Stoneridge, Inc. (SRI) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Stoneridge Fourth Quarter 2011 Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed.

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our fourth quarter earnings release. The release has been or will shortly be filed with the SEC and has been posted to 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 that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainty, and actual amounts may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today's call, we may 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 measures to the most directly comparable GAAP measures. John will begin the call with an update on the current market conditions, operating performance in the fourth quarter, our growth strategies, business development and his thoughts on future initiatives. George will discuss the financial and operational details of the quarter and future outlook including 2012 guidance. After John and George have finished their formal remarks, we will then open up the call to questions. With that, I like to turn the call over to John.

Good morning. Stoneridge revenue for the fourth quarter was $186 million, an increase of $25.6 million, or 15.9% over the fourth quarter of 2010. These results continue the revenue growth we experienced in the first 3 quarters and were primarily driven by the North American commercial vehicle and Ag markets. 2011's annual sales guidance of -- 2011's annual sales were $765.4 million, right in the range of our annual guidance of $750 million to $775 million. This revenue was a sales record for Stoneridge. We reported earnings per share of $1.56 for the fourth quarter, which was $1.37 above the prior year’s fourth quarter. Fourth quarter earnings were positively affected by our acquisition of an additional 24% stake in our PST joint venture. Earnings were reduced by a non-cash goodwill charge for BCS, our 51% owned joint venture, PST closing costs, legacy and restructuring costs related to our 2008 restructuring program for our Sarasota, Florida, and our closed SPL U.K. operations, and other inventory valuation and warranty items. We also experienced higher material costs in areas other than copper, such as rare earth minerals used in our Control Device business, and material charges included in inventory related to the prior quarter’s operational difficulties. These costs are identified in the supplemental schedule filed with our fourth quarter earnings release. George will provide additional details in the financial review. Our fourth quarter sales performance continued to increase over the prior year, but was below our projections for the fourth quarter due to lower sales to large commercial vehicle manufacturers in both Europe and North America. While below our projected forecast, sales to our commercial vehicle customers in the fourth quarter increased by 20% to $97.2 million, and as a result of increased medium and heavy truck production in North America and Europe compared to the prior year. Agricultural and Equipment category sales increased in the quarter versus the prior year by approximately 24% to $38.7 million, continuing the sales growth experienced in the Ag market throughout 2011. Sales in our Passenger Car and Light Truck segment were $50.2 million in the quarter, which was an increase of 3.7% compared to the prior year. As previously discussed, we are aligning our automotive product portfolio around key product families in emissions and actuation, which have attractive market growth, while reducing our presence in commodity or non-competitive product lines. During the fourth quarter, our operational performance continued to improve as evidenced by improved customer service levels, reduced premium freight, reductions in headcount and overtime. We were able to complete the inventory build for the Ag peak season, which will have benefits in the first half of 2012. As we started the new year, we are seeing the benefits of the prebuild in terms of improved order fulfillment, reduced overtime and premium freight, issues that impacted us in 2011. The Wiring operations have and are improving performance. For example, fourth quarter premium freight was reduced by $2.4 million, compared to the first quarter, and more importantly, as I said, based on our current performance, we will not see the first quarter of 2012 negatively impacted by high-premium freight as we saw in the first quarter of 2011. Labor efficiencies improved as well, although the full benefit was not realized as customer delays in the start-up of our new Saltillo facility from August to November, resulted in redundant headcount for the period. Headcount has now been normalized by the end of the fourth quarter, and we should see an improved cost structure for Wiring going forward. Another example of Wiring operational improvement is we reduced 1,075 people from our Mexican plant operations, or about 17.1% from the peak of March 2011. Our plans call for an additional reduction of 9.7% in 2012. A more important measure of productivity was realized as sales volume has increased in the Wiring business by 27.8% for 2011, and our sales per employee increased by 29.9%. Based on the forecast for 2012, we project further sales increases of 13.7%, and sales per employee of 13.9%, as our improvement continues in labor efficiency. While we have only 1 month to compare in 2012, our past due piece has dropped by 98% versus January of 2011, which is another example of the improvement. The Wiring operations are emerging from a difficult year in 2011. We have seen improvement in the last 2 quarters, and the trend is projected to continue into the current year, giving us the confidence we have made progress and will continue to do so. New business awards in the quarter were $21.4 million. For the year, new business awards were $231.4 million, of which $117 million were new awards, and $114 million were replacement awards. In the fourth quarter, our Asia-Pacific business had 2 significant awards totaling $8.3 million in annual sales. These awards were for the EGT sensor product line for commercial vehicle applications for selective catalytic reduction. Our strategy to focus control device technology and expand it across geographic regions and vehicle segments is paying off. Minda Stoneridge, our unconsolidated JV in India, posted fourth quarter sales of $10.9 million, and an increase of 11.7% versus the fourth quarter of last year. The sales increase was driven primarily by new business wins and to a lesser extent by market growth. Our share of net income was $220,000 in the fourth quarter. Minda sales reached nearly $50 million in 2011 compared to last year’s level of $33.4 million, an increase of $16.6 million or 49.7%. Minda’s annual sales projections should increase to $60 million to $65 million next year, and exceed $75 million in the next 2 years, consistent with our previous projections made over the last 2 years. PST, our Brazilian joint venture, recorded fourth quarter 2011 sales of BRL 114.1 million, an increase of 13.6% from BRL 100.4 million in the fourth quarter of 2010, driven by volume increases from the launch of our audio business with the mass merchandisers and retailers in 2011. PST fourth quarter sales based on an average exchange rate of BRL 1.80 to the dollar were $63.3 million. Audio sales now represent nearly 27% of our volume in the fourth quarter versus approximately 7% in the fourth quarter of 2010. The audio business growth accounted for much of the increase in PST sales in 2011. Full year sales for PST were BRL 410.9 million compared to BRL 321 million in 2010, or an increase of BRL 89.9 million or 29%. PST’s gross margins improved to 46.8% in the fourth quarter of 2011, from 42.3% in the third quarter of 2011, partially due to price increases implemented in the fourth quarter. The fourth quarter operating income was 21.4% compared to 7.5% in the third quarter of 2011, and 17% in the fourth quarter of 2010. PST’s fourth quarter performance was favorably affected by the reversal of a VAT tax on commissions paid, which affected the operating income level. George will address this issue in more detail. In summary, 2011 was a challenging year from an operational and material cost perspective, the impacts of currency, as well as the natural disasters in Japan and Thailand. Our non-Wiring businesses performed well in 2011, and we expect this to continue in 2012. We saw gradual improvement in the second half from the Wiring operations, and we have addressed the operating issues that affected their performance. Finally, in the fourth quarter, we addressed the remaining legacy and restructuring issues. We are starting 2012 in a much better position in the Wiring business and expect to see continuing improvement in our operating performance in 2012. Our major served markets continue to grow. North American automotive production forecasts are projected to be between 13 million and 14 million for 2012, the North American commercial vehicle market continues to improve and current industry forecasts indicate this recovery will continue. The most recent European 2012 production estimates show a possible 5% to 10% reduction versus 2011. However, we should not be impacted to this degree as we have new program launches increasing our vehicle content. In addition, our European team has taken cost control actions consistent with the market forecast. Finally, we expect continued growth in the construction and agricultural markets as this segment represents approximately 20% of our sales in 2011. Continuing market improvements and growth with our customers from new programs this year and next will drive top line sales. As we restore our operating performance and recover commodity cost and currency impacts through contractual terms, we will restore our financial performance in the targeted ranges over the next 2 years. With that, I would like to turn the call over to George, to provide additional details of our performance and outlook, including guidance for 2012.

