CTS Corp (CTS) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CTS Corporation 2005 Fourth Quarter Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

And I would now like to turn the conference over to the Director of Investor Relations, Mitch Walorski. Please go ahead, sir

Thank you, Leah. I'm Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation fourth quarter 2005 earnings conference call. Thank you for joining us today. Participating from the Company today are Donald Schwanz, President and CEO, and Vinod Khilnani, Senior Vice President and Chief Financial Officer.

Before beginning the business discussion, I would like to remind our listeners that the conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties was set forth in last evening's press release, and more information can be found in the Company's SEC filings.

To the extent that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanation and reconciliation are available on our website in the Investor Relations section.

I will now turn the discussion over to our CEO, Don Schwanz.

Thank you, Mitch.

Last night we released our fourth quarter financial results, capping another year of sales and earnings growth. For the quarter, sales of 154.6 million were up 8.5% over the fourth quarter last year. This was the ninth consecutive quarter of year over year sales growth. Full year sales of 617.5 million were up 16% over 2004. Fully diluted earnings per share in the quarter were $0.22. This includes $0.03 per share for the impact of a tax expense related to the additional repatriation in Q4 of funds held in foreign jurisdictions. Earnings this past quarter were also impacted by the sale of our low temperature coal-fired ceramics business unit, and the sale of certain excess assets which Vinod will describe in a minute. Excluding these amounts, adjusted quarterly earnings of $0.23 per share can be compared to $0.17 per share in Q4 last year.

While overall 2005 sales results were up significantly over 2004, they were not as strong as we originally projected them to be a year ago. So what happened? In a nut shell, there were four major drivers to this shortfall.

First, wireless infrastructure related sales were significantly below expectations. This included both component sales for infrastructure applications and sales of electronics manufacturing services to infrastructure OEMs. Sales to Motorola alone, our second largest customer, were down over 30 million from original expectations, driven by softer than expected infrastructure demand, mostly out of Asia. In fact, I commented on this in earnings conference calls throughout 2005. Note that component sales for infrastructure applications, while considerably lower than our expectations, were still up year-over-year.

The second factor, our automotive product sales were about 15 million below expectations, driven by customer delays in the launch of our belt tension sensors, and to a lesser extent pedal modules, as well as lower than projected demand for Big Three cars and certain European models where we have above average content.

Third, our sales of components in the mobile handset applications declined about 18 million from 2004, which was faster than we had projected. As we have been consciously exiting this market, we expected a decline. However, an early decision by OEMs to end the life of several phones led to the more rapid fall off in volume.

Finally, in our EMS business, we just plain overestimated volume growth for some of our existing customers and were too optimistic in our expectations of how quickly we could capitalize on the SMTEK acquisition to drive new business capture.

Disappointing as these factors were, I remain optimistic about the fundamental earnings and sales growth picture going forward. Our business base with Motorola, for example, has broadened into a wider variety of applications, reducing the sensitivity to any particular end customer. The delayed automotive product launches have now all occurred and we continue to be successful in broadening our customer base. Handset related sales declines were expected anyway, and never were viewed as a factor in future growth. And finally we have seen EMS acquisition related sales leverage continue to improve through the year and expect it to be positive over the long term.

As has been my practice I want to comment on some recent events and factors that impacted Q4 and that will be important as we look ahead. Beginning with the Automotive market. This market continues to be roiled by high oil prices, bankruptcies and financial difficulties of several OEMs and key suppliers. Fourth quarter automotive sales in both North America and Europe weakened with the Big Three in North America finishing the year down about 2 points in share from last year. This hurt our sales in the quarter by about $1 million. On the positive side, however, we secured a pedal order in Q4 from a major Asian OEM that had not previously been a customer, and more recently we received an order for exhaust gas recirculation sensors for a European OEM that was not a previous customer. These orders reflect our continuing success in broadening our customer base.

There is one recent disappointment that I need to mention. Ford advised us about a week ago that they do not intend to proceed to production with our occupant classification system. This was one of those opportunities that we classified as a whale, would have been a huge gain changer if we could have landed it, but we did not build that assumption into our forward guidance, so the loss, while disappointing, does not alter our expectation of double-digit growth in automotive related sales over the next several years.

In Electronic Components we had an excellent quarter for new infrastructure design wins, capturing 40 new slots for a total of 136 new design wins on the year. This is up 75% over last year. Almost 40% of wins came in 3G wireless applications. From a demand standpoint, we continue to see year over year growth in the infrastructure market, but as I mentioned a moment ago, demand was below original expectations, especially as regards the rate of 3G roll out.

