TRW Automotive Holdings Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: TRW Automotive Holdings Corp. (TRW)
by: SA Transcripts

TRW Automotive Holdings (NYSE:TRW)

Q4 2012 Earnings Call

February 15, 2013 8:30 am ET

Executives

Mark Oswald - Director of Investor Relations

John C. Plant - Chairman, Chief Executive Officer and President

Joseph S. Cantie - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Rod Lache - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Ravi Shanker - Morgan Stanley, Research Division

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

Operator

Good morning, and welcome to the TRW conference call. [Operator Instructions] And as a reminder, this call is being recorded. Presentation material for today's call was posted to the company's website this morning at trw.com/results. Please download the material now if you have not already done so. [Operator Instructions]

I would now like to introduce your host for today's conference call, Mark Oswald, Director of Investor Relations. Sir, you may begin.

Mark Oswald

Thank you, and good morning. I would like to welcome everyone to our fourth quarter and full year 2012 financial results conference call. This morning I'm joined by John Plant, our Chairman and Chief Executive Officer; and Joe Cantie, our Chief Financial Officer. On today's call, John will provide an overview of the current automotive environment and its impact on TRW. John will also provide a brief summary of the financial results and discuss other related business matters, including our outlook and planning assumptions for 2013. After John's comments, Joe will provide an expanded review of the financial information. At the conclusion of Joe's comments, we will open the call to your questions.

Before I turn the call over to John and Joe, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to Slide 2 of the presentation for our complete Safe Harbor statement.

The Risk Factors section of our 2011 Form 10-K and our first, second and third quarter 10-Qs contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2011 10-K and 2012 quarterly SEC filings by visiting the Investors section of our website at trw.com or through the SEC website at sec.gov. On a related matter, we expect to file our 2012 Form 10-K later today. Once filed, the 10-K can also be accessed through either website.

In addition to the financial information presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which are posted on the Investors section of our website at trw.com.

Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given our permission for any other recording of this call, and do not approve or sanction any transcribing of the call.

This concludes my comments. I'll now turn the call over to John Plant.

John C. Plant

Thanks, Mark and good morning, everybody. As you can see from the results posted this morning, TRW's fourth quarter performance solidified another successful year for the company. The fourth quarter and full year results demonstrate the strong market position of the company, especially against the backdrop of the difficult industry conditions that continue in Europe.

During the quarter, sales were $4 billion, a year-on-year increase of 4%, adjusting for currency and divestitures, a positive outcome and continued evidence of increasing demand for TRW's safety technologies and our presence in developing economies, and this helps set the offset in the decline in European vehicle production. Operating profit before special items was $295 million. Net income was $199 million, and earnings per share were $1.55 on the same basis. Earnings per share exceeds last year's $1.53 adjusted for special items and taxes. And finally, in line with the company expectations, we generated cash from operating -- operations, less capital expenditures, of $413 million during the quarter.

The strong performance achieved allow the company to move forward with many strategic initiatives, such as funding the company's growth strategy, actively managing and reducing our exposures to legacy liabilities, namely the company's pension and other postretirement obligations. In fact, despite the negative impact from historically low discount rates, the obligations at the end of year 2002 (sic)

remains at a very manageable level, thanks to a number of actions implemented during the year, the most significant of which included offering onetime lump-sum payments to certain of our U.S. retirees and former employees, which reduced our liabilities by $350 million.

And last but not least, TRW's strong underlying business performance enabled the company to return close to $268 million to its shareholders during 2012 through share repurchase programs. Notably, despite the share repurchases and the investments made for future growth, the company reduced its net debt to a new low position of $239 million.

Beyond the financial performance achieved in Q4 and the full year, TRW's world-class quality metrics, expanding regional diversification and success at winning new business helps to position the company for long-term success. I'll expand on the full year highlights in just a few moments. First, I'll add a few additional comments on the fourth quarter. In North America, vehicle production remained strong and tracked in line with the expectations industry observers established at the start of the quarter. The strength within the region continued to partially offset the year-on-year decline in vehicle production in Europe.

Overall, North American production was up 10% compared with the fourth quarter of 2011. On a sequential basis compared to the Q3, production was up 127,000 units. Within the quarter's vehicle build, the Detroit 3 manufacturers lagged the overall growth of the region, with production up 5% year-on-year. This underperformance for the Detroit 3 was a common theme throughout 2012, but continued to narrow as it progressed throughout the year. Consumer demands remained solid as the fourth quarter seasonally adjusted annual selling rate returned to around the 15 million unit level. The steady upward trend in demand appears to support the current level of production.

