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TRW Automotive Holdings (NYSE:TRW)

Q3 2013 Earnings Call

October 29, 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

Ravi Shanker - Morgan Stanley, Research Division

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

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

Richard J. Hilgert - Morningstar Inc., Research Division

Ryan J. Brinkman - JP Morgan Chase & Co, 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 third quarter 2013 financial results conference call. This morning, as usual, 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 this year, as well as certain preliminary planning assumptions for 2014. 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 and our first and second quarter 10-Qs contain additional information about risks and uncertainties that could impact our business. You can access a copy of our 2012 10-K and our 2013 quarterly 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 third 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 were posted on the Investors section of our website. 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, everybody. TRW's third quarter results reflect the strong market position of the company. During the third quarter, sales totaled $4.2 billion, and were 6% higher compared with the prior year quarter. The higher sales were driven by increasing demand for TRW's technologies and our strengthening presence in developing economies. Operating profit before special items was $294 million, an increase of 11% compared to last year. Net income before special items was $187 million and earnings per share were $1.52. Compared to last year, earnings per share increased 23%. And finally, in line with our expectations, the company generated cash from operations of $147 million during the quarter.

I'll also point out that during the third quarter, the company repurchased its common stock, returning approximately $260 million to its shareholders through the share repurchase program. And as announced this morning, the share repurchase authorization was increased to $2 billion. This increase reflects our confidence in sustaining positive earnings and cash flow and further demonstrates our commitment to driving shareholder returns over time. Since commencing our buyback programs in 2012, the company has now returned approximately $730 million to its shareholders through the end of the third quarter. Joe will discuss the expanded repurchase program and TRW's financial performance in more detail in just a few minutes.

In addition to the highlights just mentioned, I'd also like to point out that TRW has earned an investment-grade rating from Standard & Poor's during the quarter. We're pleased that S&P recognizes TRW's stronger market position and financial strength. The company's solid operating performance through September will support another strong year for the company. I'll expand on our year-to-date results in just a few moments. First, just a few additional comments on the third quarter.

North America. Vehicle production remained strong and tracked in line with the expectations industry observers established at the beginning of the quarter. Overall, North American production was up 6% compared with the third quarter of 2012. Consumer demand remained strong, as the third quarter's seasonally adjusted annual selling rate averaged about 15.7 million units, which marked the highest quarterly selling rate so far this year. In Europe, although signs of stabilization continued, the European industry remains weak, as recessionary conditions continue to weigh on consumer confidence and vehicle sales. For the quarter, total European production at 4.4 million units was up modestly compared with last year's third quarter. Although we are encouraged that the steep year-on-year production declines have diminished, it's important to note that volumes on an absolute basis remain at multiple year lows. This depressed level of production continues to be influenced by the vehicle sales throughout the region. Although the stabilization of vehicle sales within Europe's major markets is an encouraging sign, and this suggests that light vehicle industry may have reached a bottom. In China and Brazil, the vehicle industry continues to trend higher. For TRW, combined sales in the 2 markets accounted for 21% of TRW's total third quarter sales and were up 19% year-on-year, well ahead of vehicle build.

With respect to our year-to-date results, we remain solidly on track. Sales totaled $12.9 billion, an increase of 4% compared to the same period last year. Operating profit, excluding special items for the first 9 months of the year, was $970 million on sales of 12.9 billion and operating margin of about 7.5%, a good outcome considering that we continue to invest to support our future growth. Net income on the same basis was $628 million and earnings per share were $5.05. The performance achieved through September provides a firm foundation for a strong 2013 and further positions the company for long-term success.

Moving onto the third quarter business developments. Product launches during the quarter continued to strengthen TRW's diversity and leadership in intelligent safety solutions. A few examples include foundation brakes, electronic park brake and safety and sensor electronics on the Honda Accord in Asia Pacific. General Motors launched its all-new Corvette with TRW's airbag modules, brake actuation, seat belts and steering wheel. Ford launched its Transit in Europe with TRW's curtain passenger airbags, electric power steering 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 first 9 months of the year, our quality averaged under 3 parts per million across all products and customers.

