Stoneridge Inc (SRI) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome the Stoneridge fourth quarter 2011 conference call. My name is Jasmine and I will be your coordinator for today. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed.

Good morning everyone and thank you for joining us on today's call. By now you should have received your fourth quarter earnings release. The release has been or will shortly be filed with the SEC, and has been posted to our website at www.Stoneridge.com. Joining me on today's call are John Corey, our President and Chief Executive Officer, and George Strickler, our Chief Financial Officer.

Before we begin I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual amounts may differ materially. Additional information about such factors and uncertainties that could cause results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading Forward-looking Statements.

During today's call we all may also be referring to certain non-GAAP financial measures. Please see the investor relations section of our website for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

John will begin the call with an update on the current market conditions, operating performance in the fourth quarter, our growth strategies, business development and his thoughts on future initiatives. George will discuss the financial and operational details of the quarter and future outlook, including 2012 guidance. After John and George have finished their formal remarks, we will then open up the call to questions.

With that I would like to turn the call over to John.

Good morning. Stonebridge revenue for the fourth quarter was $186 million, an increase of $25.6 million or 15.9% over the fourth quarter of 2010. These results continue the revenue growth we experienced in the first three quarters and were primarily driven by the North American commercial vehicle and ag markets.

2011's annual sales guidance of -- 2011 annual sales were $765.4 million, right in the range of our annual guidance of $750 million to $775 million. This revenue was a sales record for Stoneridge.

We reported earnings per share of $1.56 for the fourth quarter, which was $1.37 above the prior year's fourth quarter. Fourth quarter earnings were positively affected by our acquisition of an additional 24% stake in our PST joint venture.

Earnings were reduced by a non-cash goodwill charge for BCS, our 51% owned joint venture, PST closing costs, legacy and restructuring costs related to our 2008 restructuring program for our Sarasota, Florida and our closed SPL UK operations, and other inventory valuation and warranty items. We also experienced higher material costs in the areas other than copper, such as rare earth minerals used in our Control Device business, and material charges included in inventory related to the prior quarter's operational difficulties.

These costs are identified in the supplemental schedule filed with our fourth quarter earnings release. George will provide additional details on the financial review.

Our fourth quarter sales performance continued to increase over the prior year, but was below our projections for the fourth quarter due to lower sales to large commercial vehicle manufacturers in both Europe and North America. While below our projected forecast, sales to our commercial vehicle customers in the fourth quarter increased by 20% to $97.2 million, and as a result of increased medium and heavy truck production in North America and Europe compared to the prior year.

Agriculture and equipment category sales increased in the quarter versus the prior year by approximately 24% to $38.7 million, continuing the sales growth experienced in the ag market throughout 2011.

Sales in our passenger car and light truck segment were $50.2 million in the quarter, which was an increase of 3.7% compared to the prior year. As previously discussed, we are aligning our automotive product portfolio around key product families in emissions and actuation which have attractive market growth, while reducing our presence in commodity or noncompetitive product lines.

During the fourth quarter our operational performance continued to improve as evidenced by improved customer service levels, reduced premium freight, reductions in headcount and overtime.

We were able to complete the inventory build for the ag peak season, which will have benefits in the first half of 2012. As we started the New Year, we are seeing the benefits of the pre-build in terms of improved order fulfillment, reduced overtime and premium freight, issues that impacted us in 2011. The wiring operations have and are improving performance.

For example, fourth quarter premium freight was reduced by $2.4 million compared to the first quarter. And more importantly, as I based on our current performance, we will not see the first quarter of 2012 negatively impacted by higher premium freight as we saw in the first quarter of 2011.

Labor inefficiencies improved as well, although the full benefit was not realized as customer delays in the startup of our new Saltillo facility from August to November resulted in a redundant headcount for the period. Headcount has now been normalized by the end of the fourth quarter and we should see an improved cost structure for wiring going forward.

Another example of wiring operational improvement is we reduced 1075 people from our Mexican plant operations, or about 17.1% from the peak of March 2011. Our plans call for an additional reduction of 9.7% in 2012. A more important measure of productivity was realized as sales volume has increased in the wiring business by 27.8% for 2011, and our sales per employee increased by 29.9%.

Based on the forecast for 2012, we project further sales increases of 13.7% and sales per employee of 13.9%, as our improvement continues in labor efficiency. While we have only one month to compare in 2012, our past-due pieces dropped by 98% versus January of 2011, which is another example of the improvement.

The wiring operations are emerging from a difficult year in 2011. We have seen improvement in the last two quarters and the trend is projected to continue into the current year, giving us the confidence we have made progress and will continue to do so.

New business awards in the quarter were $21.4 million. For the year, new business awards were $231.4 million, of which $117 million were new awards and $114 million were replacement awards.

In the fourth quarter our Asia Pacific business had 2 significant awards totaling $8.3 million in annual sales. These awards were for the EGT sensor product line for commercial vehicle applications for selective catalytic reduction. Our strategy to focus Control Devices technology and expand it across geographic regions of vehicle segments is paying off.

