TRW Automotive Holdings Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: TRW Automotive (TRW)

TRW Automotive Holdings (NYSE:TRW)

Q1 2013 Earnings Call

April 30, 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

Patrick Archambault - Goldman Sachs Group Inc., Research Division

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

Richard J. Hilgert - Morningstar Inc., Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

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

Ravi Shanker - Morgan Stanley, Research Division

Operator

Good morning, and welcome to the TRW conference call. [Operator Instructions] And as a reminder, this conference 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'd like to welcome everyone to our First Quarter 2013 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 for the remainder of the year. 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 2012 Form 10-K contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2012 10-K and other SEC filings by visiting the Investors section of our website at trw.com or through the SEC's website at sec.gov. On a related matter, we expect to file our first quarter 10-Q within the next day or so. Once filed, the 10-Q can also be accessed through either website.

In addition to the financial results 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 to 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?

John C. Plant

Thank you, Mark, and good morning to everyone.

As you can see from the results posted this morning, TRW's first quarter performance was good despite the difficult conditions that continue in Europe. Our results today reflect the company's ability to mitigate those challenges.

During the first quarter, sales, which totaled $4.2 billion, was similar to the prior year quarter, a good outcome and continued evidence of the increasing demand for TRW's technologies and our presence in developing economies. This helps to offset the decline in vehicle production in Europe.

Operating profit before special items was $290 million. Net income was $189 million and earnings per share were $1.51 on the same basis.

And finally, in line with company expectations and normal seasonality, operating cash flow for the quarter was a use of $178 million. Despite the use of cash in the first quarter, we anticipate 2013 will be another positive year of cash generation for TRW.

Overall, as vehicle demand continued to deteriorate in Europe during the first quarter, TRW's results demonstrate the benefits of the company's global footprint and higher diversified product and customer mix.

In North America, vehicle production remained strong and tracked in line with the expectations the industry observers established at the beginning of the quarter. Overall, North American production was about even compared with the first quarter of 2002 -- I'm sorry, 2012. On a sequential basis, compared to Q4, production was up about 160,000 units.

Consumer demand remained strong, as the first quarter seasonality adjusted annual selling rate averaged about 15.3 million units. In contrast, the vehicle industry in Europe remains weak, as recessionary conditions and a renewed focus on the financial crisis continues to weigh on consumer confidence and vehicle sales.

With the exception of the U.K. market, the falloff in demand during the first quarter was broad based and included Southern countries, such as France, Italy, Spain as well as the German market. Efforts to align vehicle production with demand drove a significant year-on-year decrease in production beyond the level of sales decreases. For the quarter, total European vehicle production was down about 8% compared with last year's first quarter. In Western Europe, weak demand combined with inventory de-stocking resulted in a 12% year-on-year decline in vehicle production.

Although a quick recovery is unlikely, we're hopeful that conditions will stabilize as we move through the year. I'll have additional comments on our 2013 outlook in just a few minutes.

In China and Brazil, the vehicle industry continued to trend higher. Combined sales for China and Brazil accounted for over 18% of TRW's total first quarter sales and were up 24% year-on-year, and this is well ahead of vehicle build. As a result of the significant growth in China and Brazil, and the contraction of the market in Europe, TRW's European exposure drops to 42% of total sales in Q1, down from about 47% a year ago.

Moving on to first quarter business developments. Product launches during the quarter continue to strengthen TRW's diversity and leadership in intelligent safety solutions. A few examples include: driver and passenger air bag modules, electric power steering, seatbelts, steering wheels and foundation brakes on the Ford Fiesta in South America.

BMW launched its 3 Series GT in Europe, with TRW's driver and passenger airbag modules, seatbelts and steering wheel. And Opel launched its ADAM with TRW's passenger, side and roof rail airbag modules and seat belts. As a result of our ongoing quality and Six Sigma programs, we continue to launch products with world-class quality. For the quarter, our quality averaged about 3 parts per million across all products and customers worldwide.

In addition to the products launched during the first quarter, TRW continues to develop new solutions and enhance existing technologies to meet the growing demand for a wide range of vehicle safety systems. A great deal of attention recently has focused on several notable trends in the electronics field, including crash avoidance technologies, which are becoming mainstream; and a focus on radar and camera-based systems, which are affordable.

