Stoneridge Inc (SRI) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Stoneridge first-quarter 2012 conference call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. (Operator Instructions).

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

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our first-quarter earnings release. The release has been or will shortly be filed with the SEC and has been posted on our website at www.stoneridge.com.

Joining me on today's call are John Corey, our President and Chief Executive Officer, and George Strickler, our Chief Financial Officer.

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

During today's call, we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. John will begin the call with an update on the current marketing conditions, operating performance in the first quarter, growth strategies, business development and his thoughts on future initiatives, including our 2012 guidance. George will discuss the financial and operational details of the quarter and details of our 2012 guidance. After John and George are finished with formal remarks, we will then open up the call to questions.

With that, I will turn the call over to John.

Good morning. Revenue for the first quarter was $262.3 million, an increase of $69.2 million or 35.9% over the first quarter of 2011. This result includes $53.7 million for PST's consolidated sales. Excluding the effect of PST sales of $53.7 million, Stoneridge's core business sales increased by $15.6 million during the first quarter of 2012 or 8.1% compared to the first quarter of 2011.

The Stoneridge core business results continue the revenue growth experienced during 2011 and were primarily driven by North American commercial vehicle and agricultural markets. Our overall growth was moderated somewhat by the decline in the European commercial vehicle sector.

We reported earnings-per-share of $0.22 for the first quarter, which was $0.10 per share or 83% above the prior year's first-quarter earnings per share, driven primarily by our operational and financial improvement of our North American wiring business. The benefit of PST's first-quarter earnings was a wash as non-cash purchase accounting adjustments or inventory of $1.8 million and other asset step-up values of $1.4 million offset PST's first-quarter operating income of $3.5 million. The total purchase price accounting was a non-cash charge of $3.2 million or $0.06 a share. Without this charge, our operational earnings per share would have been $0.28 per share.

PST's charges were in line with our first-quarter expectations for purchase accounting adjustments as discussed during our last call. George will provide more detail on the purchase accounting effects for the quarter and for the rest of the year.

Our first-quarter sales increase over the prior year was slightly below our internal expectations due to lower sales to a large commercial vehicle customer in North America and lower sales in Europe due to the general market softness in commercial vehicle. While below our expectations, sales to our commercial vehicle customers in Q1 increased by 8.2% to $104.4 million as a result of increased medium and heavy-duty truck production in North America compared to the prior year. The agricultural and equipment category sales increased in the quarter versus the prior year by approximately 19% to $49.1 million, continuing the sales growth experienced in the ag markets throughout 2011.

Sales in our passenger car and light truck segments, which are predominantly Control Device sales, were $55.1 million in the quarter and nearly equal to the prior year, but lower than the North American passenger car market increase. As previously discussed, we are aligning our automotive product portfolio around key product families in emissions and actuations, which we believe offer attractive market growth opportunities while reducing our presence in commodity or noncompetitive product lines such as customer actuated switches.

We have also experienced a shift in share of market between car companies and platforms in the first quarter, which accounts for some of the reduction. Control Devices sales volume was up in the first quarter, consistent with the growth of our key passenger car and light truck customers in North America, offset by reduced sales of fuel shutoff switch business that was de-contented due to a fuel system design change and the exiting of a speed sensor application in the North American market. Control Devices' overall revenues increased by 3.2% due to increased sales of EGT and other emission-related products.

Stoneridge's gross margins improved in the quarter as better operational performance in the North American wiring business resulted in reduced premium freight, reductions in headcount, lower overtime, reduced employee turnover and improved operating efficiencies.

For the Stoneridge core business, material costs as a percentage of net sales offset some of the operating improvements and had an unfavorable impact on margin improvements in the first quarter. Direct materials for Stoneridge's core business as a percentage of net sales increased 2.2% compared to the prior year, despite lower cost for copper. This increase caused an unfavorable variance to last year in the amount of $5.1 million, which was a result of mix shift in the quarter and increased raw material costs.

We are implementing pricing adjustments that begin to positively impact profitability in the second quarter, which will partially recover the material costs increase in the third and fourth quarters.

The wiring operations, which were a significant drag on last year's first quarter, continued to show improvement in performance. Our first-quarter premium freight was reduced by $3 million compared to the prior quarter of 2011. Labor efficiencies improved by about $2.1 million. Average headcount in the first quarter of 2012 was lower by 490 people in the first quarter of 2011 on a quarter-on-quarter sales increase of $13 million in our Mexican wiring operations.

This represents a quarter-on-quarter 29% efficiency improvement based on sales per employee. We expect to achieve additional headcount reductions during the year as we continue to improve the wiring operations. Our projections for the wiring business this year is an increase of 9.8% in sales and an improvement of 30% in sales per employee as a further indication of our continuous improvement.

New business awards in the quarter were $58.8 million, of which $19.9 million were new awards and $38.9 million were replacement awards. In the first quarter, our Asia Pacific business had an annual award of $4 million in instrumentation for commercial vehicle applications starting in 2014.

