Stoneridge, Inc. (SRI) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Stoneridge First Quarter 2012 Conference Call. [Operator Instructions] I would now like to turn the presentation over 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 first quarter earnings release. The release has been or will shortly be filed with the SEC and has been posted on 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 uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause 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 will also be referring to certain non-GAAP financial measures. Please see the Investor Relations' section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. John will begin the call with an update on the current market conditions, operating performance in the first quarter, growth strategies, business development and his thoughts on future initiatives, including our 2012 guidance. George will discuss the financial and operational details of the quarter and details of our 2012 guidance. After John and George have finished their formal remarks, we will then open up the call to questions. With that, I'll turn the call over to John.

Good morning. Revenue for the first quarter was $262.3 million, an increase of $69.2 million or 35.9% over the first quarter of 2011. This result includes $53.7 million for PST's consolidated sales. Excluding the effect of PST sales of $53.7 million, Stoneridge's core business sales increased by $15.6 million during the first quarter of 2012 or 8.1% compared to the first quarter of 2011. The Stoneridge core business results continue due to the revenue growth experienced during 2011 and were primarily driven by North American commercial vehicle and agricultural markets. Our overall growth was moderated somewhat by the decline in the European commercial vehicle sector. We reported earnings per share of $0.22 for the first quarter which was $0.10 per share or 83% above the prior year's first quarter earnings per share, driven primarily by our operational and financial improvement of our North American wiring business. The benefit of PST's first quarter earnings was a wash as non-cash purchase accounting adjustment for inventory of $1.8 million and other assets' step-up values of $1.4 million offset PST's first quarter operating income of $3.5 million. The total purchase price accounting was a non-cash charge of $3.2 million or $0.06 a share. Without this charge, our operational earnings per share would have been $0.28 per share. PST's charges were in line with our first quarter expectations for purchase accounting adjustments, as discussed during our last call. George will provide more detail on the purchase accounting effects for the quarter and for the rest of the year. Our first quarter sales increase over the prior year was slightly below our internal expectations due to lower sales to a large commercial vehicle customer in North America and lower sales in Europe due to the general market softness in commercial vehicle. While below our expectations, sales for our commercial vehicle customers in Q1 increased by 8.2% to $104.4 million as a result of increased medium and heavy-duty truck production in North America compared to the prior year. The agricultural and equipment category sales increased in the quarter versus the prior year by approximately 19% to $49.1 million, continuing the sales growth experienced in the ag markets throughout 2011. Sales in our passenger car and light truck segments, which are predominantly control device sales, were $55.1 million in the quarter and nearly equal to the prior year, but lower than the North American pass car market increase. As previously discussed, we are aligning our automotive product portfolio around key product families in emissions and actuation, which we believe will offer attractive market growth opportunities, while reducing our presence in commodity or non-competitive product lines such as customer actuated switches. We've also experienced a shift in share of market between car companies and platforms in the first quarter, which accounts for some of the reduction. Control devices sales volume was up in the first quarter, consistent with the growth of our key passenger car and light truck customers in North America, offset by reduced sales of fuel shut-off switch business that we discontented due to our fuel system design change and the exiting of speed center application in the North American market. Control devices overall revenues increased by 3.2% due to increased sales of EGT and other emission-related products. Stoneridge's gross margins improved in the quarter as better operational performance in the North American wiring business resulted in reduced premium freight, reductions in headcount, lower overtime, reduced employee turnover and improved operating efficiencies. One of the Stoneridge core business, material cost as a percentage of net sales offset some of the operative improvements and had an unfavorable impact on margin improvements in the first quarter. Direct materials for Stoneridge core business as a percentage of net sales increased 2.2% compared to the prior year despite lower cost for copper. This increase caused an unfavorable variance to the last year in the amount of $5.1 million which was a result of mix shift in the quarter and increased raw material cost. We are implementing pricing adjustments that begin to positively impact profitability in the second quarter, which will partially recover the material cost increase in the third and fourth quarters. The wiring operations, which were a significant drag on last year's first quarter, continue to show improvement in performance. Our first quarter premium freight was reduced by $3 million compared to the prior quarter of 2011. Labor efficiencies improved by about $2.1 million. Average headcount in the first quarter of 2012 was lower by 490 people than the first quarter of 2011 on an quarter-on-quarter sales increase of $13 million in our Mexican wiring operations. This represents a quarter-on-quarter 29% efficiency improvement based on sales per employee. We expect to achieve additional headcount reductions during the year as we continue to improve the wiring operations. Our projections for the wiring business this year is an increase of 9.8% in sales and an improvement of 30% in sales per employee as a further indication of our continuous improvement. New business awards in the quarter were $58.8 million of which $19.9 million were new awards and $38.9 million were replacement awards. In the first quarter, our Asia Pacific business had an annual award of $4 million in instrumentation for commercial vehicle applications starting in 2014. We've also been awarded a new program with Tenneco for EGT in China in the amount of $2.5 million, which was originally to start in 2012. Based on the Chinese government delay of the Euro 4 implementation, market requirements for EGT will be pushed out about 18 months. The Tenneco award will be impacted by this as well. Each EGT award in China is now under review with customers as they determine their start days based on the timing of the new government regulations. We've also received a large military order for 2012 and 2013, a portion of which was included in our guidance. The release of this award is subject to change depending on the demand from the military business and funding. Finally, one European customer has pushed out their fourth quarter 2012 launch of a new program until 2013 due to a delay from other suppliers. Minda Stoneridge, our unconsolidated JV in India posted first quarter sales of $9.6 million, a decrease of $16.4 million