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Viasystems Group Inc. (NASDAQ:VIAS)

Q4 2010 Earnings Call Transcript

February 8, 2011 2:00 pm ET

Executives

Dee Johnson – IR

Dave Sindelar – CEO

Gerald Sax – SVP & CFO

Analysts

Param Singh – Stifel Nicolaus

David Sagalov – Jefferies

Eric Reubel – MTR Securities

Nick Farwell – Arbor Group

Operator

Good day ladies and gentlemen and welcome to Viasystems Group’s Fourth Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to introduce Dee Johnson. Ms. Johnson you may begin.

Dee Johnson

Thank you, Ely. I’d like to welcome everyone to the Viasystems Group investor conference call for the fourth-quarter of 2010. If you need a copy of today’s earnings press release you’ll find it at viasystems.com. We also have prepared some slides which you’ll find on our Web site.

Our presenters today are Viasystems Chief Executive Officer, David Sindelar and our Chief Financial Officer, Jerry Sax.

In the course of our discussion we’re 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 Provisions of the Securities Litigation Reform Act of 1995.

The comments we’ll 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 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. Adjusted EBITDA is reconciled with our GAAP results in today’s press release and in our slide presentation.

Management believes this measure is useful for analytical purposes and to assist in comparing results overtime and across the company. But I remind you that adjusted EBITDA excludes certain material items and is not a replacement for the reported results under Generally Accepted Accounting Principles. Adjusted EPS for the first and second quarters of 2010 are provided as reconciliations in the appendix to our slides.

I’ll now turn the call over to our CEO, Dave Sindelar and Dave will begin the slide four.

Dave Sindelar

Thanks, Dee. Good afternoon, everybody, and thanks for joining us. Consolidated sales of $243.9 million made the fourth-quarter our second largest revenue quarter ever, surpassed only by our 2010 third-quarter.

We indicated in our last quarterly call that we did not expect to match third-quarter sales and in fact our revenue came in 6% lower sequentially. Year-over-year organic growth in the quarter was 20% compared with the pro forma combined sales.

For the year as a whole, organic sales growth was just over 30%. Our adjusted EBITDA margin for the quarter was 14.8% which brings our EBITDA margin in for the year at our stated goal of 15%. Earnings per share were $0.44 in the quarter and $1.50 adjusted EPS for the year. Market demand continues to be very strong.

Our bookings in the fourth-quarter were approximately $266 million equal to our record high bookings in the third-quarter and 1.09 times fourth-quarter sales. That robust demand makes any minor constraint of our capacity all the more visible and that’s the key different between the third-quarter and the fourth-quarter in our Printed Circuit Board segment.

Our Printed Circuit Board revenue was $196.7 million, decreased almost 6% compared to the third-quarter and on an apples-to-apple basis the revenue of our current six PCB manufacturing facilities grew more than 14% year-over-year. PCB segment bookings of almost $213 million in the fourth-quarter exceeded those of the third-quarter by more than $5 million and the segment book-to-bill ratio was 1.08 to 1.

In the Assembly segment, revenue of $47.2 million decreased by 6.5% from the third-quarter and grew 53% year-over-year on strength in all four served markets, particularly the telecom and the I&I market.

Assembly segment bookings are $53 million while $6 million lower than the third-quarter bookings resulted in the segment book-to-bill of 1.13 to1. Because our Assembly business is project oriented, demand is spiky and I’d not necessarily take term changes in demand and shipments as an indication of the trend.

Turning back to our PCB segment, you may recall that our PCB operations ran at a production level very close to capacity during the third-quarter and that we anticipated some limitations on days available for production in the fourth-quarter.

As expected on start of the normal yearend holiday effect we encountered additional limitations due to the government mandated limitations on manufacturing in Southern China during the Asian games is very similar to the limitation that manufacturers had in Northern China during the 2008 Olympics. What we did not expect was a reduction of capacity during a customer quality investigation.

