Stoneridge Inc (SRI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q4 2009 Stoneridge earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the call over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed, sir.

Good morning. 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 to our website at www.Stoneridge.com. Joining me on today's call are John Corey, our President and Chief Executive Officer and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include those statements that are not historical in nature and include information concerning our future results or plans. Although we believe such statements are based upon reasonable assumptions, you should understand that these statements are subject to risk and uncertainty 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 may 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 our growth strategies and business development and his thoughts on market conditions. George will discuss the financial and operational details of the quarter and future outlook. After John and George have finished their formal remarks, we will then open up the call for questions. With that, I would like to turn the call over to John.

Good morning. After a year as bad as 2009, one can lose the perspective on the trend of performance and only see the current blip in performance. However, as we've discussed, we have put a plan in place several years ago to transform our Company. I would like to review our trends and how we are carrying it forward into the future.

Since the market downturn in the third quarter of 2008, we have been focused on the critical items to maintain our competitiveness, while positioning our Company for the longer term profitable growth. The four critical items that our management team has been executing on were -- reducing costs and lowering our break-even sales level to mitigate the market downturn, and to position the Company for improved operating income as volume returns. Protecting our liquidity and to derive positive cash flow. We focused on cash flow to ensure we could weather the downturn in the market and provide the funds needed for investment once the market recovers. Third was to provide additional liquidity to our revolving credit lines and investments, and acquisitions like the BCS acquisition we completed on October 11th of the last year. And finally, to pursue growth opportunities and business wins to drive our top line growth. How have we performed to these targets?

As we have reported on previous calls, we started restructuring the Company in the fourth quarter of 2007 and further expanded those programs to adjust to the industry realities of significantly lower market. George will share with you the details of all of our programs, but it is important to note that our Company generated operating income of $4.8 million in the second half of 2009 after recording an operational loss of $23.1 million in the first half of 2009. We generated operating income in both the third and fourth quarters of 2009 and slightly higher volume than the first half of 2009. This reflects the significant cost improvements that we have implemented across the Company and we have lowered our break-even level by 24%. Our gross margins were 21% in the fourth quarter at the lower end of our range due to increased copper costs, costs added to support new program launches, and some supply disruption in getting components -- a point we made in our third quarter call.

We did a good job of maintaining our cash position. We closed our cash balance at year end of $91.8 million compared to $92.7 million that we had at the end of 2008. We accomplished this even though sales were down by nearly 37% and we incurred additional restructuring costs in the year. We did this through reductions in working capital and capital expenditures to match the customer delays of product launches and new program starts -- specifically we spent nearly $12 million for capital expenditures in 2009. We are forecasting that capital expenditures will return to more normal levels in 2010. These combined items essentially offset the operating losses of the Company. We also received a dividend from PST of $7.3 million in December, which continues to reflect the strong operating and financial performance of PST, our Brazilian joint venture. We expended nearly $5 million for the BCS acquisition in October.

I believe our greatest achievement in 2009 was our business award wins. We had a goal to contract $100 million of new diversified business outside of our top four customers. Our organization accepted the challenge and are continuing to focus on the top four customers, we were able to expand our diversified customer base with an emphasis towards cornerstone customers. We define cornerstone customers as those customers who have expanding global footprints, significant market presence, and a commitment to being technology leaders. In 2009, we were awarded $134 million of gross business, of which $106 million was new business and $28 million was replacement business.

Of the $134 million, $99 million was represented by customers outside of our top four customers, a significant achievement in our diversification efforts. These wins have contributed to the estimated net new business of approximately $120 million over the next three years, and $170 million over the next five years. We have shared this accomplishment with you in the past, but not included our few wins that were outside of these results. We have recently been selected and are in the final negotiations for a new shift by wire application, a new product line for us with a North American OEM. This application can be extended to multiple customers. We have won a major wiring contract with a major commercial account that will begin production in February and ramps up to full production by April of 2010. We've also won a substantial contract with a major agricultural equipment customer for new wiring applications with them that will start in 2013 and is in the range of $30 million to $40 million.

Over the last two years, we have realigned our Company around two business segments -- electronics and control devices. In August, we announced the integration of our control devices business into one management team. These consolidations are starting to produce results as our D&D efforts are more focused on our customer technologies and geographic locations we choose to participate in. In the last three years, we have been focusing on expanding our core market segments -- medium and heavy duty truck, pass and light car vehicles and agricultural. In addition, we have expanded our markets to include applications with military instrumentation and material handling. For 2009, our percentage of sales was 51% for commercial, which is medium and heavy duty, 33% for pass and light vehicle, and 16% for agricultural. Included in the commercial sales is approximately $14 million, or 3% for military. Included in the agricultural and other sales are $6.8 million, or 1% for material handling.

Our acquisition of BCS expands our military customer base to include forced protection, BAE, General Dynamics, AM General, and Oshkosh. BCS's sales were $1.6 million in the fourth quarter with an operating income of $271,000. Our plan is to integrate marketing efforts between BCS and Stoneridge to cross sell our products, primarily instrumentation and gauges through BCS to their customers. We believe there are good growth opportunities for BCS in 2010 and we expect our sales to reach -- expect our sales to reach $20 million annually this year. We further expect that BCS will be able to add $20 million to $30 million in annual sales over the next three years.

