Viasystems Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 8.12 | About: Viasystems Group, (VIAS)

Viasystems Group (NASDAQ:VIAS)

Q2 2012 Earnings Call

August 08, 2012 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

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Franklin Jarman - Goldman Sachs Group Inc., Research Division

Nick Farwell

Operator

Good day, ladies and gentlemen, and welcome to Viasystem Group's Second Quarter 2012 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. I'd like to welcome everyone to the Viasystems investor conference call for the second quarter of 2012. 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 provisions 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 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. Good morning, everyone, and thanks for joining the call. There's a lot of information today to cover about Viasystems' very busy second quarter. I'll begin by referring to Slide 4 of the presentation material. On June 1, we announced the completion of the DDi acquisition. Our reported results include the results of DDi from June 1 forward. Unless I specifically refer to the reported figures, my comments about net sales will mean the pro forma combined sales of both Viasystems and DDi for all comparisons and terms. At the end of April, we completed a offering of $550 million of senior secured notes. We were pleased to get a 7 7/8% rate on a 7-year term, which has substantially improved from our previous 12% notes that were due to mature 4 years sooner. This offering not only replaced our $220 million of the 12% notes, but it also provided the funding for the DDi acquisition.

We've only been running the newly acquired business for a couple of months now, but I believe we're making good progress on integrating the 2 companies. Customer feedback has been positive, and the 2 teams are working well together. I'm still expecting to achieve our committed $10 million of annual savings on a run rate basis by the end of this year.

Looking forward, there are 2 important -- these 2 important transactions are expected to yield immediate annual benefits to our shareholders through increased earnings per share. The effect of refinancing the 12% notes to the lower 7 7/8% should be accretive to our EPS by an amount -- by an annual amount of $0.33 per share. Incremental earnings from DDi not incremental to the interest expense on the notes used to fund the acquisition are also expected to be slightly but immediately accretive to adjusted EPS. When we achieve the synergy run rate, we will see an annualized $0.50 improvement in the adjusted EPS from this acquisition.

Turning now to Slide 5, I'll comment on our second quarter operating results. Net sales for the 3 months ended June 30 were $341 million, which is about a 1% growth over the $337 million in net sales in the second quarter of a year ago and about 3% ahead of the first quarter sales of $331 million. PCB segment sales increased by approximately 1%, both year-over-year and sequentially, to $285 million. Our Assembly segment sales increased 2% year-over-year and by just over 15% sequentially to $56 million. Jerry will comment later about the onetime increases in cost of goods sold required by acquisition accounting rules. Excluding the acquisition accounting effect, we achieved a sequential 250 basis point improvement in our gross margin as a percent of our reported net sales, resulting in a gross margin of 22%. This is in line with our expected seasonal improvements compared to the first quarter, and it reflects a favorable margin mix for 1 month of our newly acquired business.

Our adjusted EBITDA was $44.7 million for the quarter or 15% of reported net sales. Our adjusted EPS was 75% -- $0.75 per share for the quarter. Jerry will provide more commentary in adjusted EBITDA and adjusted EPS in his comments.

Now turning to Slide 6, I want to make a few comments about our revenue performance for each market. Automotive continues to be the largest of our end markets, which, after the acquisition, now represents about 30% of our net sales. Automotive sales increased 2% year-over-year compared to the second quarter last year and a 2% sequential decline in sales for this end market compared to the first quarter. This obviously reflects the slowing of the automobile sales globally, particularly in Europe, as well as the beginning of the shift back of the Taiwan competitor sales that we picked up during their downtime as a result of the factory flooding. Despite the recent flattening of the demand, we believe that the long-term prospects of this market remains attractive.

I&I remains our second largest end market at 29% for the second quarter's net sales. As a reminder, I&I is our catchall category that also includes wind and solar energy, medical, locomotion and others. In particular, we saw demand for shipments of our wind energy products spike during the most recent quarter, but we expect this demand for these products to decline over the balance of the year.

Computer/datacom customers represent 17% of our total sales. In our computer/datacom end market, the trend of strong year-over-year growth began early last year and it continued through the second quarter of 2012, resulting in about 13% growth in net sales compared to the same quarter last year. However, one of our customers in this end market was recently acquired, after which orders have slowed during their integration. As I mentioned -- as I have remarked in the past, I remain bullish about our developing opportunities in this market.

