Viasystems Group Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 7.14 | About: Viasystems Group, (VIAS)

Viasystems Group (NASDAQ:VIAS)

Q4 2013 Earnings Call

February 07, 2014 11:00 am ET

Executives

Kelly E. Wetzler - Vice President of Corporate Development and Communications

David M. Sindelar - Chief Executive Officer, Director and Member of Executive Committee

Gerald G. Sax - Chief Financial Officer and Senior Vice President

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Jiwon Lee - Sidoti & Company, LLC

Robert Burleson - Canaccord Genuity, Research Division

Nick Farwell

Tony Venturino

Operator

Good day, ladies and gentlemen, and welcome to Viasystems Fourth Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce Kelly Wetzler. Ms. Wetzler, you may begin.

Kelly E. Wetzler

Thank you, Andrew. We'd like to welcome everyone to the Viasystems investor conference call for the fourth quarter of 2013. If you need a copy of today's earnings press release, you'll find it at viasystems.com. We've also prepared some slides, which you will find on our website. Our presenters today are Viasystems' Chief Executive Officer, Dave Sindelar; and our Chief Financial Officer, Jerry Sax.

In the course of our discussion, we are likely to make forward-looking statements. I wish to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provision of the Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Our actual results could differ materially from any forward-looking statements that we might make. The company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today's press release and the recent SEC filings for a more complete discussion of factors that could have an impact on the company's actual results.

Some of our discussion today will include non-GAAP measures, in particular, adjusted EBITDA and adjusted earnings per share. These non-GAAP measures are reconciled with our GAAP results in today's press release and in our slide presentation. Management believes these measures are useful for analytical purposes and to assist in comparing results over time and across companies. But I remind you that adjusted EBITDA and adjusted EPS exclude certain material items and are not a replacement for the reported results under generally accepted accounting principles.

I'll now turn the call over to our CEO, Dave Sindelar.

David M. Sindelar

Thanks, Kelly, and good morning to everybody. I'll begin by referring to Slide 4 of the presentation material. Our reported sales for the quarter were a little over $303 million or about 11% ahead of the fourth quarter last year. You may remember from our last call that even though we typically have a seasonal softness in the fourth quarter, we are looking to remain flat with the $309 million reported in the third quarter. But based on some year-end customer-specific softness in our Assembly segment, we finished about 2% down sequentially.

Overall, book-to-bill ratio in the fourth quarter was 0.96 to 1, resulting in a full year ratio of 1.02 to 1. I'll comment a little later about how we expect trends in each of the end markets to impact our next quarter.

Despite a slightly lower sales volume in the fourth quarter compared to the third quarter, an improved sales mix in the final quarter of 2013 complemented our continuing cost-reduction efforts resulting in a sequential 160 basis point improvement in our gross margin rate reported for the fourth quarter. Jerry will add some additional comments later about how this margin improvement favorably impacted our reported operating income, adjusted EBITDA and adjusted EPS. But I'll highlight now that our 12.5% adjusted EBITDA and our breakeven adjusted EPS are the best results we've seen since before the Chinese factory fire in September 2012.

Now moving on to Slide 5. I want to comment on what we're seeing in each of our end markets. The automotive end market held steady at 31% of our consolidated net sales for the quarter. Automotive billings for our PCB segment increased less than 1% sequentially, while automotive billings from our Assembly segment declined sequentially.

Overall, automotive end market's net sales declined sequentially by an amount that rounds to about 1%. However, our year-over-year sales growth in this end market was substantial, by just over 23% improvement. This year-over-year improvement was primarily related to last year's temporary loss in capacity and demand during our recovery from the 2012 fire in one of our Chinese factories and the 2012 force closure of a leased Chinese facility. The year-over-year increase was also partially a result of both PCB and Assembly demand growth from a relatively new customer that has now made its way into our top 15 consolidated customers globally.

Following the Chinese New Year holiday in our first quarter, I'm looking for a solid demand in this market in 2014. Our I&I end market fell to about 24% of net sales for the quarter. Despite continuing positive book-to-bill ratios over the past 4 quarters, we experienced a broad-based pushout of deliveries, resulting in a soft finish to the year for this end market and a sequential decline of 9%.

Year-over-year, the increased demand that we enjoyed in certain customers in each of our PCB and Assembly segment were partially offset by decreased demand in certain other customers. Beyond the typical seasonality at the end of the calendar year, I'm not seeing any trends here. The sequential and year-end changes largely appear to be driven by the end market trends of our customer's own business.

In our telecom sector, despite the unusual year-end softness, which resulted in a sequential decline of about 4%, I'm generally happy with the performance in this end market. This was a pretty strong market for us this year. We grew our telecom revenues 20% year-over-year in the fourth quarter, which drew our full year growth up to about 12% in 2013 over 2012.

