Stoneridge, Inc. Q1 2010 Earnings Call Transcript

Apr.30.10 | About: Stoneridge, Inc. (SRI)

Stoneridge, Inc. (NYSE:SRI)

Q1 2010 Earnings Call Transcript

April 30, 2010 2:30 pm ET

Executives

Ken Kure – Corporate Treasurer and Director of Corporate Finance

John Corey – President and CEO

George Strickler – EVP, CFO and Treasurer

Analysts

Matthew Mishan – KeyBanc

Keith Schicker – Robert W. Baird

Stephen DeNichilo – ACK Asset

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Stoneridge earnings conference call. My name is Twanda and I will be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of today’s conference. (Operator instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn presentation over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. You may proceed, sir.

Ken Kure

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our first quarter earnings release. The release is in file with the SEC and has been posted at our website at www.stoneridge.com.

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 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’ll also 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 strategy 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 to questions. With that, I will turn the call over to John.

John Corey

Thank you. Good afternoon. In February when we reported our fourth quarter and 2009 year-end results, I reviewed our trend of improved operating and financial performance, which started in the third quarter of 2009. As stated then, and affirmed now, we have adjusted our cost structure to operate at a lower level and to leverage volume increases as the market rebounds.

I am pleased to report that our first quarter results continued the positive trend started in the third quarter of last year. First quarter sales of $148 million support our sales guidance for 2010 of between $590 million and $600 million, a projected increase of 25% for the year.

Gross margin was 22.7% in the quarter at the low end of our targeted range of 23% to 25%. We achieved operating income of $4 million and our marginal contribution was nearly $0.53 of sales at the gross margin line. We recorded a net income of $1.5 million and a positive EPS of $0.06 a share, our first positive EPS since the second quarter of 2008.

Even as we maintain our liquidity and reduced our cost we did not lose sight of our growth objectives. In the first quarter we booked $32 million in new business wins, which further diversify our customer base and address the growing emerging markets. Our net new business wins now stand at $140 million over the next three years and $206 million in the next five, excluding the impact of the BCS acquisition.

Since the third quarter of 2009 we have continued the trend of positive operating income and have recorded an improvement in the first quarter of 2010 over the prior two quarters. This performance reflects the cost improvements implemented across the company and the volume increases we are experiencing.

Cash at the end of the first quarter was $80 million, down from $91.9 million at the end of 2009. The liquidity use was primarily driven by higher accounts receivable, which resulted from higher sales. We believe we are well positioned to advantage of the market turnaround. Our objectives are to maintain our growth while managing our cost structure to continue the volume leveraged financial improvement on the business as volumes do improve.

Last year we booked new business of $134 million, with $99 million from non-traditional customers. In the first quarter of 2010, we have continued that trend as we were awarded $32.2 million of gross business of which $26.3 million was new business and $6 million was replacement. Of the $32.2 million amount, $11.2 million was represented by customers outside of our top four customers, a continuation of our diversification efforts where we made great strides last year.

Over the last two years we have realigned the Company around two business segments

Electronics and Control Devices. In August of last year, we announced the integration of our Control Devices division into one management team. With the consolidation of Control Devices, we have prioritized their D&D investments to better focus our development efforts and resources on targeted growth segments and global opportunities.

Focusing on our primary market segmentation of medium- and heavy truck, pas car, and light vehicle, and agricultural, we continue to be weighed more heavily in the commercial sector, which includes expansion into the military and material-handling sectors. For the first quarter of 2010 our percentage of sales was 49% from the commercial segment, 34% from the pas car and light vehicles segment, and 17% for agricultural and other, which includes material-handling.

We are continuing with our plans to enhance our sales by region and to cross-sell multiple customers. As an example, in the third quarter of this year we expect to begin shipping wiring products out of our Estonia facilities to support John Deere in Europe. We expect to see growth in three segments, but our commercial vehicle business will experience the most significant growth due to new customer wins.

In the first quarter of 2010, we were awarded the Dash 8 military vehicle for the Afghan theater through Navistar, which is expected to be in the range of $10 million to $15 million this year. We anticipate that sales for this platform will be produced and shipped in the second and third quarters of this year. As you look at our position when combined with the acquisition of Bolton Conductive Systems, these awards demonstrate that we have the opportunity to convert significant military business either directly through our customers or through Bolton’s customers.