Let me add a little color to this topic. During most of the fourth-quarter, we assisted a customer in investigating in an isolated defect in their final product. This investigation included upstream and downstream supply chain elements as well as our specific manufacturing processes.

Additionally, during the investigation certain of our production equipment sets were systematically taken offline and evaluated resulted in reduced capacity.

The findings indicated that the issue was ultimately caused by unique combination of three factors; one, particular laminate combined with one particular plating bath, combined with excess heat used in our customers assembly process.

Turning now to slide #6, the mix of our sales among end markets is relatively unchanged in the fourth-quarter as you can see in the pie chart. Sales for the automotive market were 36%, telecom was 23%, I&I was 24%, computer/datacom 13% and mil/aero was 4%.

Our fourth-quarter shipments to global automotive market were up 4% sequentially due to some of the capacity considerations despite the strong bookings in the quarter. Year-over-year automotive sales grew 19%.

We expect demand in this market to continue to expand not only because of the rising global vehicle shipments, but also because of the rising electronic content per vehicle. We have new equipment coming on line at the beginning of the third-quarter of 2011 that will expand our automotive PCB capacity. So we continue to meet the needs of our Tier 1 automotive customers.

In the telecom market, revenues were up 11% from a record third-quarter. Although, year-over-year telecom sales were up 17%, a sequential decline occurred in both the PCB and the Assembly segments.

Our PCB and electromechanical solution customers include most of the major OEMs in the telecom market and our revenue vary with their activity. Some of these major customers were up; some were down in the fourth-quarter.

On the Assembly side, one of our integrated cabinet projects that was very strong in the second and third-quarter, it was moved back in-house by the customer.

In the I&I market, sales were up 8% sequentially and up 33% year-over-year. We had enjoyed some opportunistic orders in shipments in the wind energy industry during the third-quarter which did not reoccur in the fourth-quarter.

Overall, trends and demand are favorable for us in the industrial markets both for the PCB and the E-M Solutions business.

In the computer datacom market, fourth-quarter sales were down 3% sequentially from a very strong third-quarter and up 17% year-over-year.

Our mil/aero sales rose 6% sequentially and 2% year-over-year. We are pleased to announce that December, our Huiyang plant achieved an AS9100 Certification for the aerospace electronics market. This complements the certification at our Forest Grove, Oregon plant and demonstrates that our aerospace capabilities extend beyond North America and include low-cost manufacturing plants.

Although the market growth expectation from mil/aero is relatively flat, we believe we can continue to grow through market share gains. We are now more than a full year into the global economic recovery and I believe the fantastic growth rates we saw in 2010 are beginning to level out to a more sustainable level.

Many of the market analysts expect our markets to grow on average about 6% throughout 2011. We expect to grow faster than our markets and it’s our internal goal to grow twice as fast as our markets.

Our opportunity to cross-sell our existing customers with both E-M Solutions capabilities and PCB quick turn availability gives us an excellent opportunity to grow at above market rates.

Another key focus for 2011 is quality service and delivery to allow us to capture and retain an increased proportion of our customers’ purchases. We will continuously refine our previously announced $100 million capacity expansion plan to meet the needs of our customers as the market develops over the next several quarters.

With that let me turn it over to Jerry, our Chief Financial Officer, who will discuss the fourth-quarter financial results.

Jerry Sax

Thanks, Dave. I’ll be covering the materials on slide #7 and #8, which are essentially similar to the first table and third table in this morning’s earnings release.

But before I begin, I’d like to give you an update on our annual year-end audit, which we typically go through at this time. We are in the final stages of completing that audit and there are some couple of administrative tests that still need to be completed.

I believe that we should be in a position to file our 10-K in the very near-term, so you can watch for that to be filed soon. These financial statements will include full year results and of course, our MD&A section of the 10-K will analyze the full year results.

I’ll begin my remarks today about the quarter by referring to slide #7. As Dave mentioned our sales volumes in the final quarter were limited as compared to the third-quarter due to capacity constraints as well as normal holiday order push-outs.