In telecom, which represents about 15% of our total sales, the positive book-to-bill ratio I highlighted during our first quarter call played out as an 11% sequential increase in net sales during the second quarter. Pockets of strength kept order levels above billing levels for this end market recently as well. Unfortunately, our sales in this end market are still down compared to the prior year, and customer forecasts are mixed. The mil/aero market, now representing about 9% of our total sales despite mixed to negative overall market views of this end market, net sales remain almost flat sequentially and year-over-year, with net changes being less than $1 million in the second quarter of 2012, and I think our market position held up quite nicely compared to most competitors.

Moving on to Slide 7, I'll make a few more comments about what we expect for the third quarter. The recent global softening of demand for the electronic components resulted in a pro forma book-to-bill ratio under 1 for the combined business during the second quarter. While we've become accustomed to expecting our third quarter to be seasonally strong, overall pessimism across our markets recently has us looking for enough orders to sustain the level of net sales our operations achieved in the most recent quarter. As highlighted in our press release, while it isn't our traditional policy to provide guidance, as a result of the acquisition of DDi and the comments about our markets, we thought it would be helpful to provide revenue guidance for the third quarter, which is in a range of $325 million to $335 million. Despite the flattening demand, we're looking to continue to execute on our integration plan to achieve our synergy cost saving goals as quickly as possible.

As expected, China labor costs continue to be a headwind, while cost of materials and overhead have remained fairly stable. So far, this summer, energy rationing in China has not affected us to the extent -- the same extent as it had last year, though rumors of revolving brownouts continue to circulate.

Following the acquisition of DDi, we now have another factory relocation project to manage. Prior to the acquisition, DDi began a project to move its Anaheim, California operations out of their historical multiunit leased campus into a nearby single-roof owned building. This project is expected to be completed near the end of this year and should be a dramatic improvement to cost, quality and obviously, less handling of production.

At the end of July, we completed the consolidation of our small Qingdao assembly operation into our Shanghai operation. Additionally, the progress we made on our capacity expansion projects in Zhongshan, China, together with the recent slowing of the automobile product demand, affords us the opportunity to accelerate the final closings of our Huizhou, China facility. We now anticipate shutting down some of the front-end production processes in that site during the third quarter.

The final topic that I wanted to cover before I hand it over to Jerry relates to our newest board members. Following the retirement of Bill McCormick and the untimely passing of Jeff Pruellage earlier this year, we are pleased to announce yesterday the appointment of 2 new independent board members, Retired Admiral William Owens and Mr. David Stevens. I'm confident these 2 individuals will be great additions to our board. A separate press release was issued that spells out their background. And with that, I'll turn it over to Jerry.

Gerald G. Sax

Thanks, Dave, and good morning, everyone. You'll notice that we've included a supplemental table on Page 9 of our earnings release this morning and on Slide 9 in the presentation materials, which I'll walk you through in a couple of minutes. That table is intended to clarify the nature and amount of the nonrecurring effects of the acquisition and the refinancing. Dave briefly mentioned the China factory relocation projects, but the effects of those are not highlighted in that new table.

Let's first look at Slide 8 or the first table included with this morning's press release. That table compares our reported results year-over-year and sequentially. The net sales here are actual rather than the pro forma figures which Dave covered, so of course, the growth is exaggerated by the acquisition. As Dave mentioned, margin improved both year-over-year and sequentially despite the onetime effect of the acquisition, which I'll talk more about on the next slide. We usually look for seasonal improvement over the first quarter, and you'll probably recall that the labor and materials cost increases in the same quarter last year choked margins in that period.

SG&A costs increased in our second quarter, and while some of that relates to the continuing effects of adding DDi for the 1 month that we own that business, much of the increase relates to the M&A deal costs. On a normalized basis, I think we're looking at something like $28 million per quarter for SG&A going forward, but that's excluding the noncash stock comp expenses. Of course, we'll be getting some immediate cost synergies from the acquisition, but we'll also be encountering integration costs during the next couple of quarters, and I'm looking forward to savings to net out the costs in the near term.

Before I comment on depreciation and amortization, I want to highlight that just as we did with the Merix acquisition a couple of years ago, we've engaged appraisal and valuation experts to help us determine the fair values of the fixed assets and the intangible assets that we acquired from DDi, all in accordance with GAAP purchase accounting rules. That determination is not yet complete, so we've used preliminary estimates for our second quarter reporting. At this point, compared to DDi's historical depreciation and amortization expense run rates, I think the write-ups of fixed assets and intangible assets may result in an incremental $1 million of quarterly depreciation expense and an incremental $1.3 million quarterly amortization expense. Total depreciation expense should also continue to increase as a result of our capacity expansion and relocation projects. All in, I'm looking at depreciation expense in the range of $23 million to $24 million for the third quarter. Amortization expense is probably going to be in the range of $1.6 million to $1.8 million for the third quarter. Restructuring expense in the second quarter includes about $1.8 million related to the factory relocation projects in China that Dave mentioned and about $200,000 related directly to the acquisition.

