Stoneridge Inc (SRI) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2008 Stoneridge Earnings Conference Call. My name is Erica, and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Ken Kure. You may proceed sir.

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 filed with the SEC and has been posted at our website at www.stoneridge.com. Joining me on today's call are John Corey, our President and Chief Executive Officer and George Strickler, our Executive Vice President and 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 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 will also be referring to certain non-GAAP financial measures. Please see the Investor Relations sections of our website for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will be begin the call with an update to our results and his thoughts on the market conditions. George will discuss the financial details for the quarter and future outlook. After John and George are 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. Before I begin to share with you the operating results of the Company and the positive steps we're taking to address the uncertainty in our markets, I want to briefly explain the nonrecurring after-tax non-cash Goodwill impairment expense, and the non-cash deferred tax asset valuation allowance that are included in our fourth quarter and year end results.

The 2008 results include an after-tax non-cash Goodwill impairment charge in the Company's Controlled Device segment of $46.1 million, or $1.97 per share and recorded an after-tax non-cash valuation allowance against the deferred tax assets of $62 million, or $2.65 per share. Excluding these nonrecurring items and the restructuring charges, full year income from continuing operations was $22.8 million, or $0.98 per share compared with $17.6 million, or $0.75 per share from last year.

George will provide more detail about the Goodwill impairment charge and the valuation allowance for deferred taxes later, but it is important to note that these non-cash charges do not impact the Company's ongoing business operations.

Since our last conference call, the global transportation industry continues in turmoil. Our focus has been to manage the areas we can control, and maintain flexibility to respond to the dynamic market in which we are operating. We are responding to the quick and volatile market conditions by focusing on six key areas: market conditions and our response, restructuring programs executed and completed in 2008, additional cost measures taken in 2008, further cost reduction initiatives being worked on for 2009, ensuring liquidity and financial strengths of the Company, and finally short-term sales growth opportunities.

We've all read about the shifts in US light vehicle in North America and European commercial vehicle markets as the global recession expands, and capital availability is largely nonexistent. In North America, passenger cars and light truck productions declined 24% during the fourth quarter. European commercial vehicle volumes also declined with fourth quarter volume dropping 14% from the prior year, while in North America, commercial vehicle market did not recover as was expected at the beginning of the year.

The economic downturn has now spread to the emerging markets China, India, and Brazil. Given that the global decline, the questions are, how are we responding and what confidence can you have in Stoneridge's management team regarding our future? We can only look to the actions we have taken and how we have adjusted as an indicator of how we will adapt to this challenging market.

In late 2007, we announced restructuring initiatives to eliminate manufacturing in our Sarasota, Florida and Mitcheldean United Kingdom facilities. These initiatives were targeted to adjust out cost structure and eliminate overhead centers to enhance profitability in robust economic times and protect profitability when market adversity occurs.

Through 2008, and concluding in the fourth quarter, we have been methodically executing on these two initiatives with urgency and diligence. Both of these initiatives were completed ahead of schedule and within budget. We incurred restructuring costs in 2008 of $13.8 million with anticipated benefits of $12.8 million in 2009 with the closing of these two facilities.

As conditions deteriorated in the second half of 2009, we took additional measures to ensure that Stoneridge would be positioned to adjust to the new economic realities. Additional changes were made when we consolidated two Canton, Massachusetts, facilities into one location, and outsourced our stamping operation in Canton which was not core to our business. These actions reduced employment and lowered overhead costs. This resulted in a reduction of our headcount at our Canton facility by 17% of the workforce. Combined with our Sarasota, Florida, and Mitcheldean, UK restructuring, our overall headcount reduction for these initiatives was 20% in 2008.

In Europe, where the commercial vehicle market declined more rapidly and significantly that originally forecasted, we reduced employment by 12% at our Tallinn, Estonia and Orebro, Sweden facilities in response to the volume decline in the fourth quarter of 2008.

We've continued to see difficult market conditions and are undertaking further actions in 2009 to address the market decline. We are consolidating our Juarez, Mexico facility from three business units into one management team. We have also initiated improvements in our Lean processes to improve effectiveness and efficiency of our manufacturing operations.

These actions have a cost ranging from $500,000 to $800,000 and an annual savings of approximately $2 million. This initiative is underway and is targeted to be complete by August with an estimated benefit for 2009 of between $800,000 and $900,000. In another Mexican facility, we will reduce employment by approximately 150 people from a combination of lower volume and Lean operating initiatives. We are estimating we will complete this by June of this year.

Combining all our restructuring and Lean initiatives, we have reduced overall Stoneridge employment levels by 14.5% from January 2008 until June 2009. At the same time, we are driving cost reductions. We continue to focus on liquidity and balance sheet strength. We have continued to strengthen our balance sheet by generating positive cash flow, managing working capital, and reducing our capital expenditures.