We have also been awarded a new program with Tenneco for EGT in China in the amount of $2.5 million, which was originally to start in 2012. Based on the Chinese government delay of the Euro 4 implementation, market requirements for EGT will be pushed out about 18 months. The Tenneco award will be impacted by this as well. Each EGT award in China is now under review with customers as they determine their start dates based on the timing of the new government regulations.

We have also received a large military order for 2012 and 2013, a portion of which was included in our guidance. Release of this award is subject to change depending on the demand from the military business and funding.

Finally, one European customer has pushed out their fourth-quarter 2012 launch of a new program until 2013 due to a delay from other suppliers.

Minda Stoneridge, our un-consolidated JV in India, posted first-quarter sales of $9.6 million, a decrease of $16.4 million versus the first quarter last year. This sales decrease was driven primarily by a 12.2% reduction in the valuation of the Indian rupee compared to the US dollar as the rupee has declined from INR45 per $1.00 in the first quarter of 2011 to INR50.4 per $1.00 in the first quarter of 2012. Excluding the effects of foreign exchange, Minda sales are flat compared to last year. Our share of Minda's net income for the first quarter was $140,000, a decrease of $213,000 from the prior year period, primarily due to the decline in the rupee exchange rate.

Minda's reported sales were nearly $50 million in 2011. Current projections have local currency revenues increasing over 2011 in the range of $50 million to $55 million, impacted by the decline in the Indian rupee. Minda still expects sales to reach $75 million in the next two years based on market and customer growth, consistent with our previous projections made over the last two years.

PST, our Brazilian joint venture, recorded first-quarter 2011 sales of BRL94.8 million compared to BRL89.2 million in the first quarter of 2011 or an increase of 6.3% on volume increases from the audio business. PST's first-quarter US dollar sales were at $53.7 million based on an average exchange rate of BRL1.77 to the $1.00 compared to $53.7 million in 2011 based on an average exchange rate of BRL1.66 to the $1.00, which represents a devaluation of the Brazilian real to the dollar of 6.2%. George will discuss in more detail the projected results for PST due to the continued weakening of the Brazilian real, which stands at BRL1.89 per US dollar on April 30, which is a further devaluation of 6.4% for the March 30 closing exchange rate.

Even though PST sales were up in local currency in the first quarter, their aftermarket sales for alarm systems and accessories were down, while audio sales were up. We see a general weakening of the economy, which is starting to have a negative impact at the consumer level.

As we began 2012, PST experienced softer aftermarket sales in January and February, but finished the quarter with strong aftermarket and accessories sales in March. Brazil's GNP growth has declined to an annualized rate of 2.8%, which is starting to impact the Brazilian consumer market. PST distributors and retailers are experiencing less demand for aftermarket products as the overall economy softens, and they are making adjustments to their inventory positions to reflect the current market demand. We do believe PST sales will trend higher in the third and fourth quarter, which is their normal seasonality.

PST's gross margin, excluding the $1.8 million for purchase accounting, was 42.6% in the first quarter of 2012 compared to 46.3% in the first quarter of 2011, partially due to an increased volume of audio sales which carry a lower gross margins. The mix of our products with more audio volume has lowered our overall gross margin, but is consistent with our 2012 annual guidance.

Excluding the effects of purchase accounting, PST's first-quarter operating margin was 6.5% compared to 12.1% in the first quarter of 2011 and was impacted by the increased selling expense.

As we look at the softening economy, the PST management team is implementing cost reductions. They have reduced headcount by about approximately 300 people and have outsourced wiring harness production to a third-party provider. The benefit of this outsourcing will be to lower costs, free up floor space for additional capacity, and improve our efficiency levels. PST is forecasting additional benefits for 2012 for identified cost actions to be in the range to $3 million to $4 million over the last eight months of the year.

Two weeks ago the Brazilian government reduced interest rates by 75 basis points on top of a 75 basis point reduction nearly a month ago. Brazilian government is attempting to slow down the US dollar inflow due to higher investment rates in Brazil and continued capital inflows into Brazil as many international companies are making investments in Brazil.

Looking at the recent Real weakness, the government actions taken have now weakened the real to BRL1.89 to the US dollar, which will have a negative impact because of the higher cost of increased value of US dollar imports.

We closed the first-quarter results on an average exchange rate of BRL1.79. If the rate continues at BRL1.89, which was in effect for April 30, 2012, this will have a negative transactional and translational effect in the second quarter on both net income and earnings per share. The economic policies of the Brazilian government is working to implement -- is to slow the economy down without pushing the economy into a severe slowdown.

Based on Stoneridge first-quarter results, our major served markets continue to grow in North America. North American automotive production forecasts are projected to be between 14.3 million top and 14.6 million units. The North American commercial vehicle market was ran at a rate of over 300,000 Class 8 units in the first quarter. The production projections have been recently reduced and were lowered to an annualized truck build level of 275 Class 8 vehicles for the rest of the year. The expectation is that the second half of the year will be weaker than the first half.