As I mentioned on our last couple of calls, even though most of the cash related to these charges will actually be paid later this year, the accounting rules required us to accrue certain estimates in the first and second quarter. At this point, we're still estimating $13 million to $15 million in total for the restructuring costs in 2012 related to the 2 China relocation actions. In addition, we're looking at something south of $5 million related to the DDi acquisition.

Because everything below operating income is affected by the refinancing, let's move on to Slide 9 of the presentation materials or Page 9 of this morning's press release. In the middle column here, you can see that we've called out the onetime effects of the acquisition and the refinancing. As highlighted in Footnote A, just over -- or just under $4 million of our second quarter cost of goods sold is related to the purchase accounting write-up of the inventory that we acquired with DDi on May 31. This will not impact future quarters. As highlighted in Footnote B, nearly $8 million of professional fees and other expenses were charged to SG&A in our second quarter related directly to the acquisition. I don't expect any such cost to impact future quarters related to the DDi acquisition, though we used some estimates, and we may see some minor true-ups of those estimates that were included in the $8 million that you see here.

Footnote C calls out the portion of the restructuring costs that are directly related to the acquisition, as I said earlier. This adjustment excludes the effects of our China factory moves because those projects are unrelated to the acquisition and the refinancing since we had announced those previously. However, you'll see in our reconciliations of adjusted EBITDA and adjusted earnings per share that we add back all the restructuring costs, and not just the acquisition-related costs.

Our reported interest expense reflects a combination of old debt and new debt, much of which changed during the second quarter. We closed on the new notes offering at the end of April, but we were not able to terminate the old notes until the end of May, which was the same time that we closed on the DDi transaction. So practically, we had 2 debt issuances overlapping for the month of May, and the funds that we had borrowed for the DDi acquisition sat idle in a bank account during the month of May. So as highlighted in Footnote D, the adjustments to interest expense add back interest on the old notes as if we had terminated them a year -- a month earlier, and on the new notes as if we had deferred a portion of the borrowings for the DDi for 1 month. Of course, going forward, we'll see the continuing effects of the new debt on our capital structure, the new notes, the revolving credit facilities and other debt of legacy Viasystems, as well as some mortgage debt that we acquired in the DDi acquisition. I'm modeling about $11.3 million of net interest expense for the third quarter.

Though much smaller in value as indicated in Footnote E, you can see that we made similar adjustments to the amortization expense related to the mid-period refinancing. But for the third quarter, I'm modeling about $750,000 of amortization expense related to financing fees.

The loss on early extinguishment of debt is near the $25 million that I estimated on our first quarter call. As indicated in Footnote F, this includes cash paid for early premium on the old notes, as well as noncash effects of accelerating the original issue discount on those old notes and the noncash effect of writing off the old deferred debt costs. There are no continuing effects of the old notes in the third quarter or thereafter, cash or noncash.

As usual, our income tax provision is very complicated this quarter. Approximately $3.7 million of the tax provision was related to the noncash write-off of deferred taxes that was determined in connection with the acquisition and the refinancing, so I backed that out in the middle column here. It's not on this slide because it's not related to the acquisition or refinancing, but you'll also note in our adjusted earnings per share reconciliation that we reported about $2 million of tax benefits from the lapse of some old historical exposure items. So I think of the normalized income tax expense in the second quarter as being something like $3.6 million, which is in line with our historical trend for our foreign operations.

Going forward, our U.S. income, including the newly acquired operations, appear to be well sheltered by NOL carryforwards. So something in the neighborhood of $3 million to $5 million per quarter of income tax related to our foreign operations is what I'm using in my modeling.

Dave already mentioned that our adjusted EBITDA was $44.7 million and that our adjusted EPS was $0.75 in the quarter. The reconciliations of those metrics to their GAAP counterpoints -- or counterparts appears in the supplemental slides of today's presentation materials and on the final 2 tables in our earnings release this morning.

You'll note that most of the adjusted EBITDA and EPS reconciling items are related to the acquisition and the refinancing, as well as our other recurring noncash items, so I don't plan to take any more time on today's call to walk through those reconciliations.

