Feb 1, 2011
Executives
Ed Lowenfeld - Matthew Simoncini - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Robert Rossiter - Chief Executive Officer, President, Director and Member of Executive Committee William Mclaughlin -
Analysts
Rod Lache - Deutsche Bank AG Brian Johnson - Barclays Capital Itay Michaeli - Citigroup Inc Aditya Oberoi - Goldman Sachs Group Inc. Christopher Ceraso - Crédit Suisse AG Ravi Shanker - Morgan Stanley Brett Hoselton - KeyBanc Capital Markets Inc.
John Murphy - BofA Merrill Lynch Himanshu Patel - JP Morgan Chase & Co
Operator
Good morning. My name is Sarah, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Lear Corporation Fourth Quarter and Full Year 2010 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr.
Ed Lowenfeld, Vice President of Investor Relations. Mr.
Lowenfeld, you may begin your conference.
Ed Lowenfeld
Thank you, Sarah. Good morning, everyone.
And thank you for joining us for our fourth quarter and full year 2010 earnings call. Review materials for our earnings call will be filed with the Securities and Exchange Commission, and they were posted today on our website, lear.com, through the Investor Relations link.
Today's presenters our Bob Rossiter, CEO and President; and Matt Simoncini, our Chief Financial Officer. Also participating on the call are other members of Lear's leadership team.
Before we begin, I'd like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of this deck and also in our SEC filings.
In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slide labeled Non-GAAP Financial Information, also at the end of this presentation.
Slide 2 shows the agenda for today's review. First, Bob Rossiter will review highlights from our fourth quarter.
Next, Matt Simoncini will cover our fourth quarter and full year 2010 financial results and our 2011 year financial outlook. Then Bob Rossiter will have some wrap-up comments.
Following the formal presentation, we will be happy to take your questions. Now please turn to Slide #3, and I'll hand it over to Bob.
Robert Rossiter
Thank you, Ed. Obviously, 2010 was a recovery year for the industry and the Lear Corporation, as our positive momentum continued through the fourth quarter.
We achieved our sixth consecutive quarters of year-over-year improvement in earnings in both of our segments. We're seeing achieving target markets, good margins and our Electrical business returning to profitability.
And it looks good for the future. The company continues to generate significant free cash flow.
And in 2010, we refinanced our capital structure. Our balance sheet and liquidity position are in the best shape since I've been in the company, 40 years.
In addition to the growth, we had a significant year of new business wins with our backlog growing to $2.2 billion, up $800 million from a year ago, and we continue to receive industry and customer recognition. We have three finalists in the PACE Awards.
Turn to Slide 4. You can see sales by region.
Today at Lear, 66% of our business is outside of North America, with 16% coming from Asia, which is our fastest growing market. And that's up since 2005 from 5%.
Turn to Slide 5, summarizes our new business backlog, $2.2 billion. It's well balanced between Seating and Electrical, well balanced in each of the regions of the world.
And as I said, our Asia-Pacific region is growing fast, and all the positive signs are there for. We move to Slide 6, the Electrical business.
Several key drivers enable to get back into profitability by almost $200 million in 2009. The EPMS business segments was negatively impacted because it was under scale relative to the fixed cost structure.
And in 2010, Sales segment grew faster than the overall industry. Sales increases which reflect the industry recovery in addition to new business and growth in the emerging markets were the major reasons for returning this business to profitability.
This segment also benefited from our restructuring efforts. In the past five years, we closed 14 plants.
Now 27 of our 33 total plants are in low-cost countries, where over 90% of our headcount is there as well. We expect this to continue, the positive momentum, as we launch $1 billion new business over the next few years.
Now I'd like to turn it over to Matt.
Matthew Simoncini
Thanks, Bob. Please turn to Slide #8, please.
This slide provides financial highlights for the fourth quarter and full year 2010. For the fourth quarter, Lear sales were up 15% to $3.2 billion, and core operating earnings were $150 million, up 30% from a year ago.
This represents the sixth consecutive quarter of year-over-year earnings improvement. The increase in profitability from the year ago reflects improved industry production, new business and the benefit of cost reductions and restructuring actions.
Our adjusted EPS was $2.38 in the fourth quarter, and free cash flow was $160 million. For the full year 2010, net sales were up 23% to $12 billion, and core operating earnings increased over $500 million to $627 million, reflecting the increased vehicle production, new business and the benefit of cost savings and restructuring actions.
Our adjusted EPS was $8.83 in 2010, and we generated $429 million in free cash flow. We finished the year with cash balance of approximately $1.7 billion after paying down about $275 million of debt.
On the next few slides, I'll cover these results in more detail. Slide #9 shows vehicle production in our key markets for the fourth quarter and the full year.