In addition to the products launch during the third quarter, TRW highlighted how its next-generation of safety technologies are laying the foundations to enable semi-automated driving at this year's International Motor Show in Frankfurt, Germany. A few examples included: TRW's next-generation radar concept, the AC1000, which supports an advance radar for 360-degree sensing applications to support a range of safety and convenience functions, including adaptive cruise control, forward collision warning, collision mitigation, automatic emergency braking, cross traffic alert and more; the company's next-generation video camera sensor, the S-CAM 3, which is an enhanced video camera sensor with 6x the processing power of the previous generation systems. The system supports lane departure warning and lane keeping, forward collision warning, forward distance indication, traffic sign recognitions, high and low beam control with pedestrian detection. And finally, attendees were also briefed on TRW's next-generation safety domain, ECU, the SDE 2. Essentially, it's an integrated hub which can process data from multiple driver systems, chassis and suspension function in one unit, a key technology in supporting semi-automated driving and car-to-car communication. Looking out over the next decade, you can expect to see a greater market penetration in both active and passive safety technologies, as new mandates and changes to the new car assessment programs and insurance incentives come into force worldwide. TRW's technology roadmap, as illustrated by the few examples just mentioned, has been designed to support these trends. Due to the depth of our safety portfolio and the breadth of the systems integration expertise, TRW's ideally positioned to continue to improve the protection of drivers, occupants and road users globally. In addition to moving forward with our innovative technologies and growth strategy, the company continues to move forward to reduce certain of our legacy liabilities.

As a follow-up to our pension buyer program relating to certain of our U.S. employees discussed on our Q2 conference call, and based upon the responses received, U.S. pension obligation will be reduced in the fourth quarter by approximately $170 million. This buyout program will be funded primarily through plant assets and a minor company contribution. When combining last year's completed program for certain of our U.S. retirees and former employees with this most recent program, obligations will have been permanently reduced by about $480 million. We'll continue to look for additional opportunities to permanently reduce TRW's pension liabilities.

Before I turn the call over to Joe, let me comment on our expectations for the remainder of 2013 and provide some initial thoughts for 2014. Overall, vehicle production forecast for the full year 2013 have remained relatively stable since our last conference call. In North America, supported by strong consumer demand and new product introductions, fourth quarter production is estimated at just over 4 million units of approximately 6% compared to last year. For the full year, we expect production to roughly total 16.2 million units, an increase of about 5%. In Europe, although it is encouraging to see the continuing trend in auto sales stabilizing, we remain cautious on near-term vehicle production and do not anticipate any sharp recovery.

For the fourth quarter, vehicle production in Western Europe is projected to be about 3 million units, up about 3% compared with last year. Total European production is forecasted at 4.6 million units, essentially flat year-on-year. For the full year, our forecast is the production of 18.9 million vehicles for total at Europe. Within this estimate, Western European production is 12.4 million units, down slightly compared to 2012. As you would expect, we'll continue to monitor the production plans of our customers and make necessary adjustments accordingly. Beyond North America and Europe, we continue to expect full year production levels in China and Brazil to increase.

Based upon these forecasted production estimates, currency assumptions and our performance in the first 9 months of the year, we now expect our 2013 sales to be approximately $17.1 billion. Moving on, you will have seen our recent public disclosures regarding the possible termination of a customer supply agreement relating to certain of our North American brake component and assembly operations. Our most recent disclosure in September indicated that the company and our customer have entered into a consultation period, and that is scheduled to complete by the end of the year. While our discussions are ongoing, it appears likely that we will not retain the business, which had revenues of approximately $700 million in 2012. As a result, although we are finalizing our operating assumptions, I would like to share our very preliminary thoughts with you regarding 2014, assuming we exit the braking business, just as mentioned.