EMS sales were up in the quarter about 21% year over year, though still below earlier expectations, mainly due to the softer than expected sales to existing customers. During the quarter, we captured 5 new customers, three in aerospace and defense, one in industrial, and one in consumer. Quote activity has remained generally strong. During the quarter, our Singapore facility completed the necessary actions to obtain medical qualifications under ISO13485, and they expect to receive the formal certification this quarter. This will be the fourth of our EMS facilities to receive this medical certification.

Before discussing our outlook for 2006, I would like to add some color to our recent announcement regarding the consolidation of our Burn operation into other facilities. The Burn, Indiana operation manufactures both automotive products and electronic components. In previous years, we have opportunistically moved some electronic component production from this facility to Asia. More recently, the enhanced capabilities in our Mexico automotive operation and in Asia have made it possible and advantageous to move the remaining production out of Burn. This consolidation process, which will begin in the first quarter, is expected to be largely completed in the third quarter. Break even on the investment is about one year. So the consolidation will negatively impact 2006, but will be a net benefit to 2007. Vinod will discuss this in more detail in a moment.

Looking ahead to 2006, we expect full year sales growth to be in the range of 6 to 8%, with Electronic Component sales down slightly year over year, and Automotive products and Electronic Manufacturing Services up solidly. The decline in Electronic Component sales continues to be driven by the reduction in handset related sales. Component sales into handset applications were almost 14 million in 2005, and are expected to drop to near zero in 2006. In contrast, sales of non-handset components are expected to grow about 15%.

Note that despite our expectations of sales growth on the year, we anticipate that Q1 sales will be down slightly year over year. This is driven by several unusual factors in the quarter, including lower EMS sales to HP, due in part to RoHS compliance transition issues, as well as a significant drop in handset related component sales, lost sales due to the divestiture of our LTCC operation, and a weaker Automotive market.

Full year diluted EPS, adjusted to exclude charges related to the consolidation of our Burn operations, is expected to be in the range of $0.68 to $0.72. This reflects the impact of equity expensing, which begins this year reducing earnings per share approximately $0.03, and additionally reflects reduced pension income year over year equivalent to $0.06 per share. As we have previously noted, the Burn consolidation expenses are expected to impact earnings $0.08 to $0.09 per share.

Now I'll turn the meeting over to Vinod Khilnani, our CFO, to discuss our financial results in more detail.

Thanks, Don. I'm sure you noted that sales in the fourth quarter were slightly short of our most recent guidance. Even so, earnings and free cash flow came in above our guidance. Results in the quarter, however, were impacted by a couple of unusual items which need to be considered to fully appreciate improvements in our operating performance.

The first material unusual item was repatriation of international cash. In December of 2005, we repatriated approximately 26 million in cash from our international entities under the provisions of the American Jobs Creation Act of 2004. You remember that we had repatriated approximately $50 million in cash in the second quarter of 2005, also under the same program. These unusual repatriations, net of the benefit relating to the reversal of income tax reserves in the second quarter of 2005, had net unfavorable impact of $0.03 per share in the fourth quarter and $0.10 per share for the full year 2005.

The second non-operating item was the previously announced sale of the assets of the Low Temperature Co-fired Ceramic product operations, and the additional sale of some excess equipment. These generated $2.3 million of gain on the sale of assets on the one hand, and approximately $1.1 million of severance costs related to the sale of LTCC operations on the other, thereby favorably affecting earnings by a net $0.02 per share.

Adjusted diluted earnings per share, therefore, were $0.23 in the fourth quarter, and $0.65 for the full year 2005, without the favorable and unfavorable items just discussed. This is a 35% increase year-over-year for the fourth quarter and for the full year 2005, thereby continuing to demonstrate our ability to leverage sales growth and increase earnings at a much higher rate than sales. In making this comparison, please remember that 2004's fully adjusted earnings per share were $0.48, excluding a $0.05 per share gain on the sale of excess Canadian land.

Looking at the fourth quarter of 2005, gross margins at 21.3% were up 0.3% year over year. Higher mix of EMS sales at 59.7% in Q4 2005, versus 53.7% in the same period last year, adversely affected the margins by 1.7 percentage points. In addition, margins were adversely affected by 0.4% due to the LTCC sales-related severance expenses. However, improved margins in both of our business segments, especially in the component and sensor business, more than offset the impact of the unfavorable mix.

SG&A and R&D expenses combined for 13% of sales in the fourth quarter of 2005, 1.6 percentage points lower year-over-year, and 0.5 percentage points lower sequentially as we continue to leverage our operating expenses. Due to the higher level of earnings in the United States, our full year effective tax rate, excluding the unusual repatriation and tax reserve reversal items, was increased to 25% from our earlier estimates and accrual rate of 23%. To catch up, therefore, we had to utilize an effective tax rate of 28% for the fourth quarter earnings.

