Lear Corporation Q4 Earnings Call Transcript

123jump.com Staff
17 Feb, 2010
New York City

Lear Corp fourth quarter net sales were $2.7 billion with 68% coming from outside North America. Fourth quarter pre-tax income was $1.26 billion against a loss of $683 million in year ago quarter reflecting structural reorganization following chapter 11 filing leading to fresh start accounting.

Lear Corp. ((LEA))
Q4 2009 Earnings Call Transcript
February 5, 2010 9:00 a.m. ET

Executives

Mel Stephens – Vice President Investor Relations & Corporate Communications
Robert Rossiter – Chairman, President, Chief Executive Officer
Mathew Simoncini – Chief Executive Officer
Ray Scott – President – President Global Electrical and Electronic Systems
William McLaughlin – Vice President Tax

Analysts

Colin Langan – UBS
John Murphy – Bank of America
Rod Lache – Deutsche Bank
Himanshu Patel – J.P. Morgan
Itay Michaeli – Citi
Brian Johnson – Barclays Capital
Christopher Ceraso – Credit Suisse
Derick Winger – Jefferies & Company

Presentation

Operator

Good morning. My name is Mason and I’ll be your conference operator today. At this time I would like to welcome everyone to the Lear Corporation fourth quarter and full year 2009 earnings call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question during this time simply press * then the number 1 o your telephone keypad. If you’d like to withdraw your question press the pound key. Thank you. Mr. Mel Stevens you may now begin.

Mel Stephens – Vice President Investor Relations

Okay thank you everyone for joining us for our call this morning. The review materials for our call were filed with the Securities and Exchange Commission and they’ve also been posted on our website lear.com underneath the investor relations link. Today our presenters are Bob Rossiter, Chairman, CEO and President and Matt Simoncini our Chief Financial Officer. And also participating on the call are two division Presidents, Lou Salvatore, President of Global Seating and Ray Scott, President of Global Electrical Power Management. Terry Larkin is with us, our General Council, Wendy Foss, our Controller, Terry Burgess, our Treasurer and John Trifall Vice President Business Planning and Analysis, and there are a number of other folks from our finance staff that will help us with questions. Before we begin I remind you that during this call we will be making forward-looking statements that are subject to certain risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of the slide deck and they’re also included in our SEC filings.

In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides titled Non-GAAP Financial Information. They’re also at the end of the deck.

If you’ll now turn to the next page, on slide 2 we outline our agenda for today. Bob Rossiter will open with an overview of 2009. Then Matt Simoncini will review our fourth quarter and full year 2009 results and also provide our financial outlook for 2010. Bob Rossiter will come back with some wrap up comments and then following the formal presentation, we’ll be happy to take your questions.

So now if you’ll turn to slide 3, I’ll hand the presentation over to Mr. Rossiter.

Robert Rossiter – Chief Executive Officer

Thanks Mel. Good morning everybody. Obviously things were pretty tough in 2009 but in the environment we reduced our structural costs, realigned our global production footprint and completed a major financial restructuring. We needed to do it to restore the company to financial health and position our business for long-term success. We made progress on our strategic priorities which include diversification of our sales globally, continued business development in the emerging markets. For 2009 approximately 70% of Lear’s net sales came from outside of North America. Our global Seating business continues to perform very well. In the second half of 2009 we operated the business close to our long-term target margin despite industry production levels that were depressed and we continue to see significant growth opportunities in Asia and other emerging markets.

In the Electrical Power and Management business, we put in place a comprehensive sales growth and margin improvement plan set by Ray and his team. Our sales backlog includes about $800 million in new electrical business and we see a significant opportunity for future growth in emerging high power and hybrid electrical vehicles. This segment was profitable in the second half of 2009. We expect to make steady progress toward our margin targets over the next few years.

If you please go to slide 4, slide 4 summarizes our major restructuring initiatives. Since mid 2005, we’ve invested $740 million in operational restructuring actions resulting in significant reduction in structural costs, major repositioning of our production footprint. During that time, we closed 35 manufacturing facilities and 10 administrative offices, had a reduction in head count of 35,000 employees and today 50% of our total facilities and 75% of our employment is in 21 low cost countries.

In 2009 we completed a comprehensive evaluation of our strategic and financial options and concluded that filing for Chapter 11 was necessary in order to realign our capital structure and position Lear for long-term success. On July 7, 2009 the company filed Chapter 11 and just four months later we emerged with substantially lower total debt and improved credit profile.

Following the problems of 2009 the company returned to profitability in the third quarter. We achieved positive free cash flow in the second half and we ended 2009 with a cash balance of $1.6 billion and less than $1 billion in debt.

Go to slide 5. In addition to restructuring our business for the future, we also continue to make progress further diversifying our sales mix. Last year 70% of our sales as I mentioned, were outside North America. In addition, we continue to diversify our customer mix with increasing sales coming from Europe and our Asian manufacturers.

