20-year life, providing the company with ample opportunity to realize these benefits. Lear's cash tax rate is expected to be approximately 20% for the next several years, reflecting the benefit of our global tax attributes.

Slide 17 summarizes industry production assumptions for 2013. Global industry production is forecasted to grow from 79.7 million units in 2012 to 80.7 million units in 2013, an increase of 1%. Production in North America is forecast to increase by 1% to 15.6 million units, and production in Europe is forecasted to decline by approximately 4% to 16.2 million units. Growth in the emerging markets is expected to continue, with production in both China and India forecasted to grow by 9% in 2013. Our 2013 financial outlook is based on an average euro assumption of $1.28 per euro.

Slide 18 summarizes our financial outlook for 2013, which is unchanged from what we announced at the Detroit Auto Show. For 2013, Lear expects net sales to increase to $15 billion to $15.5 billion, primarily reflecting the impact of our sales backlog. Core operating earnings are forecasted in the range of $725 million to $775 million, relatively flat with 2012, reflecting higher sales, offset by lower production in Europe and key program changeovers. Interest expense in 2013 is expected to increase to about $80 million, up from 2012, reflecting primarily the impact of the new $500 million bond.

Tax expense is estimated to be $195 million to $210 million, reflecting the increase in our effective tax rate to approximately 30%. As mentioned previously, given our tax attributes, we expect the cash tax rate to be approximately 20% for the next several years.

Capital expenditures are expected to remain elevated in 2013 at approximately $450 million, reflecting our strong sales backlog, as well as additional investment in component capabilities and the emerging markets. Free cash flow for 2013 is forecasted at $275 million.

Now I'll turn it back over to Matt for some closing comments.

Matthew J. Simoncini

Great. Thanks, Jeff. Lear continues to deliver solid financial results, and 2012 was our third consecutive year of higher sales and earnings per share. We also continue to make progress on achieving our strategic objectives. We believe that the investments we've been making in components and emerging markets will provide benefits and lead to improved results going forward.

Our strong and flexible balance sheet will allow us to continue to profitably grow our business and create value for our shareholders.

In closing, I want to thank the Lear team for their hard work and dedication. I'm confident with your support that Lear will continue to be successful. With that, we'd be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Itay Michaeli from Citigroup.

Itay Michaeli - Citigroup Inc, Research Division

I was hoping you can help us in terms of thinking about the cadence of earnings and margins throughout the year, just how should we prepare for the first couple of quarters at least, given the volatility in some of the production schedules there.

Matthew J. Simoncini

Yes, I think, what we're seeing from our side is a pretty normal, I would say, seasonality, if there's such a thing. A little bit stronger in the first half, a little bit weaker in the second half, driven by the third quarter shutdown more than anything. The margin should be pretty consistent around that overall 5% number first half to second half. So it's a year without a meaningful spike or hockey stick, or in that regard, a pullback. We just think it's going to be a fairly steady year in -- based on the production cadence that we see at this point.

Itay Michaeli - Citigroup Inc, Research Division

That's helpful. And then on the pace of buybacks and cash deployment, can you help us a little bit more in terms of how we should think about it? You did issue some debt, which would be a bit dilutive given the increase in interest expense. So should we think about the deployment to be a bit more front-end loaded in the next 3 years as opposed to how it's proceeded in the past 2 years?

Matthew J. Simoncini

Well, I think the increase of the authorization of $800 million is a fairly significant step-up, obviously, in the pace that we've been buying at over the first 2 years. The open $1 billion authorization over 3 years would imply a rate of slightly over $80 million a quarter. From our standpoint, I think what you should assume is that we buy in a pace that's consistent throughout the period, contingent upon prevailing market conditions. So I wouldn't expect it to be different at this point.

Itay Michaeli - Citigroup Inc, Research Division

That's helpful. And just lastly, a quick housekeeping. Can you share what you've assumed for 2013 production for the GMT900/K2XX platform?

Jeffrey H. Vanneste

We've assumed production volumes that are relatively flat year-over-year with 2012, I think, at 1,040,000 vehicles.

Operator

Your next question comes from the line of Rod Lache from Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

I guess, first 2 questions on the Seating margins. In Detroit, you went through a bit of guidance suggesting the Seating margins go down about 100 basis points in 2013. Can you just give us a little bit more on what exactly is driving that? I think you mentioned launches, but should we be thinking something like 20% of your business goes down 500 basis points? Is that what you were referring to on the launches? And is there any improvement expected in Latin America? And then to follow on -- up on that, how should we be thinking about a reasonable magnitude of improvement as you go out to 2014 once you've kind of cleared through some of these big launches?