As we move on to Slide 10, you know that I've lately been skipping over the balance sheet on these quarterly calls, but because of the impacts of the acquisition and the financing, I want to highlight just a couple of items on our balance sheet this time. Compared to the December 31 balances, most of the line item increases relate to the assets and the liabilities that we acquired from DDi. If you try to calculate our days of accounts receivable inventory and accounts payable, I'll remind you not to forget that DDi's operating results are only included for 1 month as opposed to the full balance sheet effect. The table on Page 10 of our earnings release shows working capital metrics adjusted for the acquisition effects, and you can see that they're very much in line with our historical results.

Looking at the capital structure, you should note that we took over responsibility for about $15 million of mortgage debt on the newly acquired factories in U.S. and Canada, and those liabilities are split between long-term debt and current debt on our June 30 balance sheet. The mortgages bear interest at a blended rate of about 4.5%. Long-term debt at June also includes the $550 million of new notes.

Moving on to Slide 11, you can see that the most significant cash effects are related to the acquisition and the refinancing. However, I don't want to overshadow the positive cash provided by operating activities in the quarter and year-to-date. You can see that our CapEx is $52.5 million for the first 6 months of 2012, which includes about $30 million spent in the second quarter. Excluding the CapEx for capacity expansion and other special projects, our recurring or, some people call it, maintenance CapEx has been about $13 million in each of the first 2 quarters. With the addition of 7 more factories, I expect that this recurring or maintenance CapEx run rate will increase by something like $3 million to $5 million per quarter, but we're still working on understanding exactly what those requirements will be. Of course, our expansion and other projects will continue into the second half of this year, so I expect that our recent total CapEx run rate will increase slightly for quarters 3 and 4.

Availability under our domestic and foreign credit facilities was approximately $90 million at end of the quarter, which complemented the unrestricted portion of our quarter-end cash balance of about $85 million. With the addition of several new factories in the U.S., I'm looking at some tweaks or improvements to our domestic revolving credit facility in the U.S., and I hope to have more information for you about that on our next call.

I apologize for having taken so much time on this call, more than usual today, but I hope that you find our expanded reporting format is helpful in understanding the significant onetime effects on our business this quarter.

With that, I'll give Dave control of the mic again, and we can move forward to the closing of the comments.

David M. Sindelar

Great. Thanks, Jerry. I guess now we'll just turn it back to the operator, and we can start conducting the questions-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matt Sheerin from Stifel, Nicolaus.

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

Just a couple of questions. Looking at your outlook, Dave, given -- I guess we're looking at an incremental $30 million or so from DDi based on the run rate that they've had. Is that kind of fair?

David M. Sindelar

Yes, I think that's about right. I mean, they were running about $260 million, $270 million, $280 million kind of range on an annual basis, so whether that's $20 million or $25 million or something like that, it's close.

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

So that implies your core business sort of flat, which is below seasonal. Are you looking at kind of below seasonal trends in all of your end markets, and maybe -- and particularly on automotive, which I know was down sequentially? Some other suppliers have sounded a little bit more optimistic about automotive. Maybe could you talk about what you're seeing there and the mix geographically in your business there?

David M. Sindelar

Sure. And if I miss one of the questions, remind me, make sure I get them in there. If you look at our second quarter sales over our first quarter sales, we're probably up about 1%, so -- 1%, 2%, so it's pretty consistent with -- kind of the flat to the stable. And as you look at the segments, we have seen slight increase in the I&I business, slight increase sequentially in the telecommunications side and the computer side, with military flat, and then in the automotive, as I mentioned, it's down a couple of percent quarter-over-quarter. On the automotive side, part of the issue there is, is that, as we've been talking about over the last 2 or 3 quarters, that as a result of the Thai floods and some of the factories over there going out of production until they kind of rebuild and get back into place, we were expecting to have that gradually go away during the first half of this year. And so we think that that is, in fact, in process. So I think our outlook, as I mentioned in the comments, is while we're down slightly, I think we still are pretty bullish about it as we kind of get all the bits and pieces kind of stabilized.

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

Okay. And you still have more European exposure overall in automotive, right?

David M. Sindelar

The difficulty of understanding the European piece is that I think pretty much anybody who participates in the automotive industry ships to European producers, with the likes of Bosch and Conti and TRW and Autoliv. There are a lot of production facilities inside of Europe. I don't believe a lot of that production today is getting consumed by European unit volumes. So if you really have to look at the total automotive market to figure out what's going on, Europe, from a unit volume, is struggling. The United States, I think this last month of July was the first month in a long time we've seen kind of a backup in unit sales. Asia continues to be -- being pulled along by China. And it's still growing, but the growth is not nearly what it had been for the last 12 to 18 months. So generally speaking, I think we're seeing, globally, a little bit of a slowdown. And then to kind of factor into that, I think you have to -- not to make this more confusing than it needs to be, but just to kind of get all of the facts on, you're seeing Toyota come back online as well. And while we are beginning to penetrate the Japanese market, Japanese produced, owned, produced market, we're kind of just in the beginning stages. So as Toyota comes back on, I think that that will have a period of, for lack of a better description, kind of adjustment, because with the earthquake and the tsunami, Toyota was running to play catch-up as well. So I think you're kind of seeing a bunch of different things kind of balance out, and as that all gets balanced, I think we'll be back -- kind of back to what I'll refer to as normal.