In the quarter, global vehicle production was 18.6 million units, up 9% from 2009. For the full year, global vehicle production was a record 71.5 million units, up 25% from 2009.
It is important to note that in the mature markets, while vehicle production has increased, it remained significantly below historical levels. Slide #10 provides our financial score card for the fourth quarter and full year.
As previously mentioned, sales were up 15% to $3.2 billion in the fourth quarter. In the fourth quarter, pretax income before interest and other was $126 million, and net income was $117 million.
The 2009 numbers are not comparable as a result of certain special items related to our financial restructuring. Fourth quarter SG&A as a percentage of sales was 3.2%, compared with 4.3% a year ago.
The lower SG&A in the quarter reflects primarily the increase in sales. Interest expense was down $11 million, primarily reflecting the refinancing earlier this year.
Other income was $5 million, an improvement of $25 million from a year ago. The improvement from a year ago reflects the positive impact of foreign exchange, increased equity earnings in our consolidated joint ventures.
Depreciation and amortization was $62 million, down slightly from a year ago. And for the full year, net income was $438 million.
Slide #11 shows the impact of non-operating items on our fourth quarter and full year results. For the fourth quarter, our reported pretax income before interest and other was $126 million, excluding the impact of operational restructuring cost and special items.
We had core operating earnings of $150 million, an increase of $34 million or 30% compared to a year ago. For the full year, our core operating earnings were $627 million, up $521 million from 2009.
To help clarify how these special items impacted our financial statements for the full year, we've indicated the amounts by income statement category on the right-hand side of the chart. Please turn to Page 12 for a summary of our results by business segment.
In Seating, adjusted margins in the fourth quarter improved to 7%, up 90 basis points from 2009. The margin improvement reflects higher global vehicle production, the addition of new business and the benefit of cost reductions, which more than offset higher launch cost related to the backlog.
For the full year, adjusted margins in Seating achieved target levels at 7.5%, compared to 4.1% in 2009. Slide #13 summarizes our performance in Electrical Power Management.
In the fourth quarter, adjusted EPMS margins improved to 4.3%, up 180 basis points from 2009. The margin improvement reflects higher global vehicle production, the addition of new business and the benefit of cost reductions, which more than offset higher commodity cost and launch.
As Bob described earlier, this segment return to profitability in 2010, with adjusted margins of 4.7%, a significant improvement in one year. Going forward, we expect further margin improvement as we continue to gain scale in this segment.
We believe we will need to increase revenues in EPMS segment to approximately $4 billion in order to reach our target margins of between 7% to 8%. Please turn to Slide #14.
We generated $160 million of free cash flow on the fourth quarter of 2010. For the full year, we generated $429 million of free cash flow, leaving us with yearend cash balance of $1.7 billion, well in excess of our debt.
As a reminder during 2010, we used a portion of our cash balance to reduce debt by about $275 million. Slide #15 provides an update of our share count.
Approximately 1/3 of the management RSUs granted upon emerging from bankruptcy vested on November 9, 2010. On November 10, all remaining shares of the preferred stock were converted into newly issued shares of common stock.
As of December 31, 2010, there were 52.6 million shares of Lear common stock outstanding. In addition, 1 million warrants remain, which are exercisable through November 9, 2014.
Assuming exercise of the warrants and vesting in the management restricted stock units, Lear's total shares outstanding would be 54.5 million shares. Please turn to Slide #17 for a review of our major assumptions of our 2011 outlook, which was announced at the Detroit auto show last month.
Our financial outlook is based on a forecast of global vehicle production of 74.0 million units, up 3% from 2010. In the mature markets, production growth is driven by North America, where we expect vehicle productions to increase by about 600,000 units or 5% to 12.5 million units.
Europe is forecasted to be flat at 17.4 million units. Growth in emerging markets is expected to continue at a healthy pace though at lower rates than in 2010.
Our '11 financial outlook is based on an average euro assumption of $1.33, which is flat with 2010. The two major commodities that influence our business are steel and copper.
We are forecasting steel cost to be about flat with 2010 at about $0.40 a pound. Copper prices increased significantly in the second half of last year.
Our outlook for 2011 assumes copper prices at about $4.25 per pound, up 24% from 2010 averages. Slide #18 shows a four year trend of our sales and core operating earnings.
For 2011, we are projecting sales of $12.6 billion to $13 billion. The increase in sales reflects the impact of net new business and higher projected industry volumes, partially offset by net selling price reductions in the mix of sales by platform.
We're projecting core operating earnings of $700 million to $740 million. Margins in our Seating segment are expected to be in the mid-7% range, and Electrical Power Management, we expect continued improvement from 2010 with margins increasing to 5% to 5.5%.