Matthew J. Simoncini

What -- the key drivers in this business, or probably the 3 major drivers as far as the margin erosion, Rod, is first off, the programs that are changing over are relatively significant this year, as far as just a sheer revenue standpoint. And that is probably about, in itself, maybe 100 basis points just because of new programs coming in at lower margins as we become more efficient in both our design and manufacturing process. European decrease in volumes and mix is also impacting that, probably about half of that. And the other piece of it, while we expect South America to return to profitability, it's still significantly low, the run rate of the segment overall. We'd expect these trends to continue throughout the year and then start improving heading into '14.

Rod Lache - Deutsche Bank AG, Research Division

So does the 100 basis points that you experienced from these launches, does that fully recover in the second year? Or is there some kind of a normal trajectory that you can sort of give us some feel for?

Matthew J. Simoncini

Not completely, Rod, because the program portfolio changeover continues into next year as well. We would expect to see some improvement heading into next year, but I wouldn't expect it to be a snap back.

Rod Lache - Deutsche Bank AG, Research Division

So you wouldn't necessarily get back to the 2012 margins in Seating as -- based...

Matthew J. Simoncini

Not necessarily.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And then secondly, when you gave the guidance, I think, you were assuming a weaker euro. What was it, $1.28? It's now $1.36. If we wanted to adjust for that, would we apply the corporate average margin, or are European margins somewhat below that now?

Jeffrey H. Vanneste

I think, as we've said on calls before, the margin, as it relates to ups and downs on FX, are normally around the 3% to 4% range.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And then lastly...

Matthew J. Simoncini

I'm just going to say, Rod, on the conversion of that, from a revenue standpoint, each $0.01 kind of change in the euro to the U.S. dollar is worth about $40 million annually, if you're trying to do the math.

Rod Lache - Deutsche Bank AG, Research Division

And just one last housekeeping thing. I think when you made the acquisition, you suggested that it was sort of at the corporate average margins. Was that actually the case over the course of 2012?

Matthew J. Simoncini

You're referring to the Guilford Mills acquisition, and yes, that is the case. It probably came in at target margins for the segment overall, Rod. So it's pretty consistent with the segment and in line with our expectations.

Operator

Your next question comes from the line of John Murphy from Bank of America Merrill Lynch.

John Murphy - BofA Merrill Lynch, Research Division

First question on Electrical. You continue to beat sort of our expectations, and I think are performing relatively well relative to your expectations, as well on the sales line there. I'm just curious what's really driving that upside specifically there. Is that just volume, or is it mix, or is there backlog rolling on faster? I'm just trying to understand really what the outperformance is being driven by there.

Matthew J. Simoncini

Well, this is a segment where the content per vehicle is actually increasing. So we do benefit probably disproportionately in this product group than just sheer volume, John. The real benefit, however, is coming from the backlog. This segment has grown faster on a percentage basis than Seating, as we continued to gain share. And I think that's really a function of the investments that we've made, restructuring it in our footprint and in our product portfolio, whether it's the solid-state junction boxes, some of the innovations we've had there to -- some of the innovations we've had in our connector systems are ultimately high powered. So I think, it's a combination of factors. But probably the biggest one is we're penetrating and we're gaining share in this space.

John Murphy - BofA Merrill Lynch, Research Division

So there's nothing in the quarter that was really -- had to do with mix or anything -- any program really ramping up? This is more sustainable than just really something that happened in the quarter?

Matthew J. Simoncini

We believe the performance is sustainable from the quarter.

John Murphy - BofA Merrill Lynch, Research Division

Okay. Second question just on quoting that might roll into the backlog. Any rough figures on what you're quoting on right now in addition to the $1.8 billion that you've already booked?

Matthew J. Simoncini

Yes. I mean, if you look at how we improve 2014 from a year ago, I think that number is up a couple hundred million dollars from when we announced the backlog back last January. I'd expect that same type of net new business coming in, at least, on the outer year, on the 15-year, as there's still open sourcing in that segment, in that time frame.

John Murphy - BofA Merrill Lynch, Research Division

That's incredibly helpful. And then just, if we think about the GM truck launch, obviously, that's a big one for you. Is that still in the ballpark of 10% of your sales? Is it that important to the business?

Matthew J. Simoncini

It's about that size. It's about that size, Murphy.

John Murphy - BofA Merrill Lynch, Research Division

So when you're talking about these changeovers, obviously, we have the pickups this year and the SUVs at the beginning of next year. I mean, that's a pretty big deal for the company. And once you get through that, that should be something that helps normalize margins when once you get through that sort of mid-'14.