Our total PCB sales volume actually declined by about 10% sequentially from the third-quarter in the fourth though favorable mix prevented total PCB sales value from declining that amount.

The reduced volumes were the primary contributor to the couple of points we dropped in margins on sequential basis. Because we continued to see the solid demand trends, we did not take actions to reduce fixed costs during the fourth-quarter despite the reduced availability (inaudible).

While we’re hearing a lot of noise about materials costs increasing with the price of copper, we were able to avoid material cost increases during the final quarter.

Consistent with what industry analysts are saying, we expect the materials and labor costs increases will be a challenge in the coming quarters.

Our SG&A expenses were $17.6 million for the quarter ended December 31st or just over 7% of sales. Sequentially, SG&A expenses declined by about $3 million from the third-quarter.

Our usual costs consciousness was supplemented by a couple of factors this quarter including reduced incentive compensation charges on our lower sales and earnings and our regular year-end true up of expenses accrual estimates.

I’d expect our SG&A expenses to average less than $20 million per quarter in 2011, but I don’t expect to sustain the sub $18 million level that we achieved in the last quarter of 2010.

Resulting operating income was $19.6 million or about 8% of sales for the fourth-quarter and our regular non-GAAP measure adjusted EBITDA in the final quarter as Dave mentioned was $36 million or just two ticks under our average goal of 15% of sales.

For the year, our adjusted EBITDA exceeded $141 million or 15.2% or $929 million of reported sales. We provided a reconciliation of operating income to adjusted EBITDA for the quarter is in the addendum to presentation materials and as a table in the earnings release this morning.

In other expense during the quarter, the largest change we experienced was again related to a gain/loss on foreign exchange, where currency rates actually worked in our favor during this quarter.

At $2.6 million for income taxes, our effective tax rate was about 21% of pre-tax income in this quarter and that reflects some favorable impacts of expired exposures for which we had held reserves. On an adjusted full year basis, our effective tax rate was near to 35% that I mentioned on our last call.

As a reminder, income attributable to non-controlling interest relates to our joint venture partner’s ownership stake in the legacy Merix China sites.

With $8.9 million of net income available to common stockholders and with no meaningful change in the 20 million basic shares outstanding, we achieved the $0.44 EPS in our final quarter which Dave highlighted in his remarks.

I’ve not included the balance sheet slide in the conference call materials, but as you can see in the second table in this morning’s earnings release, the changes from the prior quarter end relate primarily to the topics that I’ll cover in my comments on the cash flows.

As all of our working capital metrics are in line with our historical trends, I’ll not make any other comments on the balance sheet and we’ll go instead directly to the cash flow slide eight of the conference call materials or the third table in the earnings release.

During the fourth-quarter, operating activities generated nearly $42 million of cash. We spent just over $20 million of that cash for CapEx during the fourth-quarter, which drew our full year 2010 spend to $57 million. That’s in line with our expectations, which included a portion of the capacity expansion spend that we talked about last time.

In the category of financing activities, we paid about $2.5 million of scheduled maturities on capital leases and we also made a $1 million discretionary pay down on one our China revolving credit lines.

We’re quite pleased with the really strong cash performance in the quarter and with our solid liquidity position, which is approximately $170 million at the end of the year. We’re very happy with this position as we enter 2011.

At this time I’ll turn mike back to Dave for his final comments before we go to Q&A.

Dave Sindelar

Thanks, Gary. I just wanted to summarize, I wanted to reiterate that we’re pleased with the continued strength and demand in our automotive market and most of the other markets we serve. We continue to be vigilant about inflation in both material cost and in China labor costs and we’re working to pass these increases through to customers as much as possible.

As we mentioned in our press release, we continue to face short-term capacity challenges and particularly with respect to one of the plating lines that is being rebuilt during the first 45 days of the quarter. That coupled with the fact that seven of our production facilities are in China, and our first quarter capacity be affected by the Chinese New Year holidays.