In contrast, the automotive industry in Europe remained very weak, as the poor economic outlook and high unemployment weighed on consumer confidence and vehicle sales. For the quarter, total European production was down about 7%. In Western Europe, decelerating demand, combined with inventory de-stocking, resulted in an 11% year-on-year decline. It's likely that the poor European sales and inventory de-stocking currently taking place will continue into the first half of 2013, and I'll have a few additional comments on 2013 in just a few minutes.

For TRW, the company's favorable customer and product mix softened the negative impact of the low production level. In China and Brazil, this industry continues to trend higher, as consumers responded positively to the various stimulus actions implemented by these governments to spur the overall demand for vehicles sales. Combined sales for China and Brazil accounted for over 19% of TRW's fourth quarter sales and were up 16% year-on-year, well ahead of the vehicle builds in those countries. Similar to early results this year, I will note that as sales rose in our rest of world regions and in North America but fell in Europe, TRW's overall European exposure dropped to some 40% of total sales in the fourth quarter.

With respect to the full year results, we're pleased with the performance. Sales totaled a record of $16.4 billion, an increase of 7%, excluding the impact of currency and divestitures. Operating profit, excluding special items for 2012, was $1,232,000,000 for an operating margin of about 7.5%. Net income on the same basis was $788 million, and earnings per share was $6.14. Compared to last year's pro forma adjusted results, earnings per share were slightly higher than last year results of $6.11 per share. Joe will discuss these and other financial highlights in more detail in a few minutes.

Of course, the accomplishments achieved in 2012 were not limited to our strong financial results. The company has continued to advanced its strategic priorities of providing innovative technologies at the highest quality level and leveraging our global reach. We recognize these priorities are the foundation of TRW's future success.

Moving on to the fourth quarter business developments. Product launches during the quarter continue to strengthen TRW's diversity and leadership in intelligent safety solutions. A few examples include the Electronic Park Brake foundation brakes and the airbag modules, RF electronics and safety and sensor electronics on the Acura RLX in Asia. In Europe, Audi launched its A8 hybrid with TRW's Electronic Park Brake brake actuation, side airbag modules and the seatbelt retractor mechanism. Ford launched its Cougar in Europe with TRW's driver airbag modules, electric power steering and steering wheels.

Products launched in the fourth quarter, as well as early this year, were delivered with world-class quality as a result of our ongoing quality and Six Sigma programs. For the year, quality averaged 3.4 parts per million across all products and customers worldwide. In addition to the broader range of products launched during the year, TRW continues to develop its new solutions and enhance existing technologies to meet the growing demand for full range safety systems that help protect drivers, occupants and other road users. A few examples of technologies that were advanced during the year include pedestrian protection systems, adaptive side airbags, integrated electronic stability control and EPB systems and our next-generation camera and radar systems.

It's clear that the drive for more sophisticated products will continue as we see more stringent regulations, such as NCAP rating system. The breadth of TRW's expertise puts the company in an excellent position to meet the demands of today and tomorrow. It's exciting to look to the future, given the technologies that are in the pipeline. Adding to that excitement are the opportunities and benefits that are expected from the significant investments made in the emerging markets.

I'm encouraged with the progress of our plant expansions. As discussed previously, the resulting future growth for TRW will begin to have a positive impact on our results as we exit 2013 and move into 2014 and beyond. In the meantime, we remain committed to ensuring the appropriate engineering support takes place to -- this year to minimize the risks as we progress to the start of the launch phase at several new facilities.

In addition to having the right technologies and global footprint in place, controlling costs and protecting our profitability is essential for positioning the company's long-term success. On the upfront, we took significant steps towards improving the company's cost base to ensure competitiveness, as evidenced by the $88 million restructuring program called out in our Q4 results this morning. As you might expect, given the weak outlook for Europe's automotive industry, especially in Western Europe, the majority of these restructuring actions are aimed in that region. Actions include plant closures and adjustments to our workforce. We'll continue to monitor the production plans of our customers and look to other possible actions as necessary. Of course, in addition to the extraordinary actions, we continue to focus on our quality and Six Sigma programs to ensure the efficiency and productivity as part of our day-to-day activities.

Turning now to 2013. Let me comment on our expectations and planning assumptions. Overall, the macroeconomic factors that influenced the global vehicle markets last year will likely continue into 2013. For TRW, that translates into relatively flat vehicle production for the year, as growth in North America and China is offset by further weakness in Europe, especially in the first half.

In North America, we expect first quarter production to be just under 3.9 million units, a decrease of about 2% compared with the first quarter of last year. Within that, Detroit 3 production is expected to be relatively flat. For the full year, our planning assumptions are based on a 15.8 million build in North America. This would represent a modest 3% increase compared with 2012. Although the North American market remains robust, it's clear that the pace of growth, both in vehicle sales and production, is moderating.