versus the first quarter last year. This sales decrease was driven primarily by $12.2 reduction in the valuation of the Indian rupee compared to the U.S. dollar, as the rupee has declined from 45 rupees per dollar in the first quarter of 2011 to 50.4 rupees per dollar in the first quarter of 2012. Excluding the effects of foreign exchange Minda sales were flat compared to last year. Our share of Minda's net income for the first quarter was $140,000 a decrease of $213,000 from the prior year period, primarily due to the decline in the Rupee Exchange Rates. Minda reported sales were nearly $50 million in 2011 current projections have local currency revenues increasing over 2011 in the range of $50 million to $55 million impacted by the decline in the Indian rupee. Minda still expect sales reached $75 million in the next 2 years based on and market customer growth consistent with our previous projections made over the last 2 years. PST our Brazilian joint venture recorded first quarter 2011 sales of BRL 94.8 million compared to BRL 89.2 million in the first quarter of 2011, or an increase of 6.3% by volume increases from the audio business. PST's first quarter US dollar sales based were $53.7 million based on an average exchange rate of BRL 1.77 to the $1 compared to the $50.7 million in the 2011 based on the average exchange rate of BRL 1.66 to the $1 which represents a devaluation of the Brazilian real to the dollar of 6.2%. George will discuss in more detail, the projected results for PST due to the continued weakening of the Brazilian real which stands at 1.89 per U.S. dollar on April 30, which is further devaluation of 6.4% for the March 30 closing exchange rate. Even though sale PST sales were up in local currency in the first quarter, your aftermarket sales for alarm systems and the accessories were down while audio sales were up. We see a general weakening of the economy and we're just starting to have a negative impact of the consumer level. As we began 2012, PST experienced softer aftermarket sales in January, February but finished the quarter with a strong aftermarket accessory sales in March. Brazil' GMPs growth has declined to an annualized rate of 2.8% which is starting to impact the Brazilian consumer market. PST distributors and retailers are experiencing less demand for aftermarket products but the overall economy is softer. And they are making adjustment to their inventory positions to reflect the current market demand. We do believe PST sales will trend higher the third and fourth quarter which is their normal seasonality. PST's gross margin excluding the $1.8 million for purchase accounting was 42.6% in the first quarter of 2012 compared to the 46.3% in the first quarter of 2011, partially due to an increase volume of audio sales which carried a lower gross margin. The mix of our products with more audio volume has lowered our overall gross margin but is consistent with our 2012 annual guidance. Excluding the effects of purchase accounting, PSTs first quarter operating margin was 6.5% compared to 12.1% in the first quarter of 2011 and was impacted by the increase in selling expense. As we look at the softening economy, the PST management team is implementing cost reductions. They have reduced headcount by approximately 300 people and have outsourced wiring harness production to a third-party provider. The benefit of this outsourcing will be to lower cost free of floor space for additional capacity and improve our efficiency levels. PST is forecasting an additional benefits for 2012 for identified cost actions to be in the range of the $3 to $4 million over the last 8 months of the year 2 weeks ago, the Brazilian government reduced interest rates by 75 basis points on top of a 75 basis point reduction nearly a month ago. Brazilian government has attempted to slow down the U.S. dollar inflow due to higher investment rates in Brazil and continue to capital inflows into Brazil as many international companies are making investments at Brazil. Looking at the recent real weakness, the government actions' taken have now weakened the real 189 to the $1, which will have a negative impact, because the higher cost of increased value of U.S. dollar imports. We close the first quarter results on an average exchange rate of 179, if the rate continues at 189, which was in affect for April 30, 2012 this will have a negative trends, translation affect in the second quarter of both net income and earnings per share. The economic policies of the Brazilian government is working to implementing, is to slow the economy down without pushing the economy in to a severe slowdown. Based on Stoneridge first quarter results, our major served markets continue to grow in North America. North American automotive production forecast are projected to be between 14.3 and 14.6 million units. In North America, commercial vehicle markets which ran at a rate of over 300,000 Class 8 units in the first quarter. The production projections have been recently reduced and were lowered to an annualized truck build level of 275 Class 8 vehicles for the rest of the year, with expectations that the second half of the year will be weaker than the first half. Most recent European 2012 production estimates have shown 4% to 8% reduction versus 2011 with a softer first half and an improving second half of 2012, the opposite of what is being forecast for the North America markets. We have new program launches increasing our content partially offsetting this market decline. As noted before, one of our European programs is being pushed out from the fourth quarter of 2012 into the first half of 2013 because of delays by other suppliers. Besides North America automotive, one other strong market has continued growth, is the construction and agricultural market, as this segment represents approximately 20% of our business in 2011 and continues to grow. Continuing market improvements and growth from new customer programs this year or next should continue to drive top line sales. So as we close the first quarter, we see a lower growth expectation for North American commercial vehicle but still positive growth over last year. A reduction in European commercial vehicle market is being forecast but is subject to customer program adjustments. A question mark regarding demand in Brazilian as they attempt to balance their overall economic decline with investments being made in Brazil, capital flows and the real exchange rate versus U.S. dollars. We see continuing improvements in North American auto market as forecasted and continuing strength in the agricultural markets. In these uncertain markets, we will continue to pursue our additional cost reduction initiatives and efficiency improvements to partially offset volume declines. In addition, we are working on pricing initiatives to partially recover material cost as well as product redesign to lower our material cost in current year. It is important to know that our teams have worked diligently to address the wiring business operational issues during 2011. In the first quarter, we are seeing the benefits of the improvement as our gross margins have returned to more normal levels in the range of 21% to 23%. As we review the balance of the 2012, we are maintaining our sales guidance in the range of $1.060 billion to $1.120 billion while maintaining our gross margins in the range of 25.5% to 27.5%. Operating margins in the range of 6% to 7% and earnings per share in the $1.10 to $1.30 range. With that I'd like to turn the call over to George to provide additional details on our performance and outlook including further details on our guidance for 2012.