We are also continuing plans to enhance sales by regions and geographic areas using our technologies to cross sell multiple customers. We are making progress to expand our presence in China and India, while continuing to focus on Brazil with our PST joint venture. In China, we are extending the usage of low temperature and speed sensor technology products. China has won four new applications during 2009 in wheel speed sensors and oil level sensors. Even though they are small, it begins to enlarge our product and technology offerings. We are also starting up wiring operations in the first quarter of 2010 to support business opportunities for John Deere and other potential customers in China. We have added technical engineers and will open a new design center in the first quarter of 2010 to support our customer and product development in China. We will officially dedicate this new technical center in March and it will house our sales organizations, technical engineers and testing facilities.

In India, our current sales level now stands at about $25 million per year, mostly for instrumentation and gauges. We are adding sensor lines, which is a larger market than instrumentation. We have raised our sales targets to reach $50 million to $75 million in the next three to five years and we are adding our sensor line to our India joint venture. We believe these plans are very achievable with base business we have established in the last three years.

Operationally, as we mentioned before, we announced the integration of our hi-stat Pollak facilities in August of 2009. This has yielded benefits of reduced cost structure and a more streamlined management team. With this change, we have aligned all of our resources dedicated to our sensor switch and actuator businesses under one management team. We needed to be more effective, efficient and focused on identifying market opportunities and allocating resources directed to those products, technologies and customers that we believe have better market opportunities for sustainable growth. This consolidation does that.

We have begun to win new awards with our technologies. We have landed the first order for torque sensing with a global equipment manufacturer, which is projected to start in late 2010. We also hope to land our first order for cylinder position sensing with a major agricultural customer in the first quarter of 2010. We have a new keyless entry system with our capacitive sensing technology from Ford that is currently on the MKS, Flex, Taurus, and MKT, with plans to propagate it to the Explorer and Escape over the next two years. As mentioned previously although not officially awarded we are working on a new shift by wire application which should present significant opportunities with our light vehicle customers in North America.

In operations, now that the major restructurings are behind us, we can expect to continue to focus on quality, delivery, and cost with our lean initiatives. Our lean principals and concepts include a plan for every part, supermarket designated storage, small lot material flow, equipment tool and changeover, floor space optimization, and operator optimization, standard workflow, and workplace organization, paperless information flow, and a work facility redesign. We have been working on these processes for almost 18 months and are starting to realize the benefits. We are encouraged by our progress in the sustainability of the -- our change progress in manufacturing facilities. We are realizing improvements in our inventory days, especially in our work in process. Even with a significant drop in our sales, we continue to improve our days and inventories in our work in process. We are working to improve our supply chain and forming relationships with our suppliers to support our lean initiatives. Our other operational improvements will come from operator right sizing and product quality.

In the past two years, we have seen one of the most serious economic downturns in our business. We have taken actions to make the Company more competitive and position the Company to compete effectively for the future. We have cut our costs and lowered our break-even sales level. We have maintained our liquidity and maintained our cash position. At the same time, we have clearly stayed focused on our top line growth. I have shared with you today some of the opportunities we have already won, where we have positioned ourselves in the future for growth in emerging markets with key customers and new technologies, and entrants to new market segments to promote global growth to the cornerstone customers. We will continue to pursue making acquisitions of companies who can fill the voids we may have, such as the acquisition of BCS.

I would be remiss not to thank our employees for the sacrifices and performance they have exhibited this past year, positioning Stoneridge for the future. Looking forward to 2010, I am optimistic. We have weathered the worst of the global market decline. The markets are improving, some more rapidly than others, but they are improving. While I've highlighted some of the major accomplishments, there are many actions, both large and small, that our employees have accomplished, which have improved and strengthened the Company.

2009 was a challenging year for the industry. However, we are confident our actions will positively drive us forward. As the market returns and the industry begins its improvement, Stoneridge is poised to move forward to improve our position.

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

Thank you, John. As John indicated, 2009 was indeed a year of transition.

Though we encountered significant challenges posed by the severely reduced marketing conditions, our management team saw this as an opportunity to demonstrate their tenacity and resolve to further improve Stoneridge to benefit both the near term and the long-term. During 2009, we embarked upon numerous projects that will help Stoneridge do more than merely survive -- but to thrive in the near future. All of these initiatives undertaken were efforts to increase value and improve our processes.

During 2009, many customers and suppliers encountered problems with their own customers and suppliers. Certain customers experienced liquidity problems while others like General Motors and Chrysler went through a bankruptcy process. Through cross-functional team efforts, we were on board at GM and Chrysler's government guarantee program and through our other actions, we were able to limit our bad debt write-off to less than $100,000 in 2009. We were also able to limit disruptions from our supply chain by monitoring our vendor base closely and moving tools and equipment if necessary to more financially stable suppliers.