Not only is it exciting to look to the future given the technologies that are in the pipeline, it's equally exciting to see our customers recognizing TRW's innovative products.

During the first quarter, TRW was recognized by Chrysler Group with a 2012 Innovation Award for User Experience and Driver Assistance in the development of lane-centering assist technology.

As background, TRW's lane center assisting -- assist mechanism is an integrated camera-based solution that utilizes the camera and electronically powered steering system. The camera detects the lane markings, calculates the virtual line -- the virtual lane centerline and sends talk commands continuously to the electric steering system to help keep the vehicle centered in the lane automatically.

Given that technology is critical to our product leadership and long-term growth, we're proud to have received this award and also adds to the many contracts we have won in this area.

In addition to having the right technology in place, growing the business while protecting our profitability is essential to positioning the company for our long-term success.

After spending some time in China last week, I'm happy to report that the company's growth strategy is progressing as planned. It's exciting to see the strategy take root and transition from development and planning -- the development and planning phase to the launch phase that will occur over the next few years. This, as well as the ability to advance our technologies in the North American market, reinforces our bright future that lies ahead.

At the same time, given the weak near-term outlook for Europe's automotive industry, the company has taken further actions to restructure the business to ensure TRW's future competitiveness. During the most recent quarter, plans were initiated regarding the closure of 2 manufacturing plants in Western Europe, one in Germany and the other in France. In both instances, the current economic situation across the region, which has significantly impacted vehicle volumes, contributed to a non-sustainable cost base.

In addition to our reducing fixed costs, benefits will be achieved at the receiving locations of the business as the existing labor pool is better absorbed.

We will continue to monitor the automotive industry environment across the region and take any additional steps as necessary. We remain confident that we are executing the correct strategies in each of our markets, ranging from growth in China to restructuring efforts in Europe, to ensure the long-term success of the company.

Before I turn the call over to Joe, let me comment on our expectations for the second quarter and remainder of 2013. Overall, vehicle production volumes are expected to be influenced by the macroeconomic factors that are prevalent in each of our major regions at the moment.

In North America, supported by strong consumer demand and new product introductions, second quarter production is expected to be at 4.1 million units, up approximately 4% compared to last year.

Sequentially, compared to Q1, production will be up around 180,000 units. For the full year, we expect production to total 16 million units, an increase of about 4% compared to 2012. In Europe, we remain cautious, as the negative economic conditions within the Eurozone continue to place downward pressure on vehicle demand and production within the region.

During the second quarter, vehicle production in Western Europe is projected to be about 3.1 million units, down about 3% compared with last year. Total European production is forecasted at 4.8 million units. Similar to the fourth -- first quarter of this year, TRW's global footprint and product mix should soften the negative impact of lower production in the European region.

For the full year, our forecast is for production of 18.4 million units for the total of Europe. Within this estimate, Western European production is 11.8 million units, down roughly 6% compared with 2012. As you would expect, we will continue to flex our operations and make adjustments to help mitigate the negative impact of these volumes.

Beyond North America and Europe, we continue to expect full year vehicle production increases in China and Brazil, most likely in the mid-single digit range compared to 2012. Based upon the forecasted production estimates, currency assumptions and our first quarter performance, we now expect sales to be in the region of approximately $16.6 billion to $16.9 billion in 2013.

For the second quarter, sales are expected to be approximately $4.3 billion. We still expect capital spending for the year to be in the range of $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 our newer technologies. Consistent with prior years, TRW expects to continue its trend of cash generation in 2013, despite this increased level of investment. With regard to restructuring, we continue to expect 2013 restructuring to be in the region of $50 million.

In summary, a lot of hard work lies ahead. The team is focused on executing the strategies, while mitigating the near-term industry challenge in Europe.

And with that, I'll now hand the call across to Joe, to continue 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 were impacted by the challenging industry conditions that continue in Europe. The benefit of TRW's strong and diversified market positions was demonstrated, as solid performance in North America and China helped offset the weakness in Europe.