Matthew J. Simoncini

That's a big driver on the program portfolio. And as we launch new programs, which is typical in the space, they typically come on at a lower margin than the business that they're replacing as you work through your engineering changes and your cost reductions and your efficiencies at the plant. So, yes, we would expect to add, as we digest that launch with 1 million units spread out over a couple of years that we would see some improvement in the segment.

John Murphy - BofA Merrill Lynch, Research Division

And then just lastly, just a simple question on working capital. Jeff, as you're looking at your free cash flow forecast, are you looking for a working capital, a small working capital used similar in 2013 to what you did in 2012? Is that a fair assumption, roughly?

Jeffrey H. Vanneste

Yes. I think working capital for the full year 2013 is going to be a use of cash.

Operator

Our next question comes from the line of Ravi Shanker from Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

A couple of questions. Matt, we've seen some other suppliers take cost actions or restructuring actions in Europe given the structural issues with that market. And given that that's a bit of a drag on your margins as well, is that something that you guys are looking at?

Matthew J. Simoncini

Well, you're always looking at your infrastructure cost, especially in light of what is, we believe, is going to be a little bit of a sustained pullback. The one thing I'd like to note is that we started our restructuring program several years back, and we're approaching $1 billion of investment, and a good portion of that has been in Europe. And we remain, even in the downturn, solidly profitable in both segments in that region of the world. We are looking for opportunities to restructure there or do some additional restructuring. But we've been doing it all along. And I would say that's really probably not a whole lot different than what we do in any other region of the world, even in ones that are growing or constantly challenging your footprint. Obviously, the pullback in Europe from what was a high of 20 million units, which is now around 15 million, provides some opportunity to make those types of investments, and we're looking to do that. But I can't see it being, at this point, being hugely significant.

Ravi Shanker - Morgan Stanley, Research Division

Any larger actions needed there around some of the OEM plant closures that have been announced?

Matthew J. Simoncini

Well, I would expect that there'll be more coming, just because of the excess capacity that's in the segment. So I would expect, I think, all the OEMs are looking at a way to balance their production capacity to what they believe is the sustainable production estimates that are looking out over the next several years. So I would expect some more OEM actions, quite frankly.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And finally, a big picture question. Now that you and the other seating suppliers have made a bunch of component acquisitions over the last several years, do you see any change in the way the OEMs are -- changing the way they source components? Are they more comfortable giving you guys full seat contracts now that you have a much better vertical integration efficiency?

Matthew J. Simoncini

No, I don't think that's really changed. I think the -- it's been fairly consistent sourcing. There may be some nuances to it that are different. I just think that in order to be a Tier 1 seat provider, you have to have full design capabilities, first and foremost, the ability to assemble in a just-in-time nature. You have to have global reach because there's a rotation to global programs. And you have to be able to design and assemble the major subcomponents of the seat because it's the key driver of cost and quality. And I think what you're seeing, as some of the others in the space are trying to get that vertical integration, is a recognition of the drivers in quality and cost. For us, it's been a good investment, and we've made nice returns in those subsegments.

Operator

Your next question comes from the line of Brian Johnson from Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

I know you don't talk, or you don't put this on the slide, the kind of order in the pipeline pre-backlog activity, but just a kind of couple questions around that. First, are there different lead times on Seating versus Electrical? I tried to discern a pattern in the growth of the 2013 and 2014 pattern, but it didn't see one. And then the second question is, given these high margins in Electrical, as others have noted, and the sort of lower-than-typical margins in Seating, how does the ROIC look between those 2 divisions? And then, how does it affect the kind of business you go out and quote for, and where you put the additional $50 million of CapEx, as you think about going after business?

Matthew J. Simoncini

I would start with your first question, which is the lead time. And I would tell you that if you have full design responsibilities, the lead times are pretty consistent between the 2 products, Seating and Electrical Distribution, to about 3 years. 2.5 to 3 years. The OEs are working hard to shorten that, and we're seeing some shortening of award to start a production. But I would say, between 2.5 and 3 years is probably the norm at this point. If it's build-to-print or a running change, as they say in the industry, then it can be much shorter. But the vast majority of what we do is the 2.5 to 3-year, because we do have full design capabilities in most cases. As far as margins in Electrical and return on investment, the return on investment in both segments are fairly consistent, and both are performing slightly above our cost of capital right now. From an investment standpoint, we believe that the investment in Electrical space with this current mass and market position has great returns. But we also believe the same for Seating, where we have a solid #2 position. And I think we can leverage that position to take advantage of some of these global platforms. So whether it's connectors in China or seat cover business in South America, we're making a nice return on both those investments. And so I would tell you, in the incremental capital, we don't necessarily steer to Electrical or to Seating. We have opportunities in both.