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

Okay, that's helpful. And then on telecom, you had decent sequential growth, as you've pointed out, still down year-over-year. Are you still seeing a positive book-to-bill in that segment?

David M. Sindelar

Yes, we are.

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

And what's your book-to-bill overall for the quarter? I don't know if you gave it.

David M. Sindelar

It was about -- for the quarter, it was about 0.9.

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

0.9, okay. All right. And then, Jerry, on the SG&A, I missed that number that you gave, sort of expectations for the company now in Q3 and going forward.

Gerald G. Sax

I'm looking at $28 million, and again, that excludes the GAAP reported noncash stock comp. I know that you exclude that from your number as well. So I think $28 million is the number you're looking for.

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

Okay. Well, that seems like a fairly big jump up sequentially. Is that mostly related to -- it couldn't be all related to the acquisition.

Gerald G. Sax

It is.

David M. Sindelar

No, it is. It is. I mean, the difference between the 2 companies, the DDi and Viasystems, is Viasystems is a high-volume, low-mix, and so our handholding of customers and things of that nature is a lot less than when you have the high-mix, low-volume type of business and the quick-turn and the prototyping.

David M. Sindelar

Yes, if you look at their historical SG&A as a percent of sales, it was much higher than ours.

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

Okay, so it's technical sales, engineering, et cetera, in that number?

David M. Sindelar

Yes.

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

Okay. And I know their gross margin was also higher because of that mix. And given your seasonality, would you expect that gross margin to hold at that 22% level or be up on the mix with DDi or...

David M. Sindelar

I'll let Jerry chime in as well. I think the -- the second quarter, I think, generally speaking, was a good quarter for us. We had significant volume and a lot of things working. We didn't have as many rolling blackouts in China as we had the year before. And so as we go into the second quarter, if I was to put a range on it, again, I'd probably range it in 20.5% to 21.5% margin, so I would expect a little bit of decline because of the volume and potentially a few things, like a few rolling blackouts in August and September.

Gerald G. Sax

In addition, based on where we are right now, we're looking at kind of the final production period of the HZ facility occurring in the third quarter. And so there's going to be some lack of full absorption. As that factory comes down, not all of those costs qualify as restructuring expenses. So I expect a little bit of dilution in our gross margin rate just for the fact that we're bringing down a pretty significant factory. The smaller factory, Qingdao, went through that same thing in the second quarter, but it was much smaller, and it wasn't even worth calling out the effect of that.

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

Okay, that's helpful. And then just lastly on the synergies from the acquisition, that $10 million you talked about, when are we going to start to see that roll off? Is that beginning in the December quarter?

David M. Sindelar

Yes, I think that's probably a good -- we're in the process of -- over the last couple of years, we've done 2 fairly significant acquisition mergers. One was Merix. One was -- well, obviously, the latest one was DDi. For the Merix acquisition, we had over 12 months of planning and analysis and paralysis, so we pretty much -- at the date we closed, we knew pretty much every step we were making. With the DDi acquisition, it came up a little bit quicker and faster. And while we had parameters, we've seen -- we kind of knew what we wanted to do. We didn't have names and numbers and specific steps to get there. So I think your assumptions are pretty good. We're going to start -- probably take most of July, August and September making sure we have everything identified and we have all the bases covered and we don't hurt customer relations, customer service. And then towards the fourth quarter will be kind of the full implementation. By the time the numbers start rolling through, I would -- I think the $10 million should be pretty much full force by the end of this year, and we'll kind of see it starting to trickle in as we go through the rest of this year.

Gerald G. Sax

And just to give some other examples, some of the savings we're expecting are kind of the back-office and professional services, things like auditors. But of course, we're going to have to get our auditors through the opening balance sheet. And I talked in my comments about the valuation experts that we have engaged. Those are incremental costs that we're going to be paying out for audit or financial reporting-related things this year that are sort of onetime effect for us this year, but by the end of the year, we should enjoy the savings that we anticipated for that type of events. So it's -- some things, we just have to wait to get through, as I mentioned in my comments, some of the incremental costs of the integration which are going to offset those synergy savings for a quarter or 2.