A quick recap of the key highlights for the quarter included sales in excess of $4.2 billion, a good outcome considering the significant headwinds of lower vehicle production in Europe. An operating profit of $290 million and margin of 6.9%, after excluding special items. This level of profit was solid overall, despite reflecting the increased level of investment for future growth, and again, the poor operating environment in our largest market. Earnings per share were $1.29 on a GAAP basis and $1.51 after excluding special items.

And finally, with regard to the capital structure, as previously announced, the company completed a $400 million 4.5% bond offering, taking advantage of very favorable market conditions. I'll expand on our capital structure in a few minutes, but first, let me review our first quarter results with you in a bit more detail.

For the quarter, we reported sales of $4.2 billion, an increase of $5 million compared to the same period a year ago. Currency translation and a divestiture that occurred in the third quarter of last year had a negative impact on sales of about $20 million. Otherwise, sales improvements in North America and China, essentially offset the decline in Europe for us. For the quarter, we had an operating profit of $253 million, which is a decrease from the prior year level of $331 million.

Restructuring charges were $37 million this year, relating to the European cost actions that John described earlier, compared to $2 million last year. Excluding restructuring, operating income was $290 million in this quarter compared with $333 million last year. A higher mix of lower margin business, about $10 million in planned cost increases to support future growth, and the negative impact resulting from the difficulties in Europe drove the year-on-year decrease. In addition, last year's results did benefit from a few favorable items that did not recur this year, which, net, were about $15 million.

Moving down the income statement. Interest expense totaled $30 million, which is consistent with last year's level of $29 million. As a reminder, last year's quarter included a loss on retirement of debt totaling $5 million.

Finally, tax expense was $62 million in the current quarter, compared with $93 million last year. Both the 2013 and 2012 periods included tax benefits related to special items, totaling $10 million and $2 million, respectively.

Excluding the tax benefits, the overall effective tax rate was approximately 28% for the first quarter, which is at the lower end of the expected full year range, which I'll discuss with you in a few minutes.

For the quarter, our diluted share count averaged 126.9 million shares, which is 4.3 million lower than last year, reflecting our share repurchase programs. At the bottom line, we posted GAAP net earnings of $1.29 per share compared with net earnings of $1.59 in the prior year. However, excluding the special items I have discussed from both periods, earnings were $1.51 this year compared with $1.62 in last year's first quarter. In terms of EBITDA for the quarter, we had $396 million, excluding special items.

Let me shift now to our cash flows and capital structure. For the quarter, operating cash flow was a use of $178 million, which compares to a use of $102 million in 2012. Capital expenditures for the current quarter were $104 million compared with $96 million last year. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was a negative $282 million this quarter compared to a negative $198 million last year.

The cash flow result was consistent with our internal expectations, as higher working capital requirements and increased level of restructuring and lower overall earnings contributed to the year-on-year decline. As John pointed out earlier, despite the cash outflow in the first quarter, which follows our normal seasonal pattern, we anticipate that 2013 will be another cash generation year.

At the end of the first quarter, our total gross debt was $1,880,000,000, while net debt outstanding was $534 million. The $418 million increase in total gross debt compared with year end 2012, reflects the company's $400 million, 4.5% bond offering, completed during the first quarter. The proceeds from the offering provide additional flexibility to our already solid capital structure ahead of future debt maturities, such as the half-coupon call feature occurring in December on our 8 7/8 bonds and $533 million of bonds maturing next March. Despite having a negative carry for a period of time, completing the transaction was a good risk-managed outcome for the company.

As far as an update on our share repurchase programs, during the first quarter, we had limited trading days available to buy our shares, given the restrictions resulting from the capital transactions completed in Q1. In total, approximately 200,000 shares were repurchased using about $10 million of cash. Despite the limited activity during the quarter, the company has not changed its previous guidance for the full year and continues to target repurchases in the $500 million range during 2013. We intend to resume actively repurchasing shares in the second quarter.

Switching subjects now to the second quarter and the remainder of 2013. As John indicated, TRW's full year 2013 production forecasts are for 16 million units in North America, 18.4 million units in Europe and growth in the rest of the world regions. The forecast for Europe includes continued near-term stress, followed by a modest recovery as we progress through the remainder of the year.

Based on these production assumptions and our first quarter performance, full year sales are now forecasted in the range of $16.6 billion to $16.9 billion. At this time, we're expecting second quarter sales of about $4.3 billion, slightly higher than last year's level. We expect capital spending to range between $710 million to $740 million in 2013, which is consistent with our earlier projections.