The improvement in margins reflect significant structural cost reductions, the benefit of operational restructuring, as well as the efficiency gains throughout our operations. We expect to maintain our competitive cost structure at higher revenue, which will result in another meaningful increase in earnings in 2011.
Going forward, we continue to focus on aggressively managing our costs and running our business efficiently. Slide #19 provides additional detail on our 2011 financial outlook.
I'd like to highlight a few items in addition to the sales and core operating earnings that were described on the prior slide. Capital expenditures are projected to increase to $250 million, driven by our backlog, as well as selective investments in component manufacturing capacity in emerging markets.
We're continuing to evaluate incremental investment opportunities to expand our component capabilities in the emerging markets. We are forecasting 2011 restructuring expense at about $125 million, up from 2010, reflecting a delay in the timing of certain actions previously anticipated to have occurred in 2010.
Cash outlays for restructuring is expected to be consistent with the expense at about $125 million. We anticipate that 2011 will be the last year of accelerated restructuring spending.
Despite the higher capital spending and cash restructuring, we are forecasting positive free cash flow of approximately $400 million. We expect net other expense to be about break-even, which includes earnings from non-consolidated joint ventures, offset by the impact of certain foreign exchange items state and local taxes and other miscellaneous items.
Adjusted tax expense is estimated to be about $120 million to $125 million, resulting in an effective tax rate of approximately 18%. The increase in taxes from 2010 reflects increased earnings of foreign subsidiaries.
Our cash taxes for 2011 should be approximately $90 million. Turning now to Page 20 for our summary.
Lear's performance in 2010 continued to benefit from industry recovery and cost reductions. Our sales were up 23% versus 2009, and margins improved in both business segments.
We generated strong free cash flow and finished the year with $1.7 billion of cash. Alternatives for deploying our excess cash balances include increased capital spending with a focus on component capacity in emerging markets, niche acquisitions that can further diversify our sales providing scale in Electric Power Management will provide additional component capabilities returning excess cash to shareholders.
We expect to further improve our financial performance in 2011 with sales of $12.6 billion to $13 billion, core operating earnings of $700 million to $740 million and free cash flow of approximately $400 million. This will result in adjusted EPS of $9.20 to $9.85 per share.
We continue to win new business in both segments and enter 2011 with a three-year backlog of $2.2 billion. Now we'd be happy to take your questions.
Operator
[Operator Instructions] And your first question comes from the line of Rod Lache from Deutsche Bank.
Rod Lache - Deutsche Bank AG
Just first of all, on your Q4, can you tell us how significant the launch cost for and raw materials on a year-over-year basis? And to what extent is that affecting gross profit growth?
What should we be thinking about that going forward?
Robert Rossiter
Yes, we did have a significant quarter for launch cost, Rod, as a lot of expenses that we incurred this quarter is in support of the $900 million of new business that's coming on in 2011. On a year-over-year basis, launch cost were between $25 million and $30 million on a year-over-year basis.
We did also see some headwinds in commodities, mainly in Electrical Power Management between $5 million to $6 million on higher copper cost on the components that we're responsible for, as well as the timing and the adjustment of the timing of recovery that usually has a one-month lag or one quarter lag. We also saw some impact from the mix in the quarter as some of our car lines were down slightly from the third quarter sequentially.
Rod Lache - Deutsche Bank AG
And do those -- you'd mentioned previously that you expected about $10 million of raw material cost inflation. I'm wondering just given that pace of $5 million to $6 million in one quarter, is that likely to be higher now in 2011?
And how should be thinking for the full year 2011 versus '10 about those launch cost?
Matthew Simoncini
Yes, on the launch lunch cost, probably the big changes year-over-year is you're going to have launch and development costs in the backlog. It's probably going to increase in the ballpark of $25 million each.
So about a $50 million headwind between those two line items as we continue to try to get ready and prepare to launch the $900 million in new business this year and next. From a commodity standpoint, the main headwind that we're seeing, Rod, is on copper.
And it's been pretty volatile, up and down, but significantly higher on an average year-over-year. Just to refresh everybody's memory, we used about 100 million pounds of copper, 80% of which, however, is managed through price, historical price indexing with our customer.
And that's the wire that we used -- the copper we use in our wire harnesses. On the components, the connectors in the box if it's our responsibility that's roughly 20% or 20 million pounds, that's our responsibility.
And that's where we're seeing the headwinds. Right now, our guidance is based on roughly $4.25 a pound type commodity numbers.
We are seeing some pressure to that number, but we're comfortable with our guidance at this point.
Rod Lache - Deutsche Bank AG
And then steel is flat because of contracts that you have or pass-throughs?
Matthew Simoncini
It's actually slightly up from the average, but consistent with the $0.40 a pound. On the steel, we use about 2.8 billion pounds of steel at this level of production.