The peaks and valley of the telecom sector continue to be driven by the global competitive bidding on equipment and installation projects, and I think we have been partnering with the right customers and have won more than our fair share of those projects in the past year or so. While it's difficult to expect growth to sustain at this pace, I hope to see the telecom business to sustain the average quarterly levels we have seen over the past year.

Computer and datacom sector sales continue to rebound; we saw during the third quarter, improving by approximately 8% sequentially and approximately 5% year-over-year. Sales to customers in this end market improved to about 17% of our total net sales for the quarter. Our success with some new customers and new customer projects, together with the rebound of demand of certain other customers, has recently more than offset the reduced end market demand of some -- of one other specific customer.

Our mil/aero market business again held steady at about 10% of our consolidated net sales. A slight sequential increase of about 1% didn't quite get us back to last year's fourth quarter sales run rate. A continued lack of customer commitments stemming, we believe, from the U.S. government budget issues still has had an adverse effect on our billing levels. And it feels like price competition is growing for the demand that is available, so I'd look for this to be a tough market throughout 2014.

Moving on to Slide 6, I'll share a couple of comments about what we are expecting from the coming quarter. The first quarter of every year is the hardest to predict because of all the uncertainties surrounding the Chinese New Year holiday. We always expect some downward pressure on sales and margins due simply to the reduced working days. But with each passing year, it is becoming more difficult to predict whether or not our full complimented trained employees will return from the Chinese New Year holidays in China.

With all that said, I'm certainly more optimistic about our first quarter than I was last year. Our factory profile is much more stable following the relocations and the fire recoveries that defined us in 2013. I'm hopeful that the momentum we have achieved on margin improvement will be sustained into the new year. At this point, I'm expecting continued increase in employment cost in China, but we should not see too much change until the second quarter.

Unfortunately, demand visibility remains limited, but we continue to pay close attention to what we're hearing from our customers and suppliers in order to set our own expectations.

With that, let me turn it over to Jerry to discuss the rest of the financial results.

Gerald G. Sax

Thanks, Dave, and good morning. As usual, this morning's press release included our summary unaudited financial results for the quarter, and those results are also included in the online presentation materials that were posted for today's call.

We're in the final stages of our annual financial statement audit, and you should be able to access our full 10-K filing by the end of next week.

Slide 7 shows our summary income statement for the fourth quarter, compared sequentially to the third quarter of 2013 and also compared year-over-year to the final quarter of 2012.

Dave already talked about our fourth quarter net sales of $303 million and our 19.5% gross margin, so let me begin by talking about our $22.6 million SG&A expense line.

Excluding $1 million of noncash stock compensation expense, which is included in the reported SG&A, our fourth quarter cash SG&A costs were the lowest of the year at $21.6 million. As we ended the year, we adjusted down our incentive compensation expenses on both a cash and noncash basis to reflect the actual levels earned in the year compared to estimates provided in earlier periods.

With the new calendar year comes a reset of our incentive compensation targets, so I expect a sequential increase of SG&A cost in our first quarter of 2014, and my expectations for total quarterly cash SG&A cost is now in the range of $25 million to $26 million throughout the coming year.

When we talked at this time last year, I noted that we expected the cash SG&A costs to be in the range of $26 million to $27 million per quarter, so that indirectly suggests that we've achieved some permanent cost reductions versus this same time last year.

You could see depreciation and amortization expenses in the quarter, were again in line with historical trends. And as I noted on our last quarterly call, I expected only minor fourth quarter restructuring costs related primarily to the conclusion of our exit from the former leased Anaheim factory.

As I look ahead into 2014, I'm not modeling any new restructuring costs, although I believe there may be some minor residual expenses related to the Anaheim move as the lease actually extended a couple of months into 2014.

Our reduced SG&A costs, together with the 160 basis point improvement in gross margin that Dave highlighted, resulted in $11.7 million of operating income for the fourth quarter, which is the highest quarterly level we've seen in the past 2 years. The $11.7 million of operating income in the quarter also reconciles to $37.9 million of adjusted EBITDA that Dave highlighted earlier.

As demonstrated in a separate table at the back of the presentation materials and this morning's press release, the nature and amount of reconciling items are consistent, both sequentially and year-over-year.

Moving farther down the income statement to our nonoperating income and expense lines for the quarter. You'll note that interest and amortization lines are consistent both sequentially and year-over-year based on only minor changes in our debt structure during that time. However, you'll note a rather significant change in the line item labeled "Other, net." The majority of the change was caused by a noncash reversal of a contingency reserve in the amount of about $9 million. If you look at our adjusted EPS reconciliation for the period, you'll see that we've eliminated the favorable effect of this noncash item, both because it's nonrecurring and because it is not related to our current operations.

Our income tax expense of $3.5 million in the fourth quarter continues to relate primarily to our operations in China. Looking forward, our quarterly provision for income taxes should remain in the range of $3 million to $4 million.