Operator

Our next question comes from Jiwon Lee from Sidoti & Company.

Jiwon Lee - Sidoti & Company, LLC

I just kind of wanted to circle back on your near-term revenue expectations. I think you did highlight some of the end market dynamics, but if you could sort of kind of pick out a end market that sort of dropped the most in recent weeks or months that triggered to trim your expectations.

David M. Sindelar

I'm sorry, I was -- I'm not sure there's any one market that's affected it other than just trying to listen to what all is going on and kind of look in our bookings and billings and different things. Unless you're seeing something dramatically different, then I'm seeing -- Europe seems to be at best sideways, if not down. United States, there's not a whole lot of vibrancy coming out of the U.S. market. China continues to struggle -- continues to plug along. I think China, as a government, a economic region, probably has more resources to prop up or whatever their economy. So I'm kind of looking at the general market, the general commentary, looking at bookings and billings, listening to what I'm hearing from customers, what I'm listening to suppliers and talking to about everybody I can just to try to get a feel for what's going to happen in the second quarter. And I may be talking to the wrong people, but I haven't heard or seen anything that would say that the second half is going to be any stronger than the first half.

Jiwon Lee - Sidoti & Company, LLC

Well, that's helpful. And is there additional incremental pressure from the Chinese labor cost side, or is that just one of those things that's just going to be the effect of life [ph], as you said earlier?

David M. Sindelar

Yes, no. I've -- I think I've -- I mean, my opinion has been this for not just the last 3 quarters or sort of 3 months, it's been this way for the last year, year and a half. I think we're going to continue to see labor cost increases. Typically, the way the labor cost increases come is they come in the beginning of the year when they have a minimum wage increase, and that pretty much filters all the way up the chain, so you can't have entry people making more than the people that have been there for a year or 2 years or 3 years. So I think we're going to continue to see the actual rates go up, and you're also seeing a lot of press and different things about overtime hours and how many hours they can work and how does that filter into your workforce and how many people you need to hire and things of that nature. So I think the labor cost has been, at least for the last 12, 18 months, been a big topic of discussion inside of Viasystems, and I think it's going to -- labor costs are going to continue to be an issue as we go over the next 5 years.

Jiwon Lee - Sidoti & Company, LLC

And lastly for me, would you care to comment on your midterm -- I mean, looking beyond the next several quarters, gross margin or the operating margin goals, if you have them?

Gerald G. Sax

Jiwon, look, what we continue to talk about, and there's no evidence today to think that it's wrong, is that we think the 23% to 25% margin is where this business operates on a continuing basis. There'll be some quarters up and some quarters down, but in periods of high demand, we're faced with cost pressures. In periods of low demand, we're faced with pricing pressures. So it's kind of where this world resides, and I don't see anything in the combination of these 2 businesses that changes our near- and long-term outlook.

Operator

And our next question comes from David Wong from Wells Fargo.

Amit Chanda - Wells Fargo Securities, LLC, Research Division

This is Amit Chanda calling in for David. I just wanted to ask if you could provide some more detail as to where the strength in telecom is occurring geographically, and if this represents share gains for Viasystems, in your view?

David M. Sindelar

I'm not so sure I'd characterize it as share gains. I'd characterize it more as just program wins, project wins. And when the OEMs or the carriers decide to start spending money, and it trickles down to the equipment manufacturers, and it comes to us. So it's -- I think it's really more project-focused as opposed to anything else.

Gerald G. Sax

We serve telecommunications customers from a number of our factories, and we obviously report everything on a global basis. So in many cases, you don't see all the noise, but some factories are up and some factories are down. As Dave suggested, it was just very -- being on the right projects at the right time for the last quarter or so.

David M. Sindelar

And I think if you went back, and at least it was consistent again and maybe, at the time, misery loves company, but as we went through the second half of last year, it seemed like everybody in the telecom, components or equipment suppliers to the big equipment producers or the carriers seemed -- was wondering where the telecom industry was going, and that carried on through the first quarter. And we continue to hear about this much, much heralded LTE 4G build-out, and it never really materialized. And so it's good that the fact that we're up, we're happy with that. But it's -- I'm not sure that we gained a big new customer or big market share gains.

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Okay. And Jerry, can you talk about your expectations for inventory trends for the September quarter following a 20% sequential increase in the June quarter?