The vast majority is through purchase component, only about 200 million to 250 million pounds of that 2.8 billion pounds is through raw steel buy. So through the components, roughly 60%, we direct, 40% is directed by the customers.
So on the directive portion from the customer, we have some certain built-in commercial protections. On the other purchase components, we typically have fixed price contracts.
That being said, when steel does move up, it does provide additional cost to the supply chain from the customers to us, to our sub-tiers that need to be addressed through value engineering and maybe a reduction in purchasing savings. So it's an area that we're comfortable with right now, but we’re keeping an eye on.
But we're comfortable with where steel is.
Rod Lache - Deutsche Bank AG
Any update on how material to the Tunisia situation is to the Electric Power division, if it is at all?
Matthew Simoncini
Yes, we did incur in the fourth quarter and early part of this year some additional cost with the disruptions, the political disruptions in Tunisia. We do have Electric Power Management plant there, a wire facility that supports our business in continental Europe.
We did incur some premiums, but at this point, not material to the guidance.
Operator
Your next question comes from the line of Himanshu Patel from JPMorgan.
Himanshu Patel - JP Morgan Chase & Co
I know you don't disclose regional profits by quarter, but can you just comment directionally on how margins look or compare between the Seating business in North America versus Europe?
Matthew Simoncini
Yes, it's typically higher. We are profitable in both segments in Europe.
The profit in the U.S. is typically higher than Europe in the Seating segment for a lot of reasons, but the main one being the level of vertical integration and amount of Lear content on our platforms.
We typically have higher level of directed content in Europe. So in the U.S., we're able to benefit from our ability to make seat covers and metals and mechanisms in place among our products.
We have a higher level of Lear content on the seat and that provides the ability to reduce cost to our customer, but also to improve our margins. In Europe, there's still a higher portion of customer directed, which in times of depressed margin.
The other issue is Europe typically has lower contented type vehicles because you don't see the level of three rows of large SUVs fully powered. That's a very unusual vehicle for European market.
Himanshu Patel - JP Morgan Chase & Co
Just going back to the launch cost in the fourth quarter. I know there's seasonality, but if we just look at the business sequentially, it looks like there was about $300-odd million of revenue growth and pretty much flat core operating income.
I'm just wondering was there anything non-recurring during the quarter that sort of prevented any operating leverage on a sequential basis? Or, cause it does seem like the top line was stronger than what you guys we're thinking about maybe at the start of the quarter.
Matthew Simoncini
Yes, it was slightly stronger. There's always one timers in the numbers or what we call one-timers or what have you, adjustments, whether they're positive, negative, Himanshu, but the real driver for us was the mix was slightly weaker on a sequential basis.
We did have a step up in development and launch cost. So from our standpoint, it really wasn't too unanticipated.
We actually outperformed the guidance that we gave as little as on the third quarter, our earnings call by a fewer amount reflecting the kind of stronger revenues that came in. So from that standpoint, it wasn't unanticipated.
Overall, the seats are performing very well right in the sweet spot of the target margin ranges. So if it was a material one-timer we would be disclosing it.
So from our standpoint, it was a fairly clean quarter, but there's always pluses and minuses.
Himanshu Patel - JP Morgan Chase & Co
And then just this ramp up that you saw in development and launch cost in the fourth quarter, could you speak to the cadence of that, just over the course of the four quarters of 2011? Should we think about that going back down in Q1 or does it stay up at this elevated level?
Matthew Simoncini
It stays at this elevated level just because the cadence of how the backlog didn’t come in. Now we think that, to put a frame of reference on it, our launch cost in 2010 were roughly $40 million higher than they were in 2009.
We expect this year to be about $25 million higher still. So we went from a number of roughly $20 million to $60 million, $65 million type level of launch cost in 2010.
We'd expect that number to grow by another $20 million to $25 million in 2011. We think from a cadence standpoint, it would be pretty equal, first half, second half from a launch perspective and fairly consistent with what we're seeing in the fourth quarter.
Operator
Your next question comes from the line of Brian Johnson from Barclays Capital.
Brian Johnson - Barclays Capital
Two housekeeping questions, can you maybe elucidate a bit on that other income and how it swings from positive $5 million to neutral for the year? And in particular, how we should think about IAC or any equity income as part of that?
Matthew Simoncini
Yes, it swings really, it's a pretty choppy line. And right now, it's based on, mainly, the changes in the FX assumptions for the remainder of the year, which impacts a lot of -- this line captures a lot of the FX impact on some of the intercompany loans, also on state and local taxes.
It's kind of a catch-all, unfortunately. From an equity earnings standpoint, we'd expect equity earnings to remain relatively consistent year-over-year on an non-consolidated sub.
And that line items is a little bit hard to gauge because the visibility isn't as great as a wholly-owned rear control entity in many cases. IAC is profitable.
