Stoneridge, Inc. Q4 2009 Earnings Call Transcript

| About: Stoneridge, Inc. (SRI)

Stoneridge, Inc. (NYSE:SRI)

Q4 2009 Earnings Call

February 16, 2010 11:00 AM ET


Kenneth A. Kure - Corporate Treasurer and Director of Corporate Finance

John C. Corey - President, Chief Executive Officer and Director

George E. Strickler - Executive Vice President, Chief Financial Officer and Treasurer


Matt Mishan - KeyBanc Capital Markets

Keith Schicker - Robert W Baird

Bennett Lin [ph] - Jefferies & Company

Brett Hoselton – KeyBanc Capital Markets

Gary Moorman [ph] - Alpine Associates


Good day, ladies and gentlemen, and welcome to the Q4 2009 Stoneridge Earnings Conference Call. (Operator Instructions).

I would now like to turn call over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed, sir.

Kenneth Kure

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our fourth quarter earnings release. The release has been filed with the SEC and has been posted at our website at

Joining me on today's call are John Corey, our President and Chief Executive Officer, and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include those statements that are not historical in nature and include information concerning our future results or plans. Although we believe such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading forward-looking statements.

During today's call, we may be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will begin the call with an update on our growth strategies and business development and his thoughts on the market conditions. George will discuss the financial and operational details of the quarter and future outlook.

After John and George have finished their formal remarks, we will then open up the call for questions. With that, I'd like to turn the call over to John.

John Corey

Good morning. After a year as bad as 2009, one can lose perspective on the trend of performance and only see the current blip in performance. However, as we’ve discussed, we have put a plan in place several years ago to transform our company. I would like to review our trends and how we are carrying it forward into the future.

Since the market downturn in the third quarter of 2008, we’ve been focused on the critical items to maintain our competitiveness while positioning our company for longer-term profitable growth. The four critical items that our management team has been executing on were, reducing cost and lowering our break even sales level to mitigate the market downturn and to position the company for improved operating income as volume returns, protecting our liquidity and to drive positive cash flow. We focused on cash flow to ensure that we could weather the downturn in the market and provide the funds needed for investment once the market recovers.

Third was to provide additional liquidity through our revolving credit lines and investments and acquisitions like the BCS acquisition we completed on October 11th of the last year. And finally to pursue growth opportunities and business wins to drive our top line growth.

How have we performed to these targets? As we have reported on previous calls we started restructuring the company in the fourth quarter of 2007 and further expanded those programs to adjust to the industry realities of significantly lower market.

George will share with you the details of all our programs, but it is important to note that our company generated an operating income of $4.8 million in the second half of 2009 after recording an operational loss of $23.1 million in the first half of 2009.

We generated operating income in both the third and fourth quarters of 2009 on slightly higher volumes in the first half of 2009. This reflects the significant cost improvements that we have implemented across the company and we’ve lowered our break even level by 24%.

Our gross margins were 21% in the fourth quarter, at the lower end of our range due to increased copper cost, cost added to support new program launches and some supply disruption in getting components, a point we made in our third quarter call.

We did a good job in maintaining our cash position. We closed our cash balance at year-end of $91.8 million compared to $92.7 million that we had at the end of 2008. We accomplished this even though sales were down by nearly 37% and we incurred additional restructuring cost in the year.

We did this through reductions in working capital and capital expenditures to match the customer delays of product launches and new program starts. Specifically, we spent nearly $12 million for capital expenditures in 2009. We are forecasting that capital expenditures will return to more normal levels in 2010.

These combined items essentially offset the operating losses of the company. We'll also received the dividend from PST of $7.3 million in December, which continues to reflect a strong operating and financial performance of PST, our Brazilian joint venture.

We expended nearly $5 million for the BCS acquisition in October. I believe our greatest achievement in 2009 was our business award wins. We had a goal to contract a $100 million of new diversified business outside of our top four customers.

Our organization accepted the challenge and while continuing to focus on the top four customers, we were able to expand our diversified customers base with an emphasis towards cornerstone customers. We define cornerstone customers as those customers who have expanding global footprints, significant market presence and a commitment to being technology leaders.

In 2009, we were awarded a $134 million of gross business of which a $106 million was new business and $28 million was replacement business. Of the $134 million, $99 million was represented by customers outside of our top four customers, a significant achievement in our diversification efforts.

These wins have contributed to the estimated net new business of approximately $120 million over the next three years and a $170 million over the next five years.

We have shared these accomplishments with you in the past, but not included are a few wins that were outside of these results. We have recently been selected and are in the final negotiations for a new shift-by-wire application, a new product line for us with a North American OEM. This application can be extended to multiple customers.

We have won a major wiring contract with a major commercial account that will begin production in February and ramps up the full production by April of 2010. We have also won a substantial contract with a major agricultural equipment customer for new wiring applications that will start in 2013 and is in range of $30 million to $40 million.

Over the last two years, we have realigned our company around two business segments, electronics and control devices. In August, we announced the integration of our control devices business into one management team. These consolidations are starting to produce results as our D&D efforts are more focused on our customers, technologies and geographic locations that we choose to participate in.

In the last three years we have been focusing on expanding our core market segments medium and heavy-duty truck, pass and light car vehicles and agriculture. In addition, we have expanded our markets to include applications with military instrumentation and material handling.