Based upon early production estimates, currency assumptions and assuming lost sales related to the likely termination of the brake business within the North American operations, our 2014 sales would be expected to be in the range of between $17 billion and $17.3 billion. This projection is based on modestly increased production levels in each of TRW's major markets. In North America, we expect the region will remain strong and increase about 2%. In Europe, given our expectations for a slow and gradual recovery, at best, to a -- on a 1% to 3% year-on-year production increase is likely. And in China and Brazil, expansion is also expected most likely at a single-digit range pace. Of course, we plan to firm up and provide our detailed 2014 assumptions and guidance when we report our 2013 full-year results early next year. Regardless of the outcome of the negotiations on this brake components and assembly business, TRW's long-term growth story remains sound and intact. Focusing back on our third quarter and the first 9 months of the year, we remain focused on finishing a strong year, which will provide a good base as we move into 2014.

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

Joseph S. Cantie

Thank you, John, and good morning to everyone. As John mentioned earlier, our third quarter results continue to build on the positive momentum established earlier this year and positions the company for a successful 2013. The company remains focused on completing the year in a strong fashion. Of course, a lot of hard work is needed in the remaining months to complete another record-setting year and to position us for a good start to 2014. A quick recap of the key highlights for the quarter just completed include sales of $4.2 billion, a best-ever third quarter sales level and evidence of increasing demand for TRW's products and hopefully, a stabilization of vehicle production in Europe, our largest market. We had an operating profit of $294 million for a resulting margin of 7% after excluding special items, an increase from the prior year level of 6.7%. Earnings per share were $1.60 on a GAAP basis and $1.52 after excluding special items. And finally, with regard to our capital structure, the company continued with its share repurchases, using $260 million of cash to repurchase shares during the quarter.

In addition to the aggressive pace of repurchases completed during the quarter, the company's Board of Directors authorized an additional $1 billion in share repurchases, bringing our total repurchase authorization to $2 billion. This is a great outcome and clear evidence of TRW's commitment to maximizing shareholder returns over time. I'll expand on our capital structure in a few minutes.

First, let me review the third quarter results with you in a bit more detail. For the quarter, we reported sales of $4.2 billion, an increase of $247 million compared to the same period a year ago. Currency translation benefited sales by approximately $76 million during the quarter, as the euro to dollar exchange rate averaged 1.32 this quarter compared with 1.25 last year. Excluding the effects of currency, sales increased about 4% compared with the previous year, with increases in each of our major geographic markets. As mentioned earlier, Europe's vehicle production in the quarter was stable, allowing us to perform well in this region during Q3.

For the quarter, we had an operating profit of $289 million compared to $262 million in the 2012 period. Excluding restructuring charges of $5 million this year and $3 million in last year's third quarter, the year-on-year increase in profit of $29 million was primarily driven by the associated profit from the higher level of sales, partially offset by approximately $10 million in planned cost increases to support our future growth. Currency in the quarter was a slight negative at the profit level, despite contributing to sales, as a result of differing geographical currency movements in the quarter.

Moving down the income statement, interest expense totaled $33 million, slightly higher compared with last year's level of $26 million. The higher level of interest reflects the negative carry of our first quarter bond issuance in anticipation of sizable debt maturities within the next 5 months. Finally, tax expense was $62 million in the current quarter compared with $68 million last year. Both the 2013 and 2012 periods included tax benefits relating to special items, totaling $15 million and $10 million, respectively. Excluding these tax benefits, the overall effective tax rate was approximately 28% for the third quarter of 2013. For the quarter, our diluted share count averaged 124.2 million shares, which is 5.1 million lower than last year, reflecting our share repurchase programs. At the bottom line, we posted GAAP net earnings of $1.60 per diluted share compared with $1.28 in the prior year. However, excluding the special items I've discussed from both periods, earnings were $1.52 per share this year, up 23% compared with last year's third quarter earnings of $1.24, which highlights the very strong quarter that we had. In terms of EBITDA for the quarter, we had $403 million, excluding special items compared with $361 million in the prior year, measured on the same basis.

Moving onto a group brief review of our results for the first 9 months of the year, we reported sales of $12.9 billion, which is an increase of $527 million compared to the previous year. Increased vehicle production in North America and China, combined with continued growth resulting from increased demand for TRW's safety technologies, more than offset production declines in Europe, our largest market. Excluding restructuring charges, our operating income for the first 9 months of 2013 was $970 million compared with $937 million last year. Essentially, the profit pull-through from the higher level of sales was partially offset by several factors, including planned increases in cost to support future growth.