Minda Stoneridge, our unconsolidated JV in India, posted fourth quarter sales of $10.9 million and an increase of 11.7% versus the fourth quarter of last year. The sales increase was driven primarily by new business wins and, to a lesser extent, by mark it growth. Our share of net income was $220,000 in the fourth quarter.

Minda's sales reached nearly $50 million in 2011 compared to last year's level of $33.4 million, an increase of $16.6 million or 49.7%.Minda's annual sales projections should increase to $60 million to $65 million next year and exceed $75 million in the next 2 years, consistent with our previous projections made over the last 2 years.

PST, our Brazilian joint venture, recorded fourth quarter 2011 sales of BRL114.1 million, an increase of 13.6% from BRL100.4 million in the fourth quarter of 2010, driven by volume increases from the launch of our audio business for the mass merchandisers and retailers in 2011. PST fourth quarter sales, based on an average exchange rate of BRL1.80 to the dollar, were $63.3 million.

Audio sales now represent nearly 27% of our volume in the fourth quarter versus approximately 7% in the fourth quarter of 2010. The audio business growth accounted for much of the increase in PST sales in 2011. Full-year sales for PST were in BRL410.9 million compared to BRL321 million in 2010, or an increase of BRL89.9 million or 29%.

PST's gross margins improved to 46.8% in the fourth quarter of 2011 from 42.3% in the third quarter of 2011, partially due to price increases implemented in the fourth quarter. The fourth quarter operating income was 21.4% compared to 7.5% in the third quarter of 2011 and 17% in the fourth quarter of 2010. PST's fourth quarter performance was favorably affected by the reversal of a VAT tax on commissions paid, which affected the operating income level. George will address this issue in more detail.

In summary, 2011 was a challenging year from an operational and material cost perspective, the impacts of currency, as well as the natural disasters in Japan and Thailand. Our non-wiring business has performed well in 2011 and we expect this to continue in 2012. We saw gradual improvement in the second half from the wiring operations, and we have addressed the operating initiatives which affected their performance.

Finally in the fourth quarter we addressed the remaining legacy and restructuring issues. We are starting 2012 in a much better position in the wiring business and expect to see continuing improvement in our operating performance and 2012.

Our major served markets continued to grow. North American automotive production forecasts are projected to be between 13 million and 14 million for 2012. The North American commercial vehicle market continues to improve, and current industry forecasts indicate this recovery will continue.

The most recent European 2012 production estimates show a possible 5% to 10% reduction versus 2011. However, we should not be impacted to this degree as we have new program launches increasing our vehicle content.

In addition, our European team has taken cost control actions consistent with the market forecasts. Finally, we expect continued growth in the construction and agricultural markets, as this segment represents approximately 20% of our sales in 2011.

Continuing market improvements and growth with our customers from new programs this year and next will drive topline sales. As we restore our operating performance and recover commodity cost and currency impacts through contractual terms, we will restore our financial performance in the targeted ranges over the next 2 years.

With that, I would like to turn the call over to George to provide additional details of our performance and outlook, including guidance for 2012.

Thank you John. John has reviewed with you our sales for the fourth quarter, the year forecast, and the updated forecast for the European markets. Our growth has been solid the last 2 years and is forecasted to continue to grow from both the market and our business wins.

Focusing on the profitability for the 2011 fourth quarter and the fourth quarter items affecting net incomes and earnings per share, as presented in the attached schedule to the earnings, I want to provide detail of the adjustments in the fourth quarter and provide an update on the unusual items we have been reporting on quarterly. After reviewing our progress, I will share the operational highlights for the quarter and provide the outlook including guidance for 2012.

We recorded net income of $38.6 million or $1.56 per share in the fourth quarter. Included in the fourth quarter profitability is a one-time gain from the PST transaction of $1.72 per share, which reflects the valuation increase for our investment in the PST joint venture. Offsetting the positive impacts in the quarter are 3 key areas which had negative impacts on net income of $11.8 million or earnings per share of $0.48 per share.

Costs related to the PST transaction for transaction costs and adjustment to our long-term incentive plan, which impacted net income by $2.7 million or $0.11 per share; legacy or previous restructuring activity related to liquidation of SPL in the UK; sale of our Sarasota facility and a partial write-down of our ERP project in North America for our North America Electronics project, which impacted net income by $4 million or $0.16 per share.

Other items reflecting operational impacts were asset valuations and warranty claims, impacting net income by $5.1 million or $0.21 per share, which also reduced our gross margin by 2.9% of sales in the fourth quarter.

During the third-quarter analyst call, we forecasted a gross margin of 21% for the fourth quarter. With the drop in sales of nearly $10 million discussed by John earlier, and the cost items recorded in the fourth quarter, cost of goods sold and gross margin were impacted by 4.3% to sales, which negatively impacted our reported gross margin of 17.4% for the fourth quarter. With the improvements John discussed and the improvement in our copper prices and weaker Mexican peso, we should return gross margins on the Stoneridge base business back to our historical levels of 21% to 23% in 2012.