For 2009, our percentage of sales was 51% for commercial, which is medium and heavy duty, 33% for pass and light vehicle and 16% for agricultural. Included in the commercial sales is approximately $14 million or 3% for military. Included in the agriculture and other sales are 6.8 or 1% for material handling.

Our acquisition of BCS expands our military customer base to include Force Protection, BAE, General Dynamics, AM General and OshKosh. BCS’s sales were $1.6 million in fourth quarter with an operating income of $271,000. Our plan is to integrate marketing efforts between BCS and Stoneridge to cross sell our products primarily instrumentation and gauges through BCS to their customers.

We believe there are good growth opportunities for BCS in 2010 and we expect our sales to reach $20 million annual in this year. We further expect that BCS will be able to add 20 to $30 million in annual sales over the next three years. We are also continuing plans to enhance sales by regions in geographic areas using our technologies to cross sell multiple customers.

We are making progress to expand our presence in China and India while continuing to focus on Brazil with our PST joint venture. In China, we are extending the usage of low-temperature and speed sensor technology and products.

China has won four new applications during 2009 in wheel speed sensors and oil level sensors. Even though they are small, it begins to enlarge our product and technology offerings. We are also starting up wiring operations in the first quarter of 2010 to support business opportunities for John Deere and other potential customers in China.

We have added technical engineers and will open a new design center in the first quarter of 2010 to support our customer and product development in China. We will officially dedicate this new technical center in March and it will house our sales organization's technical engineers, and testing facilities.

In India, our current sales level now stands at about $25 million per year for mostly for instrumentation and gauges. We are adding sensor lines which is a larger market than instrumentation.

We have raised our sales targets to reach 50 to $75 million in the next three to five years and we are adding our sensor lines to our Indian joint venture. We believe these plans are very achievable with the base business we have established in the last three years.

Operationally, as we mentioned before, we announced the integration of our Hi-Stat and Pollak facilities in August 2009. This has yielded benefits of reduced cost structure and a more streamlined management team. With this change, we have aligned all of our resources dedicated to our sensor, switch and actuator businesses under one management team.

We needed to be more effective, efficient and focused on identifying market opportunities and allocating resources directed to those products, technologies, and customers that we believe have better market opportunities for sustainable growth. This consolidation does that.

We have been begun to win new awards with our technologies. We have landed the first order for torque sensing with a global equipment manufacturer, which is projected to start in late 2010. We also hope to land our first order for (inaudible) position sensing with a major agricultural customer in the first quarter of 2010.

We have a new keyless entry system with our capacitive sensing technology for Ford that is correctly on the MKS, Flex, Taurus and MKT with plans to propagate it to the Explorer and Escape over the new two years. As mentioned previously, although not officially awarded, we’re working on a new shift by wire application, which should present significant opportunities with our light vehicle customers in North America.

In our operations, now that the major restructurings are behind us, we can expect to continue to focus on quality, delivering cost with our lean initiatives. Our lean principles and concepts include a plant for every part, supermarket designated storage, small lot material flow, equipment tooling changeover, floor space optimization and operator optimization, standard work flow and work place organization, paperless information flow and a work facility redesign. We have been working on these processes for almost 18 months and are starting to realize the benefits.

We’re encouraged by our progress and the sustainability of our change of progress and manufacturing facilities. We’re realizing improvements in our inventory days, especially in our work in process. Even with a significant drop in our sales, we’re continuing to improve our days in inventories and our work in process. We’re working to improve our supply chain and forming relationships with our suppliers to support our lean initiatives. Our other operational improvements will come from operator right sizing and product quality.

In the past two years, we’ve seen one of the most serious economic downturns in our business. We have taken actions to make the company more competitive and position the company to compete effectively for the future.

We have cut our cost and lowered our break even sales level. We’ve maintained our liquidity and maintained our cash position. At the same time, we have clearly stayed focused on our top line growth.

I have shared with you today some of the opportunities we have already won where we’ve positioned ourselves in the future for growth in emerging markets with key customers and new technologies and entrance to new market segments to promote global growth with cornerstone customers.

We will continue to pursue making acquisitions of companies who can fill voids we may have such as the acquisition of BCS. I would be remiss not to thank our employees for their sacrifices and performance they have exhibited this past year to position Stoneridge for the future.

Looking forward to 2010 I am optimistic. We have weathered the worst of the global market decline. The markets are improving, some more rapidly than others, but they are improving. While I’ve highlighted some of the major accomplishments, there are many actions, both large and small that our employees have accomplished which improved and strengthened the company.

2009 was a challenging year for the industry. However, we are confident our actions will positively drive us forward. As the market returns, and the industry begins its improvement, Stoneridge is poised to improve our position. With that, I’d like to turn the call over to George.

George Strickler

Thank you, John. As John indicated, 2009 was indeed a year of transition. Though we encountered significant challenges posed by the severely reduced market conditions, our management team saw this as an opportunity to demonstrate their tenacity and resolve to further improve Stoneridge to benefit both the near term and the long term.

During 2009, we embarked upon numerous projects that will help Stoneridge to do more than merely survive but to thrive in the near future. All these initiatives undertaken were efforts to increase value and improve our processes.

During 2009, many customers and suppliers encountered problems with their own customers and suppliers. Certain customers experienced liquidity problems while others like General Motors and Chrysler went through a bankruptcy process.

Through cross functional team efforts, we were on-boarded in GM and Chrysler's government guaranteed program and through our other actions we were able to limit our bad debt write off to less than a $100,000 in 2009.