In positioning Stoneridge for the future, certain aspects of our revolving credit facility needed to be amended in order to allow important value-added projects to proceed. During October, our team amended our revolving credit agreement to permit us to proceed with three important initiatives. We completed the European restructuring which provide us the opportunity to repatriate about $38 million in value from Europe with minimal expense, as well as repatriate approximately $5 million in cash in December. As mentioned in our previous call, Stoneridge acquired Bolton Conductive Systems in October of last year. With the acquisition, we believe this will provide us with the opportunity to expand into new military customers, as well as expand Stoneridge's existing product offering into the military segment, as explained by John.

Finally, we amended our credit agreement to allow us to reorganize our UK subsidiary in order to cap certain liabilities. All manufacturing lines and products were transferred to Estonia, China and Mexico, and completed by December 2008. We continue to monitor the Capital Markets for opportunities to refinance our debt on less expensive and more favorable terms. Though the North American and European markets are beginning to show signs of stabilizing, other markets around the world appear to be improving at a faster pace. Our joint venture in Brazil is showing signs their economy is strengthening and returning to normal levels. Our portion of equity earnings increased from $2.3 million in 2008 to $2.9 million in the fourth quarter, an increase of $600,000, or approximately 21.5%, and significantly better than the first half of 2009. PST declared and paid $7.3 million of dividends in the fourth quarter to Stoneridge.

One of our major goals for 2009 was to manage the cash flow and liquidity. During the course of the year, we funded our operational growth initiatives through our free cash flow generation and available cash balances. Our quarter end cash balance totaled $91.9 million compared to $92.7 million at the end of 2008. During 2009, we began to reap the benefits of the restructuring programs we initiated in 2007. Our fixed costs, which we described as our SG&A and overhead expenses, excluding restructuring costs decreased by approximately $14.7 million from the fourth quarter 2009 compared to the fourth quarter of 2008. These reductions have helped offset the dramatic decline in profitability caused by the market downturn. We are pleased to report positive operating income in both the third and fourth quarters. Our restructuring from the fourth quarter of 2007 to the fourth quarter of 2009 cost the Company $20 million in both expense and cash flow, but we were able to permanently reduce approximately $34 million of fixed manufacturing and overhead costs.

Now I would like to cover with you some of the details regarding the financial performance for the quarter. Revenue of $133.8 million in the fourth quarter represents a decrease of $24.2 million, or 15.3%. Our sales decrease was the result of declining production volumes in our served markets, severe restrictions on consumer credit, and general economic conditions. For the fourth quarter, light vehicle revenue increased from $45.8 million to $47 million, an increase of $1.1 million, or 2.5%. The increase was primarily attributable to the 1.3% increase in traditional domestic production, and our controlled devices segment. Medium and heavy duty truck sales totaled $67.9 million in the quarter, a decrease of $17.1 million, or 20.1% over the prior year. The revenue decrease was driven by a decline of 17.9% in the North American commercial vehicle production, and a decline of 53.9% in European commercial vehicle production.

Sales to agriculture and other markets totaled $18.9 million, a decrease of $8.2 million, or 30.2% below last year. North America revenue accounted for 76.2% share of the fourth quarter revenue compared to 77.8% for the same period last year. The percentage increase of our North America revenue reflects a more dramatic effect of reduction in European commercial vehicle builds and unfavorable foreign exchange rate changes on European sales. In the fourth quarter electronics revenues were $82.6 million compared to $111.7 million last year, a decrease of $29.1 million, or 26.1%. Unfavorable factors affecting the fourth quarter performance were the 17.9% decrease in North America commercial vehicle production, a 53.9% decrease in European commercial vehicle production, and unfavorable foreign exchange translation. Revenues for control devices of $51.2 million increased from $46.3 million compared to the fourth quarter of 2008, which is an increase of $4.9 million, or 10.6%. The 1.3% increase in production in North American light vehicles for the traditional domestic manufacturers was the primary reason for the increase.

Our fourth quarter gross profit was $28 million, resulting in a gross margin of 21%. Our gross margin increased 2.1% basis points from the prior year level. This marks the second quarter in a row that our gross margin was greater than 20%. The continued increase is primarily due to our cost structure initiatives. Gross margin in the fourth quarter of 2009 was not affected by restructuring costs. This compared to the fourth quarter of 2008, which included $2.6 million in restructuring costs. Sales from low cost manufacturing locations accounted for 44.6% of total sales for the fourth quarter compared to 39% in the prior year. The increase is due to lower overall Stoneridge sales in the current quarter. With our China operation, our announced production line grew moves from Mitcheldean, UK the operation to China and Estonia and our corporate-wide initiatives, we expect our sales from low land cost locations to continue to grow in the future. We will continue to expand our presence in the three low cost manufacturing locations -- Mexico, Estonia, and China.

Selling, general and administrative expenses totaled $25.9 million in the fourth quarter compared to $33.2 million in the previous year. The decrease in SG&A is primarily due to cost structure savings, which are the result of the previously discussed restructuring initiatives, and lower compensation-related expenses in 2009. We have reduced our design and development expense from $9.7 million to $8.1 million, as some of our customers have delayed some of their future projects and platforms. Our SG&A and design and development spending increased compared against our last quarter, supporting new customer requests and near-term product launches, especially our European truck platforms, North American wiring initiative, and the launch of our new wiring business in North America that begins in February 2010, as John mentioned earlier.