In the fourth quarter we finally brought to conclusion some long-term open issues, some of which relate to our 2007 to 2009 restructuring programs, the BCS acquisition we made in October 2009, and a reassessment of our ERP efforts for our North America operations. These items impacted net income by $4 million or $0.16 per share.

We recorded $1.1 million in expenses in SG&A for the completion of our restructuring for the Sarasota facility in Florida and our SPL facility in the UK, which impacted earnings per share by $0.05 per share. We also recognized the write-down of a portion of our goodwill for the acquisition of the BCS business made in October 2009, which resulted in a negative impact to net income of $2.1 million or $0.08 per share.

As the military and defense market has been experiencing significant reduction in defense spending over the last 2 years, the BCS sales have been negatively impacted which led to the recording of the partial impairment charge in December of this year. Since Stoneridge owns 51% of the BCS business, our minority partners recognize their 49% share of the non-cash goodwill write-down.

We shut down the Sarasota facility in December of 2008 and all production was moved to Lexington, Ohio and Juarez, Mexico. The final issue to be addressed was the sale of the Sarasota facility. The commercial market has been very depressed in Florida, which extended the period for us to sell the facility.

We finally completed the sale of the Sarasota facility in December of this year for about book value, which generated $4 million in cash. At the time of the sale we increased our environmental reserve by $600,000 to ensure that we provided sufficient reserves to cover future liabilities.

When we shut down our SPL facility in 2008, we worked to cap any liabilities that remained with the company. During the last 3 years we addressed the wind down of the company and put SPL through the UK liquidation process. In the fourth quarter we have successfully liquidated the company and settled all creditor claims and received a full disposition of the pension liability. At this time we have no defined pension liability programs remaining in the company.

The last remaining issue with SPL is the building, which has a long-term guaranteed lease attached to the facility. We are entering into an agreement that will structure a financial arrangement to cap the liability and provide the owners of the facility in Stoneridge the ability to sublet the facility. We have reserved an additional $500,000 to recognize the potential additional expense for the conditions negotiated in the agreement.

We purchased a 51% interest in Bolton Conductive Systems in October 2009. BCS is a wiring business in the military defense business. We made the purchase to broaden our customer base in military and defense business, to supplement what we do for Navistar with customers such as Force Protection, BAE, AM General, General Dynamics and Oshkosh.

Since the acquisition in 2009, military and defense spending has dropped by nearly 60%. As a result we recorded an impairment of our goodwill by $4.9 million in SG&A, while 49% of this charge, (technical difficulty) total $2.4 million will be recorded as net income attributable to non-controlling interest, which represents our minority partner's share of the goodwill impairment.

As part of the SG&A we also recognized a write-down of $800,000 for the North American ERP effort. It was started in 2008 through 2010 for the North America Electronics business. It was stopped in 2011 as we were not satisfied with our ability to implement this project given the operational issues we were addressing.

We are restarting the ERP project for all of our North America operations while the Control Devices in North America Electronics, rather than just our North America Electronics business. This effort has been scoped and will focus on demand planning and production forecasting in the first phase in the first half of 2012, which will be completed by the end of the second half of this year. In addition we will begin the ERP phase in the second half of 2012 which most likely will extend into the first half of 2014.

This effort is important to the continuous improvement of our wiring business specifically, but is also important for standardizing all our operations in North America, similar to what we have in Europe. We believe with the recognition of these charges and expenses in the fourth quarter we have addressed the legacy and previous restructuring programs. We have right-sized BCS based on the current level of defense spending and dealt with open items and the operating issues we experienced during 2011.

During this past year we have been reviewing with you the negative cost impacts for operational issues and higher copper prices, and the strengthening of the Mexican peso. On the positive side, the wiring operations have improved significantly during the year and are positioned well for 2012.

As you recall the wiring business was impacted in 2011 by copper increases and the strengthening of the Mexican peso by $10.7 million. And the operational issues cost us $13.3 million due to labor inefficiency, overtime, excessive headcount, premium freight and the startup costs for the new Southwest facility in Saltillo. The operational issues and the currency commodity impact cost the wiring business a total of $24 million for the year.

For 2012 we have offset much of the negative operating costs of $13.3 million. Our 2012 performance will be positively impacted by $13.2 million compared to last year. We have reduced the premium freight to normal levels by the end of the second quarter of 2011 and this benefit will benefit us by $5.2 million for both freight in and freight out for 2012. The Saltillo plant is running well and the $3.2 million startup cost is behind us.

In terms of customer deliveries and past-due pieces, our operating team in the wired plants have reduced our past-due pieces by 98% for the first quarter of 2012 compared to the first quarter of 2011. As John discussed, our indirect and direct labor has been reduced in our wiring operations by 1075 people from the peak in March 2011, or 17.1%, while sales were up 27.8%. Our sales per employee are up by 29.9%, which is a good measure of productivity improvement.

And based on our current plan for 2012, we will continue to improve our indirect and direct labor headcount by an additional reduction of our headcount by 9.7% when our sales are forecast to increase by 13.7%. As a result, our productivity of sales per employee will increase by 13.9%. Our operating team has made significant progress which will continue to drive our manufacturing costs lower in 2012.