Brian Arthur Johnson - Barclays Capital, Research Division

And in terms of the quoting activity, as we think about where 2014 and 2015 backlog may go, any difference in the mix between the 55-45 the backlog currently is? Because this looks like it's 50-50 in the out year.

Matthew J. Simoncini

Yes, I would tell you that -- I would tell you, Brian that I would expect it to kind of get back to more normalized. While we're penetrating a little bit faster in Electrical, I wouldn't expect a 50-50 split to continue. I would expect it to, again, kind of tip a little bit more toward Seating just because of the sheer size of that segment in relation to the $4 billion that we have in Electrical. The cadence of sourcing is -- it's a pretty normal year coming up. I don't see it accelerating. In the same token, I don't see it slowing. And I think it's just a pretty normal year coming forward.

Operator

Your next question comes from the line of Chris Ceraso from Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Wanted to come back to a couple of things. You mentioned that you thought this would look like a relatively normal year in terms of the distribution of earnings first half versus second half. I was hoping you could revisit that a little bit, because it looks like most third-party estimates for the build rates, certainly in Europe, is much more back-half weighted than front-half weighted. So why is it that your earnings would not be somewhat tilted that way as well?

Matthew J. Simoncini

What I said was that I thought the sales were going to be a little bit more front-half loaded just because of the shutdown that you typically see in the third quarter for both product changeovers in Europe, and vacations, Chris. I thought the margin distribution would be relatively consistent first half to second half at -- I mean, right around 5% on average, first half to second half. That's driven by a lot of different things. One is the step-up in program changeovers in the back half of the year versus the front half, offset by the production cadence. So there's literally thousands of inputs that go into projecting a company of this size, global reach and size and complexity. From our standpoint, we don't see a major spike in the margins or decrease in the margins. It's a pretty normal seasonal year with the third quarter from a revenue standpoint being down, which is more normal. So the sales will be a little bit front-half loaded to the first half -- or first half over the second half. And I think the margins stay right around that 5% range.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. So if I can paraphrase, maybe, yes, there are double-digit production declines in Q1 in Europe, but you also have a heavier concentration of changeovers in the back half, and those 2 things kind of balance out?

Matthew J. Simoncini

That would be a good way of putting it, yes.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. The second question. I don't think I'm making this up, but I thought when we were in Detroit and you were making your presentation, you had mentioned that you thought longer term, you could get Seating margins to something in the 5.5%, 6%, maybe 6.5% range, which sounded like a departure from your previously-held long-term guidance, which was for Seating margins to be in the 7% to 8% range. Is that right? Are you kind of backing away from that 7% to 8%? And if so, is it -- why is that? Did you think that maybe you were over-earning when you were doing 7% or 8% because of strong build rates on certain programs? Can you explain?

Matthew J. Simoncini

No, there's really no change. It's just a function of timing, and maybe the product changeover. The European production volume is, obviously, a lot weaker than what we thought, and the recovery is going to be a lot slower than we initially thought based on what IHS is seeing and what we're seeing as well. I do believe we could see it climb back in the relatively near term into the 6% range. And I think longer term, 7% -- over 7% makes sense for a lot of reasons. One of which is, really to me, margins are more a function of investment and the investment required. So as we go into our vertical integration strategy and component strategy, and expand our capabilities there, I believe that the returns will follow. And to us, margins are just an outcome of investment and getting the return on investment that you need. So to me, we don't believe longer term that 7% is out. There's really been no change in that.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. So it's just a function of over the next year or 2 or so, it may be stuck in the 6% range. But longer term, you still think you can get there?

Matthew J. Simoncini

Yes.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then last question is about the backlog, the $850 million. I'm hoping you can maybe identify a few of the major programs that contribute to that, including on the GM trucks. Do you have increased content versus the current program decreased or about the same?

Matthew J. Simoncini

What I would tell you on the GM trucks, it's not really net in the backlog because it's a replacement program. And the way we define backlog is net new business. So from that standpoint, I would tell you that it's not really a meaningful change at all. Jeff, why don't you take them through some of the programs that we're rolling up this year.

Jeffrey H. Vanneste

Yes. Just some of the larger programs in terms of marquee size is the Ford Focus program, which is conquest business for us. That's probably the largest single item. We've got some European business across the board, probably the biggest of which is the seat assembly on the Maserati Quattroporte. I mean, there's literally hundreds of these things. But probably the biggest of which are those 2 coupled with, also in Europe, on the EPMS side, the Land Rover/Range Rover businesses is very significant for us in total and certainly for that segment.