It returned to profit in 2010 on an operating basis, and we took our share of it. From our standpoint, they have completed a consolidation of Europe and North America with their Asian operations.
Our combined share of that business is roughly 23%. That's probably about all I can say about IAC right now.
From our standpoint, the earnings in that consolidated sub should be between $35 million and $40 million, and that includes IAC at this point.
Brian Johnson - Barclays Capital
And then, as again, as we think about the strategic, maybe some of the implications behind the relatively flat sequential quarter, you mentioned launch costs, was there anything around the year-end negotiations stirring up pricing with the OEMs, one way or another, that either gives you more confidence going into next year, makes you think that the OEMs are perhaps more willing than in the past to absorb some of the commodity cost increases, passing on launch cost and so forth? Or is it pretty much what it's been for a while and no real change in that tenured account?
Matthew Simoncini
We get this question a fair bit. There's really no change.
Our obligation as a Tier 1 is to provide cost reductions. Our customers are in a very consumer- and price-driven business.
And our obligation as a major Tier 1 is to find a way to get cost out of our product. Now from a planning perspective, we run at about a net 2% price down, but we're able to provide cost savings far in excess of that amount through our ability to control vertical integrations and designs.
So through value engineering and being able to kind of manage a lot of the components, we're able to take far greater cost out of system and provide that to our customer to make them more successful in their price point externally. There's really been no change.
The customer is not responsible for the launch costs. That's our responsibility as a supplier.
And from a commodity standpoint, while there's not a direct pass-through on commodities other than the historic pricing, indexing on copper, we do work with the customer to try to attack cost throughout the system and work with our supply chain. And it does impact negotiations from that standpoint as we go in there and try to work through the cost models.
The short answer, though, to your question, Brian, is there really hasn't been a change. I think that one of the benefits of Lear Corporation and being able to control the level of vertical integration that we do and having the global footprint that we do have in the engineering capabilities, is as customers are looking for these price downs, it plays very strongly into our strengths of being able to engineer cost out and provide component savings.
Brian Johnson - Barclays Capital
So the guidance you gave was obviously in line with what the pricing negotiation ended up with the OEMs?
Matthew Simoncini
Right. It wasn't completely in that, and the price environment, it's tough, but that's nothing new.
Brian Johnson - Barclays Capital
So there was no end of the year true-up that would've caused profits to even either be better or worse than we would've thought?
Matthew Simoncini
No.
Operator
Your next question comes from the line of John Murphy from the Bank of America.
John Murphy - BofA Merrill Lynch
Page 13, when you were going through the Electrical business, Matt, you mentioned something about not being able to get to your target markets until that revenue line got to about $4 billion. And this is going to be somewhat intertwined with my second question.
Is that the kind of thing that you guys can do in the next two or three years with some small niche acquisitions and investment in emerging markets? Or is that the kind of thing where you need to do a bigger deal to bring that kind of level of revenue on?
And the second question, which is intertwined with that, is as you outlined your priorities for your excess cash, which is pretty significant at this point, you mentioned increased CapEx, niche acquisitions and then return of excess value to shareholders. You'd have to do some pretty big ramps in your CapEx and pretty big niche acquisitions, not to start returning cash to shareholders soon.
Just sort of first on that Electrical business and what you might do there. And then second, that is intertwined with this redeployment of capital and what you'll do there.
Matthew Simoncini
Let's start with the Electrical business. The Electrical business, if you look at where we finished this year, Murph, at $2.6 billion, with the backlog that we have and we still expect the backlog to grow, especially in 2013 when there's still some open sourcing, you've got $1 billion of incremental revenue.
That puts you in the $3.5 billion type range with upside for sourcing, and that's not taking into consideration what we believe will be continued market recovery in the mature markets. So I think you can get there organically in the relative near term, three years, let's say.
That being said, if we had the opportunity to invest in a niche acquisitions that would facilitate the growth or facility diversity or give us some an additional capability in emerging markets, we would absolutely consider it. So from our standpoint, we don't have to do it to get to scale, but we will consider it, and we are evaluating different opportunities to make those type of niche acquisitions.
From the use of the cash, you're right. I don't think that these potential actions are mutually exclusive.
From our standpoint, just to kind of refresh it, we like to maintain a minimum liquidity of about $1 billion combination of cash and revolver, although we need a fair bit left in that on a real basis to run our business, which results in a fair bit of excess liquidity. We do believe that position A is the look at opportunities to invest organically, followed by a niche acquisitions, and we're constantly keeping our ear to the ground on looking at things that could provide value in a relative near term.
And thirdly, we are very conscious of shareholder value and creating shareholder value, as is our Board, and we're looking for ways to do that. And part of that maybe returning a modest amount of the cash in an efficient manner to the shareholders, but having financial wherewithal and a strong balance sheet is not necessarily a bad thing in this market and in this industry.