Thank you, John. As we've been sharing with you over the past several quarters. We have been addressing our 2011 operating issues and wiring business. Based on our teams' efforts, we expect to improve financial performance in 2012. In our last call, we shared with you that our first quarter is progressing consistent with our plans. We're pleased that our first quarter was consistent with our plans. We benefited from improved operating performance in the wiring business along with more favorable copper cost and improved Mexico peso exchange rates from a weaker Mexican peso of which is partially offset by increased raw material cost. Raw material cost increases to net sales continue to be an area we're working to address, as our raw materials to sales in the first quarter 2012 was 2.2% higher than the first quarter of last year. We're working to address the raw material cost increases through pricing actions, redesigns of our products collaborating with our suppliers and pursuing our older net materials source, part of our raw material cost, percentages of net sales increases just due to product and customer mix in our controlled device segment. We've also been pleased with the progress integrating PST into Stoneridge after completing the final phase of the transaction on January 5, 2012. Last year, we reviewed with you quarterly the negative cost impacts for operational issues, higher copper prices, the financial impact of the Mexico peso and the startup of our new facility in Saltillo, Mexico. As a result of the actions has taken the wiring operations improved significantly during 2011 and is well-positioned for this year. We saw the improvement in our financial and operating results as gross margins return to more levels in the first quarter. As you recall, the wiring business was adversely impacted in 2011 by operational issues, which causes $13.3 million, the laboring efficiency, over time, excess of headcount, premium freight and the startup cost of our new facility. In addition, the wiring business was adversely impacted in 2011 by copper increases and the strength in the Mexico peso by $10.7 million. The operational issues and the currency and commodity impact cost for wiring business, it total $24 million last year. For 2012, we have offset and estimated $20.9 million of the $24 million of the negative operating cost, commodity impacts and foreign exchange costs. And our plan for this year was to offset $13.2 million of the operating issues, which will positively impact 2012. We have 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 the freight-in and the freight-out for this year. In the first quarter 2011, premium freight in wiring operations improved by $3 million compared to last year. The Saltillo plant is running well and the $3.2 million startup cost is behind us. In regarding commodities, we have had 68% of our estimated copper consumption for this year at $4 per pound. And this will benefit the wiring business by about 2 million in 2012 compared to 2011, assuming copper's stays at $4 per pound or lower for the remainder of the year. We have executed a forward contract to purchase $55 million of Mexico pesos at an average exchange rate of $13.09 Mexico pesos to the U.S. dollar. This will benefit the wiring business by an estimated $5.7 million in 2012 compared to last year, assuming the $72 million worth of peso equivalent can be purchased at Mexico pesos $13.09 to the U.S. dollar. Through the actions taken to improve operations and hedging our copper in the Mexico peso positions for the wiring business, we will offset nearly $20.9 million in negative cost impacts $24 million which we experienced last year. As a direct result of these improvements for first quarter of 2012, our gross profit excluding PST was 21.3% and is in line with plan and our guidance. We increased our ownership stake to 74% of PST as of December 31, and fully completed the transaction on January 5 of this year. As a result of the 24% ownership purchase, this will change the accounting for PST's results other financial statement. Last year, we've recognized 50% of PST's net income under the equity method of accounting in our P&L. And a single line called equity and investee. With the additional ownership in PST as of December 31, of last year, we fully consolidated PST's balance sheet and our yearend balance sheet. Starting January 1, of this year, in addition to consolidating the balance sheet, we will recognize a 100% of PST's revenues, expenses and net income in our P&L. And we'll recognize an expense for 26% minority partner share of net income as non-controlling interest expense. In terms of taxes, we will only reflect PST's effective tax rate in our consolidated results, which tend to vary between 19% and 20% on PST's pre-tax income. At the time, we'll receive dividends which normally is in the fourth quarter, we will accrue additional tax between the U.S. statutory tax rate of 35% and the effective rate of tax provided in Brazil on the cash dividend amount being received by Stoneridge. PST will be representing our SEC filings as a separate reporting segments starting with the first quarter of this year. The 2011 acquisition of the additional shares of PST included balance sheet write-ups of the existing assets as well as recognition and good-will in relation, of the fair value recognize by the purchase. Our 2012 earnings guidance included those non-cash expenses associated with the 2011 write-up of assets which have a negative impact on profitability for PST. And our 2012 guidance, we expected the expense for the write-off of purchase account stepped-up values to be approximately $13.1 million for 2012. The inventory expense was estimated $5.4 million, which would be amortized over the first 5 months of this year according to PST's inventory turnover rate. The remaining $7.7 million was the amortized evenly over the entire year. In terms of timing and amounts we expect that purchase accounting expense to be $9.3 million in the first half of this year, which would include the full write-off of stepped-up inventory values of $5.4 million. And $7.7 million for all other assets and $3.8 million in the second half of 2011 as inventory write-ups will be amortized in the first half of this year. Under purchase price accounting, we have up to one year to true up asset valuations. And we have continued to refine our estimates for purchase accounting amounts that affects PST's profitability. In the first quarter, we expensed $3.2 million in non-cash purchase accounting adjustments in total. This had a net income impact of $1.6 million or $0.06 per share. As a result of our EPS excluding purchase prices accounting adjustments would have been $0.28 per share for continuing operations. This includes $1.8 million for the write-up of inventory and the remaining $1.4 million of expense for all other asset write-ups. For the balance