Our debt balance is at the lowest year end levels in ten years. We have improved our accounts receivable balances and have the lowest level of aged receivables in nearly five years. In spite of the volume declines in bank build for product production transfers, we reduced our inventory slightly by $2.6 million to $54.8 million. We have 38 days of inventory which is above our targeted level of 28 to 31 days.

For those companies who have manufacturing, engineering, and financial capabilities, there may be opportunities to capture business in the near-term. We continue to focus on our near-term revenue opportunities to diversify our customer base and realign our product portfolio. Part of the diversification initiative is to invest in technologies where we believe we show the most promise for growth such as emissions, power distribution, magnetic sensing, chemical sensing, tachographs, and alarm and tracking systems.

We continue to monitor business conditions and will take the necessary steps to ensure Stoneridge is positioned for the current economic environment.

Before I make a few comments regarding 2009, let's review our fourth quarter performance. Net sales for the fourth quarter decreased by $27.5 million, or 14.8% to $158 million. This sales decrease was the result of a 24% decrease in the production of traditional domestic light vehicle manufacturers based on weaker consumer demand, lack of credit availability, and a reduction in fleet sales. European commercial vehicle production declined by 14% compared to the fourth quarter of 2007. In addition, the strengthening of the US dollar in the fourth quarter negatively impacted sales by approximately $15 million.

Our aftermarket business was relatively flat as the team was able to offset market weakness with additional business. Our strategy of focusing on cornerstone customers has begun to yield results. Offsetting some of the sale decline was the result of a design and development in build responsiveness which allowed us to win additional military business sales in North America. Finally our agricultural business improved by approximately $6.1 million or 31%.

New business awarded to the fourth quarter included wins at our cornerstone customers and new Asian OE customers specifically Hanoi and Caterpillar Japan. These wins represent continued progress with our key customers in support of geographic diversification initiatives. Finally, our new business awards both new and replacement business have totaled approximately $259 million for the full year 2008.

During this downturn, we will continue to focus on design and development efforts to support the near and long-term growth opportunities. We intend to maintain our annual development spend over the planning horizons between 5.5% and 5.8% of net sales. However, in 2009 we have elected to reduce the spend in response to market reductions. We have been refocusing design and development spending on innovative and new technologies that offer the ability to cross sell to multiple customers in multiple applications. Examples in our Control Device segment include magnetic torch sensing, cylinder position sensing, driveline actuators, non-contact sensing, chemical sensing, emissions, gas, and temperature sensing. Examples in our Electronic segment include integrated module systems, zoning and next generation of tachographs in Europe and alarm and tracking systems in Brazil. However, given the state of the markets, customers are changing their development needs and we must adjust accordingly.

Our gross margin for the fourth quarter excluding restructuring costs of 20% compared to 26% in the fourth quarter of last year. The gross margin reduction is primarily the result of the decreased volume in our passenger car and light truck segments, and our commercial vehicle segments, and foreign exchange translation impacts.

Our gross margin was also negatively affected by approximately $1.9 million in the restructuring charges, and about $700,000 in lost overhead recoveries due to lower volumes which were the result of restructuring inventory spill from the first half of 2008.

We continue to manage our raw material cost though volume reductions impact our purchase pricing. Unlike most automotive suppliers, we do not have significant exposure to purchases of steel. Our primary purchase commodities are copper, zinc, and nickel. Our major purchases for components are plastic, molded parts, connectors, electronics and printed circuit board assemblies.

In electronic components we have established global sourcing which has continued to benefit us with annual reductions based on volume benefits we can offer to a few key suppliers, although with the volumes we're now experiencing, it will be difficult to obtain additional benefits in the short-term.

In these turbulent times, we have established a program where our purchasing function monitors the financial viability of our vendors in an effort to mitigate sourcing disruptions while minimizing risk.

Operationally we continue to show improvement for the year. For the year, our cost of poor quality which represents waste scrap and premium freight improved by $3.3 million compared to last year on a similar sales basis. We also continued our efforts to reduce our manufacturing overhead structures and establish a flexible and efficient global manufacturing footprint.

Our operating loss excluding the impairment charges of Goodwill for the fourth quarter of 2008 was $3.9 million, compared with operating income of $12.9 million in the fourth quarter of last year.

Our fourth quarter 2008 results were negatively affected by $4.4 million in restructuring charges, and approximately $700,000 in lost overhead recovery due to lower volumes which were the result of the restructuring inventories built in the first half of 2008.