In Europe, we remain very cautious, as the negative economic conditions within the Eurozone place downward pressure on vehicle demand and production within that region. When you consider the added negative impact of inventory de-stocking, which is currently taking place, the outlook appears gloomy. During the first quarter, vehicle production in Western Europe is projected to be about 3 million units, down about 15% compared with last year. Total European production is forecasted at 4.6 million units.

TRW's favorable customer mix will help soften the negative impact, but not fully offset the decline as lower production is forecasted for Volkswagen and its luxury brands. For the full year, our forecast for production is 18.3 million units for total Europe. Within this estimate, Western European production is 11.8 million units, down 55% [ph] compared with 2012 levels. Although a decline in production is not welcome, especially in our largest markets, we believe the magnitude of this decline is manageable, and we will flex our operations to offset the negative impact.

Beyond North America and Europe, we expect full year vehicle production levels in China and Brazil to increase, most likely in the mid-single digit range compared with 2012. Based on the forecasted production estimates and currency assumptions, we expect sales to be in the range of approximately $16.4 billion to $16.7 billion. Sales in the first quarter should be approximately $4.1 billion. Capital spending in the year is expected to be about $710 million to $740 million, as we continue to build out our infrastructure in strategic high-growth areas, such as China, and in support of the continued expansion of newer technologies.

Consistent with prior years, TRW will continue its trend of cash generation in 2013 despite this increased level of investment. With regard to restructuring, we expect 2013 restructuring expense to be about $50 million, slightly higher than our historical range of $30 million to $40 million due to the difficult operating environment in Europe. As I mentioned earlier, we'll continue to monitor the production plans of our customers and adjust the timing and scope of our actions accordingly.

In summary, we're pleased with 2012. However, the focus is now on 2013 and beyond to ensure that our positive momentum continues. We remain confident that we're executing the correct strategies to ensure long-term success for the company.

And with that, I'll now hand the call over to Joe to discuss our financial results in further detail.

Joseph S. Cantie

Thank you, and good morning to everyone. As John mentioned earlier, our results for the quarter built on the positive momentum that was established throughout the first 9 months of the year and solidified a very successful 2012 for the company. The fourth quarter contained a number of special items; however, after adjusting for these items, which I'll take you through in a few minutes, you'll find that the core results were very solid, especially when you consider the negative industry conditions that continued to weigh on Europe.

A quick recap of the key highlights for the quarter included sales in excess of $4 billion, our best-ever fourth quarter sales level, despite the headwinds of lower vehicle production in Europe and the negative impact of currency movements. We had operating profit and margin of $295 million and 7.3%, respectively, after excluding special items, a very good result after considering the increased level of investments for future growth and the poor operating environment in our largest market.

The trend of reducing the company's debt continued, as net debt declined to $239 million as a result of the strong free cash flow of $413 million in the quarter. And finally, the company used $166 million to repurchase TRW shares during the quarter, adding to the shares that were purchased in the first half of the year.

For the year, despite industry challenges that were discussed with you over the past 12 months, TRW finished 2012 with record sales, sales growth above underlying vehicle builds, achieved historic lows for the company's debt levels, returned over $268 million to its shareholders through stock repurchases and made significant investments related to the future growth of our company. It was a very good year. Despite these successes, we remain grounded and realize a lot of hard work lies ahead to ensure the positive momentum is carried forward.

I'll discuss our 2013 outlook in just a few minutes but first, I'll move through the fourth quarter and 2012 results in a bit more detail. For the quarter, we reported sales of $4 billion, an increase of $46 million or 1% compared to the same period a year ago. Currency translation had an $86 million negative impact on sales during the quarter, as the euro-to-dollar exchange rate averaged 1.3 this quarter compared with 1.35 last year. In addition, divestitures completed over the past year resulted in a decline of $23 million of sales in this quarter.

Adjusting for currency and the effect of the divestitures, sales improved by about 4%, including an increase of $128 million of module sales in the quarter compared to last year. For the quarter, we had an operating profit of $155 million, which is a decrease from the prior year level of $280 million. Included in the 2012 and 2011 fourth quarter operating profits were restructuring charges of $88 million and $27 million, respectively.

The current period also included a net noncash charge of $52 million related to the permanent elimination of liabilities associated with certain pension and other postretirement benefit matters. The majority of this accounting charge related to a lump-sum buyout program offered to certain of our U.S. retirees and former employees. Excluding these charges from both periods, operating income was $295 million in the fourth quarter of this year compared with $307 million last year. The profit contribution from the higher level of sales between the 2 quarters was essentially offset by about $15 million in planned cost increases to support future growth and the negative profit impact of currency movements between the 2 quarters.