Thank you, John. John has reviewed with you our sales for the fourth quarter, the year forecast and the updated forecast for the European market. Our growth has been solid the last 2 years, and is forecast to continue to grow from both a market and our business wins. Focusing on the profitability for the 2011 fourth quarter and the fourth quarter items affecting net income and earnings per share, as presented in the attached schedule to the earnings, I want to provide detail of the adjustments in the fourth quarter and provide update on the unusual items we have been reporting on quarterly. After reviewing our progress, I will share the operational highlights for the quarter and provide the outlook, including guidance for 2012. We recorded net income of $38.6 million or $1.56 per share in the fourth quarter. Included in the fourth quarter profitability is a onetime gain from the PST transaction of $1.72 per share, which reflects the valuation increase for our investment in the PST joint venture. Offsetting the positive impacts in the quarter are 3 key areas which had negative impacts on net income of $11.8 million or earnings per share of $0.48 per share: Costs related to the PST transaction, for transaction costs and adjustment to our long-term incentive plan, which impacted net income by $2.7 million or $0.11 per share. Legacy or previous restructuring activity related to the liquidation of SPL in the U.K., sale of our Sarasota facility and the partial write-down of our ERP project in North America for our North America electronics project, which impacted net income by $4 million or $0.16 per share. Other items reflecting operational impacts were asset valuations and warranty claims, impacting net income by $5.1 million, or $0.21 per share, which also reduced our gross margin by 2.9% of sales in the fourth quarter. During the third quarter analyst call, we forecasted a gross margin of 21% for the fourth quarter. With the drop in sales of nearly $10 million discussed by John earlier, and the cost items recorded in the fourth quarter, cost of goods sold and gross margin were impacted by 4.3% of sales, which negatively impacted our reported gross margin of 17.4% for the fourth quarter. With the improvements John discussed, and the improvement in our copper prices and weaker Mexican peso, we should return our gross margins on the Stoneridge base business back to our historical levels of 21% to 23% in 2012. In the fourth quarter, we finally brought to conclusion some long-term open issues, some of which relate to our 2007 to 2009 restructuring programs, the BCS acquisition we made in October 2009, and a reassessment of our ERP efforts for our North America operations. These items impacted net income by $4 million or $0.16 per share. We recorded $1.1 million in expenses in SG&A for the completion of our restructuring for the Sarasota facility in Florida and our SPL facility in the U.K., which impacted earnings per share by $0.05 per share. We also recognized a write-down of a portion of our goodwill for the acquisition of the BCS business made in October 2009, which resulted in a negative impact to net income of $2.1 million or $0.08 per share. As the military and defense market has been experiencing a significant reduction in defense spending over the last 2 years, the BCS sales have been negatively impacted, which led to the recording of the partial impairment charge in December of this year. Since Stoneridge owns 51% of the BCS business, our minority partners recognized their 49% share of the non-cash goodwill write-down. We shut down the Sarasota facility in December 2008, and all production was moved to Lexington, Ohio, and Juarez, Mexico. The final issue to be addressed was the sale of the Sarasota facility. The commercial market has been very depressed in Florida, which extended the period for us to sell the facility. We finally completed the sale of the Sarasota facility in December of this year for about book value, which generated $4 million in cash. At the time of the sale, we increased our environmental reserve by $600,000 to ensure that we provided sufficient reserves to cover future liabilities. When we shut down our SPL facility in 2008, we worked to cap any liabilities that remained with the company. During the last 3 years, we addressed the wind-down of the company, and took SPL through the U.K. liquidation process. In the fourth quarter, we have successfully liquidated the company and settled all creditor claims and received a full disposition of the pension liability. At this time, we have no defined pension liability programs remaining in the company. The last remaining issue with SPL is the building, which has a long-term guaranteed lease attached to the facility. We are entering into an agreement that will structure a financial arrangement to cap the liability and provide the owners of the facility and Stoneridge the ability to sublet the facility. We have reserved an additional $500,000 to recognize the potential additional expense for the conditions negotiated in the agreement. We purchased a 51% interest in Bolton Conductive Systems in October 2009. BCS is a wiring business in the military defense business. We made the purchase to broaden our customer base in military and defense business, to supplement what we do for Navistar with customers such as Force Protection, BAE, AM General, General Dynamics and Oshkosh. Since the acquisition in 2009, military and defense spending has dropped by 60%. As a result, we recorded an impairment of our goodwill by $4.9 million in SG&A, while 49% of this charge, a total of $2.4 million, will be recorded as net income attributable to non-controlling interest, which represents our minority partner share of the goodwill impairment. As part of the SG&A, we also recognized a write-down of $800,000 for the North America ERP effort that was started in 2008 through 2010 for the North America electronics business. It was stopped in 2011, as we were not satisfied with our ability to implement this project, given the operational issues we were addressing. We are restarting the ERP project for all of our North America operations, both Control Devices and North America electronics, rather than just our North America electronics business. This effort has been scoped and will focus on demand planning and production forecasting in the first phase in the first half of 2012, which will be completed by the end of the second half of this year. In addition, we will begin the ERP phase in the second half of 2012, which most likely will extend into the first half of 2014. This effort is important to the continuous