Excluding the impairment and restructuring, we would have generated a slight profit in the fourth quarter. Our joint venture in Brazil reported another good quarter, but experienced a drop in volume in November and December. Local currency revenues increased 9.1% in the quarter, but were down 11% for the third quarter this year. A proportion of equity earnings decreased from $2.8 million in 2007 to $2.2 million in the fourth quarter of this year, a decrease of $600,000 or approximately 21%.

Part of the decrease is attributed to the Brazilian Real which has depreciated approximately 16.2% against the US dollar compared to the fourth quarter of 2007, and 26.7% for the third quarter of 2008. The decrease is also partially due to increased selling and marketing expenses in the fourth quarter of 2008 compared to 2007, with a continued growth of our tracking system which was launched early in 2008.

PST continues to report positive results in its aftermarket business particularly in the security products area, and in new business with OEMs in Brazil. Brazilian economy has weakened and we expect the short-term performance of PST volume declines will be offset in part by new production and customers. PST has designed and developed and will introduce a new radio application for OE manufacturers in the aftermarket, thus capitalizing on a strong positron brand recognition.

As currently proposed and if passed, new legislation will require all new vehicles to have a tracking device installed in phases over the next two years. During the fourth quarter, PST received awards for tracking devices from five motorcycle manufactures in anticipation of legislation. PST declared today $4.2 million of dividends in the fourth quarter of 2008 just on this.

Finally, our diluted earnings share excluding Goodwill impairment expense and the deferred tax asset valuation allowance was a loss of $0.01 in the fourth quarter which included approximately $0.14 per share for the restructuring expenses. This compared to income of $0.28 per share in the prior year which is you will recall was a very strong quarter for us.

Earnings for the fourth quarter would have been $0.13 per share excluding restructuring charges. The loss per share for the year ended December 31, 2008 was $4.17 per diluted share which included $0.53 per share in restructuring charges and $4.62 in nonrecurring items. Earnings per share excluding the restructuring and nonrecurring items for the year ended December 31, 2008 was $0.98 compared to $0.75 for the year ended December 31, 2007, an increase of $0.23 or 30.7%.

Going forward, we face a challenging environment globally given the almost weekly adjustments to the build plans from our OE customers. Forecasting for all aspects of our business has become more difficult. For the first quarter of 2009, the traditional domestic light vehicle OEMs are forecasted to be down approximately 40% versus the first quarter of 2008, and we have seen January production in this range.

The North American commercial vehicle market appears to be tracking downward as well, with projected reductions of 25% compared to the first quarter of 2008. European commercial vehicle markets are projected to be down 40% in the first quarter of 2008 versus for 2008 [sic].

So with these market declines what is our plan? It is simply working on the aspects of our business which are under control in the short-term and adjusting our market strategies longer term to reflect the new realities. As we discussed earlier, we are managing our costs structures by adjusting our direct labor and variable overhead costs to match reduced production levels. This may mean additional plant restructuring. We are adjusting plants to fewer workdays, or adjusting working shifts.

For 2009, we have implemented a salary wage freeze in North America unless there was a contractual obligation. We've implemented a hiring freeze with any additional headcount being reviewed personally by me. In addition, our 401K plan has been amended to allow for a discretionary match only, and our gain sharing plans are being redesigned to be profit sharing plans with profit based metrics. We will not have any payouts in 2009 under the gain sharing program unless the company exceeds the operating income target. We expect these savings from these programs to be in the range of approximately $4 million this year.

As highlighted before, we have a program underway in our Juarez, Mexico facility to consolidate three business unit overhead centers into one plant team. The initiative is to be completed by August of this year. The estimated cost will be approximately $500,000 to $800, 000 with an annual savings of approximately $2 million. We are also reviewing plant capacity in Europe to determine what additional steps may need to be taken based on the market outlook.

The environment for 2009 will most likely be the most challenged the Company has ever experienced. The same is true for the entire industry giving the interdependence of the supply chain to the OEM. But we have positioned Stoneridge to weather the storm as we see it now; we believe there is still abundant risk given the state of the industry as a whole. Though we are deciding not to issue earnings guidance at this time, we are indicating that Stoneridge should be both earnings and cash flow positive based on our planned sales in 2009 using the December 2008 forecast.

The first half is expected to experience a more severe downturn than the second half. While we are not satisfied with the results for the quarter end of year, especially after our excellent results in the first half, our team has performed well executing the large restructuring initiatives in UK and Sarasota, Florida, as well as the further realigning our cost structure at the most recent market conditions.

However, we are not pursuing cost reductions alone. We've also implemented near-term revenue programs to focus resources in obtaining additional revenues. Amid the turmoil of the industry, there may be opportunities for us to support customers by taking over for a troubled supplier, or buying assets from a financially distressed supplier and shifting the business to us.