Ancillary costs associated with our growth plans, namely, engineering, development and infrastructure costs, are tracking as planned at about $60 million to $70 million for the full year. I'll also remind you that, as a result of our increased investments over the previous 2 years, depreciation expense is also tracking $30 million to $40 million higher for the year, which you'll see most prominently in the second half of 2013. This D&A increase is consistent with our earlier guidance.

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 continue to expect commodity prices will remain neutral this year. We'll update you on this assumption as we report out our future quarters.

With regard to restructuring, we continue to forecast our full year's expense to be approximately $50 million, reflecting John's earlier comments. As a result of our $400 million bond offering completed in Q1, we now expect full year interest expense of about $130 million, given the current cost and level of debt for the company.

Finally, given our expected results by geographic location, you should continue to assume a full year 2013 effective tax rate of between 28% and 30% for modeling purposes.

In closing, our first quarter results provide a firm foundation to build on as we progress throughout the year -- or through the year. Our team is focused and realizes that a lot of hard work lies ahead to ensure the company achieves its 2013 objectives.

We'll now move to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

A couple things. First, just to help us with our year-over-year bridge, how much was U.S. -- or the module growth year-over-year for the company versus what you would consider core revenue changes?

Joseph S. Cantie

We had about an increase of about $45 million this first quarter versus prior year first quarter. And as I indicated previously, we do expect our module sales to be down overall year-on-year, about $200 million. But the way the comps work, we actually were $45 million higher in the first quarter.

Rod Lache - Deutsche Bank AG, Research Division

$45 million higher for modules?

Joseph S. Cantie

Yes.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And can you talk a little about what you anticipate in the long run? The structural cost savings would be associated with the restructuring that you're doing. And any thoughts on acquisitions?

Joseph S. Cantie

First, for the restructuring and then I'll let John, comment on the acquisitions. On the restructuring side, all of our restructuring, both in the fourth quarter and the $37 million that we took this first quarter, are all focused in Europe. As you know, the paybacks tend to be longer in Europe and the ability to complete the restructuring actions take a longer time. So for example, the charges that we took in fourth quarter are for actions that have been agreed and been put in place. But they actually won't be completed until the end of the year, and some of them actually falling into next year. So the near-term payback -- the near-term impact of that, you won't see in 2013. You will see in '14 going forward. And again, the paybacks on those typically tend to be longer, sometimes up to 3 years.

John C. Plant

The last part, Rod, was about acquisitions. The stance hasn't changed in that, if we were to see something suitable in the bolt-on area, and that we could take, I'll call it, as I said before on the run, in terms of year's cash flow or so, yes, we'd seriously consider it. We're not anticipating anything in terms of a major transformational acquisition.

Operator

Our next question is from Chris Ceraso with Credit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

SG&A in the quarter looked to be a bit lower than we thought and a bit lower than it had been running. Can you talk about why that was? Was there anything unusual in there? And can you sustain it at this level of sales?

Joseph S. Cantie

I mean, typically, our SG&A ranges from 3.5% to 4%, depending on things that are occurring during the course of the year. We came in at about 3.3%. It was a bit lower this time around. There was nothing big or unusual in there. We did have some favorable currency contracts, and hedging that winds up in our SG&A line that relates to -- and has an association with what goes through our cost of sales line. So it just happened to be a little bit lower this time around. I think you should continue to expect that 3.5%-ish range. And the company continues to be very focused on our costs, as we try to build out the infrastructure and growth anticipation costs. So we will continue to be stingy on that line, Chris. But I think 3.3% is quite low. You should continue to expect that 3.5%, plus or minus.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then just as a follow-up, you've had, I don't know, $60 million or $70 million increases in R&D and engineering to support your new business efforts over the past couple of years. Is there a point that, that spending starts to level off, or should we expect continued escalation in that spend over the coming years?

John C. Plant

We've tried to have a period of where we'd, say, have increased that probably above the rate of our revenue increase. In the future, my anticipation would be that we won't be doing that. So there should be a leveling off in terms of the percentage of our revenues. And therefore, while there may be an absolute dollar increase in the future, it will be also, I'll say, lower as a pro rata element. Please just follow or track our sales, our sales outlook.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Wait, I'm sorry, John. You're saying that it may continue to increase in dollar terms, but you'll start to get a little bit of leverage. It won't grow in lock-step with revenues? Did I have that right?