Primary and diluted earnings per share were $0.24 and $0.23, respectively, for the fourth quarter. A supplementary table that I mentioned earlier reconciles our reported EPS on a GAAP basis to our adjusted EPS that rounds to 0, which Dave highlighted earlier. Again, except for the noncash contingency reserve reversal in the fourth quarter, the nature and amounts of reconciling items are consistent sequentially and year-over-year.

Slide 8 reflects our year-end balance sheets for both 2013 and 2012. You'll note that the increased level of sales has expectedly resulted in higher levels of working capital. Except for the favorable effects of negotiated extensions of some of our payment terms with suppliers, our working capital metrics, like DSO and inventory turns, have remained consistent with our normal levels. So the increased working capital is in line with our expectations.

Moving on to our summary cash flow statement on Slide 9. In the year ended 2013, we generated $89.9 million of cash from operating results, of which, $35.6 million was generated in the final quarter. Cash spent on CapEx was about $43 million in the fourth quarter 2013, resulting in full year 2013 total CapEx of $108.5 million.

In the final quarter, $13 million related to recurring or maintenance projects and the remaining $30 million of CapEx related to special projects such as capacity additions, factory relocations, safety enhancements and the replacement of fire damaged equipment.

Net debt repayments totaled $2.2 million during 2013. As a final recap of our debt activity for the year, $895,000 of the total repayments relates to the final maturity of convertible bonds that we acquired with the Merix merger way back in 2010. And the balance relates to payments on mortgages on some of the acquired DDi sites, including an approximate $300,000 optional prepayment on one of our highest-rate U.S. mortgages.

The $187,000 that you see identified as financing and other fees relates to the December amendment of our domestic credit facility, which extended the maturity of that facility through the end of 2018, among other enhancements that were made to the facility. The net result of all of that was a use of just over $20 million of cash during 2013.

2013's ending cash balance of $55 million, when combined with our available credit facilities in the U.S. and China, resulted in overall liquidity at the end of the year remaining solid at $160 million.

That concludes my prepared remarks. I'll turn it back over to Dave at this point.

David M. Sindelar

Great. Thanks, Jerry. At this juncture, we'll open it for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Matt Sheerin.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

So first, Dave, on your outlook, it sounded like you wanted to -- sound a little bit more optimistic and obviously, as you said, visibility in the last 3 or 4 years going into the first quarter has been all over the place. But typically -- I mean, you're down in the low- to mid-single digits really just based on those fewer selling days and with the Chinese New Year. Is that still kind of what you're looking at, which is going to shake out to kind of mid-single-digit year-over-year growth?

David M. Sindelar

Yes, I think that's right. We -- as we talked about our book-to-bill in the fourth quarter, it dropped down a little bit, and that's not unusual, but as you can appreciate the fact that most of our products have anywhere from 6- to 8-week kind of lead time. What happens in December pretty much reflects what's going to happen in January. And then as you get into January, February, March, you have the Chinese New Year piece of it. So we kind of look at what happened in December and what's happening in the first part of this year. And I think the kind of feel right now is that we're going to be kind of in the $300 million range on revenue.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's helpful. And on the gross margin, I mean, you've obviously had some positive levers with the -- the factory is coming back. It sounds like mix helped you a little bit as well. And so are we still expecting gross margin to be down a little bit just on the lower volumes?

David M. Sindelar

Yes, I think it will be down just a little bit. And again, it's primarily the result of, as you look at the Chinese New Year and such a big portion of our production is in China, and the actual holidays are about 4 days, but because of travel cost and time to get back and forth, it really kind of takes a full week out of the first quarter when people start leaving and when you have to start shutting down factories and starting them back up. So that will have a little bit of a downward push.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And in the automotive segment, you've obviously rebounded fairly nicely in the last couple of quarters, given your utilization rates are back. You're still about $10 million, $15 million below on a quarterly level, your peak level on a couple years ago. Are you confident that you got the capacity and the ability to win those customers back? I mean, are you still looking to grow into that kind of number?

David M. Sindelar

Yes. And part of this issue that we struggled with is, as you might imagine, is that if you go back to 2012, and not to rehash a bunch of unpleasant experiences, we had the shutdown of our HZ facility, and then we had the fire, both of those had automotive customers in the facilities. When we put some capacity on, we weren't expecting, obviously, to lose the Guangzhou capacity because of the fire. So we had enough capacity, but we had a shift once the Guangzhou fire -- we had to kind of consume some of that capacity from Guangzhou to make existing customers happy, and we continue to put in an incremental capacity. In 2013, we approved another incremental capacity, which should be coming up kind of full-fledged here some time between now and the mid-second quarter. So once that comes on, we should have the ability to kind of go back to the historical levels and bring those customers back.