Please go to slide 6. We continue to grow in Asia. The Asia Pacific region now accounts for $1.3 billion or 13% of our consolidated worldwide sales. Including non consolidated sales, our total revenue in Asia is about $1.9 billion. Within Asia, China is our largest and fastest growing market. Last year we had consolidated sales of $900 million in China and total sales including our joint ventures of $1.3 billion.

Slide 7, on this slide we’re highlighting the sales growth and margin opportunity we have in the Electrical Power Management business. We have global capabilities to supply both traditional electrical distribution in Power Management systems as well as emerging high power and hybrid electrical component systems. We also have a strong sales backlog of $800 million and have restructured this business to reduce our costs and to improve our low cost footprint. We’re optimistic about the future for this business. In fact, I’m more optimistic than everybody else. We’re making solid progress in restoring the margins in this segment as evidenced by our fourth quarter results. The sales backlog combined with industry recovery over the next three years should improve our sales to $3.5 billion. Longer term, we’re targeting revenue of $4 billion to $5 billion and our margin target is 6.5% to 7.5% which is consistent with our long-term target for our Seating business.

While overall Electrical content of vehicles is continuing to grow, we are excited about the opportunity that is emerging in high power and hybrid applications. Essentially these new electrical systems include high power wiring, connectors and other components in addition to traditional wiring and power management systems. We have one significant new business on a wide range of electrical and hybrid electrical vehicles including the new Chevy Volt which launches later this year.

Now I’d like to turn it over to Matt for a review of our financial results and outlook and I’ll come back at the end.

Mathew Simoncini – Chief Financial Officer

Great. Thanks Bob. Please turn to slide 9. This slide provides financial highlights for the fourth quarter and for the full year of 2009. As you know, we returned to profitability in the third quarter following losses in the first half of the year. In the fourth quarter, industry production levels in mature markets improved year-over-year as strong growth continued in Asia. Net sales in the fourth quarter were up 5% to $2.7 billion. Core operating earnings were positive at $116 million reflecting significant cost reductions and our free cash flow was positive $11 million.

For the full year net sales were down 28% to $9.7 billion reflecting sharply lower production volumes. Core operating earnings for the year were $107 million reflecting an improvement in the second half results as the production environment improved and cost reduction actions continued. Free cash flow for the year was a negative of $156 million reflecting losses in the first half and cash investments in restructuring initiatives, both capital and operational. On the next few slides I’ll cover our fourth quarter and full year results in more detail and provide an updated financial outlook for 2010.

Slide 10 shows the global industry production environment for the fourth quarter and the full year. In the fourth quarter global industry production was up 20%. This was driven primarily by the higher production in Europe, up 20% and accelerating growth in emerging markets. Production in North America was up modestly. For the full year global industry production was down 13% reflecting significant declines in the mature markets, offset in part by continued growth in the emerging markets.

Slide 11 summarizes the status of fresh start accounting. Basically, fresh start accounting results in a new basis for our assets and liabilities and establishes a new financial reporting entity following our emergence from Chapter 11. For 2009 our financials have been segregated and reported as predecessor for pre emergence results and successor for post emergence results. Fourth quarter and full year 2009 financial results reflect combined predecessor and successor results. The results of operations of the predecessor and successor however, are not comparable due to various adjustments in connection with the fresh start accounting. Under fresh start accounting the company’s consolidated assets and liabilities are recorded at fair value as of November 9, the date that we emerged from Chapter 11 in a manner that is similar to purchase accounting.

On the emergence date, the consensus distributable value for Lear was about $3.1 billion including $2.1 billion of equity and about $1 billion in debt. This is the amount that was included in the company’s planned reorganization that was approved by the U.S. Bankruptcy court.

Slide 12 shows the specific fair value adjustments we have made to the various balance sheets. Goodwill decreased by $900 million based on the overall distributable value as well as an allocation to customer and technology intangibles. Customer and technology intangibles increased $160 million. These assets have an average amortization life of seven years. The ongoing increase in amortization costs for this asset will be about $22 million a year. Intangible assets in total are now about $800 million and they include $621 million of goodwill and $187 million of customer and technology intangible assets. The overall fair value of our fixed assets, decreased by $5 million. The life of certain asset categories were extended and as a result, annual depreciation expense will actually decrease by about $10 million a year. Finished goods inventory increased by $9 million which impacted reported cost of sales in the fourth quarter by the same amount.

The value of our equity investments and non consolidation joint ventures, increased by $9 million. The non controlling interests in our consolidated joint ventures increased by $55 million.

Slide 13 provides a financial score card for the fourth quarter and full year 2009 including the impact of fresh start accounting. Starting with the top line, net sales were up 5% to $2.7 billion in the fourth quarter with 44% of our sales coming from Europe, 32% in North America and 24% in the rest of the world. For the full year, net sales were down 28% from last year. The decline reflects lower industry production in mature markets. Our reported fourth quarter pre tax income was $1.2 billion compared with a loss of $683 million a year earlier. Income in 2009 was primarily driven by a gain related to our capital reorganization.