of the year, we expect another $1.5 million of expense for inventory and $5.2 million for other asset write-ups. We expect the $1.5 million for inventory to be expense for the second quarter, while the other $5.2 million will be expense radically over the balance of the year. And in summary, total purchase accounting adjustments in 2012 are now expected to be $9.9 million compared to $13.1 million in our previous guidance. Of the $9.9 million of purchase accounting, that will affect net income $1.5 million is depreciation and $6.7 million is the amortization. In addition of the normal translation risk of operating results associated with the foreign subsidiary, PSTs had significant risk associated with foreign exchange that can affect if some Stoneridge's financial results. PST currently have the U.S. dollar balance sheet exposure of $23 million and U.S. dollar denominated debt with 2 Brazilian banks, which we're used to finance Chinese U.S. dollar supplier payments for the launch of their audio products and $3 million for monthly U.S. dollar denominated payables. These exposures are revalued each month end with the changes in the value reflected through the balance sheet in the P&L. These valuation differences could be large and affect PSTs profitability from month-to-month, mitigate this risk we've embarked an inventory reduction plan to reduce PSTs debt as it is the least expensive way to reduce the U.S. dollar exposure. PST has U.S. dollar denominated direct material disbursements source from China with an estimated annual spend amount of approximately $45 million. If the U.S. dollar strengthens against the Brazilian real then the cost of these goods for currency or loan can significantly affect the gross profit of PST. And since the first of the year the, real revalued to 74 in January, but weakened to 182 by the end of March. Since the first quarter close the real exchange rates weakened compare to the U.S. dollar to 189, which will be used for April 30 to close. At the exchange rate of 189, this represents a devaluation of an additional 5.2% in the month of April that would represent nearly $1.2 million PNL charge if the exchange rates stays at the same level of years at the end of April. PST is working to reduce their inventories over $20 million, significantly reduced the U.S. dollar payable exposure by paying down U.S. dollar debt and expense of local currency working capital loans. Now I want to review our operational performance during the first quarter. Revenue up $262.3 million in the first quarter of 2012, represents an increase of $69.2 million or 35.9% over the first quarter of last year. Our first quarter sales include $53.7 million of PST sales that were not consolidated last year. Excluding PSTs first quarter sales, Stoneridge's quarter sales increased by $15.6 million or 8.1% compared to the first quarter of last year. Stoneridge's core sales increased as the result of increasing production volumes in most of our served markets, new business sales programs and continued economic improvement in most segments of our markets. For the first quarter of pass car/light vehicle sales were $55.1 million and a body equal to the first quarter of last year. We did not experience the market growth at other automotive suppliers, they're reporting as we've been realigning our automotive product portfolio around key product families in emissions and actuations which have attracted market growth while reducing our presence in commodity or noncompetitive product lines. Commercial vehicle production continued strong in North America and was down in Western Europe. Our sales in the medium and heavy-duty truck market was $104.4 million which was an increase of $7.8 million or 8.1%. The change is primarily a result of increased volume in the North America market and net new business. Sales to ag and other market totaled $49.1 million, an increase of $7.8 million or 19%. And sales to our top 10 customers grew by $6.4 million, a 4.5% improvement over the same period last year. Geographically our sales allocation shifted with the consolidation of PST. The PST, our sales allocation as approximately 61% for North America, 21% South America, 16% in Europe and 2% other. And excluding PST, North America accounted for 74% share compared to 77% for the same quarter last year. With respect to segment sales, we experienced growth in both groups for the first quarter. Electronics sales were $138.2 million for the period. We added $13.4 million or 10.7% to the top line from improvements in the global ag and other category as well as medium and heavy-duty truck market. Controlled devices rose $2.2 million or 3.2% to $78.4 million and revenue was fueled mainly by the increase in North America commercial vehicle production and strengthening of ag and pass car. Stoneridge reported a first quarter 2012 consolidated gross margin of 24.8% which includes the results of PST. The Stoneridge core business which excludes the results of PST reported gross margin of 21.3% which compares favorably to our gross margin in the first quarter of last year of 20.4% and is back on our guidance range of 21% to 23%. And as discussed earlier, our first quarter 2012 core gross margin was driven by improvement in labor productivity and premium freight primarily in our North America wiring business and improvements in copper cost and the weakening in the Mexico peso. The improvement in labor productivity and premium freight that positively affected gross margin totaled $5.1 million, the decreases in copper cost and weakening of the Mexico peso positively impacted in our results by approximately $1 million and $0.50 million respectively. We continue to execute plans including reducing direct labor and indirect labor, reducing overtime developing more efficient manufacturing processes to reduce turnover of people and enhance our training programs to prove our operating efficiencies. These actions have reduced and will continue to reduce our manufacturing cost. Additionally, during the first quarter of this year we have experienced higher raw material cost related to the precious metals, rarer magnets and resins primarily consumed in our controlled devices segment. Control devices has been implementing price increases to offset these cost increases, which will start to be reflected in the second quarter of this year. Income tax expense for the first quarter was $1.2 million and pre-tax income of $7 million resulting in an effective tax rate of 17.5%. As reported for December 31 of last year, the company continues to provide evaluation allowance offsetting its federal, state and certain foreign deferred tax assets. The decrease in the effective tax rate for the 3 month ended March 31 of this year, compared to the same period for last year was attributable to the improved financial performance of the U.S. operations as well as the consolidation of PST. As