Returning to the lump-sum buyout actions for just a moment. This program resulted in approximately $350 million defeasement of pension obligations, utilizing pension assets of about $298 million. This transaction, along with other actions, such as making a $20 million discretionary contribution to the company's pension plans in the fourth quarter, were instrumental in limiting the negative impact of historically low discount rates. Through proactive management, the unfunded status of the company's legacy liabilities remain at a very manageable level. When the 2012 10-K is filed later today, you'll see the unfunded status of the company's pension and OPEB at year-end 2012 was $532 million, up only $134 million from the prior year.

Moving down the income statement, interest expense totaled $29 million, which is equal to last year. Finally, the company recognized a tax benefit of $286 million in the current quarter compared with a benefit of $174 million last year. Both years include significant special tax items. In 2012, net tax items totaling $360 million were recognized, primarily relating to changes in our overall deferred tax position as a result of tax-planning initiatives and the reversal of the company's valuation allowance on deferred tax assets in Canada. The 2011 period included $217 million of special tax benefit items, the most significant of which was associated with the reversal of the valuation allowance on the company's deferred tax assets in the U.S.

Excluding the special tax items, tax expense in the fourth quarter of 2012 totaled $74 million compared to $43 million last year. The increase in expense year-on-year results primarily from the reversal of the company's valuation allowance in the U.S. that occurred in late 2011. At the bottom line, we posted GAAP net earnings of $3.26 per diluted share compared with net earnings of $3.27 in the prior year. Excluding the special items I've discussed from both periods and on a comparable tax basis, earnings were at $1.55 per diluted share this year compared with $1.53 in last year's fourth quarter.

In terms of EBITDA, for the quarter, we had $404 million, excluding special items, compared with $413 million in the prior year measured on the same basis. Quickly, for the full year 2012, we reported sales of $16.4 billion, which is an increase of $200 million compared with the previous year and also, set a full year record for the company. Increased vehicle production in North America and continued growth resulting from our portfolio of safety products were partially offset by production declines in Europe and the negative impact of currency movements between the 2 periods. Excluding currency and divestitures, our 2012 sales improved by about 7%.

Our operating income for the year was $1,085,000,000, which compares to $1,260,000,000 last year. Our results for 2012 included restructuring charges of $95 million and the net charge of $52 million related to the pension and other benefit plan matters that occurred in the fourth quarter just discussed. In comparison, 2011 contained restructuring charges totaling $27 million and a net gain of $9 million pertaining to other special items. Excluding these charges from both years, our operating income in 2012 was $1.2 billion, $46 million lower compared with last year.

Several items discussed during our quarterly updates contributed to this decline however, stepping back, the resulting margin of 7.5% for the year is a very good outcome considering the increased level of investment deployed in 2012. Below operating income, interest expense was $111 million compared to $118 million last year.

Both 2012 and 2011 includes losses on debt retirements, totaling $6 million and $40 million, respectively. With regard to taxes for 2012, a tax benefit of $33 million was recognized compared with a benefit of $47 million in 2011. Excluding special tax items from both periods, which I referenced earlier in my comments about Q4 or in prior quarters, tax expense was $340 million in 2012, which is about a 30% effective tax rate compared with $190 million last year.

At the bottom line, we reported GAAP net earnings of $7.83, which compares to GAAP net earnings of $8.82 last year. However, excluding special items and compared to our 2011 pro forma results, reflecting the income tax valuation allowance reversal in the U.S., earnings per share were $6.14 this year, which is slightly higher than the $6.11 we had last year. And finally, in terms of EBITDA, we had $1,648,000,000, a good result for us overall.

Let me shift now to our cash flows and capital structure. First, on operating cash flow for the quarter, we had $711 million, which compares to $608 million in 2011. Capital expenditures for the current quarter were $298 million compared with $267 million last year. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was a positive $413 million this quarter compared to $341 million last year.

For full year 2012, the company generated $333 million of free cash flow compared to $549 million in the prior year. This outcome, which we view as being very solid, reflects the increased level of investment the company deployed in our high-growth areas. For all of 2012, capital expenditures were $623 million compared with $571 million last year.

Our trend of debt reduction continues, as both gross debt and net debt at year-end set historic lows for the company at $1,462,000,000 and $239 million respectively. 2012 marked the seventh consecutive year that the company has reduced its net debt, which is impressive given the cash we used in 2012 to repurchase our shares. It is not our goal to further reduce our level of net debt by the end of 2013, given our intention to continue our share repurchase program in earnest.

As far as an update on our share repurchase program, for the quarter, the company used approximately $166 million in cash to repurchase just over 3.3 million shares of its common stock. For the full year 2012, we repurchased over 5.6 million shares using approximately $268 million of cash. As I mentioned, we expect the pace of share repurchases to remain robust in 2013, most likely in the $500 million range. The initial implementation of our repurchase program has gone well and evidences our commitment to maximizing shareholder value over time.