Below operating income, interest expense totaled $97 million compared to $82 million last year. In the current and prior year 9-month periods, we incurred losses of $5 million and $6 million, respectively, on retirement of debt. Tax expense for 2013 was $221 million on a GAAP basis and $248 million, excluding the tax effect of the special items mentioned earlier, resulting in an effective tax rate of about 28%. For the first 9 months of 2013, our diluted share count averaged 125.6 million shares, which is 4.4 million lower than last year, again, reflecting our share repurchase programs. At the bottom line, we reported GAAP net earnings of $4.88 per diluted share compared with $4.58 last year. Excluding the special items, primarily restructuring charges, earnings were $5.05 for the 9-month period this year, an increase of over 10% compared with last year's net earnings of $4.58. And finally, in terms of EBITDA, we had $1,291,000,000, a solid result considering the difficult industry conditions experienced in our largest market and our planned increases in cost to support our future.

Let me shift now to our cash flow and capital structure. For the quarter, operating cash flow was $147 million, very similar to the prior year level of $156 million. Capital expenditures for the current quarter were $140 million compared with $125 million last year. Free cash flow, which I'm defining as operating cash flow less capital expenditures, was $7 million this quarter compared with $31 million last year. And for the 9-month period, we had free cash outflow of $171 million compared with an outflow of $80 million in 2012.

Capital expenditures at $411 million during the year-to-date period were $86 million higher compared to last year's level. Despite the cash outflow through September, which is consistent with our historical seasonal pattern, we expect strong cash flow in the fourth quarter, resulting in a good, positive outcome for the full year 2013. At the end of our third quarter, our total gross debt was about $1.9 billion, while net debt outstanding was $878 million, both in good shape. Through the first 9 months of the year, the company repurchased $91 million in bond debt using $96 million of cash, as we continue to focus on positioning our balance sheet in advance of upcoming maturities.

With regards to our share repurchase programs, just a few additional comments. For the quarter, the company used approximately $260 million in cash to repurchase over 3.5 million shares of its common stock. Combinations of methods were used to execute the repurchases, including a small accelerated program. Through September, in total, we repurchased just under 6.5 million shares, using approximately $460 million of cash. For the announced upsized $2 billion program, available remaining repurchase authorization of $1.47 billion, which is expected to be executed over 3 years, reflects approximately 16% of TRW's present market capitalization.

Switching subjects now to the remainder of 2013, as John indicated, TRW's full year 2013 production forecasts are for 16.2 million units in North America, 18.9 million units in Europe and growth in the rest of the world regions. Based on these production assumptions and our performance through the first 9 months of the year, full year sales are forecasted to be approximately $17.1 billion, up about 4% from last year, a positive outcome considering the difficult industry conditions in our largest market. This would imply fourth quarter sales of about $4.2 billion, very similar to the third quarter just ended. Margin levels should be similar as well. Capital spending for the year is expected to be about $740 million, which is consistent with the guidance provided in July. 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, no change. As a result of our increased investment over the past few years, we expect to see an increase of about $20 million to $25 million for the full year in our depreciation expense, a bit lower than previously discussed.

Moving on, restructuring expense for the full year will range between $50 million and $65 million, which now reflects the likely termination of business within our North American brake component and assembly operations, which John referenced earlier. Full year interest expense should be about $130 million, no change from last time. 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, we're pleased with our performance for the quarter and during the first 9 months of the year. However, as I mentioned at the start of my comments, we recognize a lot of hard work lies ahead in order to finish the year strong, and of course, we're up for the challenge. 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 Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

John, if I can ask you on the business that you're walking away from, if you do hand it over, is there a particular date on which you expect the transition to occur?

John C. Plant

Assuming that it goes ahead, then it would start in, really, January, and it remains to be determined yet, whether that would be at a full rate or a partial rate, and obviously, it depends upon the final -- the discussions with our customer.

Ravi Shanker - Morgan Stanley, Research Division

All right. And your guidance assumes that it's just a clean break at the start...