We will look at opportunities to acquire assets from companies in liquidations as well as companies looking to divest product lines. Times like we are facing, our management team recognizes that we need to increase our involvement at all levels of the business. We needed to increase our communications to our employees, and engage in our customers for additional opportunities. We are also maintaining our emphasis on cash generation.

I can't tell you when the recovery will come, but I can tell you what we are doing, and what we think is necessary to come through this period of trial, and continue on our path of improving operations, improving financial performance, and increasing market penetration that will prepare to us while positioning the Company for eventual recovery.

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

Thank you John. Before we review the financial highlights for the fourth quarter and the outlook for 2009, I want to discuss the nonrecurring non-cash Goodwill impairment and valuation allowance for deferred taxes that was reported in the fourth quarter. Nonrecurring, non-cash Goodwill impairment was driven by adverse equity market conditions caused a decrease in the current market multiples the Company stock prices in December 31, 2008.

The benchmark that has been established by the SEC from their comment letters and releases in December 2008 measures the fair value derived by traditional valuation techniques of discounting cash flows and market multiples compared to a mark-to-market concept for marketing capitalization based on a point in time which was December 31, 2008.

On December 31, Stoneridge stock price was in a very depressed state due to the overall conditions of the market resulting in a low point of Stoneridge stock price for the year. We do not believe the mark-to-market concept properly reflects the true value of the Company, and our outlook for the financial and operating performance of the Company.

In the case of the valuation allowance for the deferred tax asset, the valuation allowance is due to the impacts of Goodwill impairment cause the Company to be in accumulative loss carried forward position. Recording the valuation allowance for financial statement purposes only will not impact the Company's ability to utilize for tax purposes net operational losses and tax credits in the future that its operating results permit. These non-cash charges do not impact the Company's ongoing business operations.

Now, I'd like to share a few financial highlights. Restructuring programs announced in November 2007 were completed on time and as planned. The cost of the Mitcheldean UK, and Sarasota facility manufacturing closures were $13.8 million. The annual benefit from these two initiatives expect to be $12.8 million in 2009 and beyond.

We have taken additional measures to reduce our cost structure response to further deterioration in the market. We've consolidated our two facilities in Canton, Massachusetts into one. We outsourced our stamping operations -- it was not core to our manufacturing strategy -- was completed by December 31 of this year. We have reduced our headcount in our Talinn, Estonia and Orebro, Sweden facilities, reflecting downturn our commercial market in Europe. We're taking further actions this year to improve the effectiveness of our manufacturing facilities in Mexico. These programs will be complete by August 2009.

In total, we have absorbed restructuring costs of $15.4 million in 2008 or $0.53 per share. We will incur an additional charge of $500,000 to $800,000 for the Juarez initiative in the first quarter of 2009, which will benefit the Company by $2 million on an annual basis. This initiative is expected to be completed by August 2009 and will reduce our headcount by 150 people with an estimated net savings of $800,000 to $900,000 in 2009.

We have started Lean initiative in one of our other wiring facilities in Mexico which will reduce our headcount by nearly 190 people. This initiative will improve our efficiency and reduce headcount to match the current market volume. It will also free up floor space providing opportunity for additional business.

Through all our restructuring efforts in 2008 and 2009 we'll have reduced our headcount by nearly 900 people or 14.5% January 2008 through August 2009. In addition to restructuring costs, we'll reduce our design and development expenditures in 2009 to under $40 million, match our efforts with our customer's product and platform launches. We are flexing our manufacturing shifts to match our production schedules. We're reducing our variable manufacturing overhead significantly more than our projected volume reductions. We've taken aggressive position for all compensation policies this year. We have frozen all salary and wage increases in North America unless we have contractual agreements. We amended our 401K match program to a discretionary program. We have changed our gain sharing program to pay out only if we exceed targeted profitability levels.

Through all of these initiatives, we have reduced our direct labor, fixed, and variable overheads, D&D expenses and SG&A expenses by nearly $38 million from 2007 compared to 2009. Including the restructuring costs we incurred in 2008 of $15.4 million, we will experience a change to our operating cost structure of nearly $63 million from 2008 to 2009, cost reduction and the full impact of restructuring costs incurred in 2008 compared to the benefits that will be realized in 2009.

Our liquidity remains very strong. We had $92.7 million in cash at December 31, 2008. Our asset backed revolving credit agreement of $100 million remains undrawn and has no restricted performance covenance in maturity at November 2011. Our 11.5% long-term bonds have long-term maturities until May 1, 2012. Capital expenditures have been thoroughly reviewed and have been reduced $21.5 million for 2009. This has been reduced from our normal capital expenditure level of $28 to $30 million per year as our customers continue to adjust to future programs. We will continue to adjust our capital expenditures if our customers delay, defer, or cancel projects. The past due receivables have been reduced to the lowest level in nearly five years. We have less than a $1 million in net past dues over 60 days. We are reviewing on a monthly basis, our customers and supplier counts to minimize our exposures and risks. We have reduced our risk to financially stressed companies and are working with those suppliers that may have financial problems.