Operator

Your next question comes from the line of ID Oberoi from Goldman Sachs.

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

A question on the margins in the EPMS segment. If you annualized the run rate of revenue that you guys did in the fourth quarter, that kind of implies almost $4 billion in revenue. And the margins, at least in the fourth quarter, were at 8%, close to 8.5%. As we go forward and the revenue continues to grow in that segment, can you just talk about the puts and takes that would impact margins from the 8.4% levels?

Matthew J. Simoncini

Yes. I think that we believe we can continue to grow that segment profitably, and we believe that we can do about 8% this year in that segment. The key drivers on margin, again, is it depends on the type of business that we win and the capital requirements associated with it. For instance, wire harnesses -- the portion of wire harnesses in Electrical Distribution systems are really not that capital intensive. It's very much like a just-in-time assembly plant. On the other hand, the electronic boxes and connectors are more capital intensive, and require a little bit higher electrical engineering content as well, and they would support having a higher margin. Right now, what I would say, Adi, is that -- just assume that we can maintain the kind of run rate margins that we enjoyed in the fourth quarter as we continue to grow that business profitably.

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

That's helpful, guys. And the second question is on the capital deployment. With the debt deal that you recently did, your -- I think, your net cash position probably would stand close to $1.9 billion. And the run rate of the cash towards buyback that you are implying kind of means a $320 million, $330 million buyback annually, which is more or less the normalized cash flow that you would generate in a normal year, right? So can you talk about where do you plan to utilize this $1.9 billion of cash in the near term?

Matthew J. Simoncini

Right. We've been pretty consistent with how we talk about cash and capital structure allocation. It's really not a whole lot different. What we want to do is continue to look for opportunities to make niche acquisitions which will -- not unlike Guilford and the size of Guilford, Guilford Mills, which will diversify our sales, provide another platform for profitable growth and also provide component capabilities ideally in low-cost margins -- or low-cost regions of the world. We also believe there's opportunity through organic investment to step up our capital expenditures and provide, again, another vehicle for profitable growth and investment. Thirdly, we have $1 billion of authorization available for share repurchase based on prevailing market conditions and the financial positioning and valuations, and we look to do that. And then we also return cash through dividends. So we're happy with the amount of leverage right now. I think we took advantage of the nice credit market environment to lower our long-term borrowing cost and provide flexibility to create value in a lot of different ways.

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

All right, got it. And finally, one housekeeping question. On the backlog you said that there's some upside risk to the 2015 number because there's still some open sourcing. Is it primarily the EPMS segment, or is it both Seating and EPMS?

Matthew J. Simoncini

I would expect both segments to grow in that period.

Operator

Your next question comes from the line of Emmanuel Rosner from CLSA.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Firstly, one more question on the, I guess, the production cadence starting this year. Can you please tell us what you're seeing currently in Europe in the -- I guess, so far in the first quarter and then for next few weeks? I think, a lot of estimates are looking forward double-digit declines, as was pointed out before. But I mean, Johnson Controls, for example, was guiding to down 14% in Western Europe. Is that the sort of magnitude you guys are seeing? And also, how is the mix playing out over there at the beginning of the year for you?

Jeffrey H. Vanneste

I think relative to the volume itself, we generally utilize IHS volumes in planning. And IHS, as several of you have alluded to, is down in the first quarter. As it relates to mix, what we're seeing there is that our general mix of vehicles is likely to be down greater than the overall industry average, at least, in the first quarter and potentially extending beyond the first quarter.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

I'm sorry. That's a function of what?

Matthew J. Simoncini

Well, the key car lines we're on -- I mean, right now, the good news about Europe for Lear Corporation is that we're well represented in all the segments. We have a good portfolio business that reflects both the customer and platform diversity in the segment. What it does mean from a mix standpoint is it's -- we don't sell to the industry. We sell to certain car lines, and those carlines would be impacted by the decrease in volumes.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Understood. And then, I guess, turning to your efforts to grow Europe components capability. The acquisitions that you're looking at, can you maybe characterize the environment for those acquisitions? Obviously, a lot of automakers -- a lot of suppliers have been consolidating and growing more vertically. So are there still lots of assets available? Are the valuations generally reasonable? Can you talk a little bit about the sort of environment you're encountering there?