Gerald G. Sax

I look at it as an inventory days or an inventory turns metric that we reported in our financial release. I think we'll see a slight improvement versus our historical trends because the acquired business tends to be more quick-turn in nature, and therefore lower inventories. For example, in our automotive business, we carry some finished goods inventories in hubs for our end customers. We don't see that occurring in the business that we acquired. So I certainly don't expect the significant growth of inventory that you saw in this quarter. But of course, most of that was just because we bought all of their inventories with the business.

Operator

Our next question comes from Frank Jarman from Goldman Sachs.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

The first question I had was just around raw material costs. I think you had a comment in the press release about lower raw material costs. How should we think about that relative to the impact to the cost structure on a go-forward basis?

David M. Sindelar

That's a -- I'll tell you the way we handle it and then try to explain how we kind of model it in. From an actual standpoint, from a cost increase or cost down, we try very, very hard to treat it as a pass-through. So since the majority of our costs, the biggest portion of our cost, is what we refer to as copper-clad laminates, which is copper, it's laminates, it's different components but it's the same product. It's specified typically by the customer. And when prices go up, we pass them through. When prices go down, our customer wants to pass those through as well. So that's kind of the first step. The second step is we've tried to characterize copper-clad laminates. They tend, and there's no direct correlation, but they tend to track copper prices, as you might imagine, but they also track oil prices and glass fiber prices, and it's a little bit more confusing than that. And if you go back over time, obviously, when the overall global manufacturing production cycle is up, copper prices go up, oil prices go up and demand for components go up, and that's typically when we see the cost increases in copper-clad laminates. When the overall global economic environment is not so robust or declining, we see flat to declining prices. And so as we sit here today, and as I mentioned in my comments, we see material costs to be fairly stable, and so we're not anticipating any significant increases in our copper-clad laminate prices. And so to Jiwon's question, what other factor are we looking at that would indicate that there's a slowing or anything else? As I kind of mentioned, we've been talking to suppliers, and it's not just us, it's suppliers, it's customers, it's everybody. So we're really seeing kind of a stabilization on our material cost, which is -- I'm not sure it's a specific-to-the-point answer, but it kind of at least gives you what the thinking is.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

Okay. I appreciate that. I guess secondly, just as I think about the cash flow, I appreciate your color around the expected required maintenance CapEx versus the tick up that you plan to spend in the back half of this year. But as I think about the free cash flow trajectory, GAAP cash from operations plus CapEx, can you talk about what you need to see in order to achieve a free cash flow positive trajectory? And if we are in a weaker environment, what does it take to think about pulling back on the capital spending plan at this point?

Gerald G. Sax

Sure. This is Jerry. We do get a lot of questions about that, as you might imagine, and I guess we continue to think of CapEx needs in 3 different buckets: growth-related, maintenance-related and market downturn. And over the past couple of years, unfortunately, we've experienced all 3 of those. And if you look back to, for example, 2009, we were spending only regulatory and safety-related spend. So that's going to be at a rate that's even less than the $13 million per quarter that I quoted as the recurring or maintenance. You pull back and you only do safety and health and regulatory, statutory and keep-the-lights-on type of things. Because the market, over the past several quarters, has been more vibrant, our plans included capacity expansion, which is more along the lines of the total expenditures that you're seeing per quarter of $25 million to $30 million, and of course, with the new business, we'll tweak that up a little bit. So those are the 2 bookends with the kind of $50 million to $60 million a year spend being the recurring or just maintaining. If you tell me that I don't have to grow the top line, I'll probably spend about that much every year. So I think when you get to either of the scenarios that are not the big capacity expansion growth, it is a pretty cash flow positive business. It's only in the periods where we're spending on the capacity expansion, and it is expensive capital upfront that you have to spend substantially before you start enjoying the operating results. You're spending it before you make it, and you burn a little bit of cash in those periods. And that's what we've been talking about for the past 3 or 4 quarters, is being on a cash burn cycle for a couple of quarters while we're in this capacity expansion, and in particular, while we're relocating the one factory that we had to move out of.

Franklin Jarman - Goldman Sachs Group Inc., Research Division

Great. And so with the completion of the factory relocation, I can think of, say, next year's CapEx trends maybe ticking back down to sort of more normal levels, especially if we're in a more anemic growth rate?

David M. Sindelar

Yes, absolutely.

Operator

[Operator Instructions] Our next question comes from Nick Farwell from Arbor Group.

Nick Farwell

Jerry, Dave, may I ask the same question that was -- you just answered slightly different way? In what way has the uncertain economic outlook actually caused you to pull back a bit on your CapEx plans or extend them or in some way try to enhance cash flow, especially during the second half of this calendar year?