improvement of our Wiring business specifically but is also important for standardizing all our operations in North America, similar to what we have in Europe. We believe with the recognition of these charges and expenses in the fourth quarter we have addressed the legacy and previous restructuring programs. We have right-sized BCS based on the current level of defense spending, and dealt with open items from the operating issues we experienced during 2011. During this past year, we have been reviewing with you the negative cost impacts for operational issues and higher copper prices and the strengthening of the Mexican peso. On the positive side, the Wiring operations have improved significantly during the year, and are positioned well for 2012. As you recall, the Wiring business was impacted in 2011 by copper increases and the strengthening of the Mexico peso by 10.7 million, and the operational issues cost us $13.3 million due to labor inefficiencies, overtime, excessive headcount, premium freight, and the start-up costs for the new Southwest facility in Saltillo. The operational issues and the currency and commodity impact cost the Wiring business a total of $24 million for the year. For 2012, we have offset much of the negative operating cost of $13.3 million. Our 2012 performance will be positively impacted by $13.2 million compared to last year. We've reduced the premium freight to normal levels by the end of the second quarter of 2011, and this will benefit us by $5.2 million for both freight-in and freight-out for 2012. The Saltillo plant is running well and the 3.2 startup cost is behind us. In terms of customer deliveries and past due pieces, our operating team in the wiring plants have reduced our past due pieces by 98% for the first quarter of 2012 compared to the first quarter of 2011. As John discussed, our indirect and direct labor has been reduced in our Wiring operations by 1,075 people from the peak in March 2011 or 17.1%, while sales are up 27.8%. Our sales per employee are up by 29.9%, which is a good measure of productivity improvements. And based on our current plan for 2012, we will continue to improve our indirect and direct labor headcount by an additional reduction of our headcount by 9.7%, while our sales are forecast to increase by 13.7%. As a result, our productivity of sales per employee will increase by 13.9%. Our operating team has made significant progress, which will continue to drive our manufacturing costs lower in 2012. The other area we have addressed for 2012 is copper escalations and Mexico peso purchases for our Wiring operations. In 2011, we absorbed higher copper cost of $4.4 million, as copper averaged $4.35 per pound during the year. The average price of copper for the year peaked in the first quarter and trended lower during the year. We have had 68% of our estimated consumption for 2012 at $4 per pound. Spot rate is trading between $3.80 to $4 a pound over the last 2 months. This will benefit the Wiring business by about $2 million in 2012 compared to 2011, assuming copper stays at the $4 per pound level throughout this year. The Mexico peso strengthened from MXN 13.83 to U.S. dollar in 2010 to an average of MXN 12.06 to the dollar in 2011. We purchased about $75 million equivalent during 2011, which cost the Wiring business approximately $6.2 million. For 2012, we are estimating we will purchase $72 million equivalent of Mexico pesos. We've already purchased $55 million at an average price of MXN 13.09 to the dollar. This will benefit the Wiring business by an estimated $5.7 million in 2012 compared to last year, assuming all of the $72 million worth of pesos are repurchased at MXN 13.09. Through these actions for operational improvement and hedging our copper and the Mexican peso positions for the Wiring business, we'll have offset an estimated $20.9 million of the negative cost impacts of $24 million, which we experienced in 2011. The $24 million cost impacted our gross margin by 3.1%, which lowered our gross margin from a more normal level of 22.3% to 19.2%, which was reported for gross margin for the full year of 2011. Our biggest accomplishment for the fourth quarter was the completion of the purchase of an additional 24% ownership of PST. We have been working to complete the purchase since the first quarter of last year, and as you remember we started a process to enhance the recognition of the valuation of PST in 2007, and we're prepared to execute an IPO. As reported in December 2011, we purchased an additional ownership position of 24% for $29.7 million in cash and 1.94 million shares of Stoneridge stock. The transaction generated a onetime gain net of tax of $42.5 million, or $1.72 per share. We incurred transaction fees of $300,000 in the fourth quarter and $849,000 for the full year. In addition, as a result of the transaction we increased our reserve for our long-term incentive plan by $2.4 million. We are excited to increase our stake in PST to 74%. PST will continue to be led by Sergio Leite and a very strong management team. They continue to work to expand their market presence with car and motorcycle alarms, tracking devices, audio for Fiat and GM and the mass merchandisers, accessories for the dealer and aftermarket and entering the home alarm business in 2012. As Brazil is growing at GNP rates similar to India and China, we will explore ways for Stoneridge to expand our product lines into the fast-growing market in Brazil. At the same time we are reviewing with PST management what products that could be applied to other global Stoneridge operations especially in India and China. PST's performance continued its improvement in the fourth quarter. John reviewed their sales performance already, but we wanted to review their profitability in the fourth quarter. PST reported operating income of BRL $24.4 million in the fourth quarter and an operating margin of 21.4% compared to BRL $17 million or 17.1% increase over the fourth quarter of 2010. The fourth quarter operating income was favorably affected by reversal of BRL $9.3 million of value-added tax that had been pending in court actions in Brazil. The decisions that have been rendered in the courts have supported the position that the value-added tax should not be withheld and would be reversed to PST's financial results. Excluding this reversal, PST would have posted a 13.2% operating margin in the fourth quarter. As we look forward to integrating PST, we will provide guidance and more insight into the business, as PST will be reported as a separate segment. In 2012, we estimate PST sales will be in the range of BRL $442 million to BRL $497 million, which translates to 240 million to $270 million at our planned exchange rate of 1.84. The real has been trading in the range of 1.85 to 1.75 compared to the dollar during this past month, and we expect PST operating margins to be in the range of 7% to 9% for 2012, which includes expenses for purchase accounting asset write-ups. The largest expense item in 2012 will be for inventory, which will be amortized primarily in the first half of 2012. The 2011 acquisition of the additional shares of PST included balance sheet write-ups of existing assets as well as recognition of goodwill in relation to the fair value recognized by the purchase. Our earnings guidance for PST for 2012 includes those non-cash expenses associated with the 2011 write-up of assets, which will have a negative impact on profitability. We expect the expense for the write-off of purchase accounting stepped-up values to be approximately $13.1 million for 2012. The inventory expense is estimated at $5.4 million of the charges, which will be amortized over the first 6 months of this year according to PST's inventory turnover rate. The remaining $7.7 million will be amortized evenly over the entire year. And to clarify timing and amounts, we expect purchase accounting expense to be $9.3 million in the first half of 2012, which will include the full write-off of stepped-up inventory values and $3.8 million in the second half of 2012. And under purchase price accounting, we have up to 1 year to true up asset valuations. In our first quarter update, we will update you on the status of these amounts and timing. During the fourth quarter, we also extended the term of our existing revolving credit agreement maturity by 5 years. We amended the agreement, which permitted us to complete the PST transaction and modified other accommodating terms. This has allowed us to secure availability under our revolving credit agreement to the year 2016. This follows the successful completion of renegotiating our long-term bonds on October 2010 to extend our maturities to November 2017, and lowering our coupon rate from 11.5% to 9.5%. The bond refinancing also permitted us to complete the secondary share issuance in November 2012, which increased our stock float and availability. As a result of these activities and our improving financial picture, S&P upgraded our credit rating in May 2011 from B- to BB, and changed our outlook from stable to positive. Moody's upgraded us in December 2011 from B to B1, and improved our outlook from stable to positive. One very positive metric that results from the transaction and our improving core business performance will be the debt-to-EBITDA ratio. In 2011, Stoneridge's debt to EBITDA, which excluded PST was 5.5x. With the acquisition of PST and based on our guidance for 2012, which includes both PST and Stoneridge, we would improve our debt-to-EBITDA ratio to 2x, a significant improvement from last year's 5.5x, which is a result of improving Stoneridge performance and a positive impact with PST's consolidated results. With this background, I want to review our operational performance during the fourth quarter. Revenue of $186 million in the fourth quarter of 2011 represents an increase of $25.5 million or 16% over the fourth quarter of 2010. Our sales increase is the result of increasing production volumes in our served markets, new business sales programs, and continued economic improvement in all segments of our markets. For the fourth quarter, our light vehicle sales were $50.2 million, an increase of $600,000 or 1.2%. This increase is attributable to slightly improved volume across all of our markets. Commercial vehicle production continued strong in North America and was marginal in Western Europe. Our sales in the medium- and heavy-duty truck market was $97.2 million, which was an increase of $15.6 million or 19.2%. The change is primarily a result of increased volume and net new business. And sales to agricultural and other markets totaled $38.7 million, an increase of $9.4 million or 31.9%. Sales to our top 10 customers grew $20.9 million, a 19.1% improvement over the same period last year. Geographically, our fourth quarter sales allocation changed very little from the previous period of last year. North America accounted for 74% share compared to 73% last year. This percentage will change significantly in 2012 with the acquisition of PST, as none of their sales are in North America. And based on our 2011 sales split, our split would have been 56% in North America, so our business is starting to reflect our significant growth potential in our operations in the emerging markets, Brazil, India and China. With respect to segment sales, we are experienced growth in both groups for the fourth quarter. Electronic sales were $124.3 million for the period. We added $23.2 million or 22.9% to the top line from improvements in the global, medium- and heavy-duty truck market. Control Devices sales rose $2.4 million or 4.1% to $61.7 million. Revenue was fueled by the increase in North America commercial vehicle production and strength in the agricultural customer sales for both volume and new business. Income tax expense for the fourth quarter was $22.7 million on a pre-tax income of $58.1 million. Income tax expense for the year was $26.1 million on a pre-tax income of $71.6 million. As reported for December 31 of 2010, the company is in a cumulative loss position and continues to provide a valuation allowance, offsetting its federal, state and certain foreign deferred tax assets. As a result, no tax benefit was provided on the U.S. loss for the year. However, the company was required to provide deferred tax expense related to the earnings of our PST joint venture, which is unaffected by our valuation allowance position. The increase in tax expense for 2011 compared to 2010 was primarily attributable to the gain recognized on the write-up, the fair market value of the historic investment in PST. Excluding the tax and the PST gain, 2011 tax expense increased compared to 2010 due to the decline in performance of our U.S. operations and the impairment of goodwill related to BCS. In addition, 2010 tax expense included a tax benefit for the reversal of a deferred tax liability related to our U.K. operations that was previously included as a component of the accumulated other comprehensive income. Due to the valuation allowance, the quarterly effective tax rates may fluctuate significantly. Additionally, our annual effective tax rate is unlikely to be in line with the tax rates that we experienced prior to recording the valuation allowance. As previously reported, the