Matthew J. Simoncini

Well, it's a difficult environment because everybody is kind of looking for the same thing. I don't believe there's a silver bullet out there, but I do believe there's nice niche acquisitions that can be executed at a fair value where the value is greater than the sum of the parts. I still think throughout there. We've had a very active process over the last several years. I think the key is to find the right one at the right value that can help the business strategically, but also create shareholder value for our investors. They're out there. You've got to work really hard to find them and to cultivate them because, in many cases, the best strategic fits are not necessarily assets that are for sale. And so you need to start to dialogue with the ownership groups. There are valuations a little bit lower in Europe, a little bit higher in Asia would probably be how I would characterize it.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

That's very helpful. And just one housekeeping to finish. On the restructuring costs, so you're getting for -- $50 million for 2013. Is that a similar amount on a cash basis? And then more specifically, obviously, you incurred almost $45 million or $50 million this quarter related to the Genk facility, but my understanding is obviously that Ford will continue to produce, therefore, so that's more time. So when do you expect that cash to come out?

Jeffrey H. Vanneste

I think, generally speaking for 2013, the expense will generally mirror the cash with the largest portion that's being, as you mentioned, related to the Genk closure.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

So you'd expect the cash for Genk to actually go out this year?

Jeffrey H. Vanneste

Some of it. Some of it.

Operator

Your next question comes from the line of Colin Langan from UBS.

Colin Langan - UBS Investment Bank, Research Division

Looking at the EPMS segment, you're at about mid-8% now and your target is 8% for '13. So I mean, is it just a factor of the weaker sales? Or are there other factors that kind of make it slightly lower going through the rest of next year? What's kind of driving the sequential decline?

Matthew J. Simoncini

That was about it. There's thousands, literally thousands of inputs that go in there. But overall, Colin, what I would say is that it's really just a function of the mix of the products that you're on. This segment has a significant portion of their revenues in Europe, as well. And so they're impacted by the downturn there, which hits them a little bit disproportionately over seating from a percentage standpoint. But all in all, we think it's going to be good business in the 8% range.

Colin Langan - UBS Investment Bank, Research Division

Okay. And any color on the pricing environment in Europe and in China? I mean, obviously, with the volumes coming down, are you getting a lot more pricing pressure from the OEMs? And I know, in China as well, it seems like pricing is an issue for the OEMs. Were they putting pressure on you there?

Matthew J. Simoncini

Yes, it's been -- it's a tough pricing environment. We typically run at about 2% net give-backs. The cost reductions we're able to provide to our customers, however, were significantly higher than that. Because through our ability to control the value stream, so to speak, and the vertical integration and our design capabilities, we have the opportunity to provide, I think, greater savings than many through value engineering. So the pressures are huge, as you would expect, because of the downturn and because of the consumer nature of purchasing of vehicle is price sensitive. And we, however, I believe, are in better shape than many of them to provide cost reductions to our customers in these components because of our global reach and our vertical integration. So long answer, short question, it's a tough environment, but it's not a whole lot different than what it's been.

Colin Langan - UBS Investment Bank, Research Division

Okay. And one last one. In terms of your $1.4 billion in cash, any update on how much is that -- of that is in the U.S.? And is there any risk that you may need to repatriate some of that?

Jeffrey H. Vanneste

Let's turn you over to Shari Burgess, our Treasurer.

Shari L. Burgess

Just approximately 1/3 of it is in the U.S.

Colin Langan - UBS Investment Bank, Research Division

What was that?

Shari L. Burgess

Approximately 1/3 of it is in the U.S.

Jeffrey H. Vanneste

I think we've got a pretty efficient cash structure, which allows the vast majority of our cash to be used for daily needs. There's probably only about -- I want to say, $200, Shari, that would be a little bit inefficient to come back for daily purposes?

Shari L. Burgess

Yes, there's a couple hundred that it would take more than a day or 2 to get back because you need some government approvals. But we have a very extensive network of intercompany loans that allows us to bring back the cash as needed to the U.S.

Colin Langan - UBS Investment Bank, Research Division

Without incurring repatriation tax?

Shari L. Burgess

Limited additional income taxes. There might be some withholding taxes here or there, but it's pretty minor.

Operator

Your next question comes from the line of Joe Spak from RBC Capital Markets.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Just a quick question on the CapEx. '13's another elevated year. I think, at the mid-point, it's about 3% of sales, and that's 2 years in a row now. If you look at the backlog, the past couple of years have been higher EPMS sales. And then, it looks like it shifts a little bit back more towards Seating in the outer years. So should we expect that the CapEx rate comes back down to that about 2% of sales that you think is more normal?