The other area we have addressed for 2012 is copper escalations in Mexico peso purchases for our wiring operations. In 2011 we absorbed higher copper costs of $4.4 million as copper averaged $4.35 per pound during the year. The average price of copper for the year peaked in the first quarter and trended lower during the year.

We have had 68% of our estimated consumption for 2012 at $4 per pound. The spot rate is trading between $3.80 to $4 per pound over the last 2 months. This will benefit the wiring business by about $2 million in 2012 compared to 2011, assuming copper stays at the $4 per pound level throughout this year.

The Mexican peso strengthened from MXN13.83 to US dollar in 2010 to an average of MXN12.06 to the dollar in 2011. We purchased about $75 million equivalent during 2011 which cost the wiring business approximately $6.2 million. For 2012 we're estimating we will purchase $72 million equivalent of Mexico pesos.

We have already purchased $55 million at an average price of MXN13.09 to the dollar. This will benefit the wiring business by an estimated $5.7 million in 2012 compared to last year, assuming all of the $72 million worth of pesos are purchased at MXN13.09.

Through these actions for operational improvement in hedging our copper and the Mexican peso positions for the wiring business will have offset an estimated $20.9 million of the negative cost impact of $24 million, which we experienced in 2011. The $24 million cost impacted our gross margin by 3.1%, which lowered our gross margin from a more normal level of 22.3% to 19.2% which was reported for gross margin for the full year of 2011.

Our biggest accomplishment for the fourth quarter was the completion of the purchase of an additional 24% ownership of PST. We have been working to complete the purchase since the first quarter of last year. And as you remember, we started a process to enhance the recognition of the valuation of PST in 2007 and we are prepared to execute an IPO.

As reported in December 2011 we purchased an additional ownership position of 24%, with $29.7 million in cash and 1.94 million shares of Stoneridge stock. The transaction generated a one-time gain, net of tax, of $42.5 million or $1.72 per share. We incurred transaction fees of $300,000 in the fourth quarter and $849,000 for the full year. In addition, as a result of the transaction, we increased our reserve for our long-term incentive plan by $2.4 million.

We are excited to increase our stake in PST to 74%. PST will continue to be led by Sergio Leite, and a very strong management team. They continue to work to expand their market presence with car and motorcycle alarms, tracking devices, audio for Fiat and GM and the mass merchandisers, accessories for the dealer and aftermarket, and entering the home alarm business in 2012.

As Brazil is growing at GNP rates similar to India and China, we will explore ways for Stoneridge to expand our product lines into the fast-growing market in Brazil. At the same time we are reviewing with PST management what products that could be applied to other Stoneridge operations, especially in India and China.

PST's performance continued its improvement in the fourth quarter. John reviewed their sales performance already, but we wanted to review their profitability in the fourth quarter.

PST reported operating income of BRL24.4 million in the fourth quarter and an operating margin of 21.4% compared to BRL17 million or 17.1% increase over the fourth quarter of 2010. The fourth quarter operating income was favorably affected by a reversal of BRL9.3 million of value-added tax that had been pending in court actions in Brazil. The decisions that have been rendered in the courts have supported the position that the value-added tax should not be withheld and would be reversed to PST's financial results. Excluding this reversal, PST would have posted a 13.2% operating margin in the fourth quarter.

As we look forward to integrating PST, we will provide guidance and more insight into the business, as PST will be reported as a separate segment. In 2012 we estimate PST sales will be in the range of BRL442 million to BRL497 million, which translates to $240 million to $270 million at our planned exchange rate of BRL1.84.

The real has been trading in the range of BRL1.85 to BRL1.75 compared to the dollar during this past month. And we expect PST operating margins to be in the range of 7% to 9% for 2012, which includes expenses for purchase accounting asset write-ups. The largest expense item in 2012 will be for inventory, which will be amortized primarily in the first half of 2012.

The 2011 acquisition of the additional shares of PST included balance sheet write-ups of existing assets as well as recognition of goodwill in relation to the fair value recognized by the purchase. Our earnings guidance for PST for 2012 includes those non-cash expenses associated with the 2011 write-up of assets, which will have a negative impact on profitability. We expect the expense for the write-off of purchase accounting stepped-up value to be approximately $13.1 million for 2012.

The inventory expense is estimated at $5.4 million of the charges, which will be amortized over the first 6 months of this year according to PST's inventory turnover rate. The remaining $7.7 million will be amortized evenly over the entire year. And to clarify timing and amounts, we expect purchase accounting expense to be $9.3 million in the first half of 2012, which will include the full write-off of stepped up inventory values and $3.8 million in the second half of 2012.

In under purchase price accounting, we have to one year to true-up asset valuations. In our first quarter update, we will update you on the status of these amounts and timing.

During the fourth quarter we also extended the term of our existing revolving credit agreement maturity by 5 years. We amended the agreement, which permitted us to complete the PST transaction and modified other accommodating terms. This has allowed us to secure availability under our revolving credit agreement to the year 2016.