John Murphy - BofA Merrill Lynch
And then maybe just lastly on your regional margins, you used to give us, a while back North America, Europe margins, now Rest of the world is becoming pretty material. Is there anything you can give us just on levels of relative profitability or maybe even absolute profitability in North America, Europe, Rest of the world?
Matthew Simoncini
Yes, I can. Margins are continuing to improve in Europe.
We are profitable in Europe. Historically, we talked about a 3% of type of margin range net in on a consolidated basis.
We're actually running a little better than that. North America is a little bit higher than the target margins of the segments, specifically in Seating because of the level of vertical integration.
And in emerging markets, we typically run about target margins overall for both segments. So if I would, to kind of give you directional type numbers, I would say in Seating, North America runs a little bit stronger than the segment margins overall, just because of the level of vertical integration.
The flip side is in Electrical Power Management, Europe runs a little bit better because they have a little bit stronger vertical integration with their connector capabilities in Europe. In the emerging markets, they both kind of average at, right around targets.
John Murphy - BofA Merrill Lynch
Just on the tax code, is there anything that you guys see that's coming as far as legislative changes or anything that would make you scratch your head or think about changing your tax guidance? I mean obviously, there's a lot of moving parts on it right now, but is there anything you foresee that would change that right now or no?
Matthew Simoncini
Well, Murph, I've got one of the best tax guys around here at this table with me, Bill McLaughlin, our VP for Taxes. What are you seeing from pending legislation?
William Mclaughlin
I guess really the big talk right now in Washington is lowering the corporate tax rate to something into the mid to high twenties with the corresponding base broadening, currently with our valuation allowance, a position that really won't affect our tax expense or our cash taxes for that matter, in the short term. Longer term, when we come out of the valuation allowance, it could change our tax profile.
John Murphy - BofA Merrill Lynch
And the length of the non-cash taxpaying, how many years have you got left there in your notes?
Matthew Simoncini
Well, we really haven't given you that, Murph. I'd have to give you the profitability in the U.S., which we haven't historically, but I don't expect to be a taxpayer this year domestically.
Operator
Your next question comes from the line of Chris Ceraso from Crédit Suisse.
Christopher Ceraso - Crédit Suisse AG
I noticed that margins in the Seating business were down a little bit sequentially from Q3 to Q4 even though revenues were up pretty nicely. Is this a function of mix, for example, fewer T900 trucks or is it higher cost or high spending?
What was the reason for that?
Matthew Simoncini
Really, couple fold. There was a mix issue where we don't sell to the industry we sell to a specific mix of platforms, each with their own kind of financial D&A based on the level of content and vertical integration.
So the mix worked against us a little bit in the quarter, not unanticipated. We also had a step up in our development of launch costs quarter-over-quarter as we get ready to launch that $900 million or thereabouts of additional backlog.
So we saw those pressures mainly in the quarter.
Christopher Ceraso - Crédit Suisse AG
And, Matt, how do you see that as we roll into Q1, similar level of cost and similar mix? Or does it bounce back?
Matthew Simoncini
For the quarter, from our standpoint, I think that there will be a similar level of cost, the mix should improve slightly from Q1. So I would anticipate a slightly higher margin in the first quarter than what we saw in the fourth quarter in the Seating segment.
Christopher Ceraso - Crédit Suisse AG
And then the trajectory on margin and Electronics, that's been improving as revenues have gone up. Does anything throw that one way or the other launch preparation or anything like that?
Matthew Simoncini
No. I mean, the team, our Electrical distribution team or Electrical Power Management team is doing a great job, launching a lot of product, winning new business at a profit and coping with some pretty serious headwinds on commodity cost, and as well as some costs associated with certain shortages on circuit boards.
That being said, we still expect the margin expansion to continue going into next year as we're able to gain scale with our backlog and continue with their savings from restructuring. We're pretty comfortable with the projections of 5% to 5.5% for this business overall for next year.
Operator
Your next question comes from the line of Aditya Oberoi from Goldman Sachs.
Aditya Oberoi - Goldman Sachs Group Inc.
I wanted to know your thoughts on the competitive landscape in the Seating segment, given your competitors have been doing some acquisitions of late. So can you comment a little bit about that?
Matthew Simoncini
Yes, I can. What you're seeing, I think, mainly with Johnson Controls is execution of the strategy that we've been talking about for a long time, which is the need to have vertical integration in order to improve your quality and control your cost and because of the margin opportunities.
We were aware of those potential targets and acquisitions. We thought we were pretty good positioned, competitively, mainly in Europe, in both seat covers and our footprint for mechanisms.