On the next slide, I’ll show our results excluding restructuring and other special items to highlight our underlying operating performance. SG&A in the fourth quarter as a percentage of net sales was 4.3% compared with 3.7% a year ago. The increase in reported SG&A reflects an increase in new program development costs. Interest expense was about $22 million down from $51 million from last year. The lower interest expense reflects primarily lower total debt obligations compared with a year ago. Depreciation and amortization was $64 million compared with $72 million a year ago. The lower depreciation and amortization expense reflects lower capital spending over the last several years. Other expense was $21 million in the fourth quarter of this year compared with $64 million a year ago. The improvement reflected a non recurrence of an impairment charge related to our divested interiors business last year.

Slide 14 shows the impact of several non operating items reported on our fourth quarter and full year results. In the fourth quarter, our reported pre tax income before interest and other expense was about $1.2 billion. Excluding the impact of reorganization items and fresh start accounting, restructuring costs, goodwill and special items, our core operating earnings in the fourth quarter were $116 million compared to $22 million a year ago. The improvement in the core operating earnings reflects primarily favorable cost performance and increased savings from our restructuring actions.

Turning now to our performance by product line and starting with slide 15, the fourth quarter the adjusted margins for our Seating business adjusted to exclude restructuring special items, improved from 3.6% a year ago to 6.1% this year. The improvement primarily reflects favorable cost performance and cumulative benefit from restructuring actions. For the full year, our adjusted Seating margins declined from 4.8% to 4.1%. This reflects primarily the sharply lower industry production environment we experienced last year offset in part by favorable cost performance and the cumulative benefit from restructuring actions.

Slide 16 shows adjusted margins for Electrical Power Management business. In the fourth quarter, margins improved to 2.5%. The improvement from a year ago reflects favorable operating performance, savings from restructuring and improved industry production.

For the full year, our margin was a negative 3.7% reflecting sharply lower industry production in the first half and selling price reductions offset in part by favorable operating performance and restructuring savings. Longer term, we expect our Electrical business to continue to improve as we bring on line our sales backlog, implement further cost improvement actions including additional restructuring actions, continue to grow in the emerging markets and benefit from the industry recovery.

Please now turn to slide 17. Free cash flow was a positive $11 million in the fourth quarter despite significant cash investments in both operational and capital restructuring initiatives that totaled approximately $85 million in the quarter. Free cash flow in the quarter compared with our prior outlook benefited by about $100 million from the timing of certain customer payments and cash outlays for operational restructuring. For the full year free cash flow was a negative $155 million including cash investments in operating restructurings and cash utilized in our capital restructuring.

Next I’d like to provide some additional information on the status of the company’s balance sheet at year end 2009. Please turn to slide 18. Most importantly, the total debt obligations have been reduced by approximately $2.7 billion to less than $1 billion at year end. We also ended the year with a cash balance of $1.6 billion. Our new capital structure provides adequate liquidity to support global operating needs and growth plans. In addition, we have no significant debt maturities before 2012 and our debt covenants provide sufficient flexibility to navigate the current environment and execute our operating plans.

Please turn to slide 19. This slide summarizes our full year financial outlook for 2010. The status is based on industry production of 10.5 million units in North America, 15.4 million vehicles in Europe and a value for the Euro of about $1.40. Based on these assumptions we are forecasting net sales for the year of between $10.2 billion to $10.7 billion. Our core operating earnings are estimated to be in the range of $250 million to $350 million. Depreciation is forecasted to be about $240 million and amortization is forecasted at about $25 million. Interest expense is estimated to be about $85 million. Our estimate for tax expense is in the range of $70 million to $90 million. Operating restructuring costs are estimated to be about $110 million for 2010. Capital spending is expected to be about $170 million. Free cash flow is expected to be in the range of $50 million to $100 million for the year. In the first quarter of 2010 however, free cash flow is expected to be negative reflecting the normal working capital increases, the timing of certain payment that benefited the fourth quarter as well.

Lastly, our 2010 forecast for average diluted shares outstanding is about 54 million shares. The share count includes the common shares, preferred shares, warrants and a portion of management shares that was granted at the time of emergence.

Now I’d like to turn it back to Bob for some closing comments.

Robert Rossiter

Thank you. Okay to sum it up today, the company continues our very strong customer focus and our operating fundamentals have never been better. We completed financial restructuring in just four months with a strong and flexible balance sheet and we ended the year with $1.6 billion in cash and $1 billion in debt. That gives us the financial resources to further improve our capital structure, invest in new products and grow in emerging markets. Despite the continued challenges that are taking place in the industry, our restructuring and cost reduction initiatives have allowed us to regain our positive operating momentum. Our financial outlook for 2010 reflects the continued momentum; core operating earnings of $250 million to $350 million and free cash flow in the range of $50 million to $100 million. Looking ahead, the sales backlog of $1.4 billion for the 2010 to 2012 period represents continued sales growth and diversity.