We have committed resources to expand our presence into China and India while continuing to focus on Brazil with our PST joint venture. In China, we are extending the usage of our low-temperature and speed sensor technology and products. China has won four new applications during 2009 in the wheel speed sensor and oil level sensors, and has won two additional awards in the first quarter of 2010 for an oil pressure switch and a passive entry switch. While these awards are small, they begin to enlarge our product and technology offerings in this important market.

We also opened a new technical center in March in Shanghai to house our sales organization, technical engineering, and testing facilities. We are launching a wiring operations to support local customers and for exports of our Control Device business in North America to satisfy customer requirements.

In India, our JV sales are forecasted to be approximately $26 million in 2010, an increase of approximately $5.6 million, or 27% over 2009. Based on the markets and our products, we have raised our sales target in India to reach $50 million to $75 million over the next three to five years as we are – and we negotiating to add our sensor products lines to this venture.

Our PST joint venture continues to perform well although below our first quarter expectations for 2010. Government incentives in the first quarter increased the sales of fully equipped new cars, which unfavorably impacted PTS [ph] sales in the first quarter. These government incentives caused more vehicles to be sold with more accessories at the OEM level, which had a negative impact on the aftermarket and dealer business. Dealers also have been lowering inventories, which had a negative impact on PST’s aftermarket business. In spite of the first quarter performance, PST still expects to achieve their planned sales and profits targets as the government incentives have expired and PST will accelerate new product launches such as the car stereo-radio-CD combination and car speakers in the balance of the year.

One of our objectives of integrating Control Device was cost reduction and a focused approach to their global markets. In the first quarter of 2010, Control Devices has improved its financial performance faster than anticipated. I am pleased to say that they were able to improve first quarter 2010 operating profit by $13 million on a $27 million sales increase compared to the first quarter of last year. The results of the technology focus they have been implementing are beginning to bear fruit. We have won new business in the last two quarters with our magnetic sensing and torque applications and capacitor sensing, which we will be launching over the next few years. We have won a ship by wire application for Ford, which will start in the 2012 model year and which can be adapted for sales to other domestic automotive customers.

In operations, we continue to focus on quality, delivery, and cost, with our lean initiatives, and to develop consistency and standardization for our manufacturing and supply chain processes. Our lean principles and concepts are beginning to drive these drive benefits. Our inventory days for the first quarter were 35.9 days. This is a 6.7 day or 16% improvement over the first quarter of 2009.

We have been primarily concentrating on the North American Electronics unit with our lean principles and tools. However, we are now beginning to implement the same methodologies in our Control Device operations.

Our first quarter was also marked by supply difficulties, which resulted in part shortages and excessive work by personnel to overcome these difficulties. I want to thank our team for their efforts to maintain our customer commitments.

In summary, we believe our progress demonstrates we have taken the right actions to make the Company more competitive and position the Company to compete effectively in the future on a global basis. We have dramatically reduced our cost structure and taken out nearly $50 million of permanent, fixed overhead cost. As a result, during 2009, we have lowered the breakeven sales level to approximately $473 million or a 26% improvement compared to the 2007 level.

We have preserved liquidity and managed our cash position. At the same time we have clearly stayed focused on our top line growth. Our net new business has grown approximately $140 million over the next three years and $206 million over the next five.

2010 is showing signs of a recovery. Passenger car and light truck production is up nearly 70% and is expected to reach in the neighborhood of 11.6 million this year in the North American market, which will benefit our Control Device business unit as we have built our 2010 plans around – for slightly less than 10 million unit build.

In the commercial vehicle market, there is an improvement over the prior year, but not the levels of the previously expected industry forecast. We believe the improvements will be tending more towards the last half of this year and then into 2011 and have adjusted our plans accordingly.

Finally, I believe that our first quarter performance has demonstrated that as the markets return and the industry begins its improvement, Stoneridge is poised to continue to improve our position.

With that, I would like to turn the call over to George.