previously mentioned for 2012, PST has a consolidated subsidiary as a result, we are no longer required revive U.S. deferred tax expense on our share of PST's earnings. We expect the 2012 annual effective tax rate to be between 16% and 20%. And we anticipate cash taxes be between $7.5 million and $8.5 million all related to foreign and state taxes. Stoneridge reported first quarter net income of $5.8 million or $0.22 per share and this compared with last year net income of $2.9 million or $0.12 per share. Depreciation and amortization expense for the first quarter was $8.8 million, an increase of $3.8 million compared to the first quarter of last year. The increase is due primarily to consolidation of PST's results in 2012. PST's depreciation and amortization on an annual basis is expected to be approximately $18 million. And Stoneridge core to be approximately $20 million. Our primary working capital totaled $210 million at quarter end, which increased by $99.2 million from the first quarter of 2011 levels. The primary reason for the increase in working capital was due to the consolidation of PST in the Stoneridge at December 31 and March 31, 2012 balance sheets. Excluding the effects of the PST consolidation, Stoneridge's primary working capital was $122.8 million or $12 million higher than the first quarter of last year. Current working capital levels for inventory, receivables and payables are a function of increasing sales and operational activities. PST's inventory continue to write-up of approximately $5.4 million at December 31 of last year and $1.5 million of March 31 of this year for purchase accounting, but is subject to final evaluation, which we expect to complete before the end of June of this year If there is any difference, we expect to report this in the second quarter of this year. 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. Operating cash flow was a sourced cash of $5.9 million in the first quarter compared to the use of cash of $15.5 million in the first quarter of last year. Our cash flow results in the first quarter were primarily driven by the higher net income and lower capital expenditures which was offset by higher trade receivables to fund higher sales. Capital investment for the quarter totaled $6.8 million, mainly reflecting investment in new products in the wiring operation and control device segment. Capital expenditures for PST totaled $2.4 million, mainly for the capitalization of tracking devices which are rented to subscribers and are included in the monthly fees charge to the subscribers. The PST's tracking device business, they have historically sold their tracking devices to their subscribers. The upfront cost was limiting the growth of adding new subscribers for their tracking service business. As a result, PST now purchases tracking devices which is included in their annual capital expenditures and represents nearly 50% of the annual capital. PST recovers the cost of the tracking devices by charging the tracking device, covering a service fee to the subscribers through this part of the contract. As of March 31, we have $63 million of availability under our $100 million asset base lending facility. And the balance of that drawn debt against our credit line includes $31 million, a portion of which was used for PST acquisition. PST has several loans used to finance working capital totaling $47.2 million of which $36.5 million is current. And PST is in full compliance for our covenants. Our first quarter ending cash balance totaled $42.9 million compared to $78.7 million at the end of the first quarter of last year. In going forward, we expect we will continue to fund our operational growth initiatives mostly through our free cash flow generation and available cash balances. We believe we will pay off our borrowed ABL balance by the end of 2012. Our forecasts are for PST to pay down $19 million of their working capital debt and US$20 million loans by the end of this year. Our business continues to show growth as the market remains strong for the North America pass car and light vehicle, North America commercial and Ag sectors. John shared with you how we have addressed customer service levels and operating issues for the wiring business. Our quarter-on-quarter performance demonstrates the improvement. We've made progress improving our labor efficiencies and continue to reduce headcount in 2012 to further improve our labor efficiencies. The wiring business sales are forecast to grow by 9.8% while sales per employee will increase by 30% on the year-on-year basis. We will benefit from improved copper cost and a weaker Mexico peso exchange rate as we have hedged contracts in place, which should benefit 2012, compared to 2011. We are working to improve our cash flow position with profitability and the reduction of our inventories of primary contributors. Our financial and operational performance has been improving compared to 2011 and we continue to accelerate the improvement of our operating shortfalls from the wiring business by ensuring that the improvements are sustainable as we continue to grow. As we look through 2012, we've maintained our belief that Stoneridge's core business sales which exclude the PST consolidated sales would be in the range of $820 million to $850 million and core gross margins were exclude any effects of the PST consolidation will be in the range of 21% to 23% and core operating income will be in the range of 5.5% to 6.5%. PSTs 2012 sales would be in the range of $240 million to $270 million based on exchange rate of $184 which were used for planning purposes. We expect gross margins to be in the range of 40% to 43% which includes expensing all the non-cash purchase accounting asset write-ups. The non-cash purchase accounting guidance including non-cash inventory write-up, now estimated at $1.4 million which will be expensed in the second quarter of the year and $1.1 million for the step-up of other assets that will be amortized in the last 3 quarters of the year. PSTs SG&A including non cash expense of $4.1 million of the write-up of assets which will be amortized evenly by month over the balance of the year. The adjustments of purchase accounting would be tax affected with the Brazilian statutory rate of 34%, the after tax gross amount would be shared with our minority partners with their 26% ownership and will be reflected in the P&L and the non-controlling interest line. The consolidated Stoneridge, we are reaffirming our guidance which including PSTs results, reflecting range of net sales from $1.060 billion to $1.120 billion range which is the first time will exceed $1 billion in sales. The forecasted gross margins will run in the range of 25.5% to 27.5% and operating income would be in the range from 6% to 7%. And 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. Operator, now I would like to open up the call for any questions.