The fourth quarter income tax credit was $600,000 on a pretax loss of $700,000. As reported for December 31, 2008, the Company's in a cumulative loss position, continues to define valuation allowance offsetting its federal, state and certain federal -- foreign deferred tax assets. As a result, no tax benefit in North America was provided for losses incurred in the fourth quarter 2009 for federal and state tax purposes. The negative impact of these valuation allowances was partially offset by tax benefit for losses incurred in Sweden. Due to the valuation allowance and pattern of projected earnings, the quarterly effective tax rates fluctuated significantly and for the year end, the Company recorded an annual tax benefit of $1 million.

The unusually low effective tax rate for 2009 is due to the circumstances that caused us to write off our deferred tax assets in December 2008 and will continue to prevent the Company from recognizing a tax benefit for domestic and certain foreign losses. Once the market stabilizes and profitability returns, we expect the effective tax rate to normalize and be in the range of 27% to 30%. Due to the Company's deferred tax valuation allowance recognized in December of last year, we will not recognize tax expense on US earnings. We will record tax expense on foreign earnings including PSP. This will cause significant volatility in our income tax expense during 2010, depending on where taxable income is made.

Stoneridge recognized a fourth quarter net loss of $218,000, or $0.01per share. This compared with prior year net loss of $337,000, which included a pre-tax restructuring charge of $4.4 million, and excluded the noncash write-off of good will and the deferred tax asset valuation allowance. Depreciation expense for the fourth quarter was $4.7 million, and amortization expense was negligible, as most the intangibles have been written off in the prior year. Our primary working capital totaled $70.6 million at quarter end, which decreased $30 million from the fourth quarter of 2008 levels. And as a percentage of sales, our working capital increase from 13.4% of sales in the prior year to 14.9% to sales in the fourth quarter this year. Our working capital measures have been significantly influenced by the drop in sales revenue. As markets return our long-term goal is to return primary working capital to 12% of sales.

Operating cash flow as a cash source of $15 million in the fourth quarter compared to a cash source of $11.8 million in the previous year. Our cash flow results in the fourth quarter were affected by lower sales activity, which generated lower working capital requirements and lower net income excluding the valuation of good will and deferred tax valuation allowance. Capital investment for the quarter totaled $3.2 million, mainly reflecting investment in new products and sensors and wiring, as well as IT spending for our ERP implementation. For the full year of 2009, some significant areas of our capital investments were in our missions, switch, and actuation products and wiring. We finished the year with total capital spending at $12 million, which is down significantly from historical levels, which should return to $23 million to $25 million range in 2010.

Two of our most important measures starting in the fourth quarter of last year and continuing this year has been cash flow and liquidity. As of December 31st, we have $54.1 million of availability under $100 million asset-based lending facility. Our borrowing base has increased by $2.6 million since the second quarter of 2009 as accounts receivable and inventories recover from cyclical lows. We have no borrowings drawn against our asset based lending facility, which has a maturity of November 2011. Our quarter end cash balance totaled $91.9 million compared with $92.7 million at the end of the fourth quarter from the previous year. We will continue to manage our capital expenditures and working capital to sustain and improve our cash flow. We continue to work to sell or close Sarasota manufacturing facility, though the commercial market for facilities of this type have been difficult. Going forward, we expect we will continue to fund our operational growth initiatives through our free cash flow generation and available cash balances. As the market recovers, our working capital will begin to grow in dollar terms, but we will continue to improve our days to achieve our primary working capital targets of 12% to sales.

The environment for 2009 has been very difficult and based on our third and fourth quarter results, it appears the market bottomed in the second quarter in 2009. We have experienced improvement in passenger light trucks in North America, our emerging markets are returning to their historical levels, PST in Brazil performed very well in the third and fourth quarter, India and China also experienced improved market conditions. The commercial market in North America has shown signs of improvement and the commercial market in Europe is still running at significantly low levels. Based on the efforts of our restructuring programs, head count reductions, adjusted 2009 compensation programs, flexing our production schedules and our reduction in design and development expenditures, we have quickly adjusted our 2009 cost structures to lower our break even level. Based on the market forecast we are experiencing, our goal has been to return to profitable operations and liquidity in very difficult times by lowering our break even sales level for profitability and cash flow.

As we return to positive operating income in the third quarter and again in the fourth quarter, and as the market stabilizes and some of the growth returns, we will need to rebuild some working capital, especially receivables to support higher sales. However, as we have demonstrated already, we will manage our liquidity and cash balances to deal with market conditions. In summary, we continued and will continue to modify our plans to respond to the rapidly changing markets. In the last several months, market forecasts seem to be changing monthly, with pass car and light truck improving, while the commercial market forecasts are declining. Our overall belief is we do not expect the robust recovery in the markets for 2010.

We have conservatively positioned Stoneridge to maintain financial discipline over our cost structures. We are making investments to support the product launches we have for 2010. We will reinstate a percentage of the employees take-aways we've made over the last two years. We will continue the ERP investment John discussed earlier for North American electronics. We fully intend to maintain the permanent fixed cost manufacturing overhead and SG&A structure improvements that we implemented to enable us to return our gross margins to historical levels in the 22% to 23% range, and further improve our gross and operating margins as the market rebounds.