David M. Sindelar

Yes, no, the -- it's a good question. And again, I don't want to -- we don't operate like a 0-based budgeting operation, so we come up with a plan to spend, and we're forever pushing and pulling and trying to make sure we match orders and demand and what customers want with our needs. Now there are certain things, as you expand the capacity in Zhongshan to shut down Huizhou and put that capacity, and there are certain things that you can't push out because you need a factory that's up and running. So we continually look at what we plan on spending versus what the market is, and I think a good example of that would be back in the 2008 time frame, we had -- and I'm not here to say that we're in a 2008 time frame, but to give you an example, early 2008, the market was strong. Everything was flowing and going. We announced our capacity expansion plans, and by the time we got to May, June, we were looking around saying this market didn't feel real good. And we started pulling spending back, people back, costs back, and as a result, as you got into '09, 2009, I think our capital spending was probably about $30 million, and we were able to pull it back pretty hard. So I'm not for a second saying we're in that same scenario, but I was just giving you an example about how we try to operate the business. Now I'll go back to what I said before. There's certain amount of the capital that we're committed to because we're shutting the factory down and we're moving it. But on the capacity expansion, the customer needs, the customer requests, we balance that daily, weekly, monthly on where we think they're going and where we expect them to be.

Nick Farwell

With that thought in mind, again, following on the prior question and looking out, say, beyond the second half of this calendar year, it sounds as if you expect a more normalized CapEx, therefore generating a positive cash flow, presumably, in '13. Is that a fair assumption?

David M. Sindelar

I think that's a fair -- now if Europe gets its act together and United States gets its fiscal cliff taken care of and all of a sudden we jump up to 6% GDP, I think we'll all be cheering. And I think at that juncture, I'll be happy to spend a little bit more capital than I currently am comfortable with.

Nick Farwell

I'm curious, what customer in I&I was acquired during the second quarter and how might that acquisition affect your relationship with that customer?

David M. Sindelar

Yes, it was on the computer/datacom side, and it was QLogic. And I think our relationship continues to be really strong and solid.

Nick Farwell

Okay. And Jerry, you commented earlier that gross profit margins on a more normalized basis might be in the 23% to 25%, reflecting the DDi acquisition in their business model. Could you comment also on what you think operating income margin might be if, in fact, you achieve 23% to 25% gross profit margins?

Gerald G. Sax

Yes, I've always thought of our business before DDi as kind of normalized 7.5% to 8% operating margin. As we were diligence-ing DDi, I expected very much the same thing because even though their margin was higher, as we talked about on one of the other questions earlier, their SG&A was also higher, so the EBITDA surrogate ended up being about the same rate as our historical. And of course, the difference between EBITDA and operating is principally the noncash items like depreciation and amortization. It's probably still a little bit too early to determine exactly what that target ought to be because I'm not far enough through the fixed asset and the intangible asset valuations to give any more guidance than I gave earlier. I think with the GAAP accounting requirements to write all those assets up, you're going to see a little bit of dilution in that operating margin, but it's all the noncash incremental depreciation expense because we had to write up the book value of their assets.

Nick Farwell

Right. I have -- obviously, I don't know that number, but in just doing some P&L work prior to and post the acquisition on the combination of the 2 businesses, it seemed to me that the public costs for DDi, which were relatively onerous, being leveraged in through the model of Via, would accrue to you in such a way that you could pick up something at the op line and enhance the prior guidance of 7.5 to 8%. I'm a little surprised that didn't -- you don't think that's likely to occur.

Gerald G. Sax

Not in the near term because of the things that I talked about, like the incremental cost of doing the integration. We're going to pay auditors a lot more this year to do our audit, and that was one of their big public costs. There should be some improvement, but I'm afraid it's going to be offset by the depreciation expense.

Nick Farwell

Okay. One last very quick question. I haven't done all the math on this, but I noticed that your total shareholders' equity declined. I think the number was $46 million. And the GAAP loss showed $38 million for the 6 months. How do you reconcile that? And I certainly could have missed a number in there. I know I missed a number.

Gerald G. Sax

Yes, it's because it's not a P&L number. Look on the cash flow statement. You'll recall that we bought out our joint venture partner, the $10 million spend, so that's $10 million less cash that doesn't go through the income statement, but it reduces equity. It's paying out their equity.

Operator

I'm showing no further questions at this time.

David M. Sindelar

Well, great. I just want to take a few minutes to thank everybody for taking the time and effort to go through this. I am extremely excited about bringing these 2 companies together, and I think relative to what was given to us in the second quarter, I think our second quarter numbers are pretty -- were actually pretty strong compared to a lot of the various competitors and things of that nature, so I look forward to a challenging but good end to 2012. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.

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