[Operator Instructions] And our first question comes from the line of Matthew Mishan with KeyBanc.

Outside of the purchase accounting, are there any cost headwinds we should be looking out for over the next several quarters? And George, what are you paying most, closest attention to?

I think the number one issue is what we share today is that we have continue to see raw material increases especially in the third, fourth quarter and then we also recognized those in the first quarter and, Matt, a lot of those were on the control device side which happened to be precious metals, magnets are a big item and our resin cost. We have implemented price increases which will start to roll-in in the second quarter and the third quarter, so by the time we get to the fourth quarter I think we've offset most of the cost increases we've seen in the control device side. And we've done the same thing in our wiring business which we will incur the same kind of trend that we'll see some improvement in the second quarter, by third and fourth quarter we will offset most of those increases.

I'm sorry, if I missed it but is it possible for you to quantify what the impact was in the first quarter?

What we did Matt, as if you look at the equivalent is, if you look at our raw material cost of sales, it's up roughly about 2.2%. And if you just take at our annual sales level that would equate to roughly about $5 million increase. So to speak, if you look at the relation between raw material costs to sales the programs we have in place, that we've recover nearly about the $4 million in pricing in control devices over the course of the year. We have about half of that amount in the electronic side, so we end up recovering most of those increases through the course of the second, third and fourth quarter.

And then moving on to, you've had an EGT award with Tenneco and China, which in the mid-2013, is that that's for commercial vehicle not light vehicle, correct?

Right. It's commercial on the side. But that award is being pushed out, it was supposed to launch this year. It's been pushed out because the Chinese government has changed, the implementation date for the Euro standard. So we're probably pushed out to 2013. It was an 18 month push out from the government.

Tenneco has about I think 7 to 8 Chinese commercial vehicle customers for emissions regulations there, are you launching on all of those customers or just the select couple.

We're not launching on all of them. I'm not sure which of these specific customer is, as product goes to Tenneco.

And I believe the emission systems are a fairly similar globally from China to Brazil to North America, is there a potential for you to be launching EGT with Tenneco across the board at some point.

Well, we would hope that we do some EGT business with them here. And we would hope that we would be able to launch that in other places as we demonstrate our capabilities. So yes, the difference is of course the timing of the emission standard, North America and Europe. Europe, 4-standard Europe, 5-standard and the North American standards and the Chinese are following the Euro-standards.

And I know you've reclassified some of your sales as class 8 versus Class 5 through 7 over the last quarter. I was just curious, how we should think about your Class 8 exposure and Navistar as a percentage of sales. And what you're seeing with the Navistar Class 8 schedules?

Well, I think overall, we've seen that Navistar has not advanced their market share as quickly as I think some of the market forecast are. We still believe that they will gain share during the course of the year. And we've taken somewhat of a position that is conservative in relation to our forecast for the year.

My last question, I think you mentioned some, especially in the press release, incremental near-term weakness in Brazil and Europe. Is that 1Q weakness or is that incremental to 1Q weakness? And in your sense is the second quarter going to be weaker than the first quarter? And with your PST guidance for instance, you had mentioned that seasonally it would be increasing in the third quarter and the fourth quarter, but you didn't mention second quarter versus the first quarter.

In Europe, we were just back from there, and we see there is reset. We see the second half strengthening. As a matter of fact, we see kind of flattening happening in the second quarter here. So we don't see any further decline. So we see then a gradual improvement there in the third and the fourth quarter. In Brazil as we look at that market, the issue for us is really the currency exchange rate and the slowdown in the general economy there, which will impact PST and how quickly distributors adjust to that. I mean this is new channel for us, so to speak, in terms of how fast people adjust to things. And so we expect to see continued weakness in the second quarter, with the third quarter strengthening and the fourth quarter strengthening. I think the target rate that the government put out that they wanted the real to be was around BRL 1.80. That's what they wanted to be. Because of their actions are strange, the real is going up to BRL 1.88, BRL 1.89. We expect it'll some of the actions that will drive that back down again, and try to stimulate growth of the economy at the same time. So if I look there is really where we have the greatest question, as to how the market's going to react, it is in Brazil.