George Strickler

Thank you, John. John shared earlier the focus of our business plan for liquidity and cost reductions. Our controllable cost reductions is focused on four key areas: our manufacturing overheads, direct labor, design and development, and SG&A expenses. Based on the results through the end of 2009 we’ve reduced our cost excluding restructuring by $99.3 million compared to 2008 and $85.8 million compared to 2007.

As we review our first quarter 2010 results, the same four cost line items, excluding the impact of restructuring costs, are down by $19.8 million compared to the first quarter of 2008, $19.2 million compared to the first quarter of 2007 and flat compared to the first quarter of 2009.

This clearly shows that we have permanently changed our cost structure and reduced our fixed cost, which combined with our sales increase has resulted in our gross margin reaching 23% in the third quarter of 2009, 21% in the fourth quarter of 2009, and 22.6% I the first quarter of 2010. With our sales reaching $148.1 million in the first quarter of this year, this would represent an annual sales level nearly $600 million, a 26% increase over the 2009 sales level of $475 million.

We have accomplished this growth of minimal increase in our cost structure. Our challenge will be aggressively manage our cost structure as tightly as we did when the market was declining as when the market rebounds.

Another important achievement accomplished by our management team was the successful wind down of our Mitcheldean, UK subsidiary. On February 23rd of this year, the Company placed its wholly-owned subsidiary, Stoneridge Pollak Limited, for administration in the United Kingdom. The company had previously ceased operations specifically as of December of 2008, as part of the restructuring initiatives announced in October of 2007. All SPL customer contracts were transferred to other subsidiaries of the company in coordination with the administrative process. The company recognized a gain below operating income of approximately $2.3 million and the reversal of certain items included with other comprehensive income during the quarter ended March, 31st, 2010.

Another important area we are monitoring are the capital markets. We have an interest in extending the term of our long term maturities, of reducing the 11.5% coupon rate on our long term bonds that mature May 1st, 2012. And as of May 1st, 2010, our bonds can be repurchased at par. If the capital markets improve, we will pursue opportunities to extend our maturities and reduce our interest rate.

Now, I would like to cover with you some of the details regarding the financial performance from the quarter. Revenue of $148.1 million in the first quarter represents an increase of $27 million or 22.3%. Our sales increase is the result of increasing production volumes in our served markets, and improving economic conditions.

For the first quarter, light vehicle revenue increased from $34.4 million to $50.1 million, an increase of $15.7 million or 45.5%. The increase was primarily attributable to the 69.5% increase in traditional domestic production in our Control Device segment.

Medium- and heavy-duty truck sales totaled $70.9 million in the quarter, an increase of $11.1 million, or 18.6% over the prior year first quarter. The revenue increase was primarily driven by an increase of 17.35 in the North American commercial vehicle production, where there continues to be a decline in European commercial production by 6.5%.

Sales to ag and other markets totaled $27.1 million, an increase of only $200,000, or 1%. North America revenue accounted for 78.5% share of the first quarter revenue compared to 80% for the same period last year. The percentage decrease of our North American revenue reflects favorable foreign exchange rates on European sales, while we continue to experience a reduction in our European commercial vehicle builds.

In the first quarter, Electronics revenues were $91.6 million compared to $82.8 million from the same period last year, an increase of $8.9 million or 10.7%. Favorable factors affecting the first quarter performance was the 17.3% increase in North American commercial vehicle production, although we sustained a 6.5% decrease in European commercial production and favorable exchange translation.

Revenues for Control Devices of $56.4 million increased $38.3 million compared to the first quarter of last year, which is an increase of $18.1 million or 47.3%. The 69.5% increase in production of North American light vehicles for the traditional domestic manufacturers was the primary reason for the increase.

Our first quarter gross profit was $33.5 million resulting in a gross margin of 22.6%. Our gross margin increased 6.7 basis points from the prior year level. This marks the third quarter in a row that our gross margin was greater than 20%. The continued increase is primarily due to our cost structure initiatives and is positively benefited by higher sales volumes. Sales from low-cost manufacturing locations accounted for 47.3% of total sales for the first quarter compared to 42.8% in the prior year. The increase is due to volume increase primarily in our Mexican facilities. Production line moves from our Mitcheldean, UK operation to China and Estonia have contributed to the increase in our low-cost manufacturing locations as well.