John C. Plant

Yes, I mean, we tend to be, as you know, fairly conservative over giving further revenue guidance, and so we've just chosen to assume the full $700 million is taken at one swoop on the 1st of the year. That remains unclear at this point, but we'll see what happens. I don't really want to give the final outcomes because there's no final outcome because otherwise it would be stated...

Ravi Shanker - Morgan Stanley, Research Division

Understood, and I think you had said that the business was like a 6% margin. So is it safe to assume that it's going to be accretive to numbers if you take it out, the margins?

John C. Plant

I'm going to pass that one to Joe.

Joseph S. Cantie

Yes, what we indicated in our filings is that the profit before tax was -- the 6.5%, Ravi. So again, we don't want to say more than that right now because we are in a discussion with our customer, but the profit before tax was 6.5%.

Ravi Shanker - Morgan Stanley, Research Division

Understood. Just lastly, what's your view on the Brazilian market right now? Do you still see that as a pretty good, beneficial [ph] opportunity? Are you hearing about anything a potential delay in regulations there, and did Brazil have any impact on the quarter in terms of FX?

John C. Plant

The Brazilian growth has been rather less than we expected but still growing substantially. The regulations are still there. Our investment program is continuing, although, again, it's like everything. We will trim it according to the rate of underlying demand. It seems, overall, that 2013 will be pretty static as a year over '12, I think, from what I recall of the numbers, the stronger first half and weaker second half is the Brazilian picture. It's obviously -- the biggest area at the moment is undergoing, I'll say, changes, being the value of its currency, which obviously depresses the translated value of those sales. So you have to pick apart the -- what's the underlying volume, what's the increase of revenue from the new safety products the market opened up to us, less the translation effect of the weakened Brazilian real.

Joseph S. Cantie

As far as the effect on the quarter, Ravi, yes, the currency did have a negative effect on us. I think in my comments, I indicated that we benefited at the sales line by $76 million on currency, yet there was no profit pull-through. In fact, a slight negative to us, and a lot of the reason for that was the devaluation of that currency because we, like many others, will import parts into Brazil in order to make our final products that we ship on to our OE customers, and, obviously, the currency works against you when you have a devaluation to the magnitude that we had in the quarter, and that will affect us going forward as well.

Operator

Our next question is from Matt Stover with Guggenheim Securities.

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

So I wanted to ask a question about the timing on the authorization. I was a bit surprised about the announcement. And I guess, in the back of my mind, and clearly this was incorrect, that tied an increase to your share authorization program to, at least, a greater sense of confidence of what the outcome might be related to the antitrust investigations. And I'm wondering if you could just kind of color what it was that you and the board went through that determine this to be the correct timing for the announcement. And I have a follow-up.

John C. Plant

The timing, Matt, really was determined by, I'll say, the progress that we've made through the first $1 billion of authorization, and I felt as though it was beneficial to be upfront and really anticipating any questions that might come, and also viewing our solid future expectation for business going forward. And if you think about it, at the current rate of use of the first authorization, then that would be exhausted in, let's call it, the first -- it's probably the first half of 2014. We could have left it to the, I'll say, first quarter of 2014 when we announce our fourth quarter results. But rather than to be any sort of vacuum on information, I felt it was appropriate to be upfront with our shareholders and say, "No, this is really what we intend to do" and lay out a clear plan and increase our authorization. So basically, it was just trying to, I will say, cut off questions before they were to come because we could see those questions coming, given the fact that our balance sheet would become further under-leveraged with our anticipated cash flows in 2014. So basically, we said what we would do is lay out and try to give a better vision forward more on a -- I think it's the first time we gave, like in a couple of years, adding on at this point, we just gave a 3-year view of a pretty healthy and attractive cash yield to our shareholders. There was no real color imputed into that regarding progress with any of the European authorities because that is not the case. We will engage further discussion on that and when it is appropriate. But at the moment, there's nothing further to update on that, and you shouldn't read into it that there's any changed clarity regarding the European Commission and the antitrust matter.