Matthew J. Simoncini

I think we -- I mean, we've made some really nice investments over the last several years. I think the number is about $300 million on the component capabilities in the emerging markets. Things like connectors, plants in China, and electrical distribution plants in South America, Brazil and Northern Africa, those have provided not only access to low-cost components, but it's also facilitating the growth in many cases because we're able to leverage those facilities to grow the top line. I quite frankly would like capital to increase, because I think that would provide opportunities to increase returns and further grow our sales. From a planning perspective, though, I would probably assume 2% to 2.5% in the outer periods, at this time, Joe. If we had the opportunity to invest, we would step it up because we're making nice returns and they're paying dividends through the sales growth. Key driver, obviously, to any capital is production numbers and backlog. So right now, as the backlog stands, we would see a decrease in '14 and that should also drive the capital down. So again, I would probably just use 2% to 2.5%.

Joseph Spak - RBC Capital Markets, LLC, Research Division

That's helpful. And just back on the cash, I was just wondering, you've clearly made some progress on the share repurchases. Has there been any additional thought given to the dividend, maybe getting the yield more in line with an S&P 500 average?

Matthew J. Simoncini

Yes. If you look back, 2 years ago we initiated the dividend. And then last year, in February, we increased it. I think you need to look at the 2 actions combined. While many have a yield higher than us, not many have both a dividend and a significant share repurchase like Lear does. I know the dividend -- the size of the dividend and the potential increase will be considered by the board here shortly.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay, great. And then maybe one housekeeping for Jeff. If you could give us -- if you have it already, an update on the pension funded status, how that closed at the end of the year?

Jeffrey H. Vanneste

The funding status of the pension plan increased slightly on a year-over-year basis, largely attributable to the acquisition of Guilford. So the lion's -- clearly [ph], all the increase is going to be attributable to the acquisition of Guilford and the unfunded pension that came from that acquisition.

Matthew J. Simoncini

Right now, we would expect that to be -- I mean, for a company our size, even with Guilford, between the OPEB and the pension, the legacy liabilities, so to speak, are very, very modest. I mean, we've closed most -- the vast majority of our plants. So really, we're kind ebb and flow with the discount rates. Right now, the unfunded status is slightly above $500 million. It's not that meaningful for a company our size.

Joseph Spak - RBC Capital Markets, LLC, Research Division

That's combined with the OPEB?

Matthew J. Simoncini

Yes, that's combined with the OPEB, right.

Jeffrey H. Vanneste

I think the split on that is roughly $175 million OPEB, and...

Matthew J. Simoncini

$350 million, $360 million on pension.

Operator

Your next question comes from the line of Peter Nesvold from Jefferies & Company.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

A question on the quarter you really haven't answered. I'm sure you get the question a lot about the difference in the margins between you and some of your competitors, but can you just walk me through briefly? I mean, how have you really been able to sustain the margin advantage relative to others, particularly in Seating and particularly in Europe, number one? And then number two, how do you sustain that going forward? How do you not get dragged down to the level were others are at?

Matthew J. Simoncini

Well, I think it's really -- it's actually pretty independent. I can't really speak to our competitors. What I can tell you is we've invested in restructuring, and the vast majority of that was in Europe, as well as other places. I mean, to turn the clock back, since we started this journey, we spent about $1 billion on restructuring our footprint. So a lot of the actions that we had to take, we've taken. And we've benefited from that, and you can see it in the margins. So from our standpoint, I think each one is independent. At the end of the day, we need to make right decisions for Lear Corporation. We believe we can compete, and we believe we can grow the top line profitably based on our capabilities. At this point, I think roughly 90% of our component facilities are in low-cost markets, or at least 90% of the employment, 80% of the components are in low-cost regions of the world or emerging markets. I think, we're seeing the benefit of that as the car companies are -- the major Western companies are going to a global platform. So we're confident that we can continue to grow margins.

Operator

Your next question comes from the line of Brett Hoselton from KeyBanc.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

I wanted to go back first to Rod's margins question and with regards to the 100 basis point margin impact due to the program changes, and it sounds like you're going to get the bulk of it back as you're moving to 2014. But my question is, do you -- when do you possibly see getting that full 100 basis points back? Is it out into 2015, or is by the time you get to the mid-2014 when you've kind of worked your way through these major changeovers?

Matthew J. Simoncini

The model -- the program portfolio, vast majority of our program portfolio in Seating changes over over the next -- this year and next. And I think that needs to settle down before we get the full benefit of those basis point improvements. The thing to note though, Brett, is that there are many inputs to margins, whether it's European volume and mix or North American sales, hopefully, in car lines that you provide the seats, to the actual operations of the facilities. So it's a lot of issues driving margins. The one particular, as related to program portfolio changeovers, we would expect it to get better once we get it behind us, and we expect to get it behind us in '14.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Kind of by the end of 2014, or is that -- that's the idea? Is that what I'm hearing?

Matthew J. Simoncini

Yes, that is what -- that is the idea.