We believe that 2010 sales levels will be in the range of $590 million to $615 million, which would represent an increase of nearly 24% to 29% compared to 2009. We have reported gross profit in the third and fourth quarter of last year of $55.1 million, or 21.9% on sales of $251.8 million, and operating income of $4.8 million. We believe that we can reach our gross margin target of 22% to 23% for 2010, with the sales forecast we are projecting, based on the current industry forecast, and improve our operating margin by managing our D&D expense and SG&A costs tightly. Our challenge we need to manage our cost structures. We reduced our spend in D&D last year to $33 million from our average spend in the period from 2006 and 2008, which averaged nearly $44 million.

We will need to increase our expenditures in this key area, adjust our product platform launch schedules for this year and next year, but not to the level we averaged during the last three years. We were able to reduce our other SG&A, other than design and development expenditures to $74 million in 2009 compared to an average of nearly $90 million per year over the last three years, 2006 to 2008. We will challenge the adding of any costs if we do not believe it adds to our performance for the long-term value. Through these combined efforts, we will be able to drive sales growth, even without a robust market forecast, with our new business wins and product launches combined for the control of our costs, we will restore gross margins to historical levels 22% to 23% and generate positive operating income and pretax income. Due to our deferred tax valuation allowance for our US businesses and our income position in Europe, we may be recognizing a higher level of income tax on our reported income due to the recognition of tax expense on our foreign earnings, which includes our PST operation.

At the same time, we we are driving cost reductions, we continue to focus on liquidity and balance sheet strength. We continue to strengthen our balance sheet by managing working capital and reducing capital expenditures to meet customer requirements. And we will continue to monitor business conditions and will take the necessary steps to ensure Stoneridge is positioned to deal with the current economic environment while positioning the Company for growth when the markets turn. Our actions have not taken capacity out of our operations, but has positioned us to reduce our overhead centers to improve our capabilities for improving profitability and generating positive cash flows.

Operator, I would now like to open the call for questions.

(Operator Instructions) Your first question comes from the line of Brett Hoselton with KeyBanc. Please proceed.

Yes, good morning. It's Matt Mishan in for Brett.

Hi, Matt.

John, George, Ken, how is everything?

Good.

Good.

Okay. First, I just wanted forget the sales guidance. I heard $590 million to $615 million, is that correct?

That is correct.

Okay. As far as operating income goes, 3Q to 4Q, you saw a -- increase in sales of about $16 million, but you saw a decrease in operating income. Can you basket and elaborate a little bit more on that?

Well, Matt, if you go down through the key components of our cost structure, we clearly were influenced on our cost side. One is copper has taken a significant upturn and copper was trading as high as $3.40 in the fourth quarter at times. And it persisted there and has backed off -- it was down to $2.90, now it's up to $3.10. So that costs us a little bit of money, probably in the range of $400,000 to $500,000.

In our product development area, I think as we shared with you earlier that we had increased costs that we were doing about $1 million on the D&D side and that was essentially for the two key platforms we have going in Europe. That was a smaller piece of it. But the larger piece was what John shared earlier, was our new launch of a commercial wiring business, which we won in the fourth quarter. We literally have opened the facility. We've manned it and staffed it with equipment. We start our first production in February with full gear-up by April. That cost us close to about $800,000 on the D& D side. And overall had a cost of about $1 million in our overhead side.

As part of that we had taken furloughs in the third quarter, both in Europe and in North America. We had to restaff as the markets started coming back and those furloughs were about $700,000 in North America. They were about $500,000 in Europe. So those are the key highlights, but I think now that we have those in place and with the volume coming back, that we can control the costs. But it was critical for those three key launches -- two in Europe, and then the one we talked about John shared with you on the wiring in the North America that's starting up in February and hitting full capacity by April.

I think it's always been part of our plan, as we've discussed in past calls, that as we took the financial discipline to conserve our cash and store it up, so to speak, that we weren't going to jeopardize opportunities for future growth. And I think as we saw these opportunities come down, you're going to see it -- shift by wire was a relatively new program for our Company this year. The wiring business is a relatively new program. Well, not relatively -- is a new program -- that we've been able to launch and we'll start to reap the benefits of that in this year. So we've done -- I think we've done what are the right things for the business. And, while we've taken a hit to the fourth quarter profitability because of this D&D investment, we'll start to see the revenue streams come on in 2010 and beyond.

So it would -- would it be fair to say that if -- I know you're guiding higher, but if sales were to remain at the same level as the fourth quarter at $135 million level, in the first quarter, you would see higher operating income, because of these one-timers?

Yes, we would. As we've chatted before, our marginal contribution is roughly around $0.30 per dollar sale. So as the sales begin to ramp up, that is usually the key factor. We track our improvement at the sales level, Matt.

We did have to incur the startup of these three and I think we alluded to that in the third quarter call, that we would be incurring these expenses. The new business win we had in North America for the wiring, we literally have leased a new facility, opened it up, manned it, staffed it, put equipment in. That's been ongoing for the last four to five months and accelerated in the fourth quarter. And that leads up to our first production in February and ramping up to more full levels by April.