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

Okay. One follow-up question, just sort of on the capital allocation question, you have some friends in Sweden who, with their accumulated capital, have a priority of seeking M&As to enhance their active safety portfolio. And I'm wondering if you could kind of, sort of illuminate your strategy as it relates to the active safety opportunity. Is this a business opportunity where you see the preponderance of the opportunity manifested in organic investment? Or do you see the opportunity for M&A to enhance your portfolio, and therefore, it would be a priority?

John C. Plant

I think, really, you are referring there to our competitor?

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

Yes, yes.

John C. Plant

It's -- been quite vocal about their need for acquisitive enhancement there. By and large, we've taken a rather different tack, and seen our own organic development of the technologies. So we have developed our suite of our camera applications, which -- our first generation is already on vehicles both here in the U.S. and in Europe where we have some, I'll say, 100% customer positions already and those are growing quite rapidly. Our second-generation camera, I mentioned on this call, is our S-CAM 3 with a very much enhanced resolution capability and functionality. And again, a lot of that development is -- well, all the development's really have been done in-house with partly with one of our strategic partners as well, as part of the recognition software. And the new radar I referred to, which is the AC1000, will progressively take over from the AC100, which again is just being launched into the European marketplace right now. I think I've commented the last quarter on the AC100. And so what we'll see is those generations of radar and camera technology. Plus, I also commented today on our shutting the main ECU, which it also is actually just about going into production with a major European customer right now, which basically is the, I'll say, fusing center for the chassis management and inputs from the antilock brake system or the stability control system, the steering, the camera-based and radar-based, I'll say, forward-looking system. So there's a lot of stuff going on. We're very much developing all of these things organically, given I think the good electronic space we have, both in the passive safety area of the crash sensors and power pressure monitors, and developing that through all of the electric braking and electric steering applications with these vision systems. It's very much something we can develop and have been developing organically. It's not that we're closed to looking at add-on things should we need them. But essentially, we've been out to develop these technologies and sell them, and gain increasing market positions by ourselves because of the breadth of our capabilities and the, I'll say, overall system of expertise that we have, which may be different to our competitor, which essentially has a passive safety system and is trying, I think, from what I read, to enter some of the active safety side.

Operator

Our next question is from Brett Hoselton with KeyBanc.

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

So I was going back through my notes and in, actually, prior years, you talked about temporary compression in operating margins should reverse post-investment period. In the past couple of quarters, we're seeing some year-over-year margin expansion. And as I think about margins into 2014, what would you identify as maybe some of the major pluses or minuses with regards to your margins? Is there anything exceptional beyond the fact that sales are going to go up, production is going to go up a little bit, you've got the braking contract. Is there anything else out there that you see as maybe a major headwind or major tailwind for your margins in 2014?

John C. Plant

I think you should expect pretty much a continuum of what we've been talking about before. I mean, there is nothing exceptional that's occurring, I think, in '14 compared to '13. I think the only observation I would make is something I called out, I think, on 2 results announcements ago is that there has been some delays of the new contracts, as our customers have delayed the introductions of new vehicles, particularly, I'll say, around the difficulties faced in Europe and the need for both European-based manufacturers or even global manufacturers to put a different cadence out regarding their product flow. Having said that, the investments that we've talked to you about on previous calls, particularly in China, have been coming onstream, are developing in accordance with our plans. And you've seen, as we've called out, again, very significant revenue enhancements in the Asia Pacific region. And our expectation is that those will continue next year. My thoughts in terms of segmentation by region is that, clearly, AP [ph] is going to continue to grow next year, given the brake supply contract position, if that occurs then -- and on the guidance, we did give that preliminary number for revenue, then North America would contract. But overall, I would expect pretty much a continue of where we are, no sharp upswings or downswings. In terms of positives and negatives, I pretty much covered the positive side. Negatives, I mean, the -- I think the one outlier, which we're all trying to understand, is what is the real shape of European production as we go into next year. Is it any sort of recovery? Is it one of units and not real value? Because we don't know the mix yet of what the European production will be. And there's still a lot of uncertainties to play out, I think, for Europe. Having said that, there is some optimism that we reached a low, and it could increase from this point onwards.