Selling, general, and administrative expenses totaled $29.5 million in the first quarter compared to $27.1 million in the previous year. The increase in SG&A is primarily due to the reinstatement of certain compensation related benefits that were curtailed in 2009. We have increased our design and development expense from $8.6 million to $9.1 million as some of our customers have made the decision to proceed with some of their future projects and platforms that have been delayed of deferred.

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 and the launch of our new wiring business in North America that begins in June of this year. As reported earlier, our SG&A expense in the first quarter of 2010 excluding restructuring is down compared to the 2007 and 2008 by $3.7 million and $5.4 million, respectively.

The first quarter income tax benefit was $1.5 million on a pre-tax loss of $6000. As reported for December 31st of last year, the Company is in a cumulative loss position and continues to provide valuation allowance offsetting its federal, state, and certain foreign deferred tax assets. As a result, no tax benefit was provided for losses incurred in the first quarter of this year for U.S. federal and state tax purposes. The impact of those valuation allowances was partially offset by a tax benefit for losses incurred in Sweden and Ireland, along with a tax benefit related to the SPL wind down activity.

Due to the valuation allowance and pattern of projected earnings, the quarterly effective tax rates will fluctuate significantly. We expect the 2010 annual effective tax rate to be between 36% and 39%. A higher effective tax rate anticipated for this year is due to the circumstances that caused us to write-off our deferred tax assets in December 2008, and which will continue to prevent the Company from recognizing a tax benefit for domestic and certain foreign losses. As the market stabilizes and profitability returns, we expect the effective tax rate to normalize and be in the range of 27% to 30%.

Stoneridge reported a first quarter net income of $1.5 million or $0.06 per share. This compared with prior year net loss of $11.6 million or $0.49 per share. Depreciation expense for the first quarter was $4.8 million and amortization expense was negligible as most of the intangibles had been written off in December of 2008.

Our primary working capital totaled $89.3 million at quarter-end, which decreased by $1.7 million from the first quarter of last year. As a percentage of sales our working capital increased from 13.6% of sales in the prior year to 17.8% of sales in the first quarter of this year. Our working capital measures have been significantly influenced by the drop in sales revenue in the last 12 months and the current working capital levels are a function of increasing sales and operational activities.

As markets return, our long term goal remains to reduce primary working capital to $0.12 of sales. We are projecting we can reach 13.7% by the end of this year. Operating cash flow was a cash use of $7 million in the first quarter compared to a cash source of $1.2 million in the previous year. Our cash flow results in the first quarter were affected by the increase to accounts receivable and the inventory offset partially by accounts payable, which were a function of increased sales and operational activities.

Capital investment for the quarter totaled $3.6 million, mainly reflecting investment in new products in sensors and wiring as well as IT spending for our ERP implementation in North American Electronics. We are forecasted to finish the year with total capital spending in the range of $23 million to $25 million.

We will continue to focus on cash flow and liquidity as a high priority. And as of March 31st of this year, we have $68 million of availability under our $100 million asset-based lending facility, a significant improvement from the $57 million level at December of last year. Our borrowing base has increased by $11.7 million since the first quarter of 2009 as increased accounts receivable balances are the direct result of higher sales. We have no borrowings drawn against our asset-based lending facility, which has a maturity of November, 2011.

Our quarter-end cash balance totaled $80 million compared with $89.2 million at the end of the first quarter from the previous year. We will continue to manage our capital expenditures and working capital to sustain and/or improve our cash flow. 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 so far for 2010 has shown signs of economic recovery, though our plans will remain cautiously optimistic. Based on our first quarter results and our April forecast, it appears the market will continue to improve compared to the second quarter of last year. We’ve experienced significant improvement in passenger light trucks in North America. Our emerging markets are returning to their historical levels. India and China are also experiencing improving market conditions.

Our PST joint venture did not perform as expected in the first quarter due to the expiration of the government tax incentives on new cars, and build-up of inventory at our dealers. PST, however, still outperformed the first quarter of last year and is reducing inventory position from 90 days to 40 days. We still continue to expect significantly improved performance compared to last year.