I look forward to your questions, and with I’ll turn it back over to the operator Ely, who will conduct the question-and-answers.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Matt Sheerin of Stifel Nicolaus. Please go ahead.

Param Singh - Stifel Nicolaus

Hi, this is Param Singh on for Matt Sheerin.

Dave Sindelar

Good morning, Param.

Param Singh - Stifel Nicolaus

So, it sounds like you expect sales to be down due to the Chinese New Year and your plating issue. Could you give us a ballpark, how much capacity constraints you’re going to have like a level of revenue that you can’t go beyond because your book-to-bill implies pretty strong end market demand?

Dave Sindelar

The book-to-bill is as you stated extremely strong. The demand is strong, and we’re working with our customers to kind of balance out our available capacity in the first-quarter versus the demand. I’d expect that the first-quarter would resemble the fourth-quarter. Once we get the plating line up and running and should be up and running here in the next week or so, we’ll hopefully be able to take the rest of the quarter and kind of catch-up, so that’s kind of the general feel for first quarter versus fourth quarter.

Param Singh - Stifel Nicolaus

So you think I mean they’re not going to go away to your competitors, you still expect to make those sales like later or maybe get pushed out of the next quarter sometime if you have the capacity come back on line?

Dave Sindelar

That’s true. What we’re doing where possible is we’re trying to shift production amongst the plants. As I’m sure you’re aware, on the automotive side, the product approved, in some cases down to the piece of equipment, but in most cases, it’s approved by facility, and we’re working with our customers to try to shift production between the facilities to allow us to kind of catch-up on the backlog so to speak.

Param Singh - Stifel Nicolaus

Okay. And then going back to the Q4 issue now, how much of that the government forced [ph] shutdown have on your sales, how much impact was that?

Dave Sindelar

It’s hard; it’s hard, I’m not sure I have calculated a number. Jerry, do you have a feel for it? Let me kind of state it in a different way. I think if it wasn’t for the kind of containment issues that we put in the place to try to identify what the issues were with one of our customers, I think kind of the combination of the government shutdowns, the holidays, and the containment issues probably affected us from an EBITDA standpoint to the tune of about $3 million to $4 million.

Param Singh - Stifel Nicolaus

Got it. The production issue that you had with your customer, is there any kind of liability do you have, are you responsible to that customer for any kind of quality or is that kind of related to the plating issue you mentioned in that you’re actually doing that because of the plating coming in from that customer program?

Dave Sindelar

Most of the exposure related to that issue. And again, as I mentioned, we’ve kind of identified three triggers to make it happen. So, we think that whatever liability exists, we’ll be covering kind of normal warranty product reserves.

Param Singh - Stifel Nicolaus

And then talking about materials headwind, I know there is like a lag you guys see I mean from what I know that usually the copper clad laminate guys usually have a quicker price increase and you guys can give it to your customers especially on the automotive side. Could that impact your margin for quarter to if prices keep on increasing?

Dave Sindelar

Again, obviously, it can be and we cannot talk about price increases, but a lot of time it takes a while to put them in the place. I’ll state that for all of our new programs, our costs have been adjusted to what we think the laminates are going to go up, so, we’re already baking that into our price, so we’re ahead of the game there.

On the other ones, we combated two ways. One, we continue to negotiate like our customers negotiate with us when we get price increases. Sometimes we’re successful in delaying those and sometimes we’re not and that has the same effect with our customers. Sometimes we’ve the ability to implement immediate price increases and sometimes there’s a delay in the negotiation process. But at least most companies I have been involved with, you really not only have to look at what happens with the pricing, but you have to look at the backlog.

So when you accept an order from a customer, is typically you don’t accept it at a variable price, you expect it at a price that was negotiated and so if you got a 30-day backlog then you have a 30-day price issue, and if you got a 60-day backlog, you have a 60-day price issue, so, the whole process is bit of a negotiation, a bit of a process.