To conclude, I’d like to thank our employees for their dedication and hard work as we restructured our company for future success and also their understanding. I’m very pleased that we are able to retain the positive factors that make Lear the global industry leader, unrelenting focus on quality, commitment to customer satisfaction and the most talented team in this business.

When you add to that our strong balance sheet, competitive cost structure, focused growth strategy, we’re ideally positioned to benefit from industry recovery.

Now we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time I’d like to remind everyone in order to ask a question press * then the number 1 on your telephone keypad. Your first question comes from Colin Langan from UBS. Your line is now open.

Colin Langan – UBS

Good morning. Actually my first question on five numbers that you disclosed the sales numbers in China. Can you give any color which segments those are in and if that includes things that are exported out of China?

Matthew Simoncini

I am sorry, you broke up a little. It’s in both segments. We have a little bit stronger book of business on the Seating side than we do on the Electrical side, so the percentage basis would be a slightly higher to Seating than it is overall for Lear Corporation in Asia and it does not include a large amount of export if any. However, one point I’d like to clarify, Colin, we do export components from Asia to the North American market and to European markets for some of the components that we manufacture but it’s not captured in the top line.

Colin Langan – UBS

Okay and then in terms of the different segments, where are you expecting the biggest improvement next year? Is that really going to be the Electrical business? Seating seems to be pretty close to a long term target.

Mathew Simoncini

I would say that it’s fairly even from a percentage standpoint. Electrical, definitely, electrical from a raw dollar standpoint is fairly even percentage improvement from dollar improvement.

Colin Langan – UBS

Okay and then I guess this is my last one. It looks like in the quarter that your corporate overhead expense seems to have improved at least sequentially to around $30 million. Is that a sustainable level?

Matthew Simoncini

No, there’s a lot of clean up that went through the accounts in the fourth quarter. On an optimum basis it’s not sustainable. I would think of that number on a quarterly basis closer to probably 45-ish on an ongoing basis, and we talked before in the third quarter call about certain factors that are not linear in the results. For instance, compensation programs in the past have been called out as a special item or reorganization item. Those for instance would go through that line item as well as certain other programs that just weren’t sustainable. So the $31 million is not the run rate.

Colin Langan – UBS

But 45% would actually be up year-over-year.

Matthew Simoncini

It will be up year-over-year.

Colin Langan – UBS

Okay thank you very much.

Matthew Simoncini

You’re welcome.

Operator

Your next question comes from the line of John Murphy from Bank of America. Your line is now open.

John Murphy – Bank of America

Good morning guys. I think you were probably just getting into some of the details of the question I was about to ask but I’ll ask it anyway. Looking at the operating margin that you did for the third and fourth quarter, you’re well north of 4%, closer to 4.3%, yet the outlook that you’re talking about for 2010 would imply margins of 2.5% to 3.3%. I think you’re probably using some pretty conservative production numbers going forward but these non repeatable benefits that we saw in the third and fourth quarter that are just going to keep this margin down? It just seems very conservative.

Matthew Simoncini

What we talked about in the third quarter call which is still true is that the second half run rate is not sustainable because we enjoyed the benefit of a couple of things. One, we talked about the compensation programs that have been called out, largely as special items. We also talked about the fact that the backlog now has grown. The car manufacturers have gotten back into launching the normal cadence of production. We have backlog coming on that’s rather significant starting in this year. So we have a litany of program development costs that we’re starting to see ramp up in the fourth quarter, but hit in earnest in 2010.

We also now are launching a backlog so our launch cost debt have been significantly below average to 2009 are now coming up slightly above that curve. So the business isn’t linear. The second half run rate is not indicative of what we see going into 2010.

John Murphy – Bank of America

How should we think about incremental margins? What do you think that should be, 15%, 20% as sales rise? Is that a reasonable X these one time reversals?

Matthew Simoncini

I think that’s a good way of looking at. It depends as much as anything what drives the increase in sales, where it’s coming from, what car lines it’s on and what have you, what regions of the world. That’s a pretty good rule of thumb.

John Murphy – Bank of America

And when we look at the Electronics business has obviously been some wild things have been going on in the press with some mechanical parts that are moving more to an electronic base. Is there an opportunity in steering or braking or anything like that as you move to more electric systems there? Maybe you’d play a role there or do you sort of add on to your existing business. Are you seeing opportunities open up?

Matthew Simoncini

Let me hand it over to our President of Global Electric Business. Ray Scott is on there.