company is required to provide U.S. deferred tax expense related to the earnings of PST. For 2012 PST will be a consolidated subsidiary, and as a result we will no longer be required to provide U.S. deferred tax on our share of PST's earnings. Stoneridge reported fourth quarter net income of $38.6 million or $1.56 per share. This compared with prior year net income of $4.5 million or $0.19 per share. Depreciation expense for the fourth quarter was $4.2 million. Our primary working capital totaled $171.7 million at quarter end, which increased by $82.4 million from the fourth quarter of 2010 levels with inventory accounting for $68.1 million of the increase. Primary reason for the increase in working capital was due to the consolidation of PST at December 31, 2011. Excluding the effects of the PST consolidation, our primary working capital was $73.8 million or 9.6% of trailing 12 months of sales compared to 14% in the fourth quarter of last year. Current working capital levels for receivables and payables are a function of increasing sales and operational activities. This is slightly better than our $0.12 per dollar sale level and mostly a function of lower inventory levels at year end. At December 31, 2011, our working capital balance included PST's accounts receivable of $49.2 million, inventory of $58.7 million and accounts payable of $9.9 million. In addition, the inventory contains a write-up of approximately $5.4 million for purchase accounting but is subject to final valuation, which we expect to complete for inventory before the end of June 2012. PST's business mix is substantially different than Stoneridge as a majority of their sales are in the aftermarket, mass merchandiser and dealer channels. As PST's business mix has more aftermarket, mass merchandiser and retail customers in their distribution channel, they tend to carry more inventory than the Stoneridge core business, which will affect our inventory turns metric in the future. We will provide more detail at the end of the first quarter, as PST will be reported as a separate segment for our first quarter 2012 consolidated results. Operating cash flow was a source of cash of $18.3 million in the fourth quarter compared to a source of cash of $10.6 million in the fourth quarter of last year. Our cash flow results in the fourth quarter were primarily driven by the decreases in inventory and accounts receivable. Capital investment for the quarter totaled $5.6 million, mainly reflecting investment in new products in the Wiring operation and Control Device segment. For the year, capital expenditures were $26.3 million, which included $5.2 million for the new Saltillo facility in Mexico. As of December 31, 2011, we have $30 million of availability under our $100 million asset-based lending facility. The balance includes $38 million of which part was used for our PST acquisition. Excluding the drawn balance, we would have had $77.5 million in undrawn availability at year end, which is a $16.2 million increase over the same period last year. Our fourth quarter ending cash balance totaled $78.8 million compared with $72 million at the end of the fourth quarter of last year, which contained approximately $20 million that was dispersed on January 5, 2012, as part of the PST transaction. And going forward, we expect we will continue to fund our operational growth initiatives mostly through our free cash flow generation and available cash balances. And we believe we will pay off our borrowed ABL balance by the end of 2012. Our business continues to show significant growth as the market remains strong for the North American, European commercial market, and Ag continues its strength. John shared with you how we are addressing customer service levels for the Wiring business, which are significantly better than our performance in the first 2 quarters of 2011. And as a result, we've been able to reduce premium freight and other labor and overhead cost to a more normal levels. We have made progress in our labor efficiencies and shared our programs to further reduce headcount by 9.7% in 2012, while sales are forecast to grow by 13.7%, and sales per employee will increase by 13.9% for the Wiring business. We will benefit from improved copper cost and a weaker Mexico peso as we have hedge contracts in place and should benefit 2012 compared to 2011. We are working to improve our cash flow position with profitability and the reduction of our inventory as the primary contributors. We have extended our ABL by 5 years with attractive rates and favorable terms, which will secure our debt and loan availability under a revolving credit agreement. Our financial and operational performance has been improving compared to where it began in the beginning of last year, and we need to continue to accelerate the improvement of our operating shortfalls for the Wiring business by ensuring that the improvements are sustainable as we continue to grow. As we look to 2012, we believe Stoneridge's core business sales, which exclude the PST consolidated sales, will be in the range of $820 million to $850 million, and our core gross margins will exclude any effects of the PST consolidation, will be in the range of 21% to 23%, and operating income will be in the range of 5.5% to 6.5%. PST's 2012 sales will be in the range of $240 million to $270 million based on a average exchange rate of 1.84 to the U.S. dollar, which we are using for planning purposes. We expect gross margins to be in the range of 40% to 43%, which includes expensing a non-cash inventory write-up estimated at $5.4 million, which will be expensed in the first 6 months of 2012, and $1.5 million for the step-up of other assets included in cost of goods sold. PST's SG&A will include a non-cash expense of $6.2 million for the write-up of assets, which will be amortized evenly by month over the year. The adjustments of purchase accounting will be tax affected with a resilient statutory rate of 34%, and the after-tax gross amount will be shared with our minority partners for their 26% ownership, and will be reflected in the P&L in non-controlling interest line. Consolidated Stoneridge, including PST results, will reflect a range of sales from $1,060,000,000 to $1,120,000,000 range, which is the first time we'll exceed $1 billion in sales. The forecasted gross margin will run in the range of 25.5% to 27.5%, and operating income will range from 6% to 7%. Based on our sales growth and margin improvement, we believe our full year 2012 earnings per share will be in the range of $1.10 to $1.30 per share. With that, operator, I would like to open up the call for questions.