The most recent European 2012 production estimates have shown a 4% to 8% reduction versus 2011 with a softer first half and an improving second half of 2012, the opposite of what is being forecast for the North American markets. We have new program launches increasing our content, partially offsetting this market decline. As noted before, one of our European programs is being pushed out from the fourth quarter of 2012 into the first half of 2013 because of delays by other suppliers.

Besides North American automotive, one other strong market is continued growth is the construction and agricultural market as this segment represents approximately 20% of our business in 2011 and continues to grow. Continuing market improvements in growth from new customer programs this year and next should continue to drive topline sales.

So, as we close the first quarter, we see a lower growth expectation for North American commercial vehicle, but still positive growth over last year. A reduction in European commercial vehicle market is being forecast but is subject to customer program adjustments. A question mark regarding demand in Brazil as they attempt to balance their overall economic decline with investments being made in Brazil, capital flows and the real exchange rate versus the US dollars. We see continuing improvements in North America auto market as forecasted and continuing strength in the agricultural markets.

In these uncertain markets, we will continue to pursue our additional cost reduction initiatives and efficiency improvements to partially offset volume inclines.

In addition, we are working on pricing initiatives to recover -- partially recover material cost, as well as product redesign, to lower our material costs and content.

It is important to note that our teams have worked diligently to address the wiring business operational issues during 2011. In the first quarter, we are seeing the benefits of the improvement as our gross margins have returned to more normal levels in the range of 21% to 23%.

As we review the balance of 2012, we are maintaining our sales guidance in the range of $1.060 billion to $1.120 billion while maintaining our gross margins in the range of 25.5% to 27.5%, operating margins in the range of 6% to 7% and earnings per share in the $1.10 to $1.30 range.

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

Thank you, John. As we have been sharing with you over the past several quarters, we have been addressing our 2011 operating issues in our wiring business. Based on our team's efforts, we expect an improved financial performance in 2012. On our last call, we shared with you that our first quarter was progressing consistent with our plans. We are pleased that our first quarter was consistent with our plans. We benefited from improved operating performance in the wiring business, along with more favorable copper costs and improved Mexican peso exchange rates from a weaker Mexican peso, which is partially offset by increased raw material costs.

Raw material cost increases to net sales continue to be an area we are working to address as our raw material to sales in the first quarter of 2012 was 2.2% higher than the first quarter of last year. We are working to address the raw material cost increases through pricing actions, redesigns of our products, collaborating with our suppliers and pursuing alternate materials sourcing. Part of our raw material cost percentage of net sales increase is due to product and customer mix in our Control Devices segment.

We have also been pleased with our progress integrating PSTN into Stoneridge after completing the final phase of the transaction on January 5th of 2012.

Last year we reviewed with you quarterly the negative cost impacts for operational issues, higher copper prices, the financial impact of the Mexico peso and the startup of our new facility in Saltillo, Mexico. As a result of the actions taken, the wiring operations improved significantly during 2011 and is well positioned for this year. We saw the improvement in our financial and operating results as gross margins return to more normal levels in the first quarter. As you recall, the wiring business was adversely impacted in 2011 by operational issues, which cost us $13.3 million due to labor in efficiency, overtime, excessive headcount, premium freight and the startup costs of our new facility.

In addition, the wiring business was adversely impacted in 2011 by copper increases and the strengthening of the Mexico peso by $10.7 million. The operational issues and the currency and commodity impact costs for the wiring business totaled $24 million last year. For 2012 we have offset an estimated $20.9 million of the $24 million of the negative operating costs, commodity impacts and foreign exchange cost. Our plan for this year was to offset $13.2 million of the operating issues which will positively impact 2012. We have reduced the premium freight to normal levels by the end of the second quarter of 2011, and this will benefit us by $5.2 million for the freight in and the freight out for this year.

In the first quarter of 2012, premium freight on our wiring operations improved by $3 million compared to last year. The Saltillo plant is running well, and the $3.2 million startup cost is behind us.

In regarding commodities, we have had 68% of our estimated copper consumption for this year at $4 per pound, and this will benefit the wiring business by about $2 million in 2012 compared to 2011, assuming copper stays at the $4 per pound or lower for the remainder of the year.

We have executed a forward contract to purchase $55 million of Mexico pesos at an average exchange rate of MXN13.09 to the US dollar. This will benefit the wiring business by an estimated $5.7 million in 2012 compared to last year, assuming the $72 million worth of peso equivalents can be purchased at Mexico pesos MXN13.09 to the US dollar.

Through the actions taken to improve operations and hedging our copper in the Mexican peso positions for the wiring business, we will offset nearly $20.9 million of negative cost impacts the $24 million, which we experienced last year. As a direct result of these improvements in the first quarter of 2012, our gross profit, excluding PST, was 21.3%, and it is in line with plan in our guidance.