Ray Scott

I think the examples you used in safety, I think that’s not really our area of focus. We see a tremendous amount of opportunity right in front of us within the PAGV, the EV’s, the hybrid and then the consolidation and the growth within components themselves and options. So we’re looking at being very selective moving forward. We have a tremendous amount of backlog right now. It’s about executing and delivering a flawless launch of what we have. Looking forward, we see tremendous upside with the consolidation and growth within Electrical and Electronics.

John Murphy – Bank of America

Okay and lastly just on mix, how was it in the quarter and how do you expect the trend forward in 2010 both in North America and Europe?

Matthew Simoncini

I think the mix in North America was what we expect to see for the most part going through 2010. In Europe we saw, we were hurt a little bit in the mix because it benefited the small car a little bit disproportionately to the larger brands and we expect that to continue as well through 2010.

John Murphy – Bank of America

Great thank you.

Matthew Simoncini

You’re welcome.

Operator

Your next question comes from Rod Lache from Deutsche Bank. Your line is now open.

Rod Lache – Deutsche Bank

Hi every body. On your last call you gave a backlog breakdown for 2010, 11, and 12. It was $300 million, $1 billion and $100 million and I was wondering whether that’s changed at all since then. And that $800 million that you’ve got in the Electrical and Electronics business, can you give us a sense of how that breaks down over the next couple of years.

Matthew Simoncini

We try not to update the backlog every call. Obviously there are ebbs and flows in business and we’re continuing to be in the marketplace and win our fair share but we’re not formally updating backlog from what we provided Rod, in the call last. The breakdown on the Electrical business is roughly $270 million in 2010, about $300 million in ’11 and a little over $200 million in ’12. And that’s how we got to the $800 million.

Rod Lache – Deutsche Bank

Okay thanks. And just back to a prior question, if you annualize the EBITDA that you did in the quarter, you get to $720 million. That’s on $10.9 billion of annualized revenue and you did mention that launch costs are going up. There are some comp issues there. But you also have about $120 million of prospective cost savings. I guess what I’m asking is, is there any reason to believe that the EBITDA would not be able to achieve at least that annualized run rate, that $720 million if you were to get to that $10.9 billion of revenue that you’re annualizing in the fourth quarter?

Matthew Simoncini

I would caution on doing that type of math a little bit, Rod Again, we talk about program development costs, there’s a lot of moving parts in the business, everything from commodities to commercial agreements with our customers to suppliers and just overall development costs, launch costs, compensation programs and what not. So it’s kind of hard to do that math. The way I would probably come at it is slightly differently. I would say that assuming that we’re in the mid point of the guidance, with a 10.5 for instance unit build; I would almost do the extension slightly different. I would take our average content per vehicle and then extend it out with a conversion between 15% to 20% and kind of do it that way and see what the math comes in at. But I have to caution again that we don’t sell to the industry for instance. We sell to specific car lines so as much as anything it depends what they build. Each car line has a slightly different kind of financial DNA and how it impacts us depending upon how much vertical integration we have on it and what not. So I’d come at it slightly differently.

Rod Lache – Deutsche Bank

Okay and on the Electrical and Electronics the 6.5% to 7.5% margin is a couple of years away but you’re at 2.5% in the quarter. Can you give us a sense of how we should anticipate the trajectory from here into 2010?

Matthew Simoncini

The way I would look at Electrical on a go forward basis is we talked about 2009 levels that they had roughly 25% fixed cost structure or $500 million on a $2 billion revenue base, right?. So from our standpoint it really is very, very sensitive to the top line. If you look at the top line in 2008, I think we had a revenue number of $2.8 billion and we were posting a margin at that time in the mid to high 2%, 2.5% to 2.8%. This year in 2010 we won’t see revenue quite get to those levels even with the industry recovery and the backlog, so I would expect those margins to be slightly lower. Or, you can take the fourth quarter run rate and say off of that we have to do some incremental developments costs. A disproportionate amount of backlog is in this segment. So, on a trajectory basis I would say probably 2010 would be slightly lower than the fourth quarter run rate, is probably the best way and then on a go forward basis, I would think that as we get to our $3.5 billion type near-term industry recovery and backlog revenue number in 2012, I would expect those margins to about double.

Rod Lache – Deutsche Bank

Great and then just lastly do you have the pension fund status at the end of the year and what the FX impact was on the quarter?

Matthew Simoncini

Yeah let me start with the easier of the two questions Rod. Pension funding status at the end of 2008 you’ll remember that we had an unfunded pension obligation of $255 million. Our current estimate is that, that would be decreased $130 million and that’s a decrease because of both funding and asset performance. We continued to fund our pensions all through our Chapter 11 process and the Opad is down slightly, not as meaningful but $172 million to $157 million. So in total between pension and Opad we actually had a decrease of about $150 million. The FX impact in the quarter was roughly $170 million on the top line.

Rod Lache – Deutsche Bank

Great thank you.

Matthew Simoncini

You’re welcome.

Operator

Your next question comes from the line of Himanshu Patel from J.P. Morgan. Your line is now open.