John C. Plant

Basically correct, yes. I mean so if we're going slightly above our revenue enhancement for a period of time -- essentially, what we did, we set ourselves up to invest in certain areas. And as you've seen, one of our major markets, let's call it Europe, has basically disappointed for the last 2 or 3 years. And we chose not to strangle off any of the development monies for the new technologies and market positions we could achieve. And we chose to ride it out through the difficult times. And hopefully, at some point, as Europe stops going down, and the rest of the world continues to perform and all the content growth we've been getting, is that our growth rate picks up, as I've talked about. And then the R&D will only move up in accordance with revenue and not above the revenue increases, what we had in the last, let's say, couple of years. So in your term, I guess you get leverage on it.

Operator

Our next question is from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

One, I guess, one specific to the new -- the investment in new plants that you have made, which have been considerable. I think on the last earnings call, we were talking about having flow-through in those new facilities be sufficient to start contributing to -- positively to margins by the end of this year. Is that -- and certainly, well into next year. Is that still the case, if we layer on those increased D&A expenses that were highlighted? I guess that's my first question. And I have a follow-up on inventories.

John C. Plant

Okay. Let me deal with the first one, then Patrick. In terms of the underlying picture, those plants are coming onstream. In fact, when I was in China last week, took the opportunity of touring some of those plants after the Shanghai auto show. And everything appears to be on track in terms of facilitization, commencement of production and increasing output, and therefore, productive contribution from them. So I think all of that basic stuff that we've talked about is there and is happening. And essentially, what we've said to you is that the basic thesis was that we would see -- we expect to see increasing growth as we exited 2013 into '14 and '15. Indeed, that is still there. In fact, in China, it certainly appears to be there. The only change to that picture that I can see at the moment is that we have seen a little bit of slowdown in terms some of our Western customers, in terms of pushback of some of their investments in new vehicle platforms. And there's 2 or 3 customers I could instance in that. And that will have some impact. Some have cut their investment plans and some have not. I can instance those if you really wanted to. But the basic thesis stands, albeit maybe with a slower front-end trajectory. And then your second question was on inventory?

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Yes. So I mean just noting, because this has been across-the-board. A lot of us, after the Detroit show, thought production was going to be down more in Q1. And certainly, that the outlook for Q2 seemed weaker as well than it is coming out to be. Yet, the end demand, obviously, for Western Europe, at least, has been probably worse, if anything. So just given we don't have very good inventory numbers, what do you see as -- how bad do you see the risk in that region, that there just hasn't been enough destocking done, and that down 4% might actually have to be down -- revised down a little more?

John C. Plant

I think that picture with Europe, as you say, is always a little bit more opaque. Certain vehicle manufacturers have clearly cut production below the level of their sales in the first quarter. And therefore, that correction indeed is occurring. The question is, how much is enough? And certain of vehicle manufacturers have -- or the vehicle manufacturers haven't quite taken the same, I will say, draconian action. So in terms of what to expect, my current thought process goes along the lines of instead of seeing that we may have pickup in the second half, I think it could be more flat for us in Europe year-on-year. But we still see things stabilizing in the second half. But I don't necessarily see the upside that we thought was there. Having said that, as you've seen, TRW actually has raised its revenue guidelines. That our previous, maybe very cautionary stance has proved to be rather too cautious. And we've taken the opportunity of saying, giving you a better revenue and improved revenue guidance, despite our fairly cautious stance on this whole European production and inventory outlook.

Operator

Our next question is from Matt Stover with Guggenheim.

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

I just want to clarify a couple of things. If I'm looking at the cost for investments, that $10 million that you identified, is that on a year-to-year basis?

Joseph S. Cantie

Yes, it is.

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

Okay. And then the comment that you made, John, with regards to slowing of planning by Western OEs. Is that Western OEs in China, or is that Western OEs globally in terms of investment plans?

John C. Plant

Basically, Western OEs globally. You've seen commensurate with the, I'll say, difficulties they've been facing, particularly from the European operations of some of these global manufacturers. They have pushed back their own investments in certain new platforms, and therefore, the new technologies that go with those platforms.