We were also able to limit disruptions from our supply chain by monitoring our vendor base closely and moving tools and equipment if necessary to more financially stable suppliers. In positioning Stoneridge for the future, certain aspects of our revolving credit facilities needed to be amended in order to allow important value added projects to proceed.

During October, our team amended our revolving credit agreement to permit us to proceed with three important initiatives. We completed the European restructuring, which provided us the opportunity to repatriate about $38 million in value from Europe with minimal expense as well as repatriate approximately $5 million in cash in December.

As mentioned in our previous call, Stoneridge acquired Bolton Conductive Systems in October of last year. With the acquisition we believe this will provide us with the opportunity to expand in new military customers as well as expand Stoneridge's existing product offering into the military segment as explained by John.

Finally, we amended our credit agreement to allow us to reorganize our U.K subsidiary in order cap certain liabilities. All manufacturing lines and products were transferred to Estonia, China and Mexico and completed by December 2008. We continue to monitor the capital markets for opportunities to refinance our debt on less expensive and more favorable terms.

Though the North American and European markets are beginning to show signs of stabilizing, other markets around the world appeared to be improving at a faster pace.

Our joint venture in Brazil is showing signs that their economy is strengthening and returning to normal levels. Our portion of equity earnings increased from $2.3 million in 2008 to $2.9 million in the fourth quarter, an increase of $600,000 or approximately 21.5% and significantly better than the first half of 2009. PST declared and paid $7.3 million of dividends in the fourth quarter to Stoneridge.

One of our major goals for 2009 was to manage the cash flow and liquidity. During the course of the year, we funded our operational growth initiatives through our free cash flow generation and available cash balances. Our quarter end cash balance totaled $91.9 million compared with $92.7 million at the end of 2008.

During 2009, we began to reap the benefits of the restructuring programs we initiated in 2007. Our fixed cost, which we described as our SG&A and overhead expenses excluding restructuring cost decreased by approximately $14.7 million from the fourth quarter of 2009, compared to the fourth quarter of 2008. These reductions have helped to offset the dramatic decline in profitability caused by the market downturn.

We are pleased to report positive operating income in both the third and fourth quarters. Our restructuring from the fourth quarter of 2007 through the fourth quarter of 2009, cost the company $20 million in both expense and cash flow, while we were able to permanently reduce approximately $34 million of fixed manufacturing and overhead costs.

Now, I’d like to cover with you some of the details regarding the financial performance from the quarter. Revenue of $133.8 million in the fourth quarter represents a decrease of $24.2 million or 15.3%. Our sales decrease was the result of declining production volumes in our served markets, severe restrictions on consumer credit and general economic conditions.

For the fourth quarter, light vehicle revenue increased from $45.8 million to $47 million, an increase of $1.1 million, or 2.5%. The increase was primarily attributable to the 1.3% increase in traditional domestic production in our control devices segment.

Medium and heavy duty truck sales totaled $67.9 million in the quarter, a decrease of $17.1 million, or 20.1% over the prior year. The revenue decrease was driven by a decline of 17.9% in the North America commercial vehicle production and a decline of 53.9% in European commercial vehicle production.

Sales to agriculture and other markets totaled $18.9 million, a decrease of $8.2 million or 30.2% below last year. North America revenue accounted for 76.2% share of the fourth quarter revenue compared to 77.8% for the same period last year.

The percentage increase of our North America revenue reflects a more dramatic effect of reduction in European commercial vehicle builds and unfavorable foreign exchange rate changes on European sales.

In the fourth quarter, electronics revenues were $82.6 million compared to $111.7 million last year, a decrease of $29.1 million, or 26.1%. Unfavorable factors affecting the fourth quarter performance were the 17.9% decrease in North America commercial vehicle production, a 53.9% decrease in European commercial vehicle production, and unfavorable foreign exchange translation.

Revenues for control devices were $51.2 million, increase from $46.3 million compared to the fourth quarter of 2008, which is an increase of $4.9 million or 10.6%. The 1.3% increase in production in North America light vehicles for the traditional and domestic manufactures was the primary reason for the increase.

Our fourth quarter gross profit was $28 million resulting in a gross margin of 21%. The gross margin increased 2.1% basis points from the prior year level. This marks the second quarter in a row that our gross margin was greater than 20%. The continued increase is primarily due to our cost structure initiatives. Gross margin in the fourth quarter of 2009 was not affected by restructuring cost. This compared to the fourth quarter of 2008, which included $2.6 million in restructuring cost.

Sales from low cost manufacturing locations accounted for 44.6% of total sales for the fourth quarter compared to 39% in the prior year. The increase is due to lower overall Stoneridge sales in the current quarter.

With our China operation, our announced production line moves from Mitcheldean, U.K. operation to China and Estonia, and our corporate wide initiatives, we expect our sales from low land [ph] cost locations to continue to grow in the future.

We will continue to expand our presence in the three low cost manufacturing locations Mexico, Estonia and China.

Selling, general and administrative expenses totaled $25.9 million in the fourth quarter, compared to $33.2 million in the previous year. The decrease in SG&A is primarily due to cost structure savings, which are the result of the previously discussed restructuring initiatives and lower compensation related expenses in 2009.