Himanshu Patel – J.P. Morgan

Hey Matt, can you help us quantify how big a benefit you think the improvement in mix in Europe could be for you guys in 2010? I think you guys are talking about industry production being down about 2% but if you sort of just control for currency and assume any backlog would it be fair to say that your European revenues would be up in ’10?

Matthew Simoncini

No, I don’t see that happening actually. I see it being relatively flat on a year-over-year basis based on what we’ve guided to right now.

Himanshu Patel – J.P. Morgan

Okay and then on this issue of one time items, I think on the last call you guys helped us a little bit directionally in terms of just drilling down into the specifics on what the impact was from some of these items. Can you help us with that out for the fourth quarter?

Matthew Simoncini

In the third quarter we had the benefit in the Seat group that we called out on the commercial recovery of roughly $10 million. What I would tell you Himanshu, every quarter has nits and nats in it that reflected out a period of adjustment whether it’s a distressed supplier cost or a commercial recovery or net-net. I would tell you that fourth quarter was relatively clean. There was not a significant one time event that we haven’t called out as a special item or restructuring, so we didn’t have that big item. I would say that net-net, it’s actually a pretty clean quarter from a run rate perspective.

Himanshu Patel – J.P. Morgan

So no major commercial settlement, then the issue with incentive comp accruals, has that been normalized in Q4?

Matthew Simoncini

No, it will start in January 1.

Himanshu Patel – J.P. Morgan

That’s in January 1 and then the third bucket I think you talked about Engineering/launch/development costs, can you help us bracket how much of an increase we could think about there relative to the fourth quarter run rate?

Matthew Simoncini

Let me see if I can get you there. It will be a step up from the fourth quarter run rate. I would think that probably one of the ways to look at is, if you took the second half run rate and extrapolated on it, the production volumes would be consistent for 2010. The decrease from the earnings is probably split evenly between the comp programs and the program development costs and then a small portion of it goes into launch related. So if I had to bucket it, I would say probably 75% of the run rate detriment from the second half is a combination of comp and program developments costs and then the remaining 25% is related to actually planning efficiencies associated with the program launches, if I was going to use broad buckets.

Now, there’s a million moving parts on an $11 billion corporation with manufacturing facilities all around the world and the number of programs that we have, so when we’re giving this type of guidance one thing I need to caution everybody on is, there is a ton of variables that go into giving a projection that’s this detailed. So in broad sense is that’s how I would get there.

Himanshu Patel – J.P. Morgan

And then on two last questions, on the China business, we’ve heard from a lot of suppliers that that’s typically a higher margin region. Is that kind of fair to say for you guys as well?

Matthew Simoncini

We think long-term the margins in China and Asia will support the overall targets for the two segments that we’ve laid out and recently it has run a little bit harder, but we’re projecting it to come more in line with the targets of the segments overall.

Himanshu Patel – J.P. Morgan

And then lastly just on the capital structure, once you kind of get a revolver in place and do other things on the capital structure you’re envisioning over the next year, what kind of optimal level of cash do you think the company needs to hold?

Matthew Simoncini

We’ve talked about the need for minimum liquidity of $1 billion to run our business. We’ve had peak to trough use and we also have cash that efficient to get our hands on in several of our foreign jurisdictions and would take a period of time to get that, so it’s not available for day-to-day funding from a debt funding standpoint.

We think again the $1 billion is probably the minimum liquidity. We’d like to have a little bit more than that obviously. So from our standpoint, it really comes down to how do we see the opportunities in front of us to grow We think there’s a lot of opportunity organically to grow this business still in Electrical distribution but also in Seats as well. So from our standpoint we could envision a possible debt pay down when we come out and refinance the debt here hopefully fairly quickly and I wouldn’t think of our cash levels going below that $1 billion to $1.1 billion. When we talk about cash, we talk about liquidity so it’s cash and revolver.

Himanshu Patel – J.P. Morgan

Okay great. Thank you, guys.

Operator

Your next question comes from the line of Itay Michaeli from Citi. Your line is now open.

Itay Michaeli – Citi

Good morning. Matt, going back to the capital structure question, can you maybe share what the size of the revolver you may be looking to place roughly?

Matthew Simoncini

It really depends on what they’ll charge me for a revolver base. They typically don’t like to give them. So in the past we had a $1 billion revolver up to $1.3 billion. I think those days are long gone as well as the tightening of the overall credit market. I could see a revolver anywhere from 10% to 15% of those levels, but again, it comes down to what the banks are going to charge and whether or not it makes sound financial sense for us. What we are seeing, is an opening in the bond markets which all of you probably see as well with the comps and what some of our competitors are doing out there. We think that we can fairly quickly take a second lien out and improve the economics and the flexibility as well, and we’re looking at the overall capital structure.