Brian Arthur Johnson - Barclays Capital, Research Division

And then South America. I think, during the auto show, you'd talked about that being roughly 100 basis point headwind. I could be incorrect there, so if I am, please feel free to correct me. But how do we think about the progression of margins there?

Matthew J. Simoncini

Well, we went -- we became unprofitable in the second half of the year. And the 100 basis points that you're mentioning relates to the year-over-year performance erosion or the impact on Seating in South America alone. So in the back half of the year, it was worth about 100 basis points because that program -- that region was underperforming and actually went to unprofitable results. We expect this year to return to modest profitability but significantly below the margins for the group overall. We'd expect that trend to continue to improve as we go through the year.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And then switching to the backlog. If I were to dial the clock back a couple of years and look at your 2013 backlog, your 2013 backlog was $400 million and now it's $850 million, so a $450 million increase. Almost a doubling. A very significant increase. And you can kind of see a similar progression on the 2014 backlog. My question is, as you look at your 2015 backlog, there's $300 million, and you think about the Seating, you think about the Electrical business, is it unrealistic to think that as has occurred in the past, that you could see almost double that in terms of the backlog by the time you get to 2015? Currently, it's $300 million. Could it be as high as $600 million.

Matthew J. Simoncini

That sounded reasonable, to assume that.

Operator

Your next question comes from the line of Ryan Brinkman from JPMorgan.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Obviously, the margins in the Electrical business are doing very well and a significant part of the story. And one of the reasons that has been given for the improvement is the increase in scale. I know you guide to 8% roughly over the near and medium term. But in thinking about the long-term margin potential for this division, which did track above 8% in 4Q, have you done any benchmarking work to estimate what the margins of competitors with even greater scale are in the subset of Electrical Power Management that you participate in? If so, would that seem to suggest even more margin expansion potential here?

Matthew J. Simoncini

I think, probably the best comp might be Delphi, and I think Delphi's margins are above 10%. But their business model is a little bit different than Lear Corporation in that they do have a greater size, which allows them to absorb some of the infrastructure cost a little bit better than Lear can. They also have a business that is a little bit higher, or significantly higher in connectors and electronics, which would require them to make a higher margin in order to get the type of return on investment they need to justify the investment. So from our standpoint, could it go higher? It could. Right now, we're comfortable guiding to that -- to the range that we gave you.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

And I know you've been doing a lot on the cost side. And it looks like your operating expense has declined in 2012, both in dollar terms and as a percentage of sales, with the largest decline being in the fourth quarter. Can you maybe talk about some of the drivers there and also to the sustainability?

Matthew J. Simoncini

I think our cost structure is sustainable. We're actually looking for opportunities to bring it down further. A lot of that is just the timing of the engineering spend in relation to the backlog and where you are in the life cycle. But we're diligent on cost. We're focused on continuous improvement. We're attacking every line item of our spending everywhere in the world, plant by plant. So it's a constant battle, and it's a constant focus of the management team, and I think we're really good at it.

Operator

Your final question comes from the line of Adam Brooks from Sidoti & Company, LLC.

Adam Brooks - Sidoti & Company, LLC

I just have 2 quick questions here. One, can you give us a sense by segment of the cadence of the backlog throughout 2013?

Jeffrey H. Vanneste

I think generally speaking, in EPMS, the backlog should come in, in 2013, more back-end loaded than front-end loaded, but not significantly so. And I think if you look at the Seating side, it's -- I think early on in the first quarter, you'll see a bigger chunk. But again, that is not terribly skewed in first half versus back half. It's pretty ratable throughout the year.

Matthew J. Simoncini

I would tell you, Adam, it's pretty consistent overall. And I don't really -- I don't know, Jeff, it's pretty flat. I mean, we're talking nuances.

Jeffrey H. Vanneste

Yes, we're not talking big swings.

Adam Brooks - Sidoti & Company, LLC

Okay, and then just one other quick question. On the China business, can you give us expectations for your performance versus the market? It seems like it's narrowed a bit for the past year or so. Maybe what you think you can do going forward?

Matthew J. Simoncini

I think we can continue to penetrate there. We've got great relationships with DFM, BAIC, SAIC FAW, and we also have, obviously, the extensions of the foreign automakers going in there. And I think, as they continue to look on global platforms, Western-style type-quality and whatnot that it's a real opportunity for Lear, and we'd expect to grow in that region faster than the market.

Well, that's the last of the questions. For the Lear team that's still on the phone, I want to thank all of you for your hard work and dedication. The results, I think, are a testament to what you've achieved this year, and we look forward to a great 2013. Thank you very much.

Operator

This concludes today's conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.

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