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

Makes sense. So if I look then at other issues during the quarter, from a margin standpoint, were the pricing adjustments similar to what we would have expected, sort of 1% to 2%?

John C. Plant

Nothing out of the ordinary in pricing at all.

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

Okay. And then we look at the 12% down in Europe. You've been restructuring in Europe for a little while, but this is such a significant year-over-year deterioration. I think it would be fair to say that your conversion on that down 12% would probably be worse than average?

Joseph S. Cantie

Yes, that's correct.

Operator

Your next question is from Richard Hilgert with Morningstar.

Richard J. Hilgert - Morningstar Inc., Research Division

I saw that you're opening a facility in Eastern Europe, in particular, Baia Mare, Romania. Was curious how much more movement over to Eastern Europe do you think is ahead for the industry? Is this something that we should still be anticipating? I understand that facilities change and footprints change over time. But is this something that we should see more of here, especially with what's been happening in the European market with capacity there?

John C. Plant

Well, first of all, the trend of the move from, I'm going to call it, high-cost countries to low-cost countries has been with us for many years. The move therefore, from Western Europe to Eastern Europe, has been occurring. And I expect that it will continue to occur, essentially because -- I mean, there are multiple reasons for it in terms of, yes, there's an hourly labor cost advantage. But also, the hours of work in Eastern Europe are higher. The productivity of employees is as good, if not better. And hence, we -- I still believe that Western Europe has a fundamental issue regarding its whole unit labor cost of production. And unless that gets corrected as part of this whole solution to the euro crisis, then there's an inexorable move of production from west to east, which is going to continue. It's not going to apply just to the auto industry. It's across many industries.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay. Very good. On the leverage front, could you remind us, please, on a debt-to-cap -- total cap basis, what's the upward bounds of leverage that the company is willing to take on?

Joseph S. Cantie

We haven't ever really expressed a target or a goal or anything like that. We have previously indicated that obviously, in the automotive industry, which is a cyclical industry, going to levels that are above 2x net debt, the opportunity would have to be enormous for the company to do something like that. So basically, on those past comments, you can infer that anything above that 2x level would have to be an exceptionally great opportunity for us.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay. Joe, on the engineering, Chris asked a question about it earlier. I was curious for just a little bit more color. A lot of what you've taken on in terms of your engineering spend has been on the development front, and this is obviously something you have to do to support your customers' programs. I'm curious how much of it has been targeted towards the research side, where you're looking for innovative approaches to doing things, new technologies, that kind of thing?

John C. Plant

Well, we pay attention to doing some work in the research area, as we've done every year, and keep that at a fairly constant level. The majority of the increase that we've been experiencing has been against technologies that we see production application of -- or for in the next 5 years. And the areas which are probably receiving most focus at the moment, are those areas where new technologies are required to meet new NCAP ratings in Europe, or I will say, anticipated new regulatory requirements in the U.S., or if not by regulation by the insurance institutes. And you're seeing that in terms of the whole focus on pedestrian protection, driver assist systems, all in the area of active safety, and things like the requirements to achieve automatic emergency braking and the forward-looking control systems that you need for those technologies. So there's a whole new wave of regulations or insurance requirements coming at the industry, both in Europe and in the U.S., we believe. And also, of course those things would also flow into China. In fact, one of the surprises I always see when going to China is just the focus on those new technologies in China. So it's an accelerating technology pace in that market as well.

Operator

Our next question is from Ryan Brinkman with JPMorgan.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Just on the cadence of buybacks, I'm curious if you might consider an accelerated share repurchase program, perhaps after gaining greater clarity on antitrust? Have you evaluated the merits of such a program?

John C. Plant

We haven't decided exactly what to do in terms of the whole shareholder firm [ph] reactions we talked about. And the update we gave you on the first call, which was that we would enhance the previous program in terms of size and timing for 2013, that currently stands, and we've given no further color or effort to reconsidering that. And as you heard for the majority of the first quarter, we were, in fact, not able to transact in the market. So we believe we have our work cut out in the remaining 3 quarters to complete the program that we have. And then we'll take another assessment commensurate with the opportunities we see as we go into 2014. We will update you in subsequent calls. We see that our balance sheet is going to be in good -- in a good condition. We've talked about generating cash again for the year. So everything appears to be in a favorable condition for us to talk to you further about that later in the year.