We increased our ownership stake to 74% of PST as of December 31 and fully completed the transaction on January 5 of this year. As a result of the 24% ownership purchase, this will change the accounting for PST's results in our financial statements. Last year we recognized 50% of PST's net income under the equity method of accounting in our P&L in a single line called equity and investee. With the additional ownership in PST as of December 31 of last year, we fully consolidated PST's balance sheet in our year-end balance sheet. Starting January 1 of this year, in addition to consolidating the balance sheet, we will recognize 100% of PST's revenues, expenses and net income in our P&L, and we will recognize an expense for our 26% minority partner share of net income as non-controlling interest expense.

In terms of taxes, we will only reflect PST's effective tax rate in our consolidated results, which tend to vary between 19% and 20% on PST's pretax income. At the time we received dividends which normally is in the fourth quarter, we will accrue additional tax between US statutory tax rate of 35% and the effective rate of tax provided in Brazil on the cash dividend amount being received by Stoneridge. PST will be represented in our SEC filings as a special reporting segment, starting with the first quarter of this year.

The 2011 acquisition of the additional shares of PST included balance sheet writeups of existing assets, as well as recognition of goodwill in relation to the fair value recognized by the purchase. Our 2012 earnings guidance included those non-cash expenses associated with the 2011 writeup of assets, which will have a negative impact on profitability for PST. In our 2012 guidance, we expected the expense for their write-off of purchase accounting stepped up values to be approximately $13.1 million for 2012. The inventory expense was estimated at $5.4 million, which would be amortized over the first five months of this year, according to PST's inventory turnover rate. The remaining $7.7 million was to be amortized evenly over the entire year.

In terms of timing and amounts, we expect the purchase accounting expense to be $9.3 million in the first half of this year, which would include the full write-off of stepped-up inventory values of $5.4 million and $7.7 million for all of their assets and $3.8 million in the second half of 2012 as inventory write-offs will be amortized in the first half of this year. Under purchase price accounting, we have up to one year to true-up asset valuations, and we have continued to refine our estimates for purchase accounting amounts that affects PST's profitability.

In the first quarter, we expensed $3.2 million in non-cash purchase accounting adjustments in total. This had a net income impact of $1.6 million or $0.06 per share. As a result, our EPS, excluding purchase price accounting adjustments, would have been $0.28 per share for continuing operations. This included $1.8 million for the writeup of inventory and the remaining $1.4 million of expense for all other asset writeups.

For the balance of the year, we expect another $1.5 million of expense for inventory and $5.2 million for other asset writeups. We expect the $1.5 million for inventory to be expensed in the second quarter, while the other $5.2 million will be expensed ratably over the balance of the year. And in summary, total purchase accounting adjustments in 2012 are now expected to be $9.9 million compared to $13.1 million in our previous guidance. Of the $9.9 million of purchase accounting that will affect net income, $1.5 million is depreciation and $6.7 million is amortization.

In addition to the normal translation risks of operating results that are associated with the foreign subsidiary, PST has significant risk associated with foreign exchange that can affect its and Stoneridge's financial results. PST currently has a US dollar balance sheet exposure of $23 million in US dollar denominated debt with two Brazilian banks, which were used to finance Chinese US dollar supplier payments for the launch of their audio products and $3 million for monthly US dollar denominated payables. These exposures are revalued each month end with the changes in the value reflected through the balance sheet and the P&L. These valuation differences could be large and affect PST's profitability from month to month. To mitigate this risk, we have embarked on an inventory reduction plan to reduce PST's debt as it is the least expensive way to reduce their US dollar exposure.

PST has US dollar denominated direct material disbursements sourced through China with an estimated annual spend amount of approximately $45 million. If the US dollar strengthens against the Brazilian real, then the cost of these goods for currency alone can significantly affect the gross profit of PST. And since the first of the year, the real revalued to BRL1.74 in January, but weakened to BRL1.82 by the end of March. And since the first quarter closed, the real exchange rate has weakened compared to the US dollar to BRL1.89, which will be used for our April 30 close.

At the exchange rate of BRL1.89, this represents a de-valuation of an additional 5.2% in the month of April and would represent nearly a $1.2 million P&L charge if the exchange rate stays at the same level it is at the end of April. PST is working to reduce their inventories over $20 million to significantly reduce their US dollar payable exposure by paying down US dollar debt and expense of local currency working capital loans.

Now, I want to review our operational performance during the first quarter. Revenue up $262.3 million in the first quarter of 2012 represents an increase of $69.2 million to 35.9% over the first quarter of last year.

Our first-quarter sales include $53.7 million of PST sales that were not consolidated last year. Excluding PST's first-quarter sales, Stoneridge's quarter sales increased by $15.6 million or 8.1% compared to the first quarter of last year. Stoneridge's core sales increased as the result of increasing production volumes in most of our served markets, new business sales programs and continued economic improvement in most segments of our markets.