This follows the successful completion of renegotiating our long-term bonds in October 2010 to extend our maturities to November 2017, and lowering our coupon rate from 11.5% to 9.5%. The bond refinancing also permitted us to complete the secondary share issuance in November 2012, which increased our stock float and availability.

As a result of these activities and our improving financial picture, S&P upgraded our credit rating in May 2011 from B minus to BB, and changed our outlook from stable to positive. Moody's upgraded us in December 2011 from B to B1 and improved our outlook from stable to positive.

One very positive metric that results from the transaction and our improving core business performance will be the debt to EBITDA ratio. In 2011 Stoneridge's debt to EBITDA, which excluded PST, was 5.5 times. With the acquisition of PST and based on our guidance for 2012, which includes both PST and Stoneridge, we would improve our debt to EBITDA ratio to 2 times, a significant improvement from last year's 5.5 times, which is the result of improving Stoneridge performance and a positive impact of PST's consolidated results.

With this background I want to review our operational performance during the fourth quarter. Revenue of $186 million in the fourth quarter of 2011 represents an increase of $25.5 million or 16% over the fourth quarter of 2010. Our sales increase is the result of increasing production volumes in our served markets, new business sales programs and continued economic improvement in all segments of our markets.

For the fourth quarter our light vehicle sales were $50.2 million, an increase of $600,000 or 1.2%. This increase is attributable to slightly improved volume across all of our markets. Commercial vehicle production continued strong in North America and was marginal in Western Europe.

Our sales in the medium and heavy-duty truck market were $97.2 million, which was an increase of $15.6 million or 19.2%. The change is primarily a result of increased volume and net new business. And the sales to agriculture and other markets totaled $38.7 million, an increase of $9.4 million or 31.9%.

Sales to our top 10 customers grew $20.9 million, a 19.1% improvement over the same period last year.

Geographically our fourth quarter sales allocation changed very little from the previous period of last year. North America accounted for 74% share compared to 73% last year. This percentage will change significantly in 2012 with the acquisition of PST, as none of their sales are in North America.

Based on our 2011 sales split, our split would have been 56% in North America. So our business is starting to reflect our significant growth potential in our operations in the emerging markets -- Brazil, India and China.

With respect to segment sales, we are experiencing growth in both groups for the fourth quarter. Electronics sales were $124.3 million for the period. We added $23.2 million or 22.9% to the top line from improvements in the global medium and heavy-duty truck market.

Control Devices sales rose $2.4 million or 4.1% to $61.7 million. Revenue was fueled by the increase in North America commercial vehicle production and strength in the agricultural customer sales for both volume and new business.

Income tax expense for the fourth quarter was $22.7 million on a pretax income of $58.1 million. Income tax expense for the year was $26.1 million on a pretax income of $71.6 million. As reported for December 31 of 2010, the company is in a cumulative loss position and continues to provide a valuation allowance offsetting its federal, state and certain foreign deferred tax assets.

As a result, no tax benefit was provided on the US loss for the year. However the company was required to provide deferred tax expense related to the earnings of our PST joint venture, which is unaffected by our valuation allowance position. The increase in tax expense for 2011 compared to 2010 was primarily attributable to the gain recognized from the write-up, the fair market value of the historic investment in PST.

Excluding the tax and the PST gain, 2011 tax expense increased compared to 2010 due to decline in the performance of our US operations and the impairment of goodwill related to BCS.

In addition 2010 tax expense included a tax benefit for the reversal of a deferred tax liability related to our UK operations that was previously included as a component of the accumulated other comprehensive income. Due to the valuation allowance, the quarterly effective tax rates may fluctuate significantly. Additionally our annual effective tax rate is unlikely to be in-line with the tax rates debt we experienced prior to recording the valuation allowance.

As previously reported, the company is required to provide US deferred tax expense related to the earnings of PST. For 2012 PST will be a consolidated subsidiary, and as a result, we will no longer be required to provide US deferred tax on our share of PST's earnings.

Stoneridge reported fourth quarter net income of $38.6 million or $1.56 per share. This compared with prior year net income of $4.5 million or $0.19 per share. Depreciation expense for the fourth quarter was $4.2 million.

Our primary working capital totaled $171.7 million at quarter-end, which increased by $82.4 million from the fourth quarter of 2010 levels, with inventory accounting for $68.1 million of the increase. Primary reason for the increase in working capital was due to the consolidation of PST at December 31, 2011.

Excluding the effects of the PST consolidation, our primary working capital was $73.8 million or 9.6% of trailing 12 months of sales, compared to 14% in the fourth quarter of last year. Current working capital levels for receivables and payables are a function of increasing sales and operational activities. This is slightly better than our $0.12 per dollar of sale level, and mostly a function of the lower inventory levels at year-end.

At December 31, 2011, or working capital balance included PST's accounts receivable of $49.2 million, inventory of $58.7 million, and accounts payable of $9.9 million. In addition the inventory contains a write-up of approximately $5.4 million for purchase accounting but is subject to final valuation, which we expect to complete for inventory before the end of June, 2012.