Switching subjects now to our expectations for 2013. As John indicated, TRW's full year 2013 production forecasts are for 15.8 million units in North America, 18.3 million units in Europe and growth in the rest of the world regions. The forecast for Europe includes quarterly stress or volatility, in that the first half will have steeper declines compared to last year, with recovery in the second half.

Based on our assumptions for production levels and currency rates, our guidance for 2013 sales is for a range of $16.4 billion to $16.7 billion. CapEx is expected to be in the range of $710 million to $740 million, as we continue to execute our investments in strategic high-growth areas. Ancillary costs associated with our growth plans, namely engineering, development and infrastructure costs, are expected to range between $60 million to $70 million in the current year.

I'll also point out that as a result of our increased investment over the previous 2 years, depreciation expense is expected to trend higher in 2013. For modeling purposes, a range of between $30 million to $40 million is appropriate. Although we are committed to ensuring the appropriate capital, engineering and infrastructure support spends take place to build out our preparedness for future business, rest assured, we are equally focused on protecting the company's profitability.

Moving on, although difficult to predict, we do not expect a significant headwind or tailwind related to commodity prices this year. We'll update you on this assumption as we report out our future quarters. With regard to restructuring, we expect our full year expense to be approximately $50 million, reflecting John's earlier comments. Primarily all of that expense is expected to be focused in Europe, with the majority of it being recognized in the first half of the year.

Our initial thoughts on interest expense is that we'll run at about $115 million for the full year, given our current debt structure. With respect to taxes, based on our forecasted results by geographic region, you should assume a full year effective tax rate of between 28% and 30% for modeling purposes.

In terms of the first quarter 2013, to be candid, we're bracing for a difficult start given the steep near-term vehicle production declines in Europe, at a time where our level of investments in emerging markets and future technologies are at an elevated level. We're expecting our sales to be about $4.1 billion, which is slightly lower compared with last year, despite the first quarter of 2013 benefiting from currency and a higher level of modules, totaling around $100 million for both of those. This implies a core sales decline of about $200 million.

The inefficiencies associated with the sales movements, together with elevated levels of costs related to our future growth, primarily engineering related, will result in a lower margin overall for Q1 compared to the prior year and sequentially, to the quarter just completed, most likely below the 7% level. As vehicle build comparisons improve and investment costs balance, we should see more regular returns as we move past the first quarter. Mitigating this effect will be the benefits of our share repurchase program, as our diluted share count should be 4 million to 5 million lower than last year's first quarter. Although the first quarter will be difficult, looking beyond the near-term challenges, we continue to be confident in TRW's bright future.

In closing, we're pleased with our performance in 2012. As I said earlier, it was a very good year, but we realize that a lot of hard work lies ahead. We're excited and look forward to continuing the positive momentum in 2013. We'll now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

Just wanted to clarify something that you said, first of all. You said in 2013, you've got costs associated with growth of $60 million to $70 million, and depreciation, that's obviously -- the depreciation part was an increase of $30 million to $40 million. Were you suggesting that there's an increase in costs associated with your growth initiatives? Or was that a total number?

Joseph S. Cantie

No, that is the incremental impact that we expect to have as a headwind in 2013 versus 2012.

Rod Lache - Deutsche Bank AG, Research Division

Okay. You're talking about fairly modest organic growth for this year based on your guidance for the year. Is there a shift in the mix of business? Is it -- is any less of that coming from modules, or is it pretty consistent on a year-over-year basis?

Joseph S. Cantie

Yes. A couple things with that, we do expect our module business to be down in '13 versus '12 by about a couple hundred million. And as you probably picked up, we are expecting a European vehicle build of about 18.3 million, and obviously, currency will play as well. We're using an assumption of about 1.3 or just under 1.3 for the euro, but there are several other currencies obviously within our portfolio. So taking all those things together, that's got us out there with our guidance right now of $16.4 million to $16.7 million.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And on a full year basis, just given these headwinds, I suppose that the module decline and core business increases is an offset. Do you believe that you can sustain the kind of earnings level that you had in 2012 into 2013?

Joseph S. Cantie

Well, we don't provide specific guidance on our earnings for the year. We tend to try to give you guys the pieces to build the mosaic, if you will. So difficult for me to comment on that overall. It's early in the year, Rod. Obviously, we know that our first quarter is going to have a steep decline in the European production and again, at a time when our costs for the emerging markets are elevated. So we know that our first quarter is going to be a bit of a challenging start, but we're confident that during the course of the year, especially in the second half of the year, if things play out in Europe the way we and others believe, we should be able to have another decent year. But I can't comment specifically on the earnings levels for the year.