Joseph S. Cantie

And Ryan, in terms of the tools as to how to transact, we've considered all the tools, as you can imagine. And you'll see the disclosure in our 10-Q, where we've indicated that the way we transact and complete that may -- I stress the word may, may include accelerated repurchase programs, as well as several other tools that are out there. But you can trust that an organization of our size and depth, well banked. We're very aware of all the tools and have a plan as to how we're going to use those tools to transact what John just referred to.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay, that's great color. And then Joe, just as you discussed earlier, annualizing your capital spending in the quarter would result in a run rate significantly below the full year guidance. So can you maybe just walk us through the CapEx cadence this year? And what is potentially driving that lumpiness, in order to help us better understand whether there is, in fact, a step change, or maybe there might be some potential for the full year to come in a bit lower?

Joseph S. Cantie

Yes, we -- if you look at our seasonal and historic pattern of CapEx, our fourth quarter is always our largest quarter in terms of recording the CapEx through the system. That has a lot to do with when we place our equipment and plants and facilities into production. We expect the same thing to occur this year. We have a heavy second half of the year launch cadence. So in my script, I also indicated that we expect the majority of our D&A increase to occur in the second half of the year as opposed to the first half of the year. That's the same pattern that holds with when we place our capital in. That will be occurring in the second half of the year, which is why the D&A kicks up in the second half of the year. So it's actually nothing really unusual. Again, if you go back and look at the pattern over the last 3, 4 years, we're always pretty light in the first couple of quarters, with CapEx heavy in the second half. Having said that, of course, we watch every dollar we spend. I certainly will be watching for where our OEs may be delaying some of their capital plans, referring to what John talked about earlier. And where we can, we certainly will place that capital and spend that cash at the last possible moment.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay. And then just last question. You did touch on decremental margins in Europe in response to Matt's question. I think you gave kind of an order of magnitude relative to the total company. And I know you don't break out margins on a regional basis, but is there anything more you can say, maybe even directionally, about the absolute profitability of your business in Europe at the current production levels? And then just, what you're doing there to contain decremental margins, and how those decremental margins might actually be tracking, if that is something you feel comfortable sharing?

Joseph S. Cantie

Well, I'll share what I can with you. I mean when you have a decline of 12% in Western Europe, given the stickiness of costs in Europe versus places like North America, you will have short-term periods where your decremental margins tend to be a little bit higher. And that's why I responded to Matt's question the way I did. What we're doing about it, of course, we're taking a look over the short, medium and long-term about what we expect in Europe, and are restructuring our operations through the current weakness to the extent necessary, in order to support the medium and long term. That has resulted in us taking actions in the fourth quarter of last year and the first quarter of this year, which is what the restructuring charges are associated with. And it involves plant facilities closing, and it involves adjusting our headcount to the lower level of production that's out there. But again, as I indicated earlier, things move a bit slower in Europe in terms of the tools that are around to take out costs than what we're used to in North America. But we are obviously focused on readjusting that cost base to what we think production will be on a trend level, going forward.

Operator

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

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

I just wanted to ask you a much more direct question, let's say, on margins. A year ago, you had anticipated margins were going to improve in 2013 versus 2012. Europe has clearly presented a much more challenging environment than all of us anticipated at that time. My impression at this point is that, given the stabilization that you expect in Europe, is that you anticipate that margins on a year-over-year basis will likely improve as you move to the back half of this year. Is that a fair assessment?