[Operator Instructions] And your first question comes from the line of Matthew Mishan with Citibank (sic) [KeyBanc].

That's KeyBanc. On PST, I just wanted to talk about that $9.3 million reversal. What would equity income have been if we would have reversed without that?

I think we said it would be 13% operating...

Yes, it would have been 13.7%, and essentially it would have been after-tax -- our tax rate, Matt, is about 20% in Brazil. Then at that point the equity earnings shift was 50%. So you would take the after-tax of the 20% and our 50% share of that would have been impacted in equity earnings.

Okay. And then the purchase accounting adjustments you're going to be making in 1H ’12 and 2H ’12, I'm assuming that's included in your EPS guidance.

They are.

Okay. All right. And the sales...

Matt, I do want to point out, we have up to a year, but we hope to finalize the inventory right here in the first quarter, second quarter, so that'll be in the first half of the results. And I think we'll finish that work before the end of June.

And that's one time as far as first half goes, and then they would not be recurring going forward.

Yes, the inventory once we expense that, that will be done, and then we have the step-up basis of all the other assets. And I think in future quarter, at the end of the first quarter I think we'll give a little more clarity what those other items are, and then the years in which they're being amortized.

And then the sales, which came in about $10 million light you cited. North American and European commercial vehicle was a little bit lower than forecast?

Right.

And was that just production changes? Or was there something else going on there?

Well, in -- I think it was production changes. In Europe we saw a December shortfall as one of the customers reduced their production schedules, I guess to balance out their inventories. And in North America, we just saw some adjustments in one of the commercial vehicle schedules from our large customer.

And Matt, one of the key customers in Europe, they were anticipating they'd reduced their volume for Brazilian exports in the first quarter. They actually did that in the fourth quarter.

And as the first quarter has kind of progressed here, are you seeing any dramatic changes to production schedules in Europe or North America? Or is everything kind of set?

No, I think right now the question for us in Europe is we probably think it's more going to be on the 5% side, but as I said, our team has already factored that in, matter of fact they started taking action last November. And so with our launches and with the cost cuts they've taken, we feel pretty comfortable that we'll be able to manage that. In North America, this market continues to remain strong. As everybody knows, one of our largest customers had lost a few share points, but they're expecting to get that back, and so that should benefit us also. But we don’t see any -- right now don’t see any significant decline.

Okay, and then last question, and then I'll jump back in the queue. Do you guys typically update your new business backlog around this time of the year? Are you going [ph] to update that?

We do, and we'll be presenting at a conference on Wednesday, and that'll updated in that conference Matt, and it'll posted on our website.

Your next question comes from the line of Robert Kosowsky with Sidoti.

I was wondering on the reconciliation schedule of the fourth quarter 2011 items, do we assume that there were no -- none of these charges, specifically the gross margin charges, in the third quarter?

No, these do not have any of the issues that we've been reporting on quarterly, Rob. But these are recurring items due to valuation of assets and inventory we had some warranty clean-ups. And I think maybe one of the questions you're starting to reach for is, are these sort of the -- do they continue in nature? And most of these apply to the poor performance of the operations throughout the course of the year, other than the one line item that we put in there, which is the purchase price variance. And as you know, we've all been fighting raw material increases over the course of the year, and we've been addressing that through recoveries with our customers, redesign of products, launch of new products. So that's the one item that we continue to still -- to address, and it's been in our results all year.

Okay, and then just looking to 2012, how do we think about the pace of PST operating income excluding or independent of the purchase accounting? I mean, is it still going to be a very low-end first half of the year and then stepping up significantly to a big fourth quarter?

Fourth quarter is always the highest. The first quarter tends to drop slightly, and then it starts to smooth out a little bit in the second and third quarter. And I think that trend looks like it'll be there for 2012.

So do you have a idea of like what percent is first half versus second half?