PST's business mix is substantially different than Stoneridge, as the majority of their sales are in the aftermarket, mass merchandiser and dealer channels. As PST's business mix has more aftermarket, mass merchandiser and retail customers in their distribution channel, they tend to carry more inventory than the Stoneridge core business which will affect our inventory turns metric in the future. We will provide more detail at the end of the first quarter as PST will be reported as a separate segment for our first quarter 2012 consolidated results.

Operating cash flow was a source of cash of $18.3 million in the fourth quarter, compared to a source of cash of $10.6 million in the fourth quarter of last year. Our cash flow results in the fourth quarter were primarily driven by the decreases in inventory and accounts receivable.

Capital investment for the quarter totaled $5.6 million, mainly reflecting investment in new products in the wiring operation and Control Devices segment. For the year capital expenditures were $26.3 million, which included $5.2 million for the new Saltillo facility in Mexico.

As of December 31, 2011, we have $30 million of availability under our $100 million asset-based lending facility. The balance includes $38 million, of which part was the used for our PST acquisition. Excluding the drawn balance, we would have had $77.5 million in undrawn availability at year-end, which is a $16.2 million increase over the same period last year.

Our fourth quarter ending cash balance totaled $78.8 million compared with $72 million at the end of the fourth quarter of last year, which contains approximately $20 million that was dispersed on January 5, 2012 as part of the PST transaction. And going forward we expect we will continue to fund our operational growth initiatives mostly through our free cash flow generation and available cash balances. But we believe we will pay off our borrowed ABL balance by the end of 2012.

Our business continues to show significant growth as the market remains strong for the North American European commercial market, and ag continues its strength. John shared with you how we are addressing customer service levels for the wiring business, which are significantly better than our performance in the first two quarters of 2011. And as a result, we have been able to reduce premium freight and other labor and overhead costs to more normal levels.

We have made progress on our labor efficiencies and shared our programs to further reduce headcount by 9.7% in 2012, while sales are forecasted to grow by 13.7%, and sales per employee will increase by 13.9% for the wiring business. We will benefit from improved copper costs and a weaker Mexico peso, as we have hedge contracts in place that should benefit 2012 compared to 2011.

We are working to improve our cash flow position, with profitability and the reduction of our inventory as the primary contributors. We have extended our ABL by 5 years with attractive rates and favorable terms which will secure our debt and loan availability under a revolving credit agreement.

Our financial and operational performance has been improving compared to where it began in the beginning of this -- of last year, and we need to continue to accelerate the improvement of our operating shortfalls for the wiring business by ensuring that the improvements are sustainable and -- as we continue to grow.

As we look to 2012, we believe Stoneridge's core business sales, which exclude the PST consolidated sales, will be in the range of $820 million to $850 million. And our core gross margins will exclude any effects of the PST consolidation, will be in the range of 21% to 23%. And operating income will be in the range of 5.5% to 6.5%.

PST's 2012 sales will be in the range of $240 million to $270 million based on an average exchange rate of BRL1.84 to the US dollar, which we are using for planning purposes. We expect gross margin to be in the range of 40% to 43%, which includes expensing a non-cash inventory write-up estimated at $5.4 million, which will be expensed in the first 6 months of 2012, and $1.5 million for the step up of other assets included in cost to goods sold.

PST's SG&A will include a non-cash expense of $6.2 million for the write-up of assets which will be amortized evenly by month over the year. The adjustments of purchase accounting will be tax effected with the Brazilian statutory rate of 34%. And the after-tax gross amount will be shared with our minority partners for their 26% ownership, and will be reflected in the P&L and non-controlling interest line.

Consolidated Stoneridge including PST results will reflect a range of sales from $1,060,000,000 to $1,120,000,000 range, which is the first time we will exceed $1 billion in sales. The forecasted gross margin will run in the range of 25.5% to 27.5% and operating income will range from 6% to 7%.

Based on our sales growth and margin improvement, we believe our full year 2012 earnings per share will be in the range of $1.10 to $1.30 per share. And with that, operator, I would like to open up the call for questions.

(Operator Instructions). Matthew Mishan.

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

I think we said it would be 13% operating (multiple speakers)

Yes, it would have been 13.7%, and essentially it would have been after-tax. Our tax rate is about 20% in Brazil. And then at that point the equity earnings share was 50%, so you would take the after-tax of the 20% and our 50% share. That would have been the impact on equity earnings.

Okay, and then the purchase accounting adjustments you are going to be making in 1H 2012 and 2H 2012, I'm assuming that's included in your EPS guidance.

They are.

Okay. And the sales --

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

And that is one-time as far as first half goes and then it would not be recurring going forward?

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

And then the sales which came in about $10 million, like you cited North American and European commercial vehicles were a little bit lower than you had forecast --

Right.

Was that just production changes or was there something else going on there?

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

And one of the key customers in Europe, they were anticipating they would reduce their volume from Brazilian exports in the first quarter. They actually did that in the fourth quarter.