Param Singh - Stifel Nicolaus

Got it. Also on gross margins, since you have it like fixed costs and you haven’t taken much out, like revenue stayed low for next quarter or so, so your gross margin should be lower for a little while till you actually have the capacity come back online, right?

Dave Sindelar

I think again the risk of thinking that the first quarter is going to reflect the fourth-quarter because of two distinct issues, but I think that that’s probably a good comparison for the first quarter of the year. (inaudible) again get the capacity back on and some of the overhead like you’d mentioned.

Param Singh - Stifel Nicolaus

Absolutely, okay. I had just one last question. So why was telecom big three guys, I mean it’s down 11% Q-on-Q, did I miss something or was that related to that customer issue or you have other things going on there?

Dave Sindelar

No, we were producing an outdoor cabinet for a customer and we ramped it up, and we’re getting rave reviews and they went through an internal analysis and they brought the production back in-house. In fact, I think they may have actually gone through and did a merger and I had some excess capacity. So they were just moving back in, so that was the biggest effect.

Param Singh - Stifel Nicolaus

I guess kind of stay at a lower level going forward then?

Dave Sindelar

Yes. I think the E-M Solutions business, as I kind of mentioned in my opening comments, is really kind of spiky. I think over the next 12 months I’d expect to backfill that with either new business or existing business from existing customers. So, I think the first quarter maybe again a little light, but I think as we move throughout the year, they will backfill that pretty quickly.

Param Singh - Stifel Nicolaus

Okay, excellent. All right, thank you so much. Those are the only questions I had.

Dave Sindelar

Great, thank you.

Operator

Our next question comes from David Sagalov of Jefferies & Company. Please go ahead.

David Sagalov - Jefferies

Hi, guys, thanks for taking the questions.

Dave Sindelar

No problem.

David Sagalov - Jefferies

Just regarding the equity and the limited flow currently out there, I’m just wondering if (inaudible) commented or you can speak a little bit to the plans on how to possibly increase the flow?

Dave Sindelar

As you would hopefully expect or imagine I have a lot of conversations regarding that both internal, external and everything else and then unfortunately we find ourselves, I find myself wondering whether it’s the chicken or the egg and with the full-year dividend 141 with the 10.5 months merits or 145 with the full year merits on a pro forma basis, the stock is probably creating all in enterprise value at 3.5 times, and I think what I find is that the X Muse [ph] and GSC guys are looking at it and saying it’s really tough for me to kind of muster up and say, I want to sell something that I like for 3.5 times.

I then follow on saying that we need float or else we’re not going get enough interest, we’re not going to get the right valuations and so, again it kind of gets back to that chicken and the egg. We continue to look for all kinds of opportunities and options and I continue to present them and I am hopeful that one, we get a little increase in the share price which will entice the X Muse [ph] and GSC guys to sell a piece of their shares in the secondary, so we get market more following.

But, unfortunately, right now, I don’t have a clean, crisp answer that this is how we’re going to get liquidity in the float, but it is something that we continue to look at and continue to probe and try to figure out.

David Sagalov - Jefferies

And just moving to debt structure, given where the debt’s currently trading, and how expensive the coupon is relative to your peers, any thoughts on you financing the capital structure or anything along those lines?

Dave Sindelar

I think and Jerry can chime in, but I will give you my $0.02. I think we issued it a year ago, October, November, so we’re 14, 15 months into it. I think it had basically a no call for 2.5 years and then after 2.5 years you had the ability to redeem it. And off the top of my head I can’t recall what the redemption premium is. I’d imagine it’s probably 50% of the coupon. So, it becomes more of a mathematical equation of whether or not you want to use in essence to pile more debt on to pay off the bonds, it was just a pure redemption.

I think we’d be running to do it all day long, but it’s kind of the premium you’d have to pay to get the bonds and that we’re kind of blocking that, so, my guess is we’re probably 12 months away from doing anything from a debt structure standpoint in any significant way.