For the first quarter, our passenger car and light vehicle sales were $55.1 million and about equal to the first quarter of last year. We did not experience the market growth that other automotive suppliers have been reporting as we have been realigning our automotive product portfolio around key product families in emissions and actuation, which have attractive market growth while reducing their presence in commodity or noncompetitive product lines.

Commercial vehicle production continues strong in North America and was down in Western Europe. Our sales in the medium and heavy-duty truck market was $104.4 million, which was an increase of $7.8 million or 8.1%. The change is primarily a result of increased volume in the North America market and net new business. Sales to ag and other markets totaled $49.1 million, an increase of $7.8 million or 19%, and sales to our top 10 customers grew by $6.4 million, a 4.5% improvement over the same period last year.

Geographically our sales allocation shifted with the consolidation of PST. With PST our sales allocation is approximately 61% for North America, 21% in South America, 16% in Europe and 2% in other. And excluding PST, North America accounted for 74% share compared to 77% for the same quarter last year.

With respect to segment sales, we experienced growth in both groups for the first quarter. Electronics sales were $138.2 million for the period. We added $13.4 million or 10.7% to the top line from improvements in the global ag and other category, as well as medium- and heavy-duty truck market.

Control Devices rose $2.2 million or 3.2% to $70.4 million, and revenue was fueled mainly by the increase in North America commercial vehicle production and strengthening of ag and passenger car.

Stoneridge reported a first-quarter 2012 consolidated gross margin of 24.8%, which includes the results of PST. The Stoneridge core business, which excludes the results of PST recorded a gross margin of 21.3%, which compares favorably to our gross margin in the first quarter of last year of 20.4%, and is back on our guidance range of 21% to 23%.

And, as discussed earlier, our first-quarter 2012 core gross margin was driven by improvement in labor productivity and premium freight, primarily in our North America wiring business and improvements in copper costs and the weakening of the Mexico peso. The improvement in labor productivity and premium freight that positively affected gross margin totaled $5.1 million. The decreases in copper costs and weakening of the Mexico peso positively impacted our results by approximately $1 million and $0.5 million respectively.

We continue to execute plans, including reducing direct labor and indirect labor, reducing over time, developing more efficient manufacturing processes to reduce turnover of people, and enhance our training programs to improve our operating efficiencies. These actions have reduced and will continue to reduce our manufacturing costs.

Additionally, during the first quarter of this year, we have experienced higher raw material costs related to the precious metals, rare earth magnets and resins primarily consumed in our Control Devices segment. Control Devices has been implementing price increases to offset these cost increases, which will start to be reflected in the second quarter of this year.

Income tax expense for the first quarter was $1.2 million on pretax income of $7 million, resulting in an effective tax rate of 17.5%. As reported for December 31, the last year, the Company continues to provide a valuation allowance, offsetting its federal, state and certain foreign deferred tax assets. The decrease in the effective tax rate for the three months ended March 31 of this year compared to the same period for last year was attributable to the improved financial performance of the US operations, as well as the consolidation of PST.

As previously mentioned, for 2012 PST is a consolidated subsidiary, and as a result, we are no longer required to provide US-deferred tax expense on our share of PST's earnings. We expect the 2012 annual effective tax rate to be between 16% and 20%, and we anticipate cash taxes be between $7.5 million and $8.5 million all related to foreign and state taxes.

Stoneridge reported a first-quarter net income of $5.8 million or $0.22 per share, and this compared with last year net income of $2.9 million or $0.12 per share.

Depreciation and amortization expense for the first quarter was $8.8 million, an increase of $3.8 million compared to the first quarter of last year. The increase is due primarily to consolidation of PST's results in 2012. PST's depreciation and amortization on an annual basis is expected to be approximately $18 million and Stoneridge core to be approximately $20 million. Our primary working capital totaled $210 million at quarter-end, which increased by $99.2 million from the first quarter of 2011 levels. The primary reason for the increase in working capital was due to the consolidation of PST into Stoneridge's December 31 and March 31, 2012, balance sheets. Excluding the effects of the PST consolidation, Stoneridge's primary working capital was $122.8 million or $12 million higher than the first quarter of last year.

The current working capital levels for inventory, receivables and payables are a function of increasing sales and operational activities. PST's inventory contained a write-up of approximately $5.4 million at December 31 of last year and $1.5 million on March 31 of this year for purchase accounting that is subject to final valuation which we expect to complete before the end of June of this year. If there is any difference, we would expect to record this in the second quarter of this year.

As PST's business mix has more aftermarket, mass merchandise and retail customers in their distribution channel, they tend to carry more inventory than the Stoneridge core business, which will affect our inventory turns metric in the future.