We have reduced our design and development expense from $9.7 million to $8.1 million as some of our customers have delayed some of their future projects and platforms. Our SG&A and design and development spending increased compared against our last quarter, to support renewed customer requests and near term product launches, especially our European truck platforms, our North America wiring initiative, and the launch of our new wiring in North America that begins in February of 2010, which John described earlier.

The fourth quarter income tax credit was $600,000 on a pre-tax loss of $700,000. As reported for December 31st, 2008, the company is in a cumulative, and continues to provide evaluation allowance offsetting its Federal, state and certain foreign deferred tax assets.

As a result, no tax benefit in North America was provided for losses incurred in the fourth quarter of 2009 for Federal and State tax purposes.

The negative impact of these valuations allowances was partially offset by tax benefit for losses incurred in Sweden. Due to the valuation allowance and pattern of projected earnings, the quarterly effective tax rates fluctuated significantly for the year and the company recorded annual tax benefit of $1 million.

The unusually low effective tax rate for 2009 is due to the circumstances that caused us to write off our deferred tax assets in December 2008 and will continue to prevent the company from recognizing a tax benefit for domestic and certain foreign loses.

Once the markets stabilizes and profitability returns we expect the effective tax rate to normalize and be in the range of 27% to 30%. Due to the company’s deferred tax valuation allowance recognized in December of last year, we will not recognize tax expense in U.S earnings. We will record tax expense on foreign earnings, including PST. This will cause significant volatility in our income tax expense through 2010 depending on what taxable income is made.

Stoneridge recognized a fourth quarter net loss of $218,000 or $0.01 per share. This compared with prior year net loss of $337,000, which included a pre tax restructuring charge of $4.4 million and excluded the non-cash write-off of goodwill and the deferred tax asset valuation allowance.

Depreciation expense for the fourth quarter was $4.7 million and amortization expense was negligible as most of the intangibles were written off in the prior year. Our primary working capital totaled $70.6 million at quarter end, which decreased $30 million from the fourth quarter of 2008 levels. And as a percentage of sales, our working capital increased from 13.4% of the sales in the prior year to 14.9% of sales in the fourth quarter this year.

Our working capital measures have been significantly influenced by the drop in sales revenue. As markets return, our long-term goal is to reduce primary working capital 12% of sales.

Operating cash flow was a cash source of $15 million in fourth quarter compared to a cash source of $11.8 million in previous year. Our cash flow results in the fourth quarter were affected by lower sales activity, which generated lower working capital requirements and lower net income excluding the evaluation of goodwill and the deferred tax valuation allowance.

Capital investment for the quarter totaled $3.2 million mainly reflecting investment in new products in sensors and wiring as well as IT spending for an ERP implementation. For the full year of 2009, some significant areas of our capital investments were in our emissions, switch and actuation products and wiring. We finished the year with total capital spending at $12 million, which is down significantly from historical levels, which should return to $23 million to $25 million range in 2010.

Two of our most important measures starting in the fourth quarter of last year and continuing this year has been cash flow and liquidity. As of December 31, we have $54.1 million of availability under our $100 million asset base lending facility. Our borrowing base has increased by $2.6 million since the second quarter of 2009 as accounts receivable and inventories recovered from cyclical lows. We have no borrowings drawn against our asset based lending facility, which has a maturity of November 2011.

Our quarter end cash balance totaled $91.9 million, compared with $92.7 million at the end of the fourth quarter from the previous year. We will continue to manage our capital expenditures and working capital to sustain and improve our cash flow and we continue to work to sell our closed Sarasota manufacturing facility though the commercial market for facilities of this type has been difficult.

Going forward, we expect we will continue to fund our operational growth initiatives through our free cash flow generation and available cash balances. As the market recovers, our working capital will begin to grow in dollar terms but we will continue to improve our days to achieve our primary working capital target of 12% of sales.

The environment for 2009 has been very difficult and based on our third and fourth quarter results it appears the market bottomed in the second quarter of 2009. We have experienced improvement in passenger light trucks in North America, our emerging markets are returning to their historical levels, PST in Brazil performed very well in the third and fourth quarter, India and China also experienced improved market conditions.

The commercial market in North America has shown signs of improvement and the commercial market in Europe is still running at significantly low levels.

Based on the efforts of our restructuring programs, head count reductions, adjusted 2009 compensation programs, flexing our productions schedules and our reduction in design and development expenditures, we have quickly adjusted our 2009 cost structures to lower our break even level.

Based on the market forecasts we are experiencing, our goal has been to return to profitable operations and liquidity in these very difficult times by lowering our break even sales level for profitability and cash flow.

We returned to positive operating income in the third quarter and again in the fourth quarter. And as the market stabilizes and some of the growth returns, we will need to rebuild some working capital, especially receivables to support higher sales.

However, as we have demonstrated already, we will manage our liquidity and cash balances to deal with market conditions.

In summary, we continue to and we will continue to modify our plans to respond to the rapidly changing markets. In the last several months, the market forecast seemed to be changing monthly with pass car and light truck improving, while the commercial market forecast are declining, our overall belief is that we do not expect a robust recovery in the markets for 2010.

We have conservatively positioned Stoneridge to maintain financial discipline over our cost structures, we are making investments to support the product launches we have for 2010, we will reinstate a percentage of the employees takeaways we made over the last two years, we will continue the ERP investment, John discussed earlier for North America electronics.