Okay. That's actually very helpful. As you look into 2010, I think there are a couple of head winds, as far as some of your cost goes. Can you talk a little bit about your exposure to copper and also some of the temporary costs that might actually have to come back in in 2010 as well.

Well, we see right now, as we see it, copper is on that is going back up. In the past, we've hedged on copper and we'll monitor that going forward and when we see opportunities to go in and buy copper, hedge copper, we'll do so. The other side is we do have some programs with our customers where we have price adjustment mechanisms so that will help us offset some of that.

I think for the nearer term, the biggest issue we see is probably supply-based disruptions, which I think a lot of the electronics people are experiencing -- and some of the non-electronics people are experiencing -- and we're going to have to manage through that as capacity starts to come back on stream. So that in the short-term, that's our, our biggest concern. That's a good news/bad news situation so to speak because it does mean that the markets are improving. Not only the transportation markets, but in other markets, so that's what's driving some of the capacity requirements.

But I think as we said, we're seeing all the markets improve over 2009 -- the North American automotive market is a little bit stronger than we expected. The commercial vehicle market in North America is a little bit delayed and a little bit lower than we expected, but we see it happening -- growing back in the third and fourth quarter. I think the European markets, as we planned, would be stronger in the second half than in the first half.

Okay.

And, Matt, one thing I think is important to note and you've noted it in some of your own releases is that we are seeing a dichotomy in the market right now. The pass car and light vehicle continues to get more robust and is stronger than originally projected, whereas on the other side, the commercial tends to be a little weaker, especially in Europe. In fact, it's down -- the latest forecast is showing down, rather significant compared to the previous forecast.

All right. You guys gave a little bit of an update on the backlog. I believe it was $$120 million over the next three years and 170 million over the next five years. Over the next three years, what's the cadence of that backlog? 2010, 2011, 2012, is it more weighted up front, or is there some more upside that could come in 2011, 2012?

It's pretty evenly split, Matt, over the three-year period. So it's roughly about the same for three years.

Could you -- you also mentioned a lot of programs you're bidding on, you think you could win. Could you put a dollar figure on that? Of programs that you think could provide some upside to that backlog.

Well, we won't do it now, but we will continually update you as the quarters go. But, I think it was clear to us that we -- this is an effort that we've really been driving and John is clearly taking it through and we'll continue to focus on that as top line as now our priority as -- we will maintain costs, but restructuring was the number one priority to liquidity. We quickly shifted into our growth and we'll give you an update as we progress quarter to quarter.

Okay, and that transitioned me to restructuring. I noticed there was only about $242,000 of restructuring costs in the quarter. Are we -- what are you forecasting for 2010 in restructuring? Is it pretty much done at this point?

Our restructuring is done. I think we've really pretty much -- based most of the restructuring is done for the second half of 2009, there's some minor things going on in the last half of the year. I think as George has said, we're now shifted away from. It's really a game of containing the cost structure that we put in place. We believe we can do that because we've taken out fixed cost structure, both in overheads for plant closures and the consolidation of business units and then driving forward on volume growth. So I don't think there will be much more in the way of restructuring because if you look at our manufacturing footprint, we're down to probably where we want to stay for the foreseeable future and we'll continue to as we get new business to expand in low cost regions.

Okay, and on the Brazilian joint venture, can you give an update on where you're at with that? I know the first step was to try and get a majority stake and then maybe consolidate into your revenue and then possible IPO. Where is that at now?

Well, Brazil -- actually their economy went down and so in the middle of the year we were looking at similar things to what we saw in North America. However, they rebounded much quicker as George indicated in the financial results, they have come back strongly. Our position was initially to try to consolidate them under accounting terminology and that with the new accounting pronouncements which George can indicate -- give you the specifics on -- will not be able to consolidate them.

We continue to watch the IPO markets. Right now the IPO markets in Brazil are returning, but only for large companies. So we'll continue to watch that, but I think we don't see any plans in the next couple of quarters to do anything there.

Yes, I would just add to that, that there's a new standard out called FAS 167, and it's got different characteristics than the FIN 46. So under those guidelines it's a little tougher to get to the level of consolidation so that doesn't look to be a real possibility. So the two items that you mentioned are always on our list. Can we buy in greater percentage or can we do an IPO? And as John has stated properly the Large-Cap markets has returned and the small MidCap is just not robust enough in Brazil at this time.

Okay, and last question, then I'll jump out and let some other people have a chance. Agriculture increased quarter over quarter pretty significantly. Is that a sustainable increase, or is that seasonal? And what are you expecting for 2010 in agriculture?

Oh, I think that's a sustainable increase. We expect the awards that are there we expect to see -- and I think when we get the read from our customers, they are starting to see improvements back in the market. So I don't believe we'll see a reduction in the agricultural sector. It might shift its mix somewhat.

Okay, great. Thank you very much, and I'll jump out.

Your next question comes from the line of David Leiker with Robert W. Baird. Please proceed.

Hi, good morning. It's Keith Schicker.