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

And then, as we think about the top line, you kind of alluded to it, John, but as we think about the top line growth, I think in the past, you had kind of anticipated the new business in China and elsewhere could be causing some acceleration in your top line growth. It sounds like you're seeing some delays in some of the launches, and that may be delaying that revenue growth acceleration? Or does that basically mean that, for some reason, the revenue growth acceleration is not going to materialize in some way?

John C. Plant

No. It's one of our -- we've seen, I mentioned [ph], have 4 or 5 vehicle manufacturers reduced the cadence of their product flow in terms of timing. They've been pulling back on tooling investment and because we have a lot of -- I think we referred to, in the past, we've had a very, very healthy order intake a couple of years ago. Well, almost every year, but certainly, a couple of years ago. And for us, the cadence of when those contracts come on is important. And we still see the story, not story, but the plan that we have is totally there, and it's a matter of there will be -- there have been some delays, but the underlying growth, we still expect to be strong as we go into '15 and '16, and '16 in particular.

Operator

And now our next question is from Richard Hilgert with Morningstar.

Richard J. Hilgert - Morningstar Inc., Research Division

I was curious about the working capital. You mentioned in the press release, I think it was, that the windup in investment there was due to growth in China. I'm curious to know, how should we look at that going through 2014, 2015? What's the trends here that we should be looking as China continues to grow, but also, you've got European volumes in a possible nascent recovery in 2014.

Joseph S. Cantie

Yes. I would say when you think of this year for 2013, it's difficult to get a real read on where working capital is at the cutoff at the end of the third quarter because we cut off on the 27th of September, and therefore, there's a bit of noise in there in that most of our OEs pay near the end of the month. So as I mentioned in my prepared comments, we do expect to have a good fourth quarter cash flow, which will result in an overall positive for the year. When I think of working capital, I mean, a general rule of thumb for us is when your sales grow, there's usually approximately a 10% -- roughly 10% rule of thumb investment in working capital as your sales continue to expand upward. When I think of '14, still unknown on the mix of business, and it all depends on where you exit the year in the fourth quarter versus the previous year fourth quarter. So it's a bit tough to call. But if you follow the general rule of thumb, which is if sales go up, if you think of it as being a 10% investment, that should get you at least in the ballpark.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay, great. Just wanted to follow-up on the earlier question about acquisition. It looks like there is a possible group of assets available from a competitor that's headquartered over in Sterling Heights. I was curious to know if that's something that you would consider, if that's something that would diversify a customer -- your customer base at all? I don't think that there's any real technological advantage from what I can tell, but perhaps you could comment a little?

John C. Plant

Well, first of all, we're certainly aware that -- you referred to a competitor in Sterling Heights. So I'm translating that to mean a passive safety company. You'll be correct in the fact that it does -- it would not add any customer positions to us because we do supply all of the customers today, and I'm not clear that it would add to our product technologies either. So we are aware of that situation. I wasn't quite sure what to use. We're aware of the opportunity, but I'm not sure if it is an opportunity. It's something to be evaluated. So we have received the information, and we will make an assessment, but we have no plan at this point in time and nothing to say regarding that particular situation.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay. One last quick follow-up on the brake situation, please. Is that a situation that came about as a result of a customer-initiated side looking for pricing? Or is this something that you've just reevaluated over time and found that returns just weren't acceptable, given your other technologies and where the business is going for TRW?

John C. Plant

I think the situation may be best characterized by our customers have a view about the price points that they feel they want to pay for certain components, which sometimes coincides with ours and sometimes does not. And we have to make an assessment of where we believe that our competitive situation is or our positional assets are, and in this particular case, I think our production base compared to their maybe price expectations, there is some degree of mismatch. And I think I'd describe it's particularly unique, a particular contract that we entered into some years ago, and that really is about it. I mean, there's no particular -- there's no fundamental dispute at all. It's one where we have a clear agreement, and we're working through that. And the only thing I'm very clear of is that, for us to deploy capital, it needs to be in sites that can be competitive in the future and also provide the right level of value to our customers, and that's what we're working through.