We fully intend to maintain the permanent fixed cost manufacturing overhead and SG&A structure improvements that we implemented to enable us to return our gross margins to historical levels in the 22 to 23% range and further improve our gross and operating margins as the market rebounds.

We believe that 2010 sales level to be in the range of 590 to $615 million, which would represent an increase of nearly 24 to 29% compared to 2009. We have reported gross profit in the third and the fourth quarter of last year of $55.1 million or 21.9% in sales of $251.8 million, and operating income of $4.8 million.

We believe that we can reach our gross margin target of 22 to 23% for 2010 with the sales forecast we are projecting, based on the current industry forecast and improve our operating margin by managing our D&D expense and SG&A cost tightly.

Our challenge, we will manage our cost structures, we reduced our spend in D&D last year to $33 million from our average spend in the period from 2006 to 2008, which averaged nearly $44 million.

We will need to increase our expenditures in this key area to, adjust our product platform launches scheduled for this year and next year but not to the level we averaged during the last three years.

We were able to reduce our other SG&A other than design and development expenditures to $74 million in 2009 compared to an average of nearly $90 million per year over the last three years 2006 to 2008. We will challenge the adding of any cost if we do not believe it adds to our performance or long-term value.

Through these combined efforts, we will be able to drive sales growth even without a robust market forecast. With our new business wins and product launches combined, with a control of our cost, we will restore gross margins to historical levels, 22% to 23%, and generate positive operating income and pre-tax income.

Due to our deferred tax valuation allowance for U.S. business and our income position in Europe, we may be recognizing a high level of income tax on our reported income due to the recognition of tax expense on our foreign earnings, which includes our PST operation.

At the same time we were driving cost reductions, we continue to focus on liquidity and balance sheet strength. We have continued to strengthen our balance sheet by managing working capital and reducing capital expenditures to meet customer requirements. And we will continue to monitor business conditions and will take the necessary steps to ensure Stoneridge is positioned to deal with the current economic environment while positioning the company for growth when the markets turn.

Our actions have not taken capacity out of our operations but positioned us to reduce our overhead centers to improve capabilities for improving profitability generating positive cash flows.

Operator, I would now like to open the call for questions.

Question-And-Answer Session


(Operator Instructions) Your first question comes from Matt Mishan - KeyBanc Capital Markets.

Matt Mishan - KeyBanc Capital Markets

I just wanted to get the sales guidance again. I heard 590 to 615, is that correct?

George Strickler

That is correct.

Matt Mishan - KeyBanc Capital Markets

Okay. As far as operating income goes, 3Q to 4Q you saw a increase in sales of about $16 million, but you saw a decrease in operating income. Can you basket and elaborate a little bit more on that?

George Strickler

Well, Matt, if you go down through the key components of our cost structure, we clearly, were influenced in our cost side. One is, copper has taken a significant upturn and copper was trading as high as 3.40 in the fourth quarter at times and it persisted there and it’s backed off to -- it was down to 2.90, now it’s back up to 3.10. So that cost us a little bit of money probably in the range of $400,000 to $500,000.

In our product development area, as we shared with you earlier, that we had increased cost that we are doing, it is about a $1 million in the D&D side and that was essentially for the two key platforms we have going in Europe. That was a smaller piece of it, but the larger piece was what John shared earlier, was our new launch of the commercial wiring business which we won in the fourth quarter.

We literally have opened a facility. We’ve manned it and staffed it with equipment. We started our first production in February with full gear up by April. That cost us close to about $800,000 in the D&D side and overall had a cost of about a $1 million in our overhead side.

As part of that, we had taken furloughs in the third quarter both in Europe and in North America. We had to re-staff as the market started coming back. And those furloughs were about $700,000 in North America. They were about $500,000 in Europe.

So those are the key highlights, but I think now that we have those in place and with the volume coming back that we can control the cost, but it was critical for those three key launches. Two in Europe and then the one we talked about, John shared with you, on the wiring and the North America that starting up in February and hitting full capacity by April.

John Corey

I think it's always been part of our plan as we've discussed in past calls, as we took the financial discipline to conserve our cash and store it up, so to speak, that we weren't going to jeopardize opportunities for future growth. And I think as we saw these opportunities come down, you're going to see it. The shift by wire was a relatively new program for our company this year. The wiring business is a relatively new program -- is a new program that we've now been able to launch and we will start to reap the benefits of that in this year.

So we've done, I think we've done what are the right things for the business. While we've taken a hit to the fourth quarter profitability because of this D&D investment we will start to see the revenue streams come on 2010 and beyond.

Matt Mishan - KeyBanc Capital Markets

So would it be fair to say that if, I know you're guiding higher, but if sales would remain at the same levels of fourth quarter of $135 million level in the first quarter you'd see higher operating income because of these one timers?

John Corey

Yes we would. As we have shared before our marginal contribution is roughly around $0.30 per dollar sale. So if the sales begin to ramp up, that is usually the key factor, we track our improvement at the sales level, Matt.

We did have to incur to start up of these three and I think we alluded to that in the third quarter call that we would be incurring these expenses. The new business win we had in North America for the wiring, we literally have leased a new facility, opened it up. We've manned it, we staffed it, we put equipment in.

That's been ongoing for the last four to five months and accelerated in the fourth quarter, and that leads up to our first production in February and ramping up to more full levels by April.

Matt Mishan - KeyBanc Capital Markets

As you look into 2010, I think there are a couple of headwinds, as far as some of your costs goes. Can you talk a little bit about your exposure to copper and also some of the temporary costs that might actually have to come back in 2010 as well?