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

I think right now the question for us in Europe is we probably think it is more going to be on the 5% side. But as I said, our team has already factored that in. As a matter of fact, they have started taking action last November. And so with our launches in, with the cost of cuts they have taken, we feel pretty comfortable that we will be able to manage that.

In North America, this market continues to remain strong. As everybody knows, one of our largest customers had lost a few share points. But they are expecting to get that back and so that should benefit us all. But we don't see any -- right now don't see any significant decline.

Last question and I will jump back in the queue. You guys typically don't update your new business backlog around this time of the year (multiple speakers) any update to that?

(multiple speakers) and we will be presenting at a conference on Wednesday, and that will be updated in that conference. That will be posted on our website.

Robert Kosowsky, Sidoti.

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

No, these do not have any of the issues that we have been reporting on quarterly. These are recurring items due to the valuation of assets in inventory. We had some warranty cleanups.

And I think maybe one of the questions you are starting to reach for is, are these -- do they continue in nature? And most of these apply to the poor performance, the operations throughout the course of the year, other than the one line item that we put in there which is the purchase price variance.

And as you know, we have all been fighting raw material increases over the course of the year. And we have been addressing that through recoveries with our customers, redesign of products, launch of new products. So that is the one item that we continue to still (inaudible) address, and it has in our results all year.

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

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

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

I don't have that at the top, but I think that is something -- we can look at it and project for you to help you out. That being a new segment, I think we will give a little more disclosure at the end of the first quarter in terms of their results and how they are performing quarter to quarter.

And you are going to start to see -- one thing I might mention to everybody is that, as PST comes on in the consolidation, there is no requirement other than we'll issue an 8-K with prior 3 years information. So as the results unfold let's say quarterly, we do not have to disclose prior quarters other than the one disclosure you will see in the 8-K. So we will help you as we get through the first quarter and the end of that, because that will be a separate segment by itself, we will give you as much visibility as we can into some of their channels and their the mix of their products, and sort of the cadence of their sales volume over the year.

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

Well 2012 is a bit -- and I tried in our tax section to give you some insight into this, is that we should normally look up around that tax rate that you -- in fact what you are currently forecasting in that 25% to 27%.

A lot of this will depend on our operating improvements and how it benefits North America. We have used that in our assumption of guidance. But as profitability improves, then clearly -- we talked about the valuation allowance and US income could come through with really no tax offset.

Okay, so that is as margins improve in the back half of the year, you are going to have that greater share flowing through with no expense?

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

And then finally as we progress to Mexico, have you moved all the business that you wanted to move into Saltillo? Have you already executed on that? Status on the employment redundancy, and then thanks a lot for the productivity statistics on Chihuahua, but do you think that that is going to -- what are the goals that you do have for that? When do those actually start to hit (multiple speakers) like normalized levels? Is that like a second-half of the year type of thing?

For the Saltillo we still have -- we will continue through the first quarter transferring business down there. The redundancy is a result of the delay in the customers of transferring business. So before we transferred business, we had to staff up, train the people, and then as the customer delayed we had people both at the existing facility and the new facility.

But that has been normalized now at the year-end. And we have a plan to continue. I think it ends in April when we finish transferring all the production down there.

Regarding the Mexican wiring operations in total, the statistics we were giving were not just for Chihuahua; they were for all of our businesses. We expect to continue to say that improvement go forward. As we are monitoring that, we expect to see continued efficiencies come up.

And as we practice, we are going through a couple of projects which are examining our operational practices and reducing manpower as a result of that. So I think we have seen those benefits in the fourth quarter. We will continue to see those benefits in the first quarter.

I might mention, you made the comment, thanks for the statistics on Chihuahua; but it is really the whole wiring business that those statistics were based on.

Okay. Otherwise, thanks for all the disclosure. It is really great, guys. Thank you very much.

Stefan Mykytiuk, Pike Place Capital.

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

It is fixed assets. It could be intangibles, customer lists and those kind of things. So, yes, so like in the second half I mentioned it will be $3.8 million. That will be pretty well a fixed item as it moves forward in 2013, 2014. And once we firm that up, we will give you a schedule that gives you the basis of the amortization of the years and those kind of things, so you can get some insight into that.

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

Yes, exactly.

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

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

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

Yes, exactly, net out (multiple speakers)

Okay, okay, all right. I had one other question. If we take out the SG&A, some of the unusual items in this table out of SG&A, it was actually down quite a bit sequentially. Was there some other reason for that?

Well, I think it is a reflection, and you saw in the third quarter that the overall -- and part of this was done at the management level -- that we did not pay out any incentive pay this year. So that was a driver.

And then quite frankly, the operations did a great job when we were struggling with the operating performance of our plants, and we really stepped up our effort to cut down on SG&A and also impacted the D&D expense. So that was an area we managed very well this year and reduced. Some of it will come back in, but we will try to hold the line on SG&A for next year.

It will go up though now because of the incentive pay, and that is roughly -- on average it is about $4 million a year. That was excluded this year. That should come back in if we hit our targeted levels this year.