On the cautious side, the commercial vehicle market in North America continues to stabilize, but no significant growth is forecast for 2010 compared to historical levels. Our sales are up due to new business and product launches. The story is different in Europe as we do not expect the European commercial market to recover in 2010. However, we have been encouraged by many of our OE commercial customers in Europe reporting stronger-than-expected results in their first quarter.

As John stated before, we are optimistic as our financial performance trend for the last three quarters reflect the significant accomplishments by the Stoneridge management team and all of our employees. We have permanently reduced our cost structure, which has lowered our breakeven sales level. We have maintained our liquidity and our cash burn rate is being controlled by actively managing our working capital. The most impressive measurement of the management team is that we never lost focus on our future growth. We have the largest (inaudible) awards that we’ve had in a number of years, $140 million over the next three years, and $206 million over the next five years.

When we couple our net new business with volume from a market rebound, and a much improved cost structure, Stoneridge will generate shareholder value and have the ability to hit our long stated goal of reaching an ROIC of 15%.

Operator, I would like to open up the call for questions at this time.

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Matthew Mishan with KeyBanc. Please proceed, sir.

Matthew Mishan – KeyBanc

Good afternoon, gentlemen.

John Corey

Hi, Matt.

George Strickler

Good afternoon.

Matthew Mishan – KeyBanc

I don’t know where to start, lots of information. I’ll start with the sales growth. Agriculture kind of struck me coming in at $27 million. Is that new business coming in because in the previous quarter it was 17, is that seasonality, or are we just back to normalized levels of ag business?

George Strickler

Well I think it’s really more of seasonality as they load their pipeline and go forward. I don’t think – I don’t recall any new business awards year-over-year, but I mean versus in that category. But the ag business is strong and is somewhat offset by what’s happening in the forestry and that particular segment of the business.

John Corey

Matt, I think what we did say though is that the ag sales were flat in the first quarter – we have not seen a lot of uptick, but yet John Deere is starting to improve significantly in the second and third quarter, but we did not see much of an uplift in the first quarter.

Matthew Mishan – KeyBanc

I was just sort of talking in reference to the previous quarter, the fourth quarter of ’09.

George Strickler

That would be cyclical.

Matthew Mishan – KeyBanc

Okay. The backlog, I just want to make sure I got the numbers correct. Did you say $140 million over the next three years and then $230 million over the next five years?

George Strickler

$206 million over the next five years.

Matthew Mishan – KeyBanc

And previously it was $120 million and $140 million.

George Strickler

Yes, that’s right.

Matthew Mishan – KeyBanc

What do you think is the difference, what’s improved?

John Corey

Well it’s coming in a couple of different sectors. In the commercial side we’ve got new launches there and I think we shared with you in the last time that we got new technologies in the magnetic sensing, torque sensing and Control Devices. Those are firm orders now. We’ve landed the capacitive sensing business and the drive by wire is now coming in, in 2012. So, we are starting to see growth coming across all our key sectors plus we continue and we mentioned that we’ve got additional wiring business that we hold in. That starts in June of this year. So, it’s really a little bit of across all our segments and across each one of our key business groups.

Matthew Mishan – KeyBanc

Okay. Could you elaborate a little bit on the – when I say sequential I mean from the fourth quarter to the first quarter, the sequential bump in SG&A. How much of that was incentive comp and how much of that was some of the temporary salary cuts coming back in and whether or not they’ve already all come back in and is this just a one quarter event or can we expect to some more in the second quarter?

George Strickler

Well, Matt, I think you almost have to go back to the third quarter of last year and the third quarter was a little bit, I will call it a little bit Draconian because we took a lot of furloughs in that period, we took a lot of unpaid leave. So it ramped down probably a little what I would call abnormal. It started to come back in the fourth quarter in terms of where it would stabilize and then what you are seeing in the first quarter is one, an increase on our (inaudible) incentives for our employees. We have held our merit increases by a quarter when they were due, so merit increases will not begin until the second quarter that’s not really in there. So it’s mostly the incentive. We have seen some pickup in the D&D side, which is including SG&A, which you referred to and it’s really with our European launches and we’ve had to spend some additional funds with our new business that’s launching in North America in June of this year.