Operator

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

Christopher J. Ceraso - Crédit Suisse AG, Research Division

I just wanted to come back to your comment about the margin in Q1, Joe. The build levels look like they're going to be relatively flat from Q4 to Q1, but you're talking about margins lower. You mentioned the step-up in both D&A and your engineering expense. Is that really explaining the difference? Or are there other puts and takes in there on the sequential margin walk?

Joseph S. Cantie

Yes, I mean, sequentially, quarter 4 to quarter 1 is, for our business, there's a number of things that factor, as they do every year. So for example, our engineering tends to be a lot higher in the first quarter versus the fourth quarter because in the fourth quarter, we're closing out a lot of our development contracts. We tend to collect a lot of our reimbursement for engineering in that quarter. You have the other factor of things like pricing agreements tend to start on January 1, but yet your cost reduction programs build during the course of the year. So you have what I'll call the natural things that happen every year when you go from fourth quarter to first quarter. And then, you add the other comments that I throw down -- that I mentioned earlier about the first quarter, and you can see the drop between the fourth quarter and the first quarter.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. A couple of items on cash flow. What do you expect for cash taxes? How much of the restructuring, the $50 million, is going to be cash? And is there any follow-through from last year's restructuring? Any other cash items, working capital, pension, just so we can bridge what we think earnings are going to look like versus cash flow.

Joseph S. Cantie

Yes, when I look at cash taxes, I think in 2012, we were somewhere around that $190 million level. I don't expect it to be materially different in 2013, so it should be in that same range. As far as our funding of pension plans, we did -- as I mentioned earlier, did do a discretionary -- what I'll call a discretionary $20 million contribution in the fourth quarter. So all things being equal, you would expect -- we've made no decision on what we're going to do in 2013, so assuming we make no further voluntary contributions, our funding levels will be about the same, less the $20 million. So that's pension, that's cash taxes. Working capital, Chris, that's a tough one. It depends on what the sales levels are as we exit the 2013 year. So it really is dependent on what you think is going to happen. I mean, generally speaking, if our sales level is materially up in the fourth quarter compared to this year, you tend to have that cash outflow as you exit the year. If our sales are flat and even through the course of the year, you won't have that. But as we see it right now, we are hopeful that our fourth quarter sales will be higher in '13. So perhaps, there will be a little bit of working capital needed to fund that.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

All right. And then just one last one about the outlook for sales beyond 2013. Have there been any changes or delays or deferrals in the new programs? I know 2014 is supposed to be a big year for new business ramping up. Any change to that expectation?

John C. Plant

No, not that we can see, Chris.

Operator

Our next question is from the line of Matt Stover with Guggenheim Securities.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

If I'm looking at the CapEx number, it was sort of a bit higher in terms of guidance for next year than what we've been looking for, and I think what, at least, the consensus have been looking for. And I'm wondering -- it's always hard to sort of scope the topology of the CapEx curves from one year to another. And I'm wondering, has there been a pull-forward of programs in the developing markets? And how should we think about kind of the shape of that curve as we look out into '14? Should it be something that we see to be flat, a bit lower, a bit higher?

John C. Plant

For fiscal -- Matt, let's comment on -- this year was slightly lower. That was 2012. We think that next year is slightly higher. I mean, some of that will reflect the delays from this year, but nothing untoward. And if anything, I look upon the capital expenditure because we don't spend capital frivolously at all. We have -- I think very clear, we spend capital when we can see good returns for it. And so I interpret the capital need as a good thing, and it really fundamentally witnesses the growth of the company that we've been talking about as we move into '14 and '15. So I think that you should look upon the capital need in a very positive light.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

And if I think -- Joe, your comment on ER&D incrementally in '13 being $60 million to $70 million. The D&A is on top of that, obviously, correct?

Joseph S. Cantie

Yes.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Okay. And then, if I got you correct, the -- for the full year, you indicated that module sales will be lower by a couple hundred million. But did you say in the first quarter, they'd be higher by a couple hundred million?

Joseph S. Cantie

No. I said in the first quarter between currency and modules being up together, those 2 items would be about $100 million. Our module sales will be up in the first quarter compared to last year's first quarter. So we had a -- if you look at our 2012 year, Matt, we had a situation where our module sales were increasing during the course of the year so that when you get to the first quarter, first quarter is down versus fourth in modules, but it's still up versus the prior year. And by the time we get to the end of the year, we'll be down $200 million.

Operator

Our next question is from the line of Ryan Brinkman with JPMorgan.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

I was hoping you could comment on the cadence of your share repurchases and what, if anything, we might be able to read into the strong repurchase amount during the quarter. You've guided for, I believe, what, $1 billion of repurchases, I think, over roughly 2 years, implying maybe $125 million per quarter if you were to straight-line it, which I know you didn't precisely guide to. So how should we think about the fact that you bought back more than that during the quarter? Does that mean you might exhaust your repurchase program early? Or is it simply because this is your strong free cash flow quarter, so this is when you would do it?