We have the lowest debt and net debt balance since 1998. We have strengthened our balance sheet to manage in the difficult market conditions and provide us with liquidity to address our cash burn rate conditions persists for all of 2009 or longer. The uncertainty in the financial markets we repositioned our North American European cash investments during the third quarter of 2008, trade returns in order to minimize risk. Our positioning of cash has not changed through today. We will continue to evaluate our investment policy.

I will now cover the fourth quarter results in more detail, and then we'll open up the call for questions. Revenue of $158 million in the fourth quarter represents a decrease of $27.5 million or 14.8%. The sales decrease was the result of 24% decrease in production volumes at the traditional domestic light vehicle manufacturers which was driven in part by dramatic shift away from light truck, SUV, due to fuel prices and severe restrictions on new consumer credit and general economic conditions.

In the fourth quarter, light vehicle revenue declined from $68.2 million to $45.5 million a decrease of $22.7 million or 33.3%. The decline was primarily attributable to the 28% decline in traditional domestic production, price reductions in our Control Device segment. Medium and heavy-duty truck sales totaled $84.8 million in the quarter, a decrease of $9.1 million or 9.7% over the prior year. Revenue decrease was driven by decline of 14.3% European commercial vehicle production, and unfavorable foreign currency exchange rates resulting in a $15 million sales reduction.

Sales to agriculture and other markets totaled $25.6 million, an increase of $6.1 million or 31.3% above last year. The increase in our agricultural sales is predominately due to strong build rates at John Deere. North America revenue accounted for 77.7% share of the fourth quarter revenue compared to 70% for the same period last year. Percentage increase of our North America revenue reflects the growth of new business in our North America commercial markets.

In the fourth quarter, electronics revenues were $111.7 million compared to $120.2 million last year, decrease of $8.5 million or 7.1%. Positive factors in the quarter were continued strong revenue from our North America commercial vehicle operations due in part to new government business. Unfavorable factors affecting the fourth quarter performance with a 14.3% decrease European commercial vehicle production, non-favorable (inaudible—background noise) currency translation.

Revenues for controlled devices of $46.3 million declined from $65.3 million last year, a decrease of $19 million or 29.1%. 24.3% decline in production of North American light vehicles, the domestic manufacturing contractual price reductions, the primary reasons for the decline.

Our fourth quarter gross profit was $29.8 million resulting in a gross margin of 18.8%. The gross margin decreased 8.7 basis points from the prior year level. This decrease was due primarily to reduced industry volumes and foreign exchange translation relative to the prior year. Gross margin was also affected by restructuring costs of $1.9 million, and lower overhead absorption of $700,000 caused by the production of inventory builds in the first half of the year (inaudible) production lines moves.

Sales from low-cost manufacturing locations accounted for 39% of total sales for the fourth quarter compared to 32% in the prior year. The increase was due to lower Stoneridge North America sales in the current quarter. But our China operation and our announced production line moves from our Mitcheldean, UK operation both China, and Estonia and our corporate wide initiatives we expect our sales from low-cost locations to grow as we relocate labor intensive manufacturing over time.

We will continue to expand our presence in the three low-cost manufacturing locations, Mexico, Estonia, and China. Our new facility in Estonia was complete and operational in November of 2008.

Billing, general administrative expenses totaled $31.7 million in the fourth quarter compared to $34.6 in the previous year. The decrease in SG&A is primarily due to increased design and development reimbursement activities related to new product launches in our European commercial vehicle unit.

The fourth quarter income tax benefits totaled $6.2 million exclude the impact of non-cash Goodwill impairment charge and deferred tax valuation allowance resulting in overall tax benefit in the fourth quarter and effective tax rate of 26.8% for the year versus our previous estimate of 42%. The negative effective tax rate for the quarter was primarily attributable to the tax benefit of the fourth quarter loss, full year benefit of the R&D credit in the combination of expiring statues of limitation, closure of certain federal, state, and foreign audits. We expect our 2009 effective tax rate to be between 28% and 32%, excluding the impact of any change in the valuation allowance.

Excluding charges for non-cash Goodwill impairment and the valuation allowance for the deferred tax asset, Stoneridge recognized the fourth quarter net loss of $300,000 or $0.01 per share, which included approximately $0.14 per share of restructuring charges. This compared with prior year net income of $0.28 per share or a decrease of $0.15 restructuring charges.