We obviously have more cash than we need at this point to run the business on a day to day basis. We probably would use some of that to bring it down. Whether or not we get a revolver still remains to be seen.

Itay Michaeli – Citi

Right and then on the 2010 guidance can you maybe share what you’ve embedded for pension expense as well as contributions?

Matthew Simoncini

We typically expect pension expense to be consistent with this year which at $35 million to $45 million range and we usually contribute consistent with that amount with the expense amount.

Itay Michaeli – Citi

That’s helpful and then lastly maybe can you give us an update on the NOL’s and specifically how we should be thinking about cash taxes over the next few years?

Matthew Simoncini

One of the experts I have on the call today is Bill McLaughlin, our VP of tax who will be more than happy to give you that detail.

William McLaughlin

We ended up at the end of 2009 with approximately $750 million of tax loss carry forwards in the U.S. We lost about $200 million in 2009 because of the bankruptcy emergence and the cancellation of that income. In addition to the tax loss carry forwards, we also have about $175 million of tax credit carry forwards that are still available and that is in addition to all of our foreign losses that continue to be available.

Itay Michaeli – Citi

That’s helpful. Thank you.

Operator

Your next question comes from the line of Brian Johnson from Barclays Capital. Your line is now open.

Brian Johnson – Barclays Capital

I just wanted to go into some of your puts and takes around the rather wide core operating earnings range. Can you give us a sense of where the North American, Europe production, is that anchored in the mid point of the range and if so, what are the puts and takes between $250 million and $350 million. How much are macro related? How much might be customer and mix related? How much are internal and expense related?

Matthew Simoncini

First the easier part of the question, Brian. Our guidance roll up at 10.5 million units in North America and the production guidance that we’ve given in Europe as well at 15.4 it would roll us up right in the middle of the range. The reason there’s such a broad range on revenues, we’re still on a relatively uncertain production environment. Sales rates for instance in North America have not reached the levels that would support a 10.5 unit build yet, although there’s optimism obviously that we can get there. So first and foremost it’s not only what the industry does in all regions of the world, it’s also what car lines within the industry get built because we don’t sell to every car line in the industry. So we put a broad range of sales in there to reflect that uncertainty. We’re rolling up fairly at 10.5 we would be in the middle of that revenue range.

Very simply, the reason we’ve got $100 million earnings range wrapped around that, first and foremost is it is 20% conversion on that revenue number. That’s also supposed to reflect not only the production uncertainty that we have and the revenue uncertainty that we have but again, again there is literally thousands of inputs that go into providing a projection of this nature for a company this large, this complicated and this many regions of the world with this many different car lines. So it’s meant to reflect not only the production uncertainty but also the difficulty in calling everything from commercial vehicles to the benefit and timing of restructuring actions and what have you.

Brian Johnson – Barclays Capital

So we can think the mid point of the guidance corresponding to the mid point of sales which corresponds to the mid point of the production down below. Second question, when you kind of go through all the fresh start accounting, is the net put intake around depreciation and amortization, it actually looks like its amazingly flat year-over-year given that, and within each of the segments is there any difference in the depreciation load each of the segments bears?

Matthew Simoncini

I think from our standpoint, depreciation is down slightly on a year-over-year basis and it’s driven by the overall trend that we had in capital spending over the same period. So as our capital spending has continued to decrease as you would expect, depreciation decreased as well, again impacted by the $22 million step up on the amortization, so the guidance that we’ve given has this $22 million step up in depreciation and then the depreciation reduction that we called out on it. From a depreciation standpoint between the two business segments, I would tell you that one, amortization of the intangibles is disproportionately pushed to Seating. There is a difference in the loads, probably a third goes to Electrical distribution and two-thirds goes to Seating on a depreciation standpoint.

Brian Johnson – Barclays Capital

Okay and then just final question, you talked about the kind of margin targets mid term around Electrical. Where are you on Seating mid term margin targets?

Matthew Simoncini

We would see a step up, definitely a step up from 2009 overall, but not at the fourth quarter run rate. I think you would see a step down from the fourth quarter run rate. We don’t think that’s a sustainable margin through 2010. We think that we get back towards that 7% kind of performance range closer to the exit rate or mid point rate in 2012 and I think we take a step each year toward that.

Brian Johnson – Barclays Capital

Okay thanks.

Operator

Your next question comes from the line of Chris Ceraso from Credit Suisse. Your line is now open.

Christopher Ceraso – Credit Suisse

Thanks good morning. Can you quantify roughly what the size of the launch cost you expect to see in 2010?

Matthew Simoncini

Yeah we can. In 2009 we had a relatively modest launch year as far as number of launches. In this business, any given year you’re launching multiple, multiple programs even when we have negative backlogs, but this year was, 2009 was a low backlog year or launch year. So we saw launch costs below the average of about $25 million versus our normal run rate of $40 million to $50 million. We think that 2010 is a much more normalized launch year and we see launch costs basically doubling or getting back to that $50 million range from the $25 million that we incurred in2009.