And, Matt, just as a follow-up to the Brazil issue, and we shared with you in today's report that January and February were weaker in the aftermarket especially in the alarm system business. And then we had a very good March, which we really brought the level back in the first quarter. We experienced the same thing in April. It was actually a little weaker in the month of April. And I think it's our dealers adjusting for what they're seeing in the marketplace. And the real question is, is this really just the market adjusting to what the government economic policies are trying to implement to at least slowdown the economy without putting a severe slowdown. But as you know, our seasonality is much stronger in the third and the fourth quarter. So our forecast is still showing that we believe there will be stronger demand in the third and the fourth quarter versus the second quarter. In fact the second quarter looks like it may be flat with the first quarter in Brazil.

And our next question comes from the line of Robert Kosowsky with Sidoti & Company.

Just a couple of quick questions. First of on control devices, did you have any price increases in the first quarter or are they really just going to hit more meaningfully here in the second quarter?

No, we had some modest price increases going on, as we've been working on this program. But as you know, it's difficult to pass through price increases to customers. So we've had an ongoing program to push that forward. But then, I would say probably $400,000 probably would be impact of what we were able to push through.

It's rather small in the first quarter, Rob, but we'll start to see improvement. In fact our percent of sales start to narrow dramatically in the second quarter and then gets much better in third and fourth quarter.

So given like the improvement that you might be seeing relative to pricing and Control Devices, plus continued improvements in Mexican operations. Do you think this low 21% gross margin is kind of a low point for the legacy business and you might see a step-up as the year progresses?

Yes, and that's what we've sort of indicated over the year that we would tend it more towards the middle or above the middle of that range in the third and the fourth quarter, and our forecast are still showing that.

What's the total second quarter purchase accounting impact and it'll be added up to about $3.5 million, is that correct or did I miss something?

Because we have $1.5 million of inventory and then the $1.1 million in cost of goods sold will be steadily even throughout the year. So it's like $350,000 a quarter that we talked about in cost of goods sold. And on the SG&A, we talked about $4.1 million spread evenly over the balance of the year as well.

Yes, that's very close, Rob, we'll see in the second quarter.

Then finally, just with regards to medium duty, how do you see that market playing out as the year progresses? And maybe some of the optimism must on the improvement in housing sentiment, is that kind of playing affected at all?

We haven't seen that. I don't think the forecast has been adjusted upward significantly for anything that's happening there. So I'd say we've seen anything in that segment.

So pretty consistent with what you saw 3 months ago?

Yes.

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

Maybe starting with the big picture, you know part of the reason for buying in a bigger chunk of PST was to try, develop a business down there in Brazil for truck and ag, and construction equipment. Where do you stand there in terms of developing those relationships either with existing customers or new customers such we can expand PST in the commercial?

We are talking to our customers about our capabilities. Currently though, for anyone of our customers with the exception of electronics and expectation if we want to go on the wiring business we had to set up a wiring facility down there. So we're in the early stages of doing that. What we'll do is we will start to put more focus on that and have a more direct alignment with sales organizations and the PST organization. So we have a link between our customers here and there. We've had conversations with some of customers telling them of our ownership position and so it's starting to be initial interest phase right now. But I don't expect to see anything this year in that regard.

I'm not sure that Q1, George, you had offer a lot of numbers. It was $5 million, was the hit from the higher raw materials in Q1?

Yes, and that's what I was explaining the math. It's sort of a number that, when you look at it our raw material cost net sales was up 2.2%. So that says it effectively that our raw material lift that is coming from a couple of different really 2T sources. Raw materials are up roughly above that $5 million, about a little over $4 million, and the other million is being influenced by mix of products in the first quarter mostly in control devices.

And you're saying you got $400,000 back in pricing in Q1 and you're going to get more in Q2?

Yes, it's actually when price is going over really the last 3 quarters that essentially mitigates in almost all of that that increase that we're looking at in the first quarter.

So you're saying by Q4, basically you get $4 million back in terms of pricing.

Right.

And then just again, I'm sorry, some of these numbers you just went through so quick, but you're saying the amortization related to PST is how much a quarter?

Their amortization for the year, for depreciation is $18 million for the year, or are you talking about the purchase pricing accounting?

Yes, just a bit. It sounds like there is 3 pieces of the purchase price accounting. Right, you got the inventory step up which is $1.5 million you're saying in Q2 and then another $350,000 a quarter for some other assured assets that stepped-up, right?

Yes. The assets stepped-up, that's being depreciated. And then the other $4.1 million over the last 3 quarters of the year is in our SG&A.

So it's essentially, it's going to be about $3.2 million in the second quarter to $1.5 million for inventory and $1.7 million for the other 2 pieces. And that will be $1.7 million in the third quarter $1.7 million in the fourth quarter. So that's your $9.9 million and we amortize $3.2 million in the first quarter.