I don't have that at the top, but I think that's something we can look at and project for you to help you out in that. That being a new segment, I think, we'll give a little more disclosure at the end of the first quarter in terms of their results and how they're performing from quarter-to-quarter. And you're going to start to see -- and one thing I might mention to everybody is that as PST comes on in the consolidation, there is no requirement other than we'll issue an 8-K with prior 3 years information. So as the results unfold, let's say, quarterly, we do not have to disclose prior quarters, other than the one disclosure you'll see in the 8-K. So we'll help you as we get through the first quarter and the end of that, because that'll be a separate segment by itself. We'll give you as much visibility as we can into some of their channels and their mix of their products, and sort of the cadence of their sales volume over the year.

Okay, then one other numbers question, what tax rate are you -- should we be looking for 2012?

Well, 2012's a bit, and I tried in our tax section to give you some insight into this, is that we should normally look up around that tax rate that you -- in fact, what you're currently forecasting in that 25% to 27%. A lot of this will depend on our operating improvements and how it benefits North America. We've used that in our assumption of guidance. But as profitability improves, then clearly -- we talked about the valuation allowance, and U.S. income could come through with really no tax offset.

Okay. So that's as margins improve in the back half of the year, you're going to have that greater share flowing through with no expense.

It could have a very -- it could have a positive effect on our performance, especially EPS, as the earnings do continue to improve in North America.

All right. And then finally with regards to Mexico, have you moved all the business that you wanted to move into Saltillo? Have you already executed on that, status on kind of the employment redundancy? And then thanks a lot for the productivity statistics on Chihuahua, but do you think that, that's going to -- I guess, what are the goals that you do have for that? And kind of when do those actually start to hit like normalized levels? Is this like a second half of the year type of thing?

So for the Saltillo, we still have -- we'll continue through the first quarter transferring business down there. The redundancy is a result of the delay in the customers of transferring business. So we had a -- before we transfer business, we had to staff up, train the people, and then as the customer delayed, we had people both at the existing facility and the new facility. But that's been normalized now at the year end, and then we have a plan to continue, I think, it ends in April when we finish transferring all the production down there. Regarding the Mexican Wiring operations, in total, the statistics we were giving were not just for Chihuahua, they were for all our businesses, and we expect to continue to see that improvement go forward. As we're monitoring that we expect to see the continued efficiencies come up. And as we track this, we're going through a couple of different projects which are examining our operational practices and reducing manpower as resulting to that. So I think we've seen those benefits in the fourth quarter. We'll continue to see those benefits in the first quarter.

Rob, I might mention, you made the comment, thanks for the statistics on Chihuahua, but it's really the whole Wiring business that those statistics were based on.

Your next question comes from the line of Stefan Mykytiuk with Pike Place Capital.

A couple of things. First off, I just want to clarify, so the $13 million or so of the purchase accounting adjustments for PST, the $6 million or so that's the non-inventory write-up is that like amortization of an intangible that's going to carry on in future years?

It's fixed assets. It could be intangibles, customer list, and those kind of things, Stefan. So yes, those -- so like in the second half I mentioned it would be $3.8 million. That will be pretty well a fixed item, then, as it moves forward in ’13, ’14. And we will, once we firm that up, we'll give you a schedule that gives you the basis, the amortization of the years and those kind of things so you can get some insight into that.

Okay. So that'll go on for a few years and then burn off over time?

Yes, exactly.

Okay, and we take the -- you're saying we take the entire $13 million and if we tax effect it at 34% we can basically add that back if we want to get to like a cash earnings number or something like that go forward?

Yes, 34% tax plus the 26% minority ownership position. That will get you to the Stoneridge impact.

When you say plus, you mean net out the 26%?

Yes, exactly, net out.

Okay. All right. Wait, I'm sorry, I had one other question. If we take out the SG&A, the -- or some of the unusual items in this table out of SG&A, it was actually down quite a bit sequentially. Was there some other reason for that or...

Well, I think, it's a reflection and you saw in the third quarter that the overall -- and part of this was done at the management level, that we did not pay out any incentive pay this year, so that was a driver. And then quite frankly, the operations did a great job when we were struggling with the operating performance of our plants, then we really stepped our effort to cut down on SG&A, and also impacted the D&D expense. So that was an area that we managed very well this year and reduced. Some of it will come back in, but we'll try to hold the line on SG&A for next year. It will go up though now because of the incentive pay, and that's roughly -- on average it's about $4 million a year. That was excluded this year. That should come back in if we hit our targeted levels this year.

Your next question comes from the line of Brian Sponheimer with Gabelli & Company.

Just want to talk about the North American truck market in this first quarter here. There's obviously been a highly publicized supply chain issue regarding brakes that -- and I'm curious as to whether that's affected production schedules in your opinion, and whether we're looking more towards the second and third quarter time period as when you'd make up some volume?

We have not seen that in our customers' forward projections. What we did see was a planned reduction from one customer from fourth quarter to first quarter, but that was really based on some export orders that they were shipping in the fourth quarter, which weren't going to repeat necessarily in the first quarter. We looked at the January sales results coming out. They looked pretty good for -- they were up year-over-year versus last January, so that's another good indication. We haven't seen that impact yet. So I mean, I think the OEs are managing around that as they have in the past. They've probably got trucks off-line, but they're still building those until they can -- once they get the final product and then they bolt it on so it's...

Okay. All right. And then as we look in 2012 into 2013, production in the off-highway markets has been outstanding for the last couple of years. How concerned are you as to whether the equipment that's been placed in the field and the age of it will turn in such a way where it's young, and you may see some sort of a flattening schedule as you look into 2013?