Operator

The next question is from the line of Jiwon Lee from Sidoti & Company.

Jiwon Lee - Sidoti & Company, LLC

Just wanted to circle back on your revenue outlook. I believe you mentioned some project wins on the I&I front. And given your sort of kind of those slow start, understandably, with the Chinese Year and all these things, how do you expect that ramp moving forward?

David M. Sindelar

Yes, I think -- and I apologize if I have misspoke. I think the project wins are really more on the telecom side and on the automotive side. And on the automotive side, we've been ramping that customer, and it was both on the PCB and the Assembly side over the last -- I mean, it's been a customer now for probably about 3 or 4 years, and their production just really kind of caught fire in 2013, and we expect to continue to grow throughout 2014. And then on the telecom side, I attribute it to more the carrier's willingness to invest in, in some of the equipment that's needed. So we saw some of the LTE and 4G kind of installations throughout the world, and we're starting to hear and see some of that continuing through the first half of this year. Now on the I&I front, we do -- we have been out getting some new projects with existing customers, and they started to ramp, but they're not -- I think they're going to ramp kind of slowly through this year and be more towards the second half front or the first half of '15 than anything else.

Jiwon Lee - Sidoti & Company, LLC

I may have [indiscernible], but thanks for the clarification.

David M. Sindelar

Yes. Yes, no problem.

Jiwon Lee - Sidoti & Company, LLC

And let's see if I could ask one question about the margin, especially on the product side, if the revenue kind of sustains the way you hope it does, is there any goal for 2014?

Gerald G. Sax

This is Jerry. And ideally, I'd like to get to a run rate by the end of the year that is north of 20, if it's 20-point-something or 21-point-something, I'd think that we had a lot of success with the continued headwinds that Dave talked about in areas like mil/aero and just kind of the choppy nature of business. And I think everybody is still afraid to be overly optimistic, and therefore, we are not making big moves, but we continue to look for little improvement quarter-on-quarter.

Jiwon Lee - Sidoti & Company, LLC

Terrific. And lastly, is there any kind of a CapEx goal or budgets for this year that you can talk about?

Gerald G. Sax

I think we've talked in the past that our CapEx, regardless of what we set out at the beginning of the year, we kind of manage it on what's happening with the operations. So we pull the strings to back it off or we let open the floodgates to increase it depending on where we see the trends. I still think of our recurring or maintenance CapEx, and I've been trying to call that out separately in each of the quarterly conference calls. I still think of that in the $40 million, $50 million, $60 million range. And then on top of that, we look at opportunities for technology investments or -- in recent months, safety investments and in things that -- lessons learned from our fire and other issues have got our factories very focused on those things, but also capacity expansion, which was the majority of what you saw in the fourth quarter of 2013. If I had to put a number on paper right now, that would be approximately the same $100 million that we've spent in the last couple of years, with the understanding that we'll tick that up or down based on what we see happening in the business.

David M. Sindelar

And I think one of the things that -- we haven't disclosed the specific amount, but as you can imagine, at the end of '12 and beginning of '13, the way the accounting rules go is that even though you have insurance to cover it, when you spend it, you record it as if it was either an expense or a CapEx. And then when the insurance proceeds come in, that's when you kind of adjust for whatever the insurance proceeds pay. So 2013 does have a fair amount of CapEx to get the plant back up and running and to where we need it. And it also had, in the early quarters, costs associated with the plant being shut down and some other extraordinary costs. So to a certain extent, the projects that we had planned in 2013, some of which got pushed out just because of capital, because of manpower and making sure that we effectively executed bringing Guangzhou back up and didn't get too overloaded with projects.

Operator

The next question comes from the line of Bobby Burleson from Canaccord.

Robert Burleson - Canaccord Genuity, Research Division

So I just had a couple of questions. One of them is just on the pushouts that you've seen in I&I. Is there any additional color as to why that's happening, and how diversified is that particular vertical for you versus some of your other verticals?

David M. Sindelar

Yes. The I&I market is primarily -- of all the markets we have, I&I is the one that is more E-M Solutions-focused than any other. And so it's really kind of more kind of the end market, and we're dealing directly with a lot of the OEMs as opposed to sending it to Printed Circuit Board assemblers or things of that nature. And as we go through our I&I accounts, it wasn't just one account, it was a lot of accounts. And what we're seeing is, in that sector, a lot more spiky nature of order placement and pushouts. And as crazy as it sounds, we've seen 1-month orders get canceled the next month they come in. So it's really kind of hard to say whether or not this is a trend or not. But it was pretty much across the whole I&I sector, everybody just kind of took a pause. And whether that was, they were a little more aggressive on their projections, and then they came down at the end of the year and they pulled back because they didn't want it in inventory. We really haven't got a real good feel for it quite yet.

Robert Burleson - Canaccord Genuity, Research Division

Okay. And then just in terms of the wage inflation, it sounds like you alluded to in Q2 that you expect...