John Corey

So, I would say the annual incentive is probably about $1.0 million to $1.3 million of that and then the rest would be the additional cost that we are incurring with our startup and our launches in Europe and our new business in North America, which begins in June.

George Strickler

And our incentive compensation, I mean we looked at our plan year and how our plan year is holding out it looks to be a good year for – as far as what we thought would be it will turn out to be, and I think as you’ve seen it in the volumes, the North American automotive, they are better than projections. So that’s one of the other factors that are driving the incentive plan. As our results start to improve, the amount that we fund that will improve.

Matthew Mishan – KeyBanc

Okay.

John Corey

And I did want to share as I did share with you, Matt, then with everybody in the call is that if you look at the trend of cars from first quarter ’07-’08 and even in the first quarter of this year, we are down when you look at the aggregate of direct labor overhead and the SG&A cost, which includes the D&D, so we continue to run this pretty tightly in terms of even with a ramp-up of sales that have gone from manual rate of about 475 now we are running about 600 million.

George Strickler

I mean that the ERP system.

John Corey

And the other thing is we are starting to ramp up the cost in our ERP system, as George mentioned that we are going to the system for our North America Electronics business and that cost start – really starts to ramp up as we go through the year.

Matthew Mishan – KeyBanc

Okay. Just following up on that question, and moving on to contribution margins, and I think quarter-over-quarter and sequentially I think we saw 11% contribution margin. I think we – I think you had hinted that program launches and increased cost with that would keep the contribution margins down a little bit in the first quarter. As we look to the second and the third and fourth quarter, we start to see some ramp up, especially in the commercial vehicle production. What contribution margin would you expect on the incremental sales?

George Strickler

Well, I will have to tell you we were a bit surprised if the gross margin level was 50, but we historically have always used right around 30% to 35% and I would continue to use that as a factor in that.

Matthew Mishan – KeyBanc

Okay. Lastly, I will jump off and see if anyone asks this question, on the Brazilian PST, can you elaborate a little bit on the – what incentives the Brazilian government was giving, why it impacted you in this quarter and not in previous quarters?

John Corey

Well, yes, in the first quarter to stimulate the market similar to what we had here was a cash for clunkers. In Brazil, they offered tax incentives on the purchase of a vehicle. And what that did is that stimulated demand. The car companies down there have a limited amount of capacity. So, they quickly saw that demand was going to exceed their ability to produce and so what they started doing was moving everybody up to sell fully-loaded vehicles. And so as they moved people up and from a person’s point of view when they were buying a fully-loaded vehicle because of the government incentive, they were not paying the full price, so that is a benefit to them. So they moved up to these fully-loaded vehicles. The normal – the add-on accessories that would happen did not happen because they were already gone in the cars. So both our OES business through the car dealerships and our aftermarket dealer business suffered as that happened. And they rolled those incentives off. It was a – and so we expect to see the business pick back up as this goes forward, plus we had an inventory adjustment in there as dealers adjusted their inventories to compensate for what happened in the market.

Matthew Mishan – KeyBanc

Okay. And you had mentioned a plan and you had mentioned being still believe in that you could make the plan for Brazil and PST, what is that, do you have a revenue projection for 2010 that you expect to hit, or do you have an equity income that you expect to recover from that business?

George Strickler

The sales forecast that we are looking at essentially takes us back to the 2008 level, roughly about the same and then the marginal contribution from Brazil, I mean you know the margins have historically run in that 48% to 50% and we don’t see any reason they should change from that. They are introducing, as John mentioned, some new platforms that will offset part of the decrease that we saw in the first quarter as they introduce the new the audio and the stereo. That will be – will help cushion some of the drop that we experienced from the luxury tax in the first quarter.

Matthew Mishan – KeyBanc

Okay, thank you very much guys.

George Strickler

Thank you.

Operator

And our next question comes from the line of David Leiker with Robert W. Baird. Please proceed, sir.

Keith Schicker – Robert W. Baird

Hi good morning, or good afternoon, I should say. It’s Keith Schicker on the line for David.