John C. Plant

The execution in Q4 last year was in line with our thinking. We're not updating the overall $1 billion repurchase program at this stage. We did use very clear words for you last year in saying this was our initial move in terms of shareholder-friendly actions. If you think about the cadence of the program that we talked about and execution over the financial years, I think the way you should interpret the $500 million for 2013 is that, that's actually very positive and if anything, an acceleration of our repurchase program. And we'll update you during the course of the year, should we decide to change the overall scope of the program. And obviously, if and when we do so, we expect that again to be seen to be a positive thing and reflect our confidence in the future.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay. That's helpful. And then, just a follow-up to that. I appreciate the comment that you do not intend to lower your net debt further. But is there any thought to actually levering perhaps the use of your upsized $1.4 billion revolver to finance the repurchase of incremental shares? Or is this just something we should think about more as being supported by current liquidity and ongoing free cash flow?

John C. Plant

I think what we've tried to indicate to you that -- by the words, that don't expect our net debt to come lower. Therefore, you might expect net debt to go higher. I think that's what you should expect from that. So we've tried to give you guidance in the sense that we said that 2013 would be positive cash flow into the company from operations, but then we would also, as you've seen based on my last comment, accelerate the share buyback program to gain a more, I'll say, reasonable capital structure. And we've been indicating for some time now that we consider the company to be under-levered. But what I want to really comment on is 2012, as you saw, is that we spent a lot of money on capital expenditure for the growth of the company, which we've said will be actually heightened in 2013 for the program we've been talking about for some time of growth in '14 and '15. And despite that investment, despite all the actions we took on sort of in voluntary contributions into legacy liabilities, even after all that and after all the share repurchase, we still lowered net debt, which I think is just an outstanding result for the company. And now we're saying, really, we don't feel the need to focus on reducing net debt. We'll focus on driving cash flow, but we plan to -- I'll say, compared to the original plan, you can think of the $500 million this year as somewhat of an acceleration of the share repurchase program, and therefore, you should be expecting a higher net debt at the end of 2013. And I said before, we'll update you on the profile of any further actions in terms of whether it's share repurchase or dividend or whatever it might be later in the year.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

That's great. I appreciate all the color. If I could just squeeze in a final question. I understand that there is an inflection in revenue toward the back half of the year, as you start to reap some of the investments that you've sown in recent years. Could you perhaps maybe just flesh that out a little bit for investors? Maybe perhaps reference some specific programs or at least some products that will be launching later in the year and tell us how should we think about that, active versus passive safety, where is it falling geographically, I think, primarily in China, et cetera.

John C. Plant

I think you should be thinking about the active side of the safety portfolio as being the product area most likely to generate above-trend sales, and you should also be thinking about China itself, because of the investments we've made, we're also generating above-trend sales there. Even if you looked at 2012, for example, just without adjusting for any translation differences, our sales in China were up 20% in the fourth quarter, which I think is just outstanding, given the vehicle build, I think, was only up about 4%. And it's been those things which have really been -- I mean, if you put that regional diversification that we've been investing in, plus the technology being improved, so 2012 was all about content growth obviously, plus those investments in the developing markets, which was fundamental to us, offsetting all of the European downdraft, all of the currency downdraft and still increasing our sales year-on-year. Now what we should be thinking about for 2013 is that our module sales will be trending lower, as Joe said. Therefore, our manufactured sales will be trending upwards, and I think that's a positive thing for us. And then, you've seen my commentary around the investments in fresh capital, and I mean, we're not choosing to invest that high level of capital for nothing. I meant, it's meant to be for productive assets, which will reflect in higher growth in the future. And of course, in doing that, we have to make assumptions about vehicle build, et cetera, et cetera. But very clearly, in our first quarter, the downdraft in Western Europe of 15% is going to have a negative impact on us.

Operator

And our next question comes from the line of Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Just firstly, wanted to follow up on that last question. The 11 facilities, I believe it is, that you have put in place, you've kind of outlined some of the costs associated with those launches. But on the revenue side, what's the timing of utilization for those plants being high enough where they become accretive to earnings? Is that sort of later on this year, as the last question implied? Or is that something that really happens in '14 and '15?

John C. Plant

You should be expecting them to be at the back end of this year and as we go into 2014 in terms of everything we've said to you consistently over, I think, in the 2-year, maybe, period now.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And this one maybe for Joe on pension. Pardon me if you have mentioned it, but in terms of the impact of pension expense, given some of the actions you've taken. And then particularly would be interested in knowing how that impacts the differential between pension expense and cash calls. If I recall, there's always been sort of like $100 million differential there between P&L impact and sort of pay-go cash calls. And how is that affected going forward, just given all the changes that have happened?