Operating cash flow was a source of cash at $5.9 million in the first quarter compared to the use of cash of $15.5 million in the first quarter of last year. Our cash flow results in the first quarter were primarily driven by the higher net income and lower capital expenditures, which was offset by higher trade receivables to fund higher sales. Capital investment for the quarter totaled $6.8 million, mainly reflecting investment in new products in the wiring operation and Control Devices segment. Capital expenditures for PST totaled $2.4 million, mainly for the capitalization of tracking devices, which are rented to subscribers and are included in the monthly service fees charged to subscribers.

For PST's tracking device business, they have historically sold their tracking devices to their subscribers. The upfront costs was in limiting the growth of adding new subscribers for their tracking service business. As a result, PST now purchases tracking devices, which is included in their annual capital expenditures and represents nearly 50% of their annual capital. PST recovers the cost of the tracking devices by charging the tracking device recovery as a service fee to their subscribers through this part of the contract.

As of March 31, we have $63 million of availability under our $100 million asset-based lending facility, and the balance of the drawn debt against our credit line includes $31 million, a portion of which was used for the PST acquisition. PST has several loans used to finance working capital totaling $47.2 million, of which $36.5 million is current, and PST is in full compliance with all covenants.

Our first-quarter ending cash balance totaled $42.9 million compared to $78.7 million at the end of the first quarter of last year. And going forward we expect we will continue to fund our operational and growth initiatives, mostly through our free cash flow generation and available cash balances. We believe we will pay off our borrowed ABL balance by the end of 2012. Our forecasts are for PST to pay down $19 million of their working capital debt and $20 million of US dollar loans by the end of this year.

Our business continues to show growth as the markets remain strong for the North American pass car and light vehicle, North America commercial and ag sectors. John shared with you how we have addressed customer service levels and operating issues for the wiring business. Our quarter-on-quarter performance demonstrates the improvement. We have made progress improving our labor efficiencies and continue to reduce headcount in 2012 to further improve our labor efficiencies. The wiring business sales are forecasted to grow by 9.8%, while sales per employee will increase by 30% on a year-over-year basis. We will benefit from improved copper costs and a weaker Mexico peso exchange rate as we have hedge contracts in place which should benefit 2012 compared to 2011. We are working to improve our cash flow position with profitability and a reduction of our inventory as the primary contributors.

Our financial and operational performance has been improving compared to 2011, and we continue to accelerate the improvement of our operating shortfalls for the wiring business by ensuring that the improvements are sustainable as we continue to grow.

As we look to 2012, we maintain our belief that 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 core 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 exchange rate of BRL1.84 to the US dollar, which we used for planning purposes. We expect gross margin to be in the range of 40% to 43%, which excludes -- includes expensing all the non-cash purchase accounting asset writeups, the non-cash purchase accounting items including non-cash inventory writeup now estimated at $1.4 million which will be expensed in the second quarter of the year, and $1.1 million for the stepup of other assets that will be amortized in the last three quarters of the year.

PST's SG&A will include a non-cash expense of $4.1 million for the writeups of assets which will be amortized evenly by month over the balance of the year. The adjustments of purchase accounting will be tax affected with a Brazilian statutory rate of 34%. The after-tax gross amount will be shared with our minority partners for their 26% ownership and will be reflected in the P&L on the non-controlling interest line.

For consolidated Stoneridge, we are reaffirming our guidance, which including PST's results, reflect a range of net sales from $1,060,000,000 to $1,120,000,000 range, which is the first time we exceed $1 billion in sales. The forecasted gross margin will run in the range of 25.5% to 27.5%, and operating income will be in the range from 6% to 7%. And based on our sales growth and margin improvement, we believe our full-year 2012 earnings-per-share will be in the range of $1.10 to $1.30 per share.

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

(Operator Instructions). Matthew Mishan, KeyBanc.

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

I think the number one issue is what we have shared today is that we have continued to see raw materials increases, especially in the third, fourth quarter, and then we also recognize those in the first quarter. And then a lot of those were on the Control Devices side, which happened to be precious metals. Magnets are a big item in our resin costs. We have implemented price increases, which will start to roll in in the second quarter and the third quarter. So by the time we get to the fourth quarter, I think we have offset most of the cost increases we have seen in the Control Devices side, and we have done the same thing in our wiring business, which we will incur the same kind of trend that will see some improvement in the second quarter. By third and fourth quarter, we will offset most of those increases.

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

Well, what we did is, if you look at the equivalent, if you look at our raw material cost of sales, it is up roughly about 2.2%. If you just take it on an annual sales level, that would equate to roughly about a $5 million increase, so to speak, if you look at the relation between raw material costs of sales. The programs we have in place that we recovered nearly about $4 million in pricing and Control Devices over the course of the year, and we have about half of that amount in the Electronics side. So we end up recovering most of those increases through the course of the second, third and fourth quarter.

Great. Then moving on to, you had an EGT award with Tenneco in China, which had a mid-2013 launch. That's for commercial vehicle, not light vehicle, correct?

Right. It is commercial on the side, but that award has been pushed out. It was supposed to launch this year. It has been pushed out because the Chinese government has changed the implementation date for the euro standard. So we are probably pushed out to 2013. It was an 18-month pushout from the government.