Depreciation expense for the fourth quarter was $5.2 million in amortization expense total $300,000. For the full year, depreciation amortization totaled $26.4 million. Earnings before interest, other income, taxes, depreciation amortization were $1.6 million in the fourth quarter compared to $19.5 million in the previous year, a decrease of $17.9 million or 91.8%. The working capital totaled $100.6 million at quarter end, which decreased $9.7 million from the end of 2007. As a percentage of sales, our working capital decreased from 15.2% of sales in the prior year to 13.4% of sales in the fourth quarter of this year. Primary reason was the decrease was reduced accounts receivable and lower inventory from lower sales activity.

While we have made progress towards improving our working capital levels, our working capital balances remain above our targeted range of 12% to 13% of sales. We see opportunity to reduce our inventory balances from the current 38 days to the range of 28 it 31 days in inventory, we're improving operational efficiencies in 2009. We have made this a focus area for our operations as liquidity and cash flows are number one target. The director of Lean operations will be focused around manufacturing efficiencies and supply chain management for our global operations.

Operating cash flow net of fixed asset additions was a use of $400,000 in the fourth quarter compared to a source of $25.6 million in the previous year. Our cash flow results in the fourth quarter were affected by lower sales activity generating lower cash flows, reduced working capital and by lower net income. Our operating cash flow for the year was $42.5 million, an increase of $9 million over the prior year level of $33.5 million.

Capital investment totaled $5.8 million in the fourth quarter, mainly reflecting investment in new products and a building expansion project at our Lexington, Ohio facility was part of our previously discussed restructuring initiative. The Lexington facility was originally contemplated to be a leased facility. The significant areas of our capital investments were in our emissions, sensor products, and wiring business, and our full capital spending was approximately $24.6 million.

We are projecting our capital spend to be $21.5 million in 2009. One of our most important measures for 2009 will be cash flow and liquidity. As of December 31, 2008 we have $57.7 million of availability under $100 million asset based lending facility. We have no borrowings drawn against our asset based lending facility. Our quarter end cash balance totaled $92.7 million compared with $95.9 million at the end of last year. Going forward, we expect we will continue to fund our operational growth initiatives for our free cash flow generation and available cash balances.

Now, I'd like to take a moment to discuss our 2009 outlook. As mentioned by John, the environment for 2009 will most likely be the most challenging the Company has ever experienced. The same is true of the entire industry given the interdependence of the supply chain to the OEMs. Though we have positioned Stoneridge to weather the storm as we see it now, we believe there's still abundant risk given the state of the industry as a whole. Though we are deciding not to issue earning's guidance at this time, we are indicting that Stoneridge should be both earnings and cash flow positive based on our planned sales of 2009.

Based on our efforts of restructuring programs, headcount reductions, adjusted 2009 compensation programs, flexing our production schedules and our reduction in design and development expenditures, [this coarsely] adjusts that our 2009 cost structures to better match declining revenues. Based on the market forecast, we are experiencing December 2008, our goal is to maintain profitability and liquidity in these very difficult times by lowering our breakeven sales level for profitability and cash flow.

2008 did not play out as we had originally expected. Did not forecast a significant drops we've now experiencing in the light vehicle market in North America, and commercial market in both North America and Europe. We did not expect the emerging markets in China, Brazil, and India to experience such a rapid slowdown. We're expecting the medium to heavy truck market to improve slightly by the end of the third or fourth quarter of this year.

In summary, we developed, executed, implemented and continue to modify our plans to respond to the rapidly changing markets. We are lowering our cost structures to offset the volume reductions. We developed plans to restructure our manufacturing overhead centers, streamline our organization to reduce our SG&A expense. To pursue near-term programs to grow the top line. We have adjusted our compensation programs to contain costs, we have significantly reduced our headcount, we have adjusted our work shifts in our plants to recent forecasts. We continue to monitor the capital markets, so we are positioned to refinance our long-terms bonds when the capital markets are more receptive.

As our markets have become more difficult, we continue to readjust our plans to address the short-term opportunities for sales growth, while investing in the right technologies for long-term growth, manage our cost structures and driving our cash flow to address the market challenges that we're all experiencing.

Operator, we'd now like to open the call for questions.

Ladies and gentlemen (Operator Instructions). And your first question comes from the line of Brett Hoselton from KeyBanc. You may proceed.

Hi John, hi George. How are you guys?

Good how are you?

Doing very well, how are you?

Doing well, congratulations on actually making a profit on an adjusted basis in the quarter. Not many suppliers are doing that these days.

Thank you.

Wanted to -- can you run through the liquidity again, George, just cash and then availably lines and so forth?