David Sagalov - Jefferies

Just one operational question. Just want to make sure I was following correctly. So, given that at the end of this quarter, those capacity constraints should loosen up, are you expecting the quarter to be sequentially flattish on a revenue basis?

Dave Sindelar

I think at the risk of giving guidance, I think that’s what we meant pretty much what I said.

David Sagalov - Jefferies

Got it. Now the Merix acquisition is closed for a few quarters, the combined company, can you just talk about kind of revenue trends for the year that you see for 2011 in the type of seasonality and just overall trends that you’re seeing?

Dave Sindelar

Yes, I’ve tried to address this a couple of ways in the past. And until you get two years where there isn’t a recession or recovery, it’s really hard to tell what the seasonality is of the new combined entity. So, well I think I understand the markets, I think that their markets were very similar to ours and I think we’re going to act the same, to come out and definitively, say, it’s a 48, 52 kind of split half-year, half-year, it’s kind of hard to say. If you look at last year, we had strength throughout and we’ve Chinese New Year in the first quarter and we’ve the Christmas year-end Holidays and in the fourth-quarter which kind of balances it out and we usually have a strong second-quarter and third-quarter. So, that kind of is the feel right now.

We use to have in the automotive sector, what they call summer slump and most of the electronics industry had a summer slump, but I’m not sure there is such a thing as a summer slump any more. In fact, if you look back over the last five years and our third-quarter has probably been the strongest as opposed to the weakest.

So, net-net, I don’t think that there’s a lot of seasonality in the business. And really the biggest seasonality you’ll find is kind of Chinese New Year in the first quarter and the year-end holidays in the fourth-quarter, and it kind of makes it 51, 49, 48, 52. And I think with what we perceive to be a growing set of markets, growing economies around the world, I think you’ll probably see the first half a little weaker than the second half.

David Sagalov - Jefferies

Great, thanks a lot.

Operator

(Operator instructions) Our next question comes from Eric Reubel of MTR Securities. Please go ahead.

Eric Reubel - MTR Securities

Hi, gentlemen, thanks for taking the questions. Jerry, Dave, over the past two quarters, when you announced the capital expansion, I think maybe you may have been a little reluctant to initially go ahead aggressively with the CapEx plan. Given the strength in the book-to-bill and the capacity limitations that you have, are you trying to pull in spending at all and if you could kind of help me understand what you expect the CapEx budget to look like over 2011?

Dave Sindelar

From a capacity standpoint, we’re trying to pull in as much as possible, especially if you look at our fourth-quarter book-to-bill ratios I don’t see anything in the market that’s slowing things down, so I think that trend is hopefully going to continue, and we’re going to be scrambling to meet demand. And then if you go through and look at any of the analysts’ projections on market growth in the PCB industry and our specific markets, they are looking at 5%, 6% compounded growth between now and 2014.

So with that said, we need to be putting in capacity to meet the demand that would appear to be coming our way. So, we let some of the capital spend, we put the purchase orders out in the fourth-quarter, and we’re trying to pull in everything we can, but my guess is that most every other printed circuit board company that has the capital and ability to invest is out there looking to invest, so the long story there is, is that the equipment market is pretty backed up as well. So, we’re pushing hard and fast to try to get as much in as possible. Jerry, you want to address the CapEx number for this year?

Jerry Sax

For the year, I think we looked through the guidance we’ve given in the past about in just an ordinary year, we’d expect our recurring CapEx to be in the $40 million to $50 million range and that’s certainly what we think we saw in 2010. As I mentioned in my comments, our total spend was $57 million and that reflects some of that capacity expansion actually having been spent in the fourth-quarter.

To the extent that we can accelerate some of the equipment coming in like Dave just said, we certainly anticipate that some of that $100 million capacity expansion that we talked about last year, more of that will fall into 2011, certainly, than we saw in 2010. I don’t have any exact figure off the top of my head. And we’re still analyzing where to start the next project and when.