And we chose not to pursue that level of those investments. That being said, we do believe that investment in components is, in specifically components in emerging markets, mechanisms, recliners, tracks, seat covers, and cut and sew, and fabric is the way to go.
Aditya Oberoi - Goldman Sachs Group Inc.
Do you think that that kind of vertical integration would put some pressure on the pricing environment given that everybody would benefit from a margin standpoint going through this vertical integration process?
Matthew Simoncini
Not necessarily. I think it's a way to improve quality and definitely drive waste out of the components and sub-tiers as you can control more of the design capabilities.
And that would benefit everybody from the customer to the suppliers as you continue to figure out ways and work the ways to bring your cost point out. But each product has its own financial D&A and really, what you need to be looking at is the return on investment.
And so from our standpoint, whether the margins go up and down depends on the amount of upfront investment required. We believe that the target margins in Seating between 7% and 8% that captures the additional vertical integration investments that we're contemplating and still provide a return in excess of our cost of capital.
Operator
Your next question comes from the line of Brett Hoselton from KeyBanc.
Brett Hoselton - KeyBanc Capital Markets Inc.
First of all, launch cost. You've talked about 2011, your expectations are going to be higher.
But as you look on to 2012, do you think you see launch cost starting to tail off? Or do you think you see another step up in 2012?
And I know that's a ways off but...
Matthew Simoncini
You're right, it is a ways off and a little bit early to be talking about ‘12. But just directionally, I would expect it to be relatively consistent because of the launch.
We have $900 million, almost $1 billion of backlog in arrears, so I would tell you I expect it to be consistent with ‘11 just directionally at this point.
Brett Hoselton - KeyBanc Capital Markets Inc.
And then as far as distribution of cash to shareholders, is there an internal kind of time frame or expectation that you have? And is this something that you think you're going to come to a conclusion on in 2011?
Or is it just kind of -- is there a time frame?
Matthew Simoncini
There's not a hard time frame. What we talked about on the distribution of cash or the consideration of distribution of cash to shareholders was the need to get through 2010 year after emergence.
We've done that, demonstrate our ability to generate cash and grow our cash balances and take care of our capital structure. We've done that, provide guidance and see the shape of the recovery.
We're pretty confident that we see it. So now we're out there giving guidance.
So I think it's a dialogue that will -- that has taken place and will continue to take place with our board. And I would expect that sometime in the not-too-distant future that we'll have a definitive statement on what we plan to do.
Brett Hoselton - KeyBanc Capital Markets Inc.
And then I think you may have answered this earlier, but I kind of got distracted here. Pricing pressure from the automakers.
Your margins, particularly in your Seating segment, are doing quite nicely here. There has been some concern with regards to the potential for increased pricing pressure from the automakers.
As you compare to three years ago or something along those lines, would you consider pricing pressure to be just kind of on par with where it was three years ago? Or do you think it's increasing, decreasing?
Matthew Simoncini
It's about the same, Brett. The only time it really kind of lightened a little bit was during 2009.
But that was really driven by the lower production volumes, where you were unable to get cost savings out because the industry was, in many cases, dark, or many car companies were actually dark. So you didn't have the ability to take the cost out of production because quite frankly there was no production.
The historic kind of 2% net is pretty consistent. Obviously, our customers are in a very competitive and consumer-price-driven type product.
Our obligation as a Tier 1 is to find them solutions through managing our cost structure and finding ways to get the inefficiencies out of the supply chain and helping them meet their overall market price. So from our standpoint, it has been a difficult environment.
It will remain a difficult environment, but in many ways, that plays to Lear's strength with our level of vertical integration, our design capabilities and our kind of global footprint. I think we’re probably in the best position to help the customer ultimately meet their goal on getting cost down.
Operator
Your next question comes from the line of Ravi Shanker from Morgan Stanley.
Ravi Shanker - Morgan Stanley
I think I heard you say that mix could be a headwind in 2011, as well. Can you just touch upon that a little bit more?
Is there any particular platforms that you think are going to be weaker next year?
Matthew Simoncini
Yes there's a couple of our key platforms that we think, year-over-year, may be down slightly, probably for slightly different reasons. In Europe, for instance, we've got the 3-Series down, one 3-Series down because it's going through a refresh.
They're going through their multiple, different platforms are starting to re-launch the next generation. We would expect that production on that platform to be down slightly, and that would drive the mix.
That's a very important, highly contented Lear platform. In the U.S., the large full-size GM, SUVs and pickups, we expect to be slightly weaker year-over-year.
They had a great year in 2010, and we think that we would see a little bit of a softening, are planning for a little bit of a softening on that platform as well. The other thing that's important to note from a mix standpoint is that while the industry is growing, we expect North America to grow.
In our backlog, are certain programs like the Fiat 500, for instance, that is an incremental production number for the North American production, but it's actually in our backlog since we're going to be doing that. So that's one of the reasons why you don't necessarily see that conversion on the industry.