Brian Sponheimer, Gabelli & Co.

Congratulations on the PST acquisition. I don't think we had spoken since.

Thank you, Brian.

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

We have not seen that in our customers' forward projections. What we did see was a planned reduction from one customer from fourth quarter to first quarter. But that was really based on some export orders that they were shipping in the fourth quarter which were not going to repeat, necessarily, in the first quarter.

We looked at the January sales results coming out. They look pretty good for -- they were up year-over-year versus last January, so that's another good indication. We have not seen that impact yet.

I mean, I think the OEs are managing around that, as they have in the past. They have probably got trucks off line, but they are still building those until they can -- once they get the final product. And then they bolt it on, so to speak.

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

The off-highway segment, we have some share in there. I think our bigger segment is the ag segment. And looking at the forward forecast that we have seen from our customers, that continues to remain strong throughout that period of time.

So I don't think we are going to be as impacted by the off-highway segment. As a matter of fact, we might pick up some share there if we win some program awards. But we have not certainly isolated that as a significant risk for us.

Okay, thank you. Good quarter. Good luck.

Richard Hilgert, MorningStar.

So I backed the $1.24 out of the $2 in diluted earnings per share as reported basis, come up with $0.76 a share for the full year; of that $0.76, what would be PST's portion?

Their equity earnings were roughly -- I don't have that off the top of my head. Their equity earnings were roughly around $10 million, somewhere right to that level.

$10 million incremental revenue that you got from the acquisition?

There was no revenue (multiple speakers) there was no revenue, Richard, it was only -- I think what you're asking in the normalized $0.76 for this year, what would PST's impact be?

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

We did (multiple speakers) he is talking about the (multiple speakers)

Yes, Richard, right now if you look at the line called equity earnings, it is $10 million year-to-date. And Minda is in there for roughly about $1 million, so that would leave Brazil at $9.034 million. But remember, under equity accounting we have to tax effect that on Stoneridge's statutory rate of 35%.

So 35%, that takes you down to $5.9 million. That means the earnings were about $0.23 for PST under the equity earnings basis for 2011.

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

I think that is something a lot of you will be doing your models, and we provided enough detail that you can frame around that to get to that result. We gave you guidance on both the sales and the margins.

And the biggest change in PST now is we no longer tax effect their earnings. Their effective tax rate in Brazil was about 20%, so we no longer accrue a 35% statutory rate of Stoneridge.

And then, less the purchase price accounting which your $13.1 million, your tax rate is 20%. And did then have net of the 26% minority, I think with those factors you can get pretty close to what the net results are for PST.

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

I think it was up 1.7%, our revenue was. The market growth was greater than that. And as we explained, we have -- we are de-contenting some of our products out of customer platforms because they are not profitable. They are commodity type products and they don't focus on the technology direction that we are heading in that business.

An example of that technology direction is of course the EGT, and we have reported this time that we have won a couple of significant awards in China for that product. And in the past we have reported on other significant awards we have won in Europe on that product. So the whole shift in that Control Devices business, which is primarily automotive, is away from non-technology kind of commodity type products to more products where we think we can bring some value to the customer through technology or application.

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

Yes, I think that would be a fair assessment.

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

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

Robert Kosowsky.

I was wondering if you could guys could give us an idea of what your free cash flow is looking like this year, and in particular what the general free cash flow characteristics of PST were, that you are now going to be consolidating. Maybe (multiple speakers) a CapEx number too (multiple speakers) as well.

(multiple speakers) talking about 2012?

Yes.

Well, I think we gave you pretty good insight into the margins and the profitability, because that would be the primary driver. We do believe that we can hold working capital increases to about $0.12 per dollar of sale.

And we were somewhat over in our inventory. We still think we have an improvement there of $5 million to $10 million. We will hold capital in the range of $25 million to $30 million, so with those factors, we should see a pretty significant cash flow for 2012.

And then historically, Brazil is not what I'd call a capital-intensive business, other than -- when you see their first-quarter disclosure, they show capital. But about half of that is what we have -- we actually buy the tracking devices down there, and then we lease them out or rent them out through the customer base because it is an expensive front end investment for the consumer.

So their capital is really geared around that, but historically they generate a significant amount of cash flow with their margins. And then we have been paying a dividend anywhere from 45% to 60% historically in those earnings, and we see no reason why that would change.

All right, thanks a lot guys and good luck with 2012.

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

Well, I would like to thank you for joining us on the call. Needless to say, 2011 was a difficult year. But it really was, in many respects, a good year for our operations of Control Devices and our European businesses, and our North American Electronics business.

Our big issue, as we have discussed during the year, was the performance of our wiring business. That was driven by poor operational performance, copper escalation and currency escalation.

As we look at the -- we have got one month under our belt here in 2012. As we looked at the performance in January of all of our businesses, it is tracking right in the range that would meet our projections that George has given you for the full year. So we are feeling very good that we have gotten a lot of these issues under control, and we are continuing to work the business and work the issues, and continue to drive the performance improvement so we can have a much better 2012.

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