Hi, Keith.

Just a couple questions left over here. Can you comment -- I think you danced around it a little bit, but what is the expectation for the quarterly cadence in terms of revenue during the course of the year? Is this like the North American commercial market where we will be barbell-ish with a soft spot in the middle? How would you characterize how the year shapes up for you guys?

I think on the commercial vehicle market, we would say that in North America and Europe, the second half is going to be stronger than the first. Maybe some others see a bigger barbell in commercial vehicle in North America. I don't think we see that as much as maybe others might. We see a stronger market in the automotive than we have been previously anticipating. So I think that it's a nice balance for our Company. We're down a little bit maybe in looking at what we thought commercial vehicle in the first half, but we're up in what we saw in automotive. And we expect the balance of the year to strengthen in both sections.

Keith, we see the first quarter, the lowest of the quarters. Third which follow that little trend. I think we'll be looking at an increase in the first quarter in the range of 4% to 6% and then third quarter would be slightly above that. And then the third -- the second quarter and the fourth quarter will be fairly equal because we got some of the launches coming out in the fourth quarter. So I think that will help you put the pieces together in terms of how we're looking at the market for the year.

Okay, so essentially, this new business that you're launching in 2010 seems to be a little bit weighted towards the back part of the year?

Well, other than the one I've mentioned, in our wiring section. And that does come up in late first quarter, second quarter.

Okay.

Depends how it ramps up through the year.

Okay, and then the contribution margin, that jumps right up to the normal level this next quarter? Or is there still additional costs that's going to be coming back?

There's still additional costs in the first quarter, so I think we're looking for that trending a little on the lower level. Then it really starts to build throughout the rest of the year.

Okay, and then I guess lastly, can you comment what you're hearing from -- specifically from your customers, key customers -- Volvo in Europe and Navistar in North America seem to be doing a little bit better relative to the market here recently? What's the expectation, or can you provide any color about that for the upcoming year?

I would hesitate to provide any color on that. I think you've said it. They are experiencing slight improvements. So we're looking, as indicated, a sign of maybe the overall market coming back. They are ahead of it, but we're certainly not going to provide any more color to what they have said I think.

Okay.

We've seen in the market in the past, when you look at the projections that are going on, you see -- projections are still moving all around, although maybe they are still moving up, but some are moving up above previous forecast, some are moving down below previous forecast, although all are up over 2009. We're just trying to manage within the range.

Okay, and then lastly, if you look at your commercial vehicle exposure and your light vehicle exposure for each segment, can you roughly just describe how that splits between North America and Europe, just ballparkish?

Well, almost all of our light trucks -- light vehicle is in North America, very little piece in Europe, not significant -- although we're going to grow that. And then on commercial vehicle, it's I think as you put it, about -- two-thirds, one-third.

Two-thirds Europe or two-thirds North America?

North America.

Two-thirds North America, one-third Europe.

Okay, that's great. Thank you very much.

You're welcome, Keith.

Your next question comes from the line of [Bennett Lim] with Jefferies & Company. Please proceed.

Hi, good morning.

Good morning.

Just wanted to find out what your D&A expense was in the fourth quarter. Depreciation and amortization.

Yes, I think we said it was $4.7 million.

Let me double-check that. It was $4.7 million.

Okay. And in 2010, would you say that CapEx would be around $35 million?

Yes, I think it's going to run in that range.

Okay, and you mentioned the availability under the revolver, was it $51 million?

Yes, that was the availability under the revolver, yes.

Okay. Were there any letters of credit drawn on that facility?

That includes--

Yes, that includes the letter of credit, which they run about $2.5 million.

Okay, all right. That's all I had. Thank you.

You're welcome.

Your next question comes from the line of Brett Hoselton with KeyBanc. Please proceed.

Hey, John, George, Ken, how are you?

Good, Brett, how are you doing?

Doing all right. I just want to follow up quickly on the copper cost pass-throughs and just ask you, how should we think about -- let me ask specific questions here. What percentage of your contracts have some form of pass-through mechanism?

I would say about half that have that.

Half. As we think about this $400,000 to $500,000 increase from the third to the fourth quarter, is there any delay in that mechanism that may cause that to be -- let's say overstated as you went from the third to the fourth quarter, or is it generally pretty consistent with the price increase or decrease in copper?

No, there's a delay to that pricing mechanism that runs anywhere from 90 to 120 days, Brett.

Okay. And then switching to the outlook, it sounds like you feel pretty good about the outlook for the ag business. Maybe a little less so for North American commercial vehicle, but feel pretty good about the back half of the year.

But European commercial vehicles, what are customers telling you at this point in time in terms of their expectations into the first half of the year and into the second half of the year? Are they mixed? Are you they feeling like it's bottomed? Are they feeling a little more confident, we'll see some improvement? Where are your customers at?

Well, again, you get a mixed story, because some of them are asking us how fast could we ramp up production and you look at that and say, okay, this is what we think. Others are not even asking that question. You're still seeing shutdowns. But I think in general if you look at Europe, it's starting to rebound, starting to recover. Customers are becoming a little more positive. Some are very positive on it, so I think they are starting to see some improvements in their market space.