Tenneco has about, I believe, like seven to eight Chinese commercial vehicle customers for emissions needing some new regulations there. Are you launching on all those customers or just a select couple?

No, we are not launching on all of them. I'm not sure which the specific customer is. It is a product that goes to Tenneco.

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

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

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

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

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

In Europe, we were just back from there, and we see it as we said. We see the second-half strengthening. As a matter of fact, we see kind of a flattening happening in the second quarter here. So we don't see any further declines, and we see then a gradual improvement there in the third and fourth quarter.

In Brazil, as we look at that market, the issue for us is really the currency exchange rate because and the slowdown in the general economy there, which will impact PST and how quickly distributors adjust to that. I mean this is a new channel for us, so to speak, in terms of how fast people adjust to things. And so we expect to see the second quarter continue to be -- continued weakness in the second quarter with the third quarter strengthening and the fourth quarter strengthening.

I think the target rate that the government put out that they wanted the real to be was around BRL1.80. Now that is what they wanted it to be. Because of their actions, the strain is still going on, and the real is going up to BRL1.88, BRL1.89. We expect they will take some of the actions that will drive that back down again and try to stimulate growth in the economy at the same time. So, if I looked at it is really where we have the greatest question as to how the market is going to react, it is in Brazil.

And just as a follow-up to the Brazil issue and we shared with you in today's report that January and March -- January and February were weaker in the aftermarket, especially in the alarm system business, and then we had a very good March, which really brought the level back to the first quarter. We experienced the same thing in April. It was actually a little weaker in the month of April, and I think it is our dealers adjusting to what they are seeing in the marketplace. And the real question is, is this really just the market adjusting to what the government economic policies are trying to implement to at least slow down the economy without putting any severe slowdown?

But, as you know, our seasonality is much stronger in the third third and fourth quarter. So our forecasts are still showing that we believe there will be stronger demand in the third and fourth quarter versus the second quarter. In fact, the second quarter looks like it may be flat with the first quarter in Brazil.

Thank you very much, and congratulations on a nice quarter.

Robert Kosowsky, Sidoti & Co.

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

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

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

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

That is what we sort of indicated over the year that we would tend to inch up more towards the middle or above the middle of that range in the third and fourth quarter, and our forecasts are still showing it.

Okay. That is good. And what is the total second-quarter purchase accounting impact going to be? I add it up to about $3.5 million. Is that correct, or did I miss something in 2Q?

(multiple speakers) Because we will have $1.5 million of inventory, and then you have got the (multiple speakers) addenda $1.1 million in cost of goods sold will be spread evenly throughout the year. So it is like $350,000 a quarter that we talked about in cost of goods sold. And then in the SG&A, we talked about $4.1 million spread evenly over the balance of the year as well. Ratably (multiple speakers)

Okay. That is helpful.

Yes, that is very close to what we will see in the second quarter.

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

We have not seen that. I don't think the forecast has been adjusted upwards significantly for anything that is happening there. So I cannot say we have seen anything in that segment.

Okay. So still pretty consistent with what you saw three months ago?

Right.

Stefan Mykytiuk, Pike Place Capital.

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

Well, now that we have that, we are going to be out talking to our customers about our capabilities. Currently though for any one of our customers with the exception of Electronics and (technical difficulty), if we wanted to go into the wiring business, we would have to set up a wiring facility down there.

So we are in the early stages of doing that. And what we will do is we will start to put more focus on that by having a more direct alignment with the sales organization and the PST organization so we have a link between our customers here and there. We have had conversations with some of our customers telling them of our ownership position, and so it is starting with the initial interest phase right now. But I don't expect to see anything this year in that regard.

Okay. And then I'm not sure, the Q1 -- George, you rattled off a lot of numbers. What was the -- it was $5 million was the hit from the higher raw materials in Q1?

Yes, that is what I was explaining to Matt. It is sort of a number that when you look at it, our raw material costs to net sales is up 2.2%. So that says it effectively, that our raw material lift, but it is coming from a couple of different -- really two key sources. Raw materials are up. Roughly of that $5 million, about a little over $4 million, and the other $1 million is being influenced by mix of products in the first quarter, mostly in Control Devices.

Okay. And you are saying you got $400,000 back in pricing in Q1, and you are going to get more in Q2?

Yes, we actually have pricing going over really the last three quarters that essentially negates and offsets almost all that increase that we are looking at in the first quarter.

Okay. So you are saying by Q4, basically you get $4 million back in terms of pricing?

Right.

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

You mean for the -- their amortization for the year for depreciation is $18 million for the year. Are you talking about the purchase price accounting or the --?

Yes, well, you had -- it sounds like there are three pieces of the purchase price accounting. You have got the inventory stepup, which is $1.5 million you are saying in Q2, and then another $350,000 a quarter for some other sort of asset stepup, right?