We’re cautious not to have too many projects going on at the same time, which can create some chaos and over use of some of our engineering and qualification resources. So I don’t want to suggest that everything is going to be serial, but we can’t have too many projects going on at the same time. I think you should anticipate the spend to be fairly even over the year, but certainly at a higher rate than the $57 million that we had in 2010.

Eric Reubel - MTR Securities

Dave, if you could give any color around the company start target to grow 2X to the market expected in the 5% to 6% range? What segments do you think are going to be the biggest drivers? Does the Merix acquisition really help improve that?

Dave Sindelar

Obviously, if you look at our markets I think we’re going to see very strong growth in the automotive market. I think we’re going to see strong growth in the I&I market. And the I&I market for us is really more of a catch all market than anything else, but a lot of our E-M Solutions, lot of our project-related stuff comes through there as opposed to kind of providing printed circuit boards for the automotive industry.

In the I&I sector, we do things like manufacture the power converter for the wind mill. So I kind of view that as a project as opposed to a complete industry and it’s for mainly one or two customers. But in any event, I see tremendous strength coming from automotive, I&I, I see telecom being strong.

And on the computer/datacom side I think the combination of the Merix customer base and then the combined capabilities should provide us with an opportunity to grow beyond just a normal growth rate. So, it’s bunch of different levels but new customers, new opportunities with existing customers should expand services that we didn’t have before and then two pretty vibrant markets on the I&I side and the automotive side.

Eric Reubel - MTR Securities

Do you expect I&I to be a little less lumpy than in 2011?

Dave Sindelar

The short answer is, no. It’s going to take us a couple of years to kind of balance out that segment from a specific customer standpoint and specific product standpoint. That’s where the wind revenue goes and wind revenue for us is a big component of that. It’s going to take a while. Unfortunately, I think we’re going to need to grow to get the lumpiness out.

Eric Reubel - MTR Securities

One last one if I can. Jerry, how should I be thinking about cash taxes for 2011 on a quarterly run rate basis?

Jerry Sax

In my comments, I mentioned 35%. That’s what I’m continuing to look at now. We continue to model planning strategies to reduce that, but in the near term, I’m taking 35% is probably a pretty good figure.

Eric Reubel - MTR Securities

For cash taxes as well?

Jerry Sax

Yes.

Eric Reubel - MTR Securities

Okay. All right. Thanks very much.

Dave Sindelar

Thank you.

Operator

Our next question comes from Nick Farwell of Arbor Group. Please go ahead.

Nick Farwell - Arbor Group

I want to make sure I understood the answer, Jerry, to your last question. You’re saying both cash and accrual will be at 35%, is that correct? One and the same, in essence?

Jerry Sax

In the near term, yes. Based on our profile, it gets probably understatedly complicated across years with NOLs and things. Based on our profile today, our provision is very near our cash taxes for the near-term. I hope to see some of that changing as we accomplish some of the tax planning strategies we have going out in the future and by that I mean reducing our cash taxes, but it just feels to me right now for the next short-term, it’s going to be about the same thing.

Nick Farwell - Arbor Group

Very simplistically, is that in large measure because the losses that were based in Merix in North America are not applicable to China, just to be very, very simplistic?

Jerry Sax

That is a very simple but accurate answer, yes.

Nick Farwell - Arbor Group

And then I noticed in the fourth-quarter you had a restructuring credit as opposed to a charge, I believe I saw that. Was that the insurance claim? I missed what that was from.

Jerry Sax

No, I think you have to go all the way back to some of the restructuring activities that we did on the Viasystems standalone back in 2008-2009. Some of the estimates that we provided back then, I don’t know it was $20 million something of total expenses. As things ultimately got paid out, we had $200,000 of unnecessary accruals that we decided to clean up at the end of the year.

Nick Farwell - Arbor Group

So is there a likelihood for additional reversal or at least that restructuring charges that was deferred or expensed, I should say?

Jerry Sax

It’s pretty clean. I think when you see the 10-K, you’ll see a note to the financial statements that includes a role forward of the restructuring cost. I don’t have it in front of me but from my memory, our total reserves at the end of the year are down, less than $2 million.