John Corey

Well right now, as we see it, copper is one that’s going back up. But in the past, we’ve hedged on copper and we will monitor that going forward, and when we see opportunities to go in and buy copper or hedge copper we will do so.

The other side of it is that, we do have some programs with our customers where we have price adjustment mechanisms, so that will help us offset some of that. I think for the nearer term, the biggest issue we see is probably the supply base disruptions, which I think a lot of the electronics people are experiencing and some of the non-electronics people are experiencing.

And we are going to have to manage through that as capacity starts to come back on stream. And so, in the short-term, that’s our biggest concern. That’s a good news, bad news situation, so to speak, because it does mean that the markets are improving, not only in the transportation markets, but in other markets, so that’s what driving some of the capacity requirements.

But I think as we said, we are seeing all of the markets improve over 2009. The North American automotive market is a little bit stronger than we expected, the commercial vehicle market in North America is a little bit delayed and a little bit lower than we expected, but we see it happening and growing back in the third to fourth quarter.

And I think the European markets, as we plan will be stronger in the second half than in the first half. And Matt, one thing I think is important to note and you’ve noted in some of your own releases, is that we are seeing a dichotomy in the market right now, the pass car and light vehicle continues to get more robust and stronger than originally projected.

Whereas on the other side, the commercial tends to be a little weaker, especially in Europe. In fact it’s down. The latest forecast is showing down, it’s rather insignificant compared to where the previous forecast is.

Matt Mishan - KeyBanc Capital Markets

Little bit of an update on the backlog, I believe it was a $120 million over the next three years and a $170 million over the next five years.

Over the next three years, what's the cadence of that backlog. I mean 2010, 2011, 2012, is it more weighted upfront or is there some more upside that can come in 2011, 2012?

John Corey

It’s pretty evenly split, Matt, over the three year period. So it's roughly about the same over the three years.

Matt Mishan - KeyBanc Capital Markets

You also mentioned a lot of programs you are bidding on, you think you could win. Could you put a dollar figure on that, of programs you think that could provide some upside to that backlog?

John Corey

Well, we won't do it now, but we'll continually update you as the quarters go, but I think it was clear to us that we -- this is an effort that we've really been driving and John is clearly taking it through, and we'll continue to focus on that as top line is now our priority. We will maintain cost but restructuring was a number one priority and liquidity but we quickly shifted into our growth and we'll give you an update as we progress quarter to quarter.

Matt Mishan - KeyBanc Capital Markets

That transition immediate to the restructure, I noticed there was only about $242,000 of restructuring cost in the quarter. Are we, what are you forecasting for 2010 in restructuring, is it pretty much done at this point?

John Corey

Our restructuring is done, I mean we really pretty much through – most of the restructuring is done through the second half of 2009 with some minor things going on.

So last half, I think as George said, we are now shifted away from, it’s really a game of containing the cost structure that we put in place, we believe we can do that, because we've taken out fixed cost structure both in the overheads, with plant closures and the consolidation of business units, and then driving forward on volume growth. So I don't think there will be much more in the way of restructuring because if you look at our manufacturing footprint, we’re down to probably where we want to stay for the foreseeable future and will continue to, as we win new business to expand in low cost regions.

Matt Mishan - KeyBanc Capital Markets

On the Brazilian joint venture, can you give an update on where you're at with that? I know the first step was to try and get a majority stake and then maybe consolidate into your revenue and then possible IPO. Where is that at now?

John Corey

Well, Brazil, actually their economy went down and so in the middle of the year, we were looking at similar things to what we see in North America. However, they've rebounded much quicker as George indicated in the financial results. They have come back strongly.

Our position was initially to try to consolidate them under accounting terminology, and that with the new accounting pronouncements, which George can give you the specifics on; we will not be able to consolidate them. We continue to watch the IPO markets. Right now the IPO markets in Brazil are returning only in the large companies. So we'll continue to watch that, but I think we don't see any plans in the next couple of quarters to do anything there.

George Strickler

Yeah, just to add to that is that we – there’s a new standard out called the FAS 167 and it's got different characteristics than the FIN 46. So under those guidelines, it's a little tougher to get to the level of consolidation, and so that doesn't look to be a real possibility. So the two items that you mentioned are always on our list. Can we buy greater percentage or can we do an IPO, and John stated properly is that the large cap markets returned and the small mid cap is just not robust enough in Brazil at this time.

Matt Mishan - KeyBanc Capital Markets

Okay, last question, then I'll jump out and let some other people have the chance. Agriculture increased quarter-over-quarter pretty significantly. Is that a sustainable increase or is that seasonal and what are you expecting for 2010 in agriculture?

John Corey

Well, I think that’s a sustainable increase we expected. In other words, we try to see and I think we have to read from our customers, they’re starting to see improvement back in the market. So I don’t -- I don’t believe we’ll see a reduction in the agricultural sector. So it might shift, it’s mixed somewhat.


Your next question comes from Keith Schicker - Robert W Baird.

Keith Schicker - Robert W Baird

Hey good morning it’s Keith Schicker. Just a couple of questions left over here. Can you kind of comment, I think you kind of danced around it a little bit, but what is the expectation for the quarterly cadence in terms of revenue during the course of the year?