Our cash is $92.7. In fact it's improved slightly in the year, Brett, and our liquidity, we have $100 million open revolver right now with our current, it's asset based, so we have availability under that line of roughly about $58 million. And that's got a maturity in November of 2011, and our long-term bonds are presently at $183 million. As you remember, we paid down $17 million earlier in 2008 which impacted our cash balance also, but that line goes out through May of 2012.

So as of the end of the quarter you have $58 million available on a $100 million line, correct?

Right.

Okay. The cash flow, cash flow to positive, is that operating or free cash flow being less CapEx?

Well, the $43 million is operating cash flow and the capital would be net of that, and I think one thing that we've indicated today that we're managing capital very tight. We're looking at our customer products and platform launches and so that will be a flexible item as me move forward, but for the current year in 2008, our operating cash flow was $42.5 and our capital expenditures were $24.6.

And I apologize George, what I was referring to was 2009, your outlook, your anticipating positive cash flow and I'm just wondering is that a positive operating cash flow, or is that net of CapEx in your mind?

That's net of CapEx.

Okay. And then I noticed you called out restructuring in some of your release here, and I'm wondering, is that something that you would hope for us to do as we move forward or is it just something that you've generally indicated. I mean, historically, you've identified it, but you haven't necessarily called it out as a unique or onetime charge.

Well, Brett, I think we called it out in the fourth quarter because we had such significant adjustments for restructuring the Goodwill and the valuation allowance, so we laid them all out as separate items so that you had clear visibility what was going on in operations versus the three unusual items, and actually nonrecurring items.

Okay, has any -- I think I saw gain of sale of about $0.5 million, is that that the Sarasota facility, or is that something else?

No, we're still -- that was something else, and I'm not sure exactly what that one is, but Sarasota, we continue to work on that one and as you know, we had forecasted originally have that completed in '08, but we are still working on that, and hopefully we can sell that in 2009.

Okay, and then as you think about your outlook and your assumptions for production and so forth, can you give us a general sense of what are you seeing in the light vehicle side of business? What are you thinking about commercial vehicle side of business in North America and Europe maybe percent of changes, or absolute numbers, or something along those lines. What's making your thought process?

Well, we're looking at the North America light vehicle market somewhere between 10% and 10.5%, probably towards the lower end of that range. Certainly the first quarter January sales were 9.8% on an annualized basis, so it's a very difficult period for that segment of the market. On the medium and heavy-duty truck, we're looking probably at 10% to 15% decline in the North American markets, and then in Europe, it's more like a 30% to 40% decline. I mean, I don't think the conditions are fully manifested themselves in Europe yet in terms of future production plans, so we've got to watch that very closely.

As you think about Ag and it's obviously doing quite well with John Deere, as you think that about that in 2009, your thoughts good, bad, up, down, that sort of thing?

I think we're overall we expect that business to continue to be up. I think that's what John Deere was forecasting. I mean, I think at some of their businesses, they are probably not as optimistic about it, but I think in the AG business, I think they still remain optimistic on that business.

And then from a restructuring standpoint, you talked about some additional charges to the first quarter of '09, is there an expectation that you may do some additional restructuring as you move through 2009 at this point in time, or based on what you're currently looking at, are you thinking that what we're doing with the Juarez facility is going to basically be the last of the restructuring charges?

No, I mean, and we're going to be -- I can't say that there'll be additional restructuring charges, but I won't rule it out. I think as we look at European volumes, and we look at what's happening over there, we may have to take additional measures over there, and as we continue to look at what's going on here.

Now, one of the things though that we talked about is we're looking at near-term revenue opportunities, and in our wiring business, there may be -- that's where we can generate some revenue pretty quickly if the business awards are out there. So we're aggressively pursuing that.

But we will continue to downsize our factories to try to get to the right volume of level and expectation. The real dilemma is there comes a point in time where volume might be down for the first quarter or the first half, and you might say, "Well, I need to take a major restructuring," only to see the volume's coming back and then you have to add all that back in. So the key here is to take the restructuring and try to keep it permanently out of the cost base, so when volume comes back up you can leverage yourself.

Okay, thank you, I appreciate it George.

You're welcome.

And your next question comes from the line of Brian Sponheimer from Gabelli and Company. You may proceed.

Hi, good morning John and George, how are you?

Fine.

Hi, Brian.

Just on the restructuring side, I'm not sure I picked up on this. How much exactly of that was the cash outlay?

The cash outlay -- the total expense we incurred was about $15.4 million in SG&A and the cash was very close to that. So, I mean, it was probably in the range around $14 million, Brian.