But I always hesitate to listen to that because, if you recall in 2008, up until the third quarter, that market was going great guns and everybody was saying their order books are full for the rest of the year and all of a sudden in the fourth quarter, they dropped like a rock. So we try to look at the trend and projection of what we see and balance our plans according to that. So I would say we're not seeing an aggressive growth pattern there, but we're not seeing a decline. We're seeing I guess a moderate recovery, which is stronger in the second half than it will be in the first half. That's really what we're seeing from our customers.

Very helpful.

And at the same time, Brett, a couple of customers are putting their platform launches back in the schedules they had before. So we keep watching the forecast coming out from at least the market research side and some of those don't seem to be in sync with what we're reacting to our customers with.

Interesting. John, George, Ken, thank you very much.

You're welcome.

(Operator Instructions) Your next question comes from the line of Matt with KeyBanc. Please proceed.

Yes, I think KeyBanc is monopolizing all the questions here. Just a real quick one as far as cash. You had guided previously, you thought as production ramped, working capital would ramp a little bit and you would see a modest decrease in cash. And instead I think in the fourth quarter we got an increase of about $7 million or $8 million. What are your cash flow assumptions for 2010?

Well, I think still, Matt, we can manage to incremental about $0.12 per dollar sale. So we will have to fund that level and primarily what we're seeing already is we are making great strides in lean, that we're able to balance our inventories and maintain -- or reduce them. But we will increase our receivables and our receivable days run in the range of 54 to 58 for the customer. So we will see a build in that level. And then inventories may pick up some.

We were able to manage our payables very well in the fourth quarter, as our demand started to pick up in September and October. So we'll see the payables increased around $8 million to $9 million through the course of the whole fourth quarter from December to December. I think we can hold that level for the rest of the year. And then our challenge would be to continue to manage our receivable portfolio and work on inventory, as we continue to take lean across a broader range of our operations.

That's actually very helpful. And any guidance you could possibly -- I know it's extraordinarily volatile here, but any guidance you can give on the 2010 tax rate?

Well, I think that one is going to be a difficult one because it's got to do with the mix and where the sales are coming from, and I think what I tried to share with you is we'll end up accruing a federal tax rate out of our Europe operations and clearly PST. We accrue US income tax on that of 35%. But, all the US income will be shielded. And so if you get a rough estimate of that, that's about how the taxes will flow.

Okay. All right. Well, thank you very much.

You're welcome.

Your next question comes from the line of [Gary Morman] with Alpine Associates. Please proceed.

Hey, guys, I know you mentioned operating cash flow for the fourth quarter, but I missed that. Could you just repeat that?

It was a positive $15.3 million.

Okay, and then have you guys, with the 11.5% notes -- the call price dropping this year -- in May it drops down to par, have you guys given any thought or have you been pursuing the possibility of refinancing that debt?

We have been actively looking at the Capital Markets for probably six months now, and the Capital Markets have been improving. The rates haven't quite come back at the level that we're satisfied with. And we're not under any real needs that we have to refinance. So once we find the opportunity, we'll continue to pursue that as a benefit for the Company and we'll continue to look at it.

What -- can you give me an idea of what kind of coupon you guys would need to refinance it? I assume obviously lower than 11.5%.

Well, when John and I were trying to refinance in '07 before the markets really corrected themselves, we thought we could get it done around 8%. So I think if we could get a rate somewhere there versus at the 11.5% today that we felt was beneficial, we would go after that.

Plus the other thing for us, we're also -- again, we try to look out in the future and say what are the things to prepare for? And one is if we have to refinance debt at this rate. Well, we would finance a lower level of debt.

Sure.

So we're looking at both sides.

Okay. Thanks, guys.

You're welcome.

There are no further questions at this time. I will now turn the call back over to management for closing remarks.

Well, good. I would like to thank you all for joining us.

2009, as I said, it really was a very difficult year, but if you look at what happened in the industry -- if you look at the number of suppliers who disappointed their shareholders by going in and filing and the number of suppliers who disappointed their bond holders by having that same thing happen, so they didn't -- we quickly, as we said, we followed a plan. It may be rather boring, but it's rather consistent. We're going to improve the operations, improve the financial structure and then go after the marketing side. That's what our plan has been and we were well on track for that in 2008 until the markets did turn.

Then we shifted quickly to, again, re-emphasize as we talked about, our financial portfolio to make sure we strengthened that. That's what we've done. We're now well positioned as these markets come back, not only with the funds to invest in the markets, but the operational profile to be able to grow in these markets. So as we see this business improve, as we see these markets improve, we're going to see our performance continue to go up with that, and that's really a testament to the work that's been done. But it's not exciting. It's just plain basic, this is how we're going to run our business and we're going to adjust to both risk and opportunities, as we see those things come up. And I think you'll see things in 2009 like the wiring award and the shift by wire, when we get that. Those were opportunities that came up in front of us and we had the -- not only the management strength to take care of them, but also the financial strength.

So we're looking forward to 2010 and even 2011, because as everything happens, these things will turn around and improve and we think we've positioned ourselves for those. So thanks, again, for joining us on the call.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.