Is this sort of like the North American commercial vehicle market where we’re going to be kind of barbellish with a soft spot in the middle? How would you characterize how the year shapes up for you guys?

John Corey

Yeah, I think on the commercial vehicle market we would say that in North America and Europe the second half is going to be stronger than the first. Maybe some others see a bigger barbell in commercial vehicle in North America. I don’t think we see that as much as maybe others might.

We see a stronger market in the automotive than we have been previously anticipating. So, I think that it's a nice balance for our company. We’re down a little bit maybe in looking in what we thought commercial vehicle in the first half, but we were up in what we saw in automotive and then we expect the balance of the year to strengthen in both sections.

George Strickler

Keith, we see the first quarter, the lowest of the quarters. Third, would follow that little trend, I think we will be looking at an increase in the first quarter in the range of 4% to 6%, and then third quarter would be slightly above that. And then the third – the second quarter and the fourth quarter would be fairly equal because we got some of the launches coming out in the fourth quarter. So I think that will help you sort of put the pieces together in terms of how we're looking at the market for the year.

Keith Schicker - Robert W Baird

So essentially this new business that you're launching in 2010 seems to be a little bit weighted towards the back part of the year?

George Strickler

Well, other than the one I've mentioned in our wiring section, that does come up in late first quarter, second quarter.

John Corey

It just how it ramps up through the year.

Keith Schicker - Robert W Baird

The contribution margin, that jumps right up to the normal level this next quarter or is there still additional costs that's going to be coming back?

John Corey

I think there's still additional cost in the first quarter. So I think we're looking for that trending a little on the lower level and then it really starts to build throughout the rest of the year.

Keith Schicker - Robert W Baird

Lastly, can you comment what you're hearing specifically from your customers, key customers? Volvo in Europe and Navistar in North America seem to be doing a little bit better relative to the market here recently. What's the expectation or can you kind of provide any color about that for the upcoming year?

John Corey

I would hesitate to provide any color on that. I think you've said it there. They're experiencing slight improvements. So we're looking at that as an indicative sign of maybe the overall market coming back and they're ahead of it. But we're certainly not going to provide any more color to what they've said I think.

We've seen the market in the past -- I mean when you look at the projections that are going on, you'll see, projections are still moving all around, although maybe -- they are still moving up, but some are moving up above previous forecasts, some are moving down below previous forecasts, although all are up over 2009. So, we are just trying to manage within the range.

Keith Schicker - Robert W Baird

Lastly, if you look at your commercial vehicle exposure and your light vehicle exposure, for each segment, can you roughly just describe how that splits between North America and Europe, just ballparkish?

John Corey

Yeah, well almost all of our light truck is -- I mean light vehicle is in North America, a very little piece in Europe, not significant, although we are going to grow that. And then on the commercial vehicle it’s -- I think it’s -- what is it about…

George Strickler

It’s two-thirds, one.

Keith Schicker - Robert W Baird

Two-thirds Europe or two-thirds North America?

George Strickler

North America.

John Corey

Two-thirds North America, one-third Europe.


Your next question comes from Bennett Lim [ph] - Jefferies & Company.

Bennett Lim - Jefferies & Company

Just wanted to find out what your D&A expense was in the fourth quarter, depreciation and amortization?

George Strickler

Yeah, I think we said it was $4.7 million. Let me double-check that, it was $4.7 million.

Bennett Lim - Jefferies & Company

For 2010, would you say that the CapEx would be around $25 million ballpark?

George Strickler

Yeah, I think it’s going to run in that range.

Bennett Lim - Jefferies & Company

The other thing you’ve mentioned, the availability under the revolver, was that $51 million?

George Strickler

Yeah, that was availability under the revolver, yes.

Bennett Lim - Jefferies & Company

Were there any letters of credit drawn on that facility?

George Strickler

Yes, that includes the letter of credit which they run, they run about $2.5 million.


Your next question comes from Brett Hoselton – KeyBanc Capital Markets.

Brett Hoselton - KeyBanc Capital Markets

I just want to follow up quickly on the copper cost pass-through, just to ask you. How should we think about, I guess let me ask some specific questions here I guess. What percentage of your contracts have some form of pass-through mechanism?

John Corey

I'd say about half that have that.

Brett Hoselton - KeyBanc Capital Markets

As we think about this 400,000 to 500,000 increase in the third and fourth quarter, is there any sort of a delay in that mechanism that may cause that to be, let’s say overstated as you went from the third to fourth quarter or is it generally pretty consistent with the price increase or decrease of copper?

John Corey

No, there is a delay to that pricing mechanism that runs anywhere from 90 to 120 days, Brett.

Brett Hoselton - KeyBanc Capital Markets

Switching to the kind of the outlook. It sounds like you feel pretty good about the outlook for the Ag-business, maybe a little less so for North American commercial vehicle but feel pretty good about the back half of the year.

But European commercial vehicles, what are customers telling you at this point in time in terms of their expectations into the first half of the year and into the second half of the year. Are they kind of mixed, are they felling like it’s bottomed, or are they feeling a little bit more confident, we are going to see some improvement. Where are your customers at?

John Corey

Well I think, again you'd get a mixed story because some of them are asking us how much, how fast we ramp up production, and you look at that and say okay, this is what we think and others are not even asking that question, you are still seeing some shutdowns. But I think in general, when you look at your – I mean it's starting to rebound and starting to recover, customers are becoming a little more positive, so I'm very positive on it. So I think they’re starting to see some improvements in their market space. But I always hesitate to listen to that because if you recall in 2008, up until the third quarter, that market was going great guns and everybody was saying their order books are full for the rest of the year. And all of a sudden in the fourth quarter, they dropped like a rock.