Christopher Ceraso – Credit Suisse

And similarly, the step up in the comp accrual, I am sorry if you gave that already.

Matthew Simoncini

We didn’t talk specifically about it but it would be more meaningful than the launch cost increase.

Christopher Ceraso – Credit Suisse

Okay. The guidance for tax, if I look at what you’re expecting on tax, I think on cash basis, but if I compare that to pre tax income it looks like you’re paying a pretty high rate and then just before you talked about all the NOL’s you’ve got and the credits. How do you reconcile that? Why does the tax rate look to be so high?

William McLaughlin

As you know we pay tax in various countries where we earn our pre tax income so we have a large amount of pre tax income in Asia, specifically China, South America and various countries where we do not have the tax loss carry forwards. As pre tax income grows globally, you’ll see a disproportionate decrease in our effective rate as that happens, but as it stands right now we’re looking at about $70 million to $90 million in tax expense for 2010 and the cash taxes should be approximately $1 million below that range.

Christopher Ceraso – Credit Suisse

Okay. You gave a good run down in the deck about all of the restructuring actions that have been taken to date, but you’re still spending at a pretty high rate. Can you give us a feel for 2010 and beyond? What is left to do? What are you still spending all this money on in terms of restructuring?

Matthew Simoncini

We talked about accelerated restructure. We’re restructuring in terms of accelerated and we think it’s going to remain accelerated through ’10 and ’11 and then getting back to more normalized and for our business we think more normalized is in the $40 million range. So we believe we’re in the eighth inning of the restructuring game. We still have work to do on our Seat component plants that we can move to a more efficient footprint both in Europe and North America. We think for the most part we’re where we need to be in Electrical but there are still some components that need to move into Eastern Europe.

And as always, there is customer actions that dictate that we have to incur costs. For instance, the recently announced action in Sicily by Fiat will result in us having to also close our facility that supports us. We’ll get the benefit from that action however, because we’ll produce the same amount of vehicles over less manufacturing facilities which ultimately will allow us to save one plant overhead type costs. So still some work to do in the component in moving it but we would probably call it in the seventh or eighth inning.

Christopher Ceraso – Credit Suisse

Okay and last one, you mentioned that the margin in the Asia business is running a bit hotter than the 6% to 7% guidance range longer term. Can you give us a ball park of where North America and Europe are running?

Matthew Simoncini

What we talk about in Europe is that overall longer term Europe had been running in the 2% to 3% range at these levels of volumes and we’re still kind of consistent with that. If you did the math at home, that would mean that North America was probably in the 4% to 5% range.

Christopher Ceraso – Credit Suisse

Okay thanks. That’s helpful.

Operator

Your final question comes from the line of Derick Winger from Jefferies & Co. Your line is now open.

Derick Winger – Jefferies & Company

Thank you. Of the restructuring charges that you listed in the fourth quarter, how much of the $59.3 million was cause versus SG&A and similarly for the $15.1 million of other that your broke out. And the secondly is there an interest rate assigned to any of the other long term obligations of $563.6 million on the balance sheet.

Matthew Simoncini

Lsts break it down step-by-step. You’re talking about the operational restructuring of $59 million that we had.

Derick Winger – Jefferies & Company

Yes, and then the $15.1 million of other.

Matthew Simoncini

The vast majority of it, roughly $54 million went to cost of sales.

Derick Winger – Jefferies & Company

Okay and what about the $15.1 million of other?

Matthew Simoncini

$15.1 million of other was related to 50:50. My financial expert John Trifall the head of financial planning is telling me that is half and half.

Derick Winger – Jefferies & Company

Okay and then how about any interest rate on any other term obligation of $563.6 million. What does that consist of? On the balance right below the long-term…

Matthew Simoncini

It’s a bunch of miscellaneous that goes in there. There is some modest interest rate on about $40 million of it but it would be consistent with our debt profile overall. I would tell you probably a little bit lower actually since some of it is government provided financing of some expansion plans in Europe. So it’s not really interest bearing for the most part.

Derick Winger – Jefferies & Company

And what constitutes the other $520 million?

Matthew Simoncini

It’s a whole litany of other longer term liabilities that come in through the business; pensions, worker’s comp, just the normal stuff that’s not payable within the next 12 months.

Derick Winger – Jefferies & Company

Okay thank you.

Robert Rossiter

I want to thank you all for the questions and being on the call today. I also want to thank the Lear employees again for the great service last year. I’m glad last year is over. I also want to thank you for your hard work, your understanding and the sacrifices that you all made. Sorry we had to do it. 2010, we’re all hopeful. Unfortunately though we don’t know really what’s going to happen in the marketplace out there. There is some optimism but not enough to make you feel like it’s going to get back to business as usual. So let’s keep our focus. Do the things that we do best and everything will work out. Thank you all.