Yes, it is the asset stepup that is being depreciated. And then the other $4.1 million over the last three quarters of the year is in SG&A.

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

Okay. And the decline versus the $13 million was what? It seems like the bulk of that was in the inventory stepup?

Yes, it was mostly in the inventory side. We went through a lot of detail in terms of doing that valuation. So the biggest change is really in that line.

Jimmy Baker, B. Riley & Co.

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

Well, as we said, we think that the European markets have hit the bottom, and based on what our European business group is seeing from their customers, they will start to see improvements in the third and fourth quarter. So we are expecting that positive trend. And then we looked at the North American markets and we continue to see strength in the ag markets going across the whole year so from our customer perspective.

As we look at the commercial vehicle market, I think the real question is just, one, is perhaps how much growth and volume is in the market. It was forecasted for Class 8 at 300. Now it is down to 275. We think that that trend will hold in the market place going forward. And so in medium, I think we have not seen any uptick in that beyond what we forecast.

So I think what we have adjusted for in our forecast is some opportunities that -- well, some opportunities for Europe that were not in our original forecast, offset somewhat by what may be perhaps a little more weakness in the North American market.

Okay. That is helpful. And just as a follow-up, with your Q1 commercial vehicle sales lagging industry growth as you highlighted, is that simply a function of your largest customer losing a good deal of share that you discussed, or have you had any negative content trends or other developments that would have caused you to lose share?

No, we have not had any negative content trends in there. So it is all -- we have not launched anything. As a matter of fact, all our other programs are doing well.

Robert Kosowsky, Sidoti & Co.

Just one last question. What is the total net new business wins or net new business revenue that you are going to have in 2012, and what does it look like for 2013?

I think compared to our -- before you know, we had $195 million for the four years, and we had about 20% of that for 2012. And right now we are seeing that is going to be down roughly about $12 million in 2012. Then that jumps up to that range of about $40 million to $45 million next year, 2013.

So $200 million -- 20% of $200 million less $12 million?

Right.

(Operator Instructions). Rhem Wood, BB&T Capital Markets.

Nice quarter. I jumped in a little bit late. There is a lot of numbers. But just to summarize, it seems to me that you guys in your topline forecast has taken a conservative approach. But even if things were off, you feel like you can adjust your cost structure so you can improve margins sequentially going forward? Is that fair?

That is fair. We have --

That is fair. We have -- it's actually -- in fact, John mentioned the actions taken in Brazil. In fact, it is actually split. Most of the actions we have taken a lot of them in April. We have already reduced 300 people in the direct and indirect in our plant. We have outsourced the wiring harness business that was accomplished in April already. We have taken other actions since we have seen the softness in the market in May that we are going to take probably another $2 million to $3 million of cost out of the Brazil side.

And then we have, in our manufacturing side, we are driving continuous improvement. I mean we actually have migrated from lean and calling it continuous improvement to drive efficiency levels. And so we have got upside coming, and we are doing really the assessing of all indirect labor, direct labor in our wiring plants, and that is showing great progress. And so I think we will benefit from that.

In Europe, with their downside, they have taken cost actions very similar to what they did back in 2008 and 2009 when they saw the market going down.

And the other key thing that we have still is we are monitoring the customer platforms. And we have forecasted that we would have an increase in development expense in the last nine months, and we will clearly temper that based on what we see with the volume coming of our customers. So we will balance the cost structure. As long as the market stays fairly close to where it is, I think we can manage our work costs in a way to drive profitability.

And just one other added point on the wiring operations, we have the ramp-up of the Saltillo facility, which, as that gets more efficient as it finishes its ramp-up phase, that will improve our cost structure there.

That is great color. Thanks for that. And then last, you talked about moving your core products into Brazil into the PST area. What about -- what is the timing for taking the PST products overseas? You mentioned bringing the audio line to Europe and India and to elsewhere. Has the timing on that changed?

I think it will be more looking at the alarm segment first. We have designed -- they have designed a new alarm system within an ASICs chip that we believe will start to look at first the China market and go into that market and then perhaps the Indian market.

We have looked at the European market. Alarm systems are not as an attractive a market proposition over there just because the demand is not there. So that will start to roll out as we look at this. We have got to do our market studies in China and India. And I think that again that will be over -- I don't see any benefit from those things this year in our plans.

Great. Keep up the good work. Thanks for the time.

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

Well, good. Thank you. I would like to thank you for joining us on today's call. As we said in our announcement, we are pleased with the improvement that we have in our businesses. We still have a lot of work to do in our businesses, and our team is aligned around those things. And, as I think as many of the questions came on today's call, we have some initiatives that we will be undertaking over the next several months to drive market performance. And those things will roll out over the -- well, not benefiting this year should benefit us in 2013 and beyond.

So it is an unstable market, but we are doing -- we are managing it and our organization is managing it to control our costs and continue to focus on driving efficiencies into our business. Thank you very much.

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