Some of that relates to things that have yet to be paid out for the merger-related activities in that restructuring, but some of it also relates to if you can believe at our historical European closures where funds are being paid out over many years. But in any event, I think under $2 million is the lowest restructuring reserve figure I’ve seen in our history.

Nick Farwell - Arbor Group

And then the other sort of (inaudible) question. I noticed you had a net other $200,000 credit. Is that what you’re referring to as currency, primarily?

Jerry Sax

Yes. From this call, last quarter I talked about the million dollar expense being currency-related as well. It depends on how and when currencies change and how and when we settle balances that are denominated in the foreign currencies. It’s incredibly difficult to predict and so unfortunately I don’t have any guidance for you, but I usually model $0.5 million of expense in a quarter what I’m looking at it, it’s just benefited this quarter.

Nick Farwell - Arbor Group

Okay. And then in terms of looking at the price increases, not only for labor, but copper and I’m sure there’re other raw materials, but both of those have been under upward pressure, if that’s the right way to describe it now for at least a year, certainly, nine months. You had a price increase or a rolling price increase I believe last spring, early summer. Have you initiated another one in other than obviously on new programs on the re-price, but have you initiated any other surcharges or any other way to recapture higher labor and/or primarily copper, but raw material prices?

Dave Sindelar

As we speak today, we’ve not implemented any kind of across the board, I mean other than, we’ve raised the prices on new bids, new product, new orders coming in, but we haven’t gone out with our existing agreements with automobile guys or our other long-term ones, we have not initiated it. We are beginning to look at the effects and trying to figure out what we should do as we speak.

Nick Farwell - Arbor Group

To what degree have you pre-bought any of your requirements, I mean, copper, for example, or gold or laminates or any of your critical raw materials?

Dave Sindelar

Other than taking normal MRP runs and trying to take your backlog and place it out for orders, which means, we’re 30 to 45 to 60 days out, we haven’t (inaudible) gone out and bought long on anything.

Nick Farwell - Arbor Group

And you haven’t hedged in the financial market?

Dave Sindelar

We’ve looked at it about five times or six times, and we’re yet to find, kind of a reasonable hedge to protect us other than just going out and hedging copper, which one would think that that would be a good hedge, but it turns out that it’s not necessarily a good hedge to your copper laminate prices. You’ve got glass fiber, you’ve got resins, you’ve got tolling charges to get it into the copper foil and all kinds of different other components, so...

Nick Farwell - Arbor Group

Dave, you made a comment with respect to Q1 looking relatively similar to Q4. And I assume you were referring in general in terms of revenues and perhaps also the income statement, but Jerry mentioned earlier that SG&A for year-end adjustments was perhaps somewhat below a normalized rate, perhaps approaching $20 million. That incremental $1 million or $2 million, were you including that in your comments about Q1 looking similar to fourth-quarter?

Dave Sindelar

I think my comments were probably focused more towards sales and margin kind of profiles.

Nick Farwell - Arbor Group

Okay. Because just that alone would obviously have an impact on a sequential basis on profitability, so were you including that in your general guidance with respect to Q1 looking ‘similar’ to Q4 or should we make adjustments accordingly?

Dave Sindelar

I wasn’t intending to give guidance, guidance, I was trying to give a direction, which maybe a difference of opinion, but generally speaking, I was really just kind of focusing on the sales and the margin absorption, capacity issues.

Nick Farwell - Arbor Group

So you were really focusing on the sales line, that $244 million and the 21.5% gross profit and nothing below that in your comment?

Dave Sindelar

That is correct.

Nick Farwell - Arbor Group

Okay. Thank you. Appreciate it.

Operator

I’m showing no further questions at this time. And would like to turn the call back over to management for any closing remarks.

Dave Sindelar

Thanks a lot for everybody’s time and effort and thanks for the questions, and look forward to talking to you at the end of the first quarter. Thanks a bunch.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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