George Strickler

Hi, Keith.

Keith Schicker – Robert W. Baird

Matt, actually answered – asked most of my questions here, so just a couple. Can you just run down what the nonrecurring gain was again in the quarter? I didn’t quite get that one down.

George Strickler

Keith, it was $2.3 million and it was really the reversal of the currency exchange in SPL plus the write-off of the cash and the inventories and receivables that were sold to the Stoneridge organization. So the net amount was $2.3 million included in other income below operating income.

Keith Schicker – Robert W. Baird

Okay.

George Strickler

And then the tax credit, the $1.5 million, of that $1.2 million was the wind down of the SPL operation, it’s a one item.

Keith Schicker – Robert W. Baird

So, $1.2 million of the $1.5 million was a benefit from that?

George Strickler

Right.

Keith Schicker – Robert W. Baird

So, you actually saw a pretty sizable benefit from that transaction or that event?

George Strickler

Right. And then that will finally wind down all the obligations that we have with the SPL closure that we started way back in ’07.

Keith Schicker – Robert W. Baird

Okay. If we look at – just a couple of quick ones on the top line – did Bolton add anything to revenue versus the prior quarter?

George Strickler

They have a lot of quotes in right now, but there was very little tick up in revenue. We are looking at them more for the second half of this year.

Keith Schicker – Robert W. Baird

Okay. Was there an FX impact on the top line – currency?

George Strickler

There was, but it wasn’t huge.

John Corey

Yes, it was negligible, Keith, and we will send that to you if it – we will give you the actual number.

Keith Schicker – Robert W. Baird

Okay. And then I think when we talked last quarter on the earnings call, we kind of talk about it – if we look through the course of the year, Q3 was going to be the weakest quarter although Q1 will be a little bit stronger and then Q2 will – and Q4 will be about equal and stronger than where Q1 was. Do you think that trend still holds, given changes in the industry since then or should we think about that differently?

John Corey

No, I think you should probably think about it the same way, if anything, I am hoping that it may be even better when we – because it’s commercial vehicle coming back a little bit sooner as we start to see some of the positive news and as George said, if you looked in Europe, some of the major truck manufacturers over there reported very good earnings and so maybe we’ll see some faster uptick in that. And I think I am – I love to see it come back u at the same rate that the automotive came up because I think that kind of surprised everybody how fast the North America automotive came back, but we are not projecting that, but I think we still stand by what we said before.

Keith Schicker – Robert W. Baird

Okay. And then it sounds like on the SG&A side we had some temporary cost reductions that flowed back into the business. Was there anything similar to that on the gross profit or gross margin side or do you think that’s sort of this 22% to 23% level is sustainable at $150 million plus in revenue per quarter?

George Strickler

Yes, I think we’ve proven that that’s the level we’ll run at. In fact, I think we can improve that as the volume continues to go up because at that point (inaudible) and direct labor and then raw materials side tends to fluctuate based on our sales mix. So I think that marginal contribution will be there.

John Corey

Yes, we mentioned we had some supply difficulties along with a lot of other people in the first quarter and a lot of that in order to make sure – and this is where I really think the team did a good job. I mean in some cases we are going to hand amount as we are getting parts in, we were working to produce the product and ship it to the customer, so there is some, probably some excessive cost in the labor lines as we work to ship that product out. So as the supply chain disruption starts to ease as it is now and we think it will take us – probably take through the second quarter to ease, we’ll see some recovery in that way.

Keith Schicker – Robert W. Baird

Okay. And then lastly, George, can you just update us on what your current thoughts are for the 2012 maturity?

George Strickler

Yes, I – clearly, Keith, the markets are getting very robust and so John and I are much more active now starting to look at the capabilities of what we can do in the debt markets and clearly I think the bond market for a change is looking forward as opposed to looking back on LPMs so that I think the rates are attractive for a number of ratings that the company may have. So I think our rates now coming down at the level that it makes extreme sense for us to really look at refinancing our bonds.

Keith Schicker – Robert W. Baird

Okay, that’s great. Thank you very much.

George Strickler

You’re welcome.

John Corey

Hey, Keith, by the way, the currency for the quarter is $3 million – $2 million.