Operator

Our next question is from Ryan Brinkman with JPMorgan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

I apologize. I hopped on the call a little late. I'm not sure if you addressed already the customer contract in North America, which was at risk that you'd filed a couple of 8-Ks, regarding if there was an update there, and if there already was an update, maybe you could just further comment if investors should view this as more of a one-off or whether it signifies...

John C. Plant

We've already commented, Ryan, on that. So we -- it's already on a lot of air time, and in fact, a bit of Q&A. Essentially, nothing to update at this point. I think they changed the message. It's probably likely that we won't continue, but no outcome that we can report to you as a definitive position at this point, nor are we clear on the exact transition and the revenue or the estimate we gave for '14. I described [indiscernible] that we're conservative. That's right or not. It's -- or to say that we assume that there would be 0 revenue from that particular contract. Again, that's an uncertain position at this point in time.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Sure. Is this just a very special case or does this signify any sort of broader trend in terms of your ability to take a harder line on pricing discussions with manufacturers or just the supply business in general...

John C. Plant

Well, I think it's just normal stuff with a particularly -- a very particular contract that we had is when we did it back in -- I think it was 2008, we took on the stake [ph] of business. We were going to do it with a very clear contractual set of conditions, and provided us with the protections regarding of any decision in the future where the customer thought we may not be competitive, but we were clear of our willingness to invest under a set of conditions, and the competitive set of assets positioned us as we had, so nothing, really. You shouldn't draw any wider conclusions from this at all. We have a good relationship with the customer. It's a mature discussion, and so I think it's being handled in a very professional way by both parties.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, great. And I did hear the questions earlier about the share repurchase authorization increase, which I know tracked better than expected. I'm curious about what the considerations are when you weigh whether you should initiate a common stock dividend in the context of your capital allocation strategy which obviously involves returning a lot of cash already to shareholders?

John C. Plant

Obviously, dividend is one of the options that you have. In terms of providing that to -- those returns to shareholders, I mean, our judgment was that at this point, the share repurchase was the -- our preferred method. We were clear we were giving, I think, a significant return to the shareholders, and we wanted -- trying to give additional visibility of that. I think, from what I understand, the tax -- current tax position of the U.S. is also more favorable or at least more -- for the share repurchase, that it would be under the dividend conditions because of the, particularly, U.S. tax code for -- that we face with income and corporate taxes. And so all of those things were featured in the discussion, and the share repurchase is one that we're already doing and the continuation of the program seems, by far, the best option at this point in time.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

And then just last question, I know you just provide an annual revenue outlook, but maybe just sort of a more broad revenue outlook. You're growing about 6%, a couple points faster than industry growth of about 4%, but -- and you don't provide the same type of backlog granularity as some other firms, but we know, and in totally [ph], there's a large amount coming on pretty soon, particularly in China. So how should that GAAP versus the change in global light vehicle production trend as we enter this period of increased backlog revenue?

John C. Plant

We actually haven't updated those percentages for some years now. It's always very difficult to view with the granularity that you wanted in terms of backlog. I've always felt that backlog, as a value number, is not actually a good indication because it's essentially flawed by vehicle build assumptions and contract timing and all the rest of it. CDRs have less of that flaw, but we haven't really provided update for that. We just let our actuals do the talking, and you've seen that we have outgrown vehicle build on a consistent basis. We try to give you an early preliminary view of revenue going forward, and we've also provided commentary regarding the delay of some platforms of that new business, as our customers have trimmed their investment plans, but the -- I think I also said the basic revenue growth story -- or the plan, it's more than a story, is intact. And we expect revenues to increase beyond '14 into '15 and '16, and I think I said, in 2016, in particular. So all of that is there, Ryan. But at this point, we've just chosen not to give percentages versus the vehicle build because you've then got to get into mix of regions, and via CP [ph] values for customers. And it's just like you end up tying yourself in knots which -- and you'll all remember a single-point number, and want to quote that back. And then we'll find ourselves saying, but this, but that, it's higher because of this, or it's low because of that, and it really is not a value adding discussion.

Mark Oswald

With that, Matt, I think we've come to the conclusion of the call. If you can move to wrap the call up, we do appreciate it.

Operator

Yes, sir. This concludes today's conference call. We appreciate your participation. You may disconnect at this time.

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