Ravi Shanker - Morgan Stanley
Your guidance for next year points to your core operating income being about $100 to $140 million higher, but your cash flow is pretty flat and your CapEx only up $50 million. Can you just help me understand what's going on there?
Matthew Simoncini
Yes, I can. Part of the cash this year and the outperforming of the cash, if you remember we had guiding about $350 million as little as about a month ago, benefited from kind of some certain actions this year that in 2010 that didn't happen.
For instance, our restructuring cash expenditures were down about $20 million, $30 million from what we were anticipating because certain action items slipped into 2011. So between the improved earnings and the delay in restructuring cash, that benefited the 2010 time frame.
That will have a rebound affect or a negative impact on our cash in 2011. Now when you put the two years side-by-side, though, you have over $800 million of cash generation between '10 and '11.
So you really kind of have to broaden the period of the cash. You're right.
Capital expenditures are up, and we also expect cash for restructuring to be roughly $125 million, so that's a higher use of cash, as well. Those are probably the items that are impacting cash more than anything.
But we're really happy with our ability to generate cash, and we're very happy with the fact that we think over '10 and '11 we’ll generate over $800 million of free cash flow.
Ravi Shanker - Morgan Stanley
And finally, your SG&A has been a very narrow band around $100 million the last three quarters, even with your doubling being in a wider range. Is that $100 million level like a new threshold for you or is it going to be more sensitive to the doubling?
Matthew Simoncini
It's almost like a stairstep process. It's not variable per se, but in the same token, it's not a fixed line item.
As business activities increase and as we expand in emerging markets, that's going to create some additional requirements for program management and support cost to help us grow the business. That being said, we would expect in any given quarter SG&A to be in the 3.5% to high 3% as a percentage of sales.
So it's going to bop around probably in that, I would say, high 3% of the percentage of sales through 2011.
Operator
And your final question comes from the line of Itay Michaeli from Citi.
Itay Michaeli - Citigroup Inc
Just to follow up on the cash flow question. Matt, when I look at the guidance on EBITDA and then run through CapEx, interest, restructuring and taxes, I still come up with something maybe $50 million, $60 million higher than $400 million.
Is there anything going on in working capital or accrued that's also in that wok?
Matthew Simoncini
Well, working capital will be in use, as you would expect as sales ramp up and continue to grow – back end of the year, I would expect to see a use of working capital to support the higher sales. So that's probably about it.
I mean if you walk the numbers out, I would assume a negative working capital because of the sales growth. Other than that, there's nothing really unremarkable or anything that we haven't disclosed, whether it's the cash from restructuring or the roughly $125 million to the interest expense, the cash taxes we provided.
So from that standpoint, I would just do the math that way, and I think you'll get pretty close.
Itay Michaeli - Citigroup Inc
Can you also update us on the pension and OPEB situation at year-end?
Matthew Simoncini
Yes. During 2010, we continued to fund the pensions.
Our philosophy is to fund at a minimum the service costs and interest costs on the obligation. We would, however, expect a modest growth in OPEB and pension.
Right now, slightly above $300 million at $316 million combination of OPEB and pension on funding, which is still, for a company, our size, extremely, extremely modest. And really, that was driven more than anything from the change in the discount rate, and the discount rates in many ways to long-term bond rates which decreased, which had the impact of increasing the obligation.
But I still believe that it's very, very modest and probably the lowest end of any company in this space our size.
Itay Michaeli - Citigroup Inc
And then maybe, lastly, can you just maybe refresh us on the content per vehicle on the T900 platform, both the SUVs and pickup trucks? And how should we think about the incremental margin there versus the corporate average?
Matthew Simoncini
Yes, really what drives the incremental margins on any product is the amount of content and then the amount of Lear content. So a high-powered seat typically has more content and more Lear content than that.
The 900 is a really unique platform in that it has a combination of the basic full-size pickup truck with a very basic type seats through a full three rows SUV with leather and full electric power. So on a pickup truck, you can see anything from $1,000 to $1,400 in content, depending upon whether it's a base pickup or a crew cab to an SUV, which on average, is going to be around $1,800 to $2,000 or slightly higher level of content.
From an incremental margin standpoint, again, we’ve used the rule of thumb between 15% to 20% incrementally on pure volume as it comes in. But it really depends on how the volume comes in, what type of platform, what level of content on it, whether it's a pickup truck or a our full-size SUV.
I think that handles all the questions. On behalf of the Lear Corporation, I'd like to thank you all for your support.
To our employees around the world, thank you for another great quarter and for shaping up to have 2011 be a fantastic year. So I appreciate all the hard work.
Thank you very much.
Operator
And this concludes today's conference call. You may now disconnect