David M. Sindelar

Yes, in China, the government comes out some time towards the middle to the end of the first quarter with their minimum wage increases. And so they usually announce them somewhere between February 1 and March 1 or somewhere around there, and then they're effective in various parts of the timing in the second quarter. And that in and of itself is not necessarily concerning. But what is concerning is, is that historically, that has had a kind of -- as opposed to a tumbledown, it's had a tumble-up effect. And so all the other workers that aren't working for minimum wage kind of have their expectations that the minimum wage increase will have some positive effect on their earnings number. And historically, that number was kind of in the 8% to 12% range. The last couple of years, it's been kind of in the 15% to 20% range. So that's the bad news. The good news is labor continues to be a small portion, but it doesn't take long to have too many 15% to 20% increases until labor starts becoming a bigger and bigger issue.

Robert Burleson - Canaccord Genuity, Research Division

I assume that there is no -- we've heard from other Printed Circuit Board guys with lots of exposure in China, to having a decent amount of their capacity there. We've heard that the wage inflations abated a little bit. Is there any read that you guys have on whether or not it stays at that kind of 15 plus percent level or kind of files back towards 10%?

David M. Sindelar

Yes, and not to get into China and education of China labor, but there's a lot of things going on in China over the last 18 to 24 months. You have the normal wage increases, and then you have some of the statutory benefits, the housing fund, the health funds and all the different various funds they had. So you've not only seen increases in wage numbers, but you've seen increases in better implementation of collecting those type of social fees. So that's 1 and #2. And #3, probably about 12 to 18 months ago, a lot of the OEMs came out and said they want to have all their suppliers comply with overtime laws. And oddly enough, an employee in the United States can work more overtime hours than someone in China. The reality is people in United States tend not to work nearly as much and in China, the employee actually wants the over time. So it's a bit of a crazy thing. So what's happened over the last 12 to 18 months as you've not only seen labor wage inflation, social cost inflation, but you've seen some rise in labor cost because an employee who wanted to work 120 hours overtime, a month, now has to be limited to, what is it?

Gerald G. Sax

36.

David M. Sindelar

36 hours. And then as a result, they are looking to -- they want to make the same amount of money, and when they can't, they start job hopping, and so it's a little bit of inflation creep as a result of that to keep your skilled workforce in place. So all of that has been somewhat abated except for the minimum wage. So I think, without going into all the details, I think the answer is yes, but when I tell you that the minimum wage is up 18%, you're going to say, well, that's not abated. Well, If you look at it in the total, it is, but if you look at it individually, it's not.

Robert Burleson - Canaccord Genuity, Research Division

So it sounds like just one of the components of inflation is still in play, and so overall, it's gotten better.

David M. Sindelar

Yes.

Robert Burleson - Canaccord Genuity, Research Division

And then just, one more follow-up on the I&I. Was there, I mean, in terms of how you looked at Q1, is there an opportunity -- you mentioned that some of the stuff that gets pushed out one month could come in, in terms of turns orders or rush orders in the following quarters. Is that on the table still for this quarter?

David M. Sindelar

Yes, yes. It is. And we're obviously working and trying to figure out with our customers, trying to figure out is it inventory or is it market and where can we push and help get the information or get the sale on.

Operator

The next question comes from the line of Nick Farwell from Arbor Group

Nick Farwell

David, could you comment a little bit about capacity utilization? I realize, there's some seasonality here in the first quarter, but in general capacity utilization in China versus North America?

David M. Sindelar

Yes, the -- I'll start with China. And as I mentioned, we have some more capacity on the automotive side. And so we got 3 plants, we got Zhongshan, Guangzhou and HY. Zhongshan typically runs at or near capacity, and that's the reason why we need these other incremental capacity to come on in the second quarter. So it's running. For Guangzhou, is a bit of a different animal, in that, we've probably talked about this in the past about Printed Circuit Board customers is that even though a customer was approved at Guangzhou, when we go in and how to replacement equipment and upgrade equipment, even though the equipment is a newer brand, better and everything else, the customer still has to come back and go through the approval process. And so we kind of been going through that throughout 2013. But the utilization at Guangzhou, if you break it down into 2 pieces, kind of the higher layer, kind of a lower layer account, the lower layer account is probably in the 50%, 60% utilized, and then on the high end side, it's probably, it's about 80%, 75%, 80%. So there's some room to expand there. On the HZ facility, it's kind of bounces around between kind of that. We've had -- it was throughout 2013. It has a bigger computer focus, computer was down the first part of the year. It's coming back. So it's looking like it's going to be kind of 90 plus percent utilized. Now, if you come to North America, our Toronto facility is blowing and going. Our Anaheim facility with the new plant, we put in place, it's getting new customers in and improving it, and it's being utilized fairly effectively. San Jose is pretty high. The kind of the areas of capacity with the Forest Grove, Milpitas and Sterling. And those are really where were looking to kind of increase demand and increase our sales. So -- but, I would say across-the-board, in North America, and again it's always hard to take 9 plants and come to a number. But, I would say they were probably 80% utilized.