But that was just housekeeping, and moving along, the upside of Ag, you spoke about some other areas that you were seeing some opportunities. I want to ask specifically about military business. You benefited tremendously due to the rise of the [Nemrave] program and instead of tailing off you see your success in [Nemrave] kind of piggybacking onto the new potential programs, the MATV and others that are on the horizon.

Yeah, we do if our customer wins the award. So it's really dependent on that, but we're working hand-and-hand with our partner and supporting them to develop those products and deliver those to the military for evaluation.

Are you expecting that sometime in May?

I think yeah, well, I think so. I'm not, again, I'm -- we've delivered a couple of -- they've delivered a couple prototype samples. I think they're delivering them here shortly, and I'm not sure how long the evaluation period will be.

Okay, I just wanted an update on that. Thank you guys.

You're welcome Brian.

You're next question comes from the line of David Leiker from Robert W. Baird. You may proceed.

Hi, it's Keith Schicker.

Hi Keith.

Just a quick question regarding the sort of end market outlook that you detailed, John. It looks like in the North American commercial vehicle market you were looking for a 10% to 15% year-over-year decline. We were wondering what the basis for that assumption is especially with order rates in recent months tracking much, much worse than that pace on an annualized basis.

Well, I think you've got a couple -- yeah the order rate has been down but you eventually we're going to replace the truck fleet, and remember we've had three down years now in this market where we haven't seen an up tick in the volumes that are projected. So I think that's going to be a big driver. Also you've got the new environmental regulation, that has to come in in 2010, and that may have -- drive some purchases towards the end of the year particularly in the second -- last quarter. So that's kind of what our basis is.

Now, again, conditional on all of this is that the credit markets free up and there is available capital that starts to come back into businesses. I mean, without that, we're going to continue to see tremendous pressure on this, and -- but we've assumed that by -- there will be that transition will happen. I mean, we're certainly -- the government's certainly pumping enough money into the system, now hopefully it gets it to the right places, and credit becomes available again, and businesses start to invest where they see fit.

And I think that when you look at things like the International ProStar, that's more fuel efficient vehicle, I think there's opportunities there if people look at how to manage their cost and their maintenance, that there may be opportunities there too that will stimulate something there.

Okay, that's great. Thanks. And if we look at depreciation and amortization in 2009, can you comment either quantitative or quantitatively, or qualitatively, where you see that headed?

Keith, I think it'll run in the range of about $23 million for 2009.

And that's the D and A? Or just D?

That's just D and I think the amortization is I think it was running around $300,000 a quarter so it will be about $1 million.

Okay. I think when you were talking about the 2009 outlook you said that you thought SG&A could be down. I missed this a little bit, but SG&A could be down as much as $38 million year-over-year.

Well, what we said, Keith, is that if you go back to '07/'09, we've reduced our overall cost structure $38 million between direct labor fix and variable overhead, and SG&A as a composite. I didn't give you a breakdown of --

Okay.

Each one of those groups, and then if you look at the cost incurred in '08 versus the benefit in '09 that swing is almost about $63 million between '08 and '09.

Okay. That's great, and then if we wanted to try and put some parameters around the size of your military business, that's included in -- when you break it down by segments, that's included in the commercial vehicle revenue. Is that correct?

Yeah, that's in our electronic segment of commercial vehicle.

And is there any way that you can frame the size of that business since 2008?

No, we don't disclose that.

Okay, thanks.

Thanks Keith.

(Operator Instructions). And your next question comes from the line of Gary Moorman, from Alpine Associates. You may proceed.

Hi guys. In your cash flow assumption, and being cash positive for '09, what are you have baked in there for working capital? Is that going to be a source or a use, and can you give me an idea of how much?

It'll be a source in 2009. A lot of it reflects on what happens at top line sales.

Sure.

But we see is the markets coming down to that, will be a source for us.

Can you give me a rough idea of how much?

Yeah, I would view that working capital is probably going to be in the range of somewhere around $20 million improvement through '09.

Okay. Thank you very much.

You're welcome.

And we have no questions in queue. This concludes the question and answer portion of the call. I would now like to turn it over to Mr. John Corey for closing remarks.

Well, thank you. I think that as you all know, it just a very turbulent and uncertain time and in those times, and then you've got to be fast and flexible and adaptable, and that's exactly what our program is, and that's what we've been trying to do here. And I think as we've been very proactive in taking action early, and trying to get through this period, hopefully this period -- our outlook says that it's going to be a difficult 2009, and I think that's probably consistent with a lot of the industry, and we will just continue on these initiatives that we've outlined here, and looking at how we can position the business to come out stronger when the recover happens.

So with that I'd like to thank, and again, I'd like thank our team because I think they've done a great job here in this year of 2008, and we look forward to them doing a similar job in 2009. So thank you all for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.