So we try to look at the trend and projection of what we see and balance our plans according to that. So I would say we are not seeing an aggressive growth pattern there but we’re not seeing a decline. We’re seeing a, I guess a moderate recovery, which is stronger in the second half than it will be in the first half. That’s really what we’re seeing from our customers.

George Strickler

And at the same time, Brett, a couple of customers are putting their platform launches back in the schedules they had before. So we keep watching the forecast coming out from at least the market research side and some of those don't seem to be in sync with what we’re reacting to our customers with.


Your next question comes from Matt Mishan - KeyBanc Capital Markets.

Matt Mishan - KeyBanc Capital Markets

I think KeyBanc is monopolizing all the questions here. Just a real quick one as far as cash. You had guided previously – you saw as production ramp, working capital would ramp a little bit and you see a modest decrease in cash, and instead I think in the fourth quarter we got an increase about $7 million or $8 million. What are your cash flow assumptions for 2010?

George Strickler

Well, I think still, Matt, we can manage to incremental about $0.12 per dollar of sale. So we will have to fund that level and primarily what we’re seeing already as we are making great strides in lean, that we’re able to balance our inventories and maintain or reduce them. But we will increase our receivables and our receivable days run in the range of 54 to 58 for the customers.

So we will see a build in that level and then inventories may pick up some. We were able to manage our payables very well in the fourth quarter as our demand started to pick up in September and October. So we’ll see the payables increased around $8 million to $9 million through the course of the whole fourth quarter from September to December.

I think we can hold that level for the rest of the year and then our challenge will be to continue to manage our receivable portfolio and work on inventory as we continue to take lean across a broader range of our operations.

Matt Mishan - KeyBanc Capital Markets

Any guidance you could pass, I know it’s extraordinarily volatile here, but any guidance you can give on the 2010 tax rate?

George Strickler

Well, I think that one is going to be a difficult one because it’s got to do with the mix and where the sale are coming from and I think what I tried to share with you is, we'll end up accruing a sort of a federal tax rate out of our Europe operations and clearly PST.

We accrue U.S income tax on that at 35%, but as you know that all the U.S income will be shielded and so if you sort of get a rough estimate of that, that’s about how the taxes will flow.


Your next question comes from Gary Moorman [ph] - Alpine Associates.

Gary Moorman - Alpine Associates

I know you mentioned operating cash flow for the fourth quarter, but I missed that. Could you just repeat that?

George Strickler

It was a positive $15.3 million

Gary Moorman - Alpine Associates

Have you guys, with the 11.5% notes, the call price dropping this year.

George Strickler


Gary Moorman - Alpine Associates

In May, drops down to par, have you guys given any thought or have you been pursuing the possibility of refinancing that debt?

George Strickler

We have been actively looking at the capital markets for probably six months now. And as you know, the capital markets have been improving. The rates haven't quite come back in the level that we're satisfied with and we're not under any real needs that we have to refinance. So once we find the opportunity we will continue to pursue that as a benefit for the company and we will continue to look at it.

Gary Moorman - Alpine Associates

Can you give me an idea of what kind of coupon you guys would need to refinance it? I mean I assume obviously lower than 11.5.

George Strickler

Well when John and I trying to refinance in '07 before the markets really corrected themselves, we thought we can get it done around 8%. So I think if we could get a rate somewhere there versus with the 11.5% today that we felt was beneficial that we would go after that.

John Corey

I think the other thing for us is we're also -- again we're going to -- we try to look out to the future and say what are the things that we are prepared for? And one of them is, if we have to refinance debt at this rate, well, we refinance a lower level of debt. So we're looking at both sides.


There are no further questions at this time. I will now turn the call back over to management for closing remarks.

John Corey

Good. I'd like to thank you all for joining us. 2009, as I said, it really was a very difficult year. But if you look what happened in the industry, I mean you look at the number of suppliers who disappointed their shareholders by going in and filing and the number of suppliers who disappointed their bond holders by having that same thing happen, so they didn’t – quickly as we said, we followed a plan, it may be rather boring, but it’s rather consistent.

We are going to improve the operations, improve the financial structure and then go after the marketing side. That’s what our plan has been and we were well on track for that in 2008 until the markets did turn. Then we shifted quickly to again reemphasize as we talked about our financial portfolio to make sure we strengthen that, and that’s what we’ve done.

We are now well positioned as these markets come back, not only with the funds to invest in the markets, but the operational profile to be able to grow in these markets.

So as we see these business improve, as we see these markets improve, we are going to see our performance continue to go up with that and that’s really a testament to the work that’s been done, but it’s not exciting, it’s just plain basic. This is how we are going to run our business and we are going to adjust to both risk and opportunities as we see those things come up.

And I think you’ll see things in 2009 like the wiring award and the shift-by-wire when we get that, those were opportunities that came up in front us and we had not only the management strength to take care of them, but also the financial strength.

So, we are looking forward to 2010 and even 2011, because as everything happens, these things will turn around and improve, and we think we have positioned ourselves for those.

So, thanks again for joining us on the call.


Thank you for your participation in today’s conference call. This concludes the presentation, you may now disconnect. Good day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


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