Joseph S. Cantie

Sure. I think going forward into 2013, we're not expecting much of a difference between '13 and '12 on our net pension expense, primarily because we've done a number of really great things, buyouts, cancellation of plans, et cetera, et cetera. But unfortunately, discount rates have trended down, which have caused us to reduce our discount rates on our plans. So for example, in the U.S. last year, we had a discount rate of 4.75%, this year, it's 4%. So the positive of all the actions that we're doing in terms of our expense for 2013 versus '12 has been offset by the fact that discount rates have been going down, which inflates the liability. So on an -- pure expense standpoint, it's a push. Therefore, for cash, it's really consistent, again, between 2013, 2012. So you are correct. Each year, we have about $200 million of an adjustment on our cash flow statement, and I would expect it to be in that same level again. Given that you asked the question, I'm going to take the opportunity to remind everybody on the call. This interest rate environment is really incredible, all-time lows, and as you can tell and see, our unfunded position of some $500 million, that's actually really good when you consider we're marking these things at discount rates of 4%. As soon as interest rates go up, and I don't know when that's going to happen, but somewhere in the next decade, interest rates, I think, are going to go up, and when they do, clearly, all the pension unfunded positions are going to flip and therefore, we should be in a really good position.

Operator

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

Ravi Shanker - Morgan Stanley, Research Division

You said in your comments that 4Q European production is weaker because of de-stocking. In your conversations with the OEMs, do you get a sense or do you think that inventories are pretty much rightsized right now? Or do you think there is more to cut and that this is going to be kind of based on where the European SAAR goes in the next few months?

John C. Plant

My sense is that the level of production in the first quarter, which is to a lower rate than the sales rate, as expected today, is continuing to address that inventory position. So I think at the moment, we're seeing possibly a low point in production in Europe, honestly. Obviously, you have to take the normal calendarized profile. But it feels as though we are seeing inventory correction in Q1 beyond the sales level.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And Joe, can you remind me what your exposure to the yen is, both from a direct customer perspective, as well as from a cost perspective?

Joseph S. Cantie

Very immaterial. It's not -- we do have some, but it's not one of the big currencies for us. Very minor.

Operator

Our next question is from the line of Brett Hoselton with KeyBanc.

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

I guess 2 questions here. Just to follow on the previous question, production schedules in the fourth quarter are expected to be down fairly significantly in the first quarter, as you mentioned. Based on your conversations with your customers, based on the schedules that you're seeing thus far, is it your expectation that those schedules would likely remain the same, be revised downwards, be revised upwards? Is there a particular direction bias or something along those lines that you can give us?

John C. Plant

Well, we probably always tended to take a pretty conservative view of our customers' build schedules, and so I'm not expecting further downdrafts in the first quarter of 2013. I think the real interesting question is, will we see some recovery in the second half? And indeed, when will that be? And therein lies the thing which, I'd say, probably occupies my thought for the year more than anything because, I mean, in one sense, it's hard to see going down further. At the same time, I don't think we're out of the woods in terms of the overall European situation in terms of demand and indeed, all the crisis that it's been through. So we remain very cautious on Europe and really, just hoping that it doesn't go down further. Hopefully, it goes up and then that will underpin 2014 for us.

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

Okay. And then, Joe, this is going to be a ways out here, but I'm thinking about 2014 margins. And I'm thinking European production is probably going to be more stable, which would be good. I'm assuming you're going to grow into your overhead that you've -- in terms of your expansion plans, so you get a little bit more or better capacity utilization there or some leverage there and so forth. I guess I'm trying to -- I'm asking myself, "Why would 2014 margins potentially be not be better than they were in 2013?" I come up with all sorts of reasons why they should be better. I'm trying to figure out if there's reasons why you may have a headwind in 2014.

Joseph S. Cantie

Well, no idea at this point. When I -- everything you said, I don't disagree with. When we get out into '14, depends on what's happening in the world economies, depends on what's happening with commodity -- commodities, vehicle builds, et cetera, et cetera. I mean if -- we are hopeful that and believe that European production should be up in '14 versus '13, but that's a long way aways. I'm not sure.

John C. Plant

I think one of the things you'd look at is if you take our growth last year in 2012 at 7%, adjusting for the currency and divestitures, then I think that stands up pretty well. And again, we may not -- we don't exactly go and say how great 2012 is going to be, but it was pretty robust. And so I think you can see the underlying quality of the product and innovation expenditure that we've been putting in and obviously, how good it would have been without the European downdraft that we saw last year and that we saw -- we're experiencing right now. So essentially, all of the, I think, great work in terms of content growth and technology development and footprint has obviously been reduced by, let's say, just basically the European situation. But having said that, I think you see, if you were to compare that growth rate to the industry, it stands up very well.

Operator

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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