George Strickler

Net impact, favorable.

John Corey

Favorable.

Operator

(Operator instructions) Your next question comes from the line of Stephen DeNichilo with ACK Asset. Please proceed.

Stephen DeNichilo – ACK Asset

Hey, guys, how are you doing?

John Corey

Good, Steve.

Stephen DeNichilo – ACK Asset

Good to talk to you. Most of the questions have been answered, but just a little more clarity on the incentives in Brazil. When did those actually end/

John Corey

They ended at the end of the first quarter – at the end of March.

Stephen DeNichilo – ACK Asset

End of March, okay. And then since March have April volumes picked back up to your plan and has there been any type of re-stocking at the dealer level?

John Corey

Actually the dealer re-stocking probably has not happened yet. That – you know, because we actually were in an inventory reduction as we were adjusting our inventories too. So I expect we were going to see, probably have to get to the May and June timeframe to start to see things coming back. This – (inaudible) was an automotive incentive in Brazil. There was an incentive for white goods too. And so there was a lot of things going on for share of pocket that the Brazilians could have gotten some kind of incentive for.

Stephen DeNichilo – ACK Asset

Right, right, okay. And any updated thoughts on the potential monetization of the stakes [ph]?

John Corey

The equity markets, they’ve returned for large cap and not for the mid cap and small cap and we continue to monitor that, but at this point in time the market they have not seen to be robust enough for the mid cap and small cap.

Stephen DeNichilo – ACK Asset

Okay. Okay, and then just quickly on your contribution margins, you said of 30% to 35% and a 473 breakeven run rate. What type of contribution are you assuming from cross – potential cross-selling that you are doing, new platforms. Are those typically above margin or are you just looking at your current business run rate and what that should be once the commercial markets pick up?

John Corey

Well, I think on our new business, clearly we are pricing that at higher contribution and that the new technologies differentiate ourselves like magnetic sensing, sonar positioning all those. When we say 30 to 35 that’s for the base business and where we are at today and that mix will start to change with the new technologies that we’ve been referring to the last couple of quarters.

Stephen DeNichilo – ACK Asset

So as we see this new dollar business win increase that potentially creates some upside on the contribution margin?

John Corey

Yes, I think you got to break it out. I mean some of the business wins are in existing business, I mean for instance in our wiring business wins you won't see any significant increase in contribution margin from historical levels. When you get into, as George said, you get into the magnetic sensing product, where we think we have proprietary technologies, we are going to price appropriately for that to improve the margin capabilities there. So, it – but I would still say that if you looked at our business I would say that you are going to look at three quarters of it running at about the historical rate and then the other quarters where we are going to start – as we expand into those segments, you will see that we get some capability there to move the contribution margin off. But and that’s going to develop over the next couple of years, because that’s part of the shift to the strategy that we’ve taken in this business of getting out of some of the community type products where we couldn’t and moving more into some more technologically oriented products where we had a different position.

Stephen DeNichilo – ACK Asset

And I am assuming the new ERP system can only help those numbers as well.

John Corey

Yes, well, that system is going to take all – that’s going to go through 2010 and then into 2011 to be installed, but we expect to see some benefits from that system here, correct.

Stephen DeNichilo – ACK Asset

Right, okay. Thank you, guys.

John Corey

You’re welcome.

Operator

And with no further questions in queue, I would now like to turn the call back over to Mr. John Corey for closing remarks

John Corey

Well, thank you. I think as our first quarter as we’ve said we are building the business back, we are building the business that’s consistent with the theme that we established all of last year as we went through this terrible downturn in the marketplaces. And we are optimistic because as we come out of this we are seeing, and as I think we’ve demonstrated in the first quarter, seeing the type of leverage we can get on our new cost structure. So I think our challenge now is just to see the – we’ve got the automotive markets coming up. If we can get our commercial vehicle markets coming up, our electronics will leverage that business the same way we leverage automotive, and so we are very encouraged I mean about what’s happening. As we’ve always said, we looked at this as kind of a two-year plan, 2010-2011. But hopefully it will be a little bit better than that. So, I appreciate everybody’s participation on the call today. And with that say good-bye.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a great day.

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