Nick Farwell

And - but your comment, what it sounds like is the balance. It's still somewhat imbalanced.

David M. Sindelar

Yes, absolutely, absolutely. Rounded up.

Nick Farwell

Because I -- it was my recollection that both the old Merix facility Forest Grove and some of the 2 or 3 of the facilities from DDi were trouble to begin with and it's been quite some time to get those back into a profitable mode. Is that a fair observation?

David M. Sindelar

Yes. Each one of the ones that aren't fully utilized has its own unique kind of situations. For example, Forest Grove, it's kind of had its peaks and valleys, and to a certain extent, its charter is as much to blame for its ups and downs than the market. So, Forest Grove and HY are set up to be kind of the transfer plants. We bring customers in, we develop it, we get it to medium volume, and when it goes to high volume, we sub it over to HY. When you have a North American market that's essentially flat for the last 2 years, and you continually transfer customers over, that means your programs are working, but you got to work twice as hard to kind of continue to back fill. So -- and then on the Milpitas side, we have been working a couple of things, and it was -- it had its own unique issues as part of DDi and part of us, and we continue to fight those. But probably, I would say that the biggest challenge, we have in North America right now are kind of Milpitas and Forest Grove for different, I think, different reasons.

Nick Farwell

I'm sorry, but, I forgotten. At the end of the year, do you break down, breakout the operating profit by China versus North America, in the 10-Q?

David M. Sindelar

No, we haven't.

Gerald G. Sax

In the 10-Q. No, we don't. And it is primarily because our sales force and our customer base are not lined with where we manufacture. So, kind of' it's difficult to attribute profitability of a North American customer with Chinese manufacturing to a geographic region.

Nick Farwell

Right. So if you were too, I would imagine, you do internally, can you give us some sense of the relative profitability of say look at '13 China versus North America? If you could, which I assume you do, fully allocate in some fashion to the best of your ability -- estimate cost?

Gerald G. Sax

The gross margins, when you just break it all down the gross margins in -- from our North American factories and from our Asian factories are not terribly different. So you obviously got a much higher cost base in the U.S., but the selling price for different parts is considerably higher in North America, and there's not a wide disparity in the margins coming out of any of our factories -- if that helps.

David M. Sindelar

Right.

Nick Farwell

Is that true also of cash flow if you were to cash flow to facilities, China as gross part of the 3 plants versus the 9 plants in North America?

Gerald G. Sax

Not to get too difficult, but all of our Chinese factories sell to our U.S. distribution [indiscernible] first. So we kind of take the cream off the top in the U.S. or our cash flow in the customer cash flow all comes into the U.S. and then we pay it back to China. Obviously, after you get the cash there, the bigger user of CapEx is going to be in China, because they are much bigger factories. But, there are also the bigger sales and dollar margin generators as well. So it's...

Nick Farwell

If you look at, maybe another way to ask, if you looked at your effective taxes, that is cash paid taxes. You commented that, I think a portion of that at least in the fourth quarter in the past years has been China.

Gerald G. Sax

All of it. All of it, China. We don't pay taxes in U.S. at all. I've got $1 billion NOLs.

Nick Farwell

I understand. But, I just want to clarify that. So really what's driving your tax rate is your China "profitability?"

Gerald G. Sax

Yes.

Nick Farwell

Yes, okay. And then you mentioned or David mentioned, I believe, the startup of a major new program, were you suggesting that was in the automotive sector? I'm sorry, I couldn't quite understand that.

David M. Sindelar

Yes, I think what -- I think what it was, we've been working with the company on the automotive side for probably about 3 years, 4 years now. And in 2013, is when it really kind of started to ramp and we expect to continue throughout '14. We try not to use company names, but there probably aren't too many new automotive startups in the world on the West Coast of the United States.

Nick Farwell

Right. So, in that particular case, is there a -- can you provide us some perspective or profile on the competitive nature of that particular RFP [ph] And ultimately and order that would give us some sense of sort of your competitive success?

David M. Sindelar

As I understand it right now, I don't want to think for a second that it's not a competitive situation, because there's nothing in this market, that's not competitive, especially at the moment. But, I believe we have a major share of the Printed Circuit Board side and a major share of the kind of the E-M Solutions product we sell.

Nick Farwell

And the last question. Based on your forecast into the, recognizing it's volatile at best, but, would you just generally, would you expect cash flow this year given your relative guidance of $100 million capital spending? Would you expect cash flow to be break even, slightly positive, maybe really burn a little money like the $20 million this year end'13?