John C. Plant

I think first of all, Brett, if you go back to what exactly was said a year ago, we said that we thought that the potential for margins, as we exited 2013 into 2014 and '15, could show improvement. That's what we said, so I need to correct you that we're now saying that 2013 margins would be higher. In terms of what we see going forward, I have already tried to say, the basic strand of and thesis that goes through the company is that we do expect and have expected our sales revenues, and hopefully, pull through from those conventional investments that we've made, particularly, in China and in Eastern Europe and in Mexico, to pay off and support that revenue increase into 2014 and '15. The only mitigating things that we can see against that at the moment is that production in Europe is fundamentally weaker. I mean, as each year goes back, if you look a couple of years ago to last year, I don't think any of us expected the volume and production in Europe to be down to -- in Western Europe to about 11.5 million. It's truly a miserable level. So that actually is acting as a bit of a counterweight to us. And we're continually fighting the degradation of margins in Western Europe. Because of that and the need, therefore, you've seen us close plants on a regular basis. In fact, we've told you about 2 new plants in the first quarter of this year, 1 in France, 1 in Germany. We will be announcing the closure of another plant in the balance of year in Western Europe, and that's on top of the 2 we did in 2012. That's been a continuous battle. The only other theme which is going on, which is difficult to really get our arms around at the moment, is we've seen, as I've said to you, the pushback and slowdown in cadence of 2 or 3 -- about 4 now, of our customers' platforms, their global platforms, which pushed back their own launch dates, which is going to have some dampening effect on that revenue pull-through, but no basic changes to the [indiscernible] because those vehicles are still going to be launched, maybe a few quarters later. So essentially, we are on track. We feel -- we didn't tell you that margins were going to improve in '13, but we are, hopefully, going to see revenue strengthening as we move into '14 and '15. Along what we said, and the only thing which may dampen some of that upside, is down to the pushback of these global platforms. And the wildcard of what really happens in Europe, hopefully, it stabilizes, as I talked about, in the back half of this year and maybe has the potential to increase. And then, of course, we just hope that Europe doesn't take a fundamental leg down next year, in case there's some untoward events in terms of the stability of the whole Eurozone.

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

And Joe, just a quick question on taxes. You came in a little lighter in the first quarter than your full year guidance. I'm assuming that you're not implying that your tax rate is expected to go up through the remainder of the year?

Joseph S. Cantie

Yes, we put a range out there of 28% to 30%, and we're at 28% in the first quarter. So that would imply, perhaps, it trends a little bit higher. We really don't know, which is why we put the range on it. Because it all depends on the geographic mix and what -- where we sell and all that kind of good stuff. So 28% to 30%, pretty low, or pretty small range. But currently, we did 28% the first quarter. We're saying 28% to 30%, and that implies that you might have a quarter at 29% or 30%. And it averages somewhere in that range for the full year.

Operator

We'll now take our final question from Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

John, you said earlier that you think certain OEMs in Europe have cut production enough to adjust for inventory, and certain OEMs have not. When you look at the OEMs that you're overexposed to in the region, do you feel good about where they're positioned, or do you think they have a little more to do?

John C. Plant

Well, our biggest exposure in the region is to the VW group, and we do feel good about them. And therefore, by comparison to some of the more challenged, say, western-come-southern manufacturers, that's a relatively good position to be in. So we've been slightly higher to -- I'm going to call it, the German vehicle manufacturers. And so generally feeling good, but still feeling the downdraft of, I'll say, those Western and Southern manufacturers.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And also, can you give us an update on electric power steering? Where do you think the global penetration is right now? Where do you think that goes to over time, and how are OEMs looking at this technology right now?

John C. Plant

I actually don't have data currently to mine in terms of its penetration rates in each territory. What I do note is that I do not recall any global production contracts for hydraulic steering for some time now. There's been the occasional small regional contract, where it's not really deemed necessary for the fuel efficiency of the vehicle. And so really, the trend is clearly there. I mean you're never going to say 100%, because there's always going to be some, let's say, commercial vehicle, small platform that might continue with an HPS or an electrohydraulic-based solution. But when you look out, whether it's in Europe or the U.S., or indeed, now in China, I mean we have just launched our second -- I think our second platform for a Chinese vehicle manufacturer, which are following the technologies employed by the, I'll say the [indiscernible] foreign manufacturers in China. And we just see a massive acceleration of that over the next 3 or 4 years as, in fact, the majority of that market moves to electric. So the penetration rates are going to be really high. I'm just hesitant to give you a percentage on the call today because I'm just having a mental blank of where they are at the moment.

Mark Oswald

And Mandy, that concludes our prepared remarks. If you can please move to conclude the call, it'd be appreciated.

Operator

Yes, sir. This does conclude today’s conference call. We appreciate your participation. You may disconnect at this time.

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