Yes. The off-highway segment we have some share in there. I think our bigger segment is the Ag segment. And looking at the forward forecast that we've seen from our customers, that continues to remain strong throughout that period of time. So I don't think we're going to be as impacted by the off-highway segment. As a matter of fact, we might pick up some share there if we win some program awards, but we haven't certainly isolated that as a significant risk for us.

Your next question comes from the line of Richard Hilgert with Morningstar.

Let's see, so I back the $1.24 out of the $2 in diluted earnings per share. As reported basis come up with $0.76 a share for the full year. Of that $0.76, what would be PST's portion?

See, their equity earnings were roughly -- I don't have that off the top of my head. The -- their equity earnings were roughly around $10 million, so I would guess somewhere right to that level.

The $10 million incremental revenue that you got from the acquisition.

Well, there was no revenue in [indiscernible].

No, yes, there was no revenue, Richard. It was only -- I think what you're asking, in the normalized $0.76 for this year, what would PST's impact be?

Correct, yes, the incremental EPS that you picked up by acquiring the additional amount.

We did...

He's talking about the 24% [ph].

Yes, Richard, right now if you look at the line called equity earnings, it's $10 million year-to-date, and Minda is in there for roughly about $1 million. So that would leave Brazil at $9,034,000.

But you remember, under equity accounting, we have to tax effect that on Stoneridge's statutory rate of 35%. So 35%, that'd take it down to $5.9 million. That means the earnings are about $0.23 for PST, under the equity earnings basis for 2011.

Okay, and I'm trying to -- what I'm trying to do is figure out what the difference is between what that earnings for 2011 would've been if the ownership would have stayed the same versus with the new ownership what was the incremental amount for 2011. See what I mean?

Yes, and I think that's something a lot of you will be doing your models, and we've provided enough detail that you can frame around that to get to that result. We gave you guidance on both the sales and the margins. And the biggest change in PST now is we no longer tax effect their earnings. Their effective tax rate in Brazil's about 20%, so we no longer accrue a 35% statutory rate of Stoneridge, and then less the purchase price accounting, which are $13.1 million. The tax rate's 20%, and then add net of the 26% minority. I think with those factors you can get pretty close to what the net results are for PST.

Okay. All right, and then in some of your earlier comments, you talked about the revenue from North American light vehicle being up. I think it was 1.6%, is that right?

It was -- I think it was -- yes, up 1.7% our revenue was. The market growth was greater than that. And as we explained we have -- we're decontenting some of our products up out of customer platforms, because they're not profitable. They're commodity-type products, and they don't focus on the technology direction that we're heading in that business. An example of that technology direction is of course the EGT, and we've reported this time that we won a couple of significant awards in China for that product. And in the past, we've reported on other significant awards we've won in Europe on that product. So the whole shift in that Control Device business, which is primarily automotive, is away from nontechnology kind of commodity-type products to more products where we think we can bring some value to the customer through technology or applications.

Okay, so would it be fair to say then that moving forward you're looking for a more favorable product mix on the light vehicle side of the business?

Yes, I think that would be a fair assessment.

And also it's coming from a geographic growth because our EGT is moving into Europe, and we -- and as we disclosed before we've won contracts with a major automotive supplier and a truck supplier, and we've just -- we announced we have 2 awards on the SCR application in China, plus Dongfeng last year. It was the largest engine manufacturer in China. So that business is really going -- moving and growing internationally.

And it is moving somewhat out of the car segment because a lot of that EGT is application for truck, commercial vehicle.

Your next question is a follow-up from Robert Kosowsky with Sidoti.

I was just wondering if you guys could give us a idea of what your free cash flow is looking like this year, and just kind of in particular what the general free cash flow characteristics of PST were that you're not going to be consolidating? Maybe also the CapEx number too as well.

[indiscernible] you're talking about 2012?

Yes.

Well, Rob, I think, we gave you a pretty good insight into the margins and the profitability because that'll be the primary driver. We do believe that we can hold working capital increases to about $0.12 per $1 of sale, and we were somewhat over in our inventory. We still think we have improvement there of $5 million to $10 million. We'll hold capital in the range of $25 million to $30 million. So with those factors we should see a pretty significant cash flow for 2012. And then historically Brazil is not what I call a capital-intensive business. Other than if when you see their first quarter disclosure, they show capital, but about 1/2 of that is what we have -- we actually buy the tracking devices down there, and then we lease them out or rent them out through the customer base, because it's an expensive front-end investment for the consumer. So their capital is really geared around that, but historically they generate a significant amount of cash flow with their margins. And then we've been paying a dividend, anywhere from 45% to 60% historically in those earnings, and we see no reason why that would change.

And there are no further questions at this time. I would like to turn the call to Mr. John Corey for closing remarks.

Yes. Well, I'd like to thank you for joining us on the call. Needless to say, 2011 was a difficult year, but it really was in many respects a good year for our operations of Control Devices in our European businesses, and our North American Electronics business. Our big issue, as we've discussed during the year, was the performance of our Wiring business. That was driven by poor operational performance, copper escalation and currency escalation. As we look at the -- we've got 1 month under our belt here in 2012. As we've looked at the performance in January of all our businesses, it's tracking right in the range that would meet our projections that George has given you for the full year. So we're feeling very good that we've gotten a lot of these issues under control, and we'll continue to work the business and work the issues and continue to drive their performance improvements, so we can have a much better 2012.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.