David M. Sindelar

Yes, and to kind of go back to discussion about capital and what we did in 2013 versus our original plan. So I would have a year ago, would've told you that we would have been positive cash flow this year. But as a result of the fire and the capital needed to get that plant up and running, we had a kind of snow plow, a little bit of the capital that we had in 2013 into 2014. So as a result, I think, we're probably looking to be kind of right -- kind of cash neutral.

Operator

Our next question comes from the line of Tony Venturino with Federated Investors.

Tony Venturino

A lot of questions have been answered. But I just kind of wanted to drill down maybe on cash. $55 million this quarter, is one of the lowest balances you had in a while. Could you just remind me again, kind of, what your minimum level is for operations?

Gerald G. Sax

We've never really tested it particularly since as we've gone through the acquisitions in the last couple of years. This is the lowest point, we've been. So I don't have a firm answer from what it is. It feels like $40 million keeps me liquid everywhere and not having to jump through hoops to transfer cash from entity-to-entity, and particularly across the Chinese border. I suspect that I could live with something less than that, but $40 million feels like my low level.

Tony Venturino

Okay. And then just following up on that, could you break the current cash balance down by geography?

Gerald G. Sax

I usually have about half of my cash in China and half outside of China. And I don't break it down any further than that because outside of China, it's easy to move around within a day with the safe rules in China, the banking system there. I have to ask permission to move it around even inside the country. So I have my U.S. revolving credit facility and my China revolving credit facilities. I have my China cash and my outside of China cash. And it's about half and half on the cash side.

Tony Venturino

And then talking about working capital, I believe Q1 is typically a use of working capital. Is that correct?

Gerald G. Sax

I think of Q1 as a provider of working capital mostly because when sales come down and we usually have a little bit of a dip in the first quarter because of the Chinese New Year, I typically see sales down means cash comes in the door. Sales go up, cash goes out the door. In this case, as I mentioned in my commentary, I negotiated a little bit of accounts payable extension at the end of the year so that, that could be -- I'll have to pay that in the first quarter. That could be a little bit of a use. But honestly, I don't see it as a big change in the coming quarter.

Tony Venturino

Okay. Okay. And then couple of other kind of clean up questions. Dave, you talked about Chinese New Year and not being sure if people will return to work. Could you maybe clarify that a little bit?

David M. Sindelar

Yes, yes. If you go past historically, just where most of the industrial basis in China and I call it kind of the Gold Coast, the banana belt, it runs from Beijing down to Hong Kong, MaCau and it goes in about 100 to 150 miles. That's where most of the industrial production, historically, has been. Over the last 2 or 3 years, the Chinese government continues to try to develop jobs, the economy, in what I call the interlands. And so Chinese -- so, most of our workers were kind of migrant workers and so they come in, they live in the dorm, and they work for 3 or 4 years and they save a bunch of money and then they go home. And Chinese New Year's tends to be the time where the Chinese people go back and kind of contemplate what's going to happen over the next year and they decide whether they're going to come back or they've got enough money or there's an opportunity so they can stay with their families. 2012 and '13 were very difficult time where we saw a large number of people not returning, kind of in the 15% to 20% of our workforce. And so what we saw was for 30 to 45 days after that, we had to hire a bunch of people and go through the training process and the inefficiencies related to that. Right now, we don't believe that that's going to be the same, but it's always -- when you got hit with it the last 2 years, it's always a risk and a concern.

Tony Venturino

And where did they -- where did you find the replacements?

David M. Sindelar

You have employee companies, agencies and things of that nature that it's kind of normal things that you go through. Historically, we see anywhere from 5% to 7% attrition every month in the Asian factories. So it's something that you deal with on a normal basis, except when you have a situation where 20% don't come back. And that was also, as I mentioned, the overtime hours, and those were things we were dealing with, 12, 18 months ago. And now that kind of compounded the Chinese New Year issue because sometimes employees would come back and they go to work on the street because somebody was offering a 20% increase in their wages to make up for the lack of overtime hours. So we think, we've got that -- we think we got those things taken care of and incentives in place where people will come back, but we just need to make sure that it doesn't happen again and if it does, they we're ready to attack it.

Tony Venturino

Okay, yes, that's my concern, is that you're going and replacing 15% to 20%, you're probably going to have to pay up to get those people to start with you.

David M. Sindelar

Yes, and again, I think that when you had the minimum wage, the social benefit cost, plus the pressure on overtime hours, and all those things were kind of the confluence at basically the same time, what you don't want to do is just lead with your chin, and say, okay, I'm going to give you 40% increase. You want to say, I'm going to give you a minimum wage. Okay, and we're going to do the social cost and now want to see effect of the overtime hours and I think that, that's all kind of balanced out over the last 12 months. So I think we're in a better position than we were, like I said, 12 or 18 months ago.