And the decline versus the '13 was what? It seems like that the bulk of that was in the inventory step up?

That was mostly in the inventory side. And you know we went through a lot of detail in terms of doing that evaluation, so the biggest change is really in that line.

And our next question is from the line of Jimmy Baker with B. Riley & Company.

The most of my question has been answered already. But I did have one kind of high level on the quarterly savings of your 2012 sales guidance, obviously lot of puts and takes with regard to the yearend markets and in some ramping your business. But if I look at the North American builds, both CV and light duty, they look to be a bit front-end loaded this year, maybe more so than we would have thought a few months ago. And yet your guidance implies the average quarterly sales for the balance of the year should, at least slightly exceed Q1. Of course, the PST seasonality helps there, but I just like to hear you elaborated a little beyond your prepared remarks on what gives you confidence in your sales outlook in your core operation?

Well, let me say, we think that the European markets have hit the bottom and will start based on what our European business group is seeing from there. It will start to see improvements in the third and fourth quarter. So we are expecting that positive trends. And then, when we looked at the North American market so we continue to see strength in the ag markets going across the whole year, so from our customer perspective. As we look at the commercial vehicle market, I think the real question is just one is perhaps does how much growth and vibe is in the market. It was forecasted to Class 8 at of 300, now down to 275. We think that that trend will hold in the marketplace going forward. And so medium, I think we haven't seen any upper-tick in that beyond what we've forecast. I think what we've adjusted for in our forecast is some opportunities for Europe that were in our original forecast, offset somewhat by at least maybe perhaps a little more of weakness in North American market.

And just as a follow-up, here with your Q1 commercial vehicle sales, it's kind of lagging industry growth as you highlighted, is that simply a function of your largest customer losing a good deal of share that you kind of discussed or you have some any negative content trends or other developments that would have cause you to lose share?

No. we haven't had any negative content trends in there. We haven't lost anything, as a matter of fact that all our other programs are doing well.

And our next question comes from the line of Robert Kosowsky with Sidoti & Company.

Just one last question, what's the total net new business wins or net new business revenue that you're going to have in 2012 and what's it look like for 2013?

I think compared or before we had $195 million for the 4 years and we had about 20% of that for 2012. But right now we're seeing that's going to be down roughly about $12 million in 2012. Then that jumps up, Rob, to that range of about $40 million to $45 million next year, 2013.

So 20% of $200 million, less $12 million.

Right.

And our next question comes from the line of Rhem Wood with BB&T Capital Markets.

Just to kind of summarize, it seems to me that you guys in your top line forecast is taking kind of a conservative approach, lenient things were off, you feel like you're going to adjust your cost structures so that you can improve margins sequentially going forward, is that fair?

That it's fair, we have in fact John mentioned, the actions taken in Brazil, and that fact that's actually split, most of the actions we've taken a lot of in April. We've already reduced 300 people in the direct and indirect and our plan with outsource the wiring harness business that was accomplished in April already. We've taken other actions since we've seen the softness of the market in May that we're going to take probably another $2 million to $3 million of cost out of Brazil side. And then, we have sort of in our manufacturing side, we're driving continuous improvements. I mean we've actually sort of migrated from lean and calling continuous improvement to drive efficiency levels. And so we've got upside coming and we're doing really the assessing of all the indirect labor, direct labor in our wiring plants. So that's showing great progress. And so I think, we'll benefit from that. And Europe with their downside, they're taking cost actions very similar what they did back in '08 and '09 when they saw the market going down. And the other key thing that we have still is, we're monitoring the customer platforms. And we have forecasted we'd have an increase in development expense in the last 9 months. And we're clearly temper that based on what we see with the volume coming from our customer. So we'll balance the cost structure as long as the market stays really close to where it is. I think we can manage our cost in a way to drive profitability.

Phil, just another added point on the wiring operations we have, the ramp up of a Saltillo facility which as that gives more efficient as it's finished its ramp up base. That will improve our cost structure there.

And then last, you talked about mid-year core products into Brazil, into the PST area, what is the timing for taking the PST products kind of overseas. You mentioned, bringing the audio line to Europe and India and elsewhere. Is the timing that's changed?

I think we're more of it, looking at the alarm segment first. We've designed and they've designed a new alarm system with an A6 chip that we believe we're start to look at the first in China market and go into that market and then perhaps the Indian market. We have looked at the European market, alarm systems are not as an attractive, that market proposition over their just because the demand is not there. So that will start to roll out as we look at this. We've got to do our market studies in China and India. I think that again that will be over. I don't see any benefit from those things this year in our plans.

Ladies and gentlemen, that's concludes today's question-and-answer session. I would now like to turn the call back over to Mr. John Corey for closing remarks.

Well, great. Thank you for joining us on today's call. As we said in our announcement, we are pleased with the improvement that we have in our businesses. We still have a lot of work to do with our businesses. And our team is aligned around those things. And as I think as many of the questions came on today's call, we have some initiatives that we will be undertaking over the next several months to drive market performance or those things will roll out over, not benefit this year should benefit also 2013 and beyond. So it's an unstable market, but we're doing. We're managing it and our organization is managing to control our cost and continue to focus on driving the efficiencies into our business. Thank you, very much.

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