Tony Venturino

Okay. And then last question. Just, could you give me an update on your flexible board business? How much is -- of your revenue is for flexible board?

David M. Sindelar

I'm not sure, we've ever disclosed it. It is a fairly small piece. It's a good quality market for us. But it is relatively insignificant to the total.

Tony Venturino

And how do you think about that going forward? I mean is that -- hearing a lot that, that's kind of a growth area for some competitors? I mean is that something you would want to expand?

David M. Sindelar

I think we want to expand. I think the difference in our business versus most of the things that you hear about the flex business, the flex business is, I believe, where it's kind of blowing and going and it's a big huge market. It's kind of in the cellphones in the tablets and things of that nature, which we really don't play in. Ours are more industrial kind of applications that are very unique and very kind of highly engineered kind of products. So it's a little bit a different thing than the normal flex market that most people are familiar with.

Operator

Our next question comes from the line of Owen Douglas from Robert W. Baird.

Unknown Analyst

Just a quick one. Think about the CapEx number. I think you mentioned earlier that you think of that number being about $100 million in 2014 with somewhere in the neighborhood of $50 million, $60 million of that being on the maintenance recurring level. Is that correct?

Gerald G. Sax

Yes.

Unknown Analyst

Okay. For this year, I think in the press release, it said that about $60 million of that CapEx spend was related to sort of capacity expansion, facility -- your replacement facilities and other special projects. Can you help me sort of breakdown the number a little bit just to try to understand how much of that is related to getting that plant in China back up, the Anaheim facility versus sort of other actual expansions.

Gerald G. Sax

We have not disclosed further breakdown of that, and I think until I get my insurance claims settled, I'm not interested in putting out anything publicly because I don't want to impact my insurance claim in any way.

Unknown Analyst

Okay. Understood. So in terms of thinking about at least the Anaheim facility, can you give an update on where that stands in that relocation?

David M. Sindelar

Yes, the relocation is a pretty much -- it is not pretty much, it is complete. It is, we had -- it was probably in the -- was it the third or fourth quarter? Fourth quarter? We had kind of the grand opening and brought through a large number of customers. And I think we probably had 100 to 150 customers visits. It is up and running, and I think it's probably one of the, hopefully, the best, but at least one of the best Printed Circuit Board facilities of the United States today.

Gerald G. Sax

But there are no operating activities left in the old site. But I think I mentioned in my comments that our lease runs into February, and that was just to allow us to kind of, empty out the final equipment and stuff that didn't move and put it back into the landlord's desired condition.

Unknown Analyst

Okay. So as I look at that, in terms of the heightened expenses related to that, to that relocation, I shouldn't expect to see any of that coming so going on a go-forward basis, right?

Gerald G. Sax

That's correct.

Unknown Analyst

And looking at the SG&A line, and you guys managed to cut out a decent chunk out of it sequentially as well when I look in the year-over-year. Can you sort of help me bridge that, understand what were the drivers of that decline?

Gerald G. Sax

Yes, I think I mentioned in my comments that sequentially, the biggest change was, unfortunately, incentive compensation. As we finished the year, the targets that had been set for the year were finally none and we adjusted down to that level. Year-over-year, we are down obviously a pretty substantial amount as well, and a lot of that is kind of further integration of the 2 businesses, finding where there had been some overlap, belt tightening throughout and just a very -- because of the pressures on our gross margin, we've been very stingy on our SG&A spend. And it's an area that there's always opportunity to decrease further. But I think we did a very good job in spend control. And therefore, we expect less in 2014 than I did at this time for 2013.

Unknown Analyst

Okay. Okay. That's good to know. So just I think circling back to the CapEx number, right now, I think in the trailing basis, the CapEx is about $108 million. Looking at your D&A line, the D&A has been sort of about $95 million of things of run rate we're looking at similar numbers, $95 million to $100 million there. So I'm trying to better understand that maintenance sustaining number, how it can be that much lower. I presume that this is more about the sort of timing question, right? So you can make about $40 million to $60 million of being maintenance of during the year but the rest maybe some of that could be sort of moved around if you don't spend it this year, it would need to be spent the subsequent year or am I thinking about this incorrectly?

Gerald G. Sax

No, I think that's the way to think about it. When I talked about recurring our maintenance, it's keeping the lights on and sustaining the level of the business that we have. You're not investing in capacity expansion or new technologies. You're just kind of treading water. And so all of the other stuff is elective based on the opportunities we see for the business and the trends for technology and, frankly, the trends for the environmental and other laws changing in China, for example.

Operator

[Operator Instructions] And I am showing no further questions at this time. I would now like to take the call back over to David Sindelar.

David M. Sindelar

Great. Just want to thank everybody for their time and questions and, we look forward to talking to you at the next quarter call. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This now conclude the program, and you may all disconnect. Everyone, have a great day.

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