From the balance sheet perspective, our controllable working capital, which includes account receivables, trade payables and inventories, was 13.7% of sales, 0.5 percentage points lower than the third quarter of 2005, but still approximately 4 million, or 0.7% higher than our target of 13% of sales. Higher inventory levels in EMS and Delphi receivables were the key drivers for the somewhat higher working capital.

Operating cash flow in the quarter was a strong $14.8 million, versus 4.3 million in the same quarter last year. Full year operating cash flow was 44.5 million, or three times the level of 14 million in 2004. Capital expenditures for the full year 2005 at 2.4% of sales, or $15 million, was below our earlier indicated range of 17 million to $20 million, primarily due to the timing of certain capital projects. Free cash flow for full year 2005 at 29.5 million, exceeded our expectations and was well above the level of 1.3 million in 2004, and 16.7 million in 2003. Higher cash earnings and improved working capital were the key drivers. We believe that this strong free cash flow reflects the quality of earnings we generated in 2005.

During the fourth quarter, the Company repurchased approximately 313,000 shares, for approximately $3.8 million. For the full year of 2005, we repurchased approximately 956,400 shares, for $11.3 million, at an average price of $11.80. During the first quarter, we also issued approximately 813,000 shares of common stock in conjunction with the purchase of SMTEK.

Looking ahead into 2006, we see continued improvements in our financial results, driven by sales growth and operational improvements. Gross margins should be stable for the full year, but will end the year stronger as savings from our Burn, Indiana consolidation begins to flow. We are anticipating that our pension income will go down from $7 million in 2005 to 3.8 million in 2006, which equates to a reduction of $0.06 per share.

The new accounting rules around expensing share-based payments, more commonly known as options expensing, beginning in January 2006 will adversely impact our 2006 earnings by approximately $0.03 per share. In addition, launch of our new operations in the Czech Republic are expected to result in start up expenses of approximately $0.04 per share in 2006.

Including these unfavorable non-operating issues, which equate to $0.13 per share, CTS still expects diluted earnings per share to improve to $0.68 to $0.72 in 2006, before any one-time Burns consolidation expenses. Free cash flow again should be a strong 23 million to $26 million, even with full year 2006 capital expenditure of 18 million to 21 million.

And with that, we'll open up the call for your questions.

[OPERATOR INSTRUCTIONS] Our first question is from the line of John Franzreb from Sidoti and Company. Go ahead, please.

John, good morning.

First regarding the guidance, the 6 to 8% in revenue guidance, could you break that down by business segment what your expectations are to get to that top line

Well, as I mentioned, we're expecting both automotive and EMS to be up solidly, automotive in double digits, as I've talked about in the past is an expectation for that area, and in the EMS, it would be -- would approximate high singles.

So it would be high single digits in EMS, and the components and sensors will be up year over year?

Well, the components portion of that segment, electronic components portion is actually slightly down again, driven by the reduction in handsets, our sales of components in the handset market.

Right.

The rest of the component sales are up. Net effect is still down.

So in aggregate that segment you're forecasting have a down year?

Well be that part of it is down. The overall components in segment -- sales in the segment will be up.

Okay. Okay. Secondly, looking at the pension contribution, you said it was $7 million in '05, and you expect expect it to be 3.8 million in '06. I wonder if you could give me the EPS contribution in the fourth quarter of '05 versus the fourth quarter of '04, so I can kind of get an apples to apples sense of how the quarter is doing on a pure operating basis.

From a pension income point of view?

Yes, just give me the EPS number.

The pension income in the in fourth quarter of 2005 was approximately 1.9 million, and that compared with 2.3 million in the fourth quarter of 2004. We had roughly $0.01impact if you compare Q4 '04 and Q4 '05.

And one last question. SMTEK, when you have first acquired it, you threw out a 4 to 6% EPS contribution that almost anniversaried that acquisition. What are your thoughts now about how much in bottom line contribution this thing can give on a normalized run rate?

Well, as you know, that as the year progressed, the operations were -- became more and more consolidated, and it becomes harder and harder to track SMTEK separately, but we did look at it, and concluded that despite somewhat lower than expected sales in 2005 from SMTEK customers, the bottom line was higher than what we had earlier indicated as contribution to CTS consolidated. So the acquisition turned out to be somewhat better than earlier expected from ant accretion point of view.

Great. Okay. Thank you very much, guys.

And the webcast question is from the line of Sid Parakh from the Robins Group.

Good morning, everybody. Good morning. I just have a question on the auto segment of your business. You just identified that you anticipated that auto should grow double digits in 2006. Now, in 2005, it grew about 9%, and from what I heard, you said that it continues to be a difficult market. I mean, are you -- where are you seeing the strength in this division?

Well, fits of all I want to clarify one thing. When we talk about auto, we're talking about in a market context. Our segment is actually electronic components and the sensors portion of the total Company's business. So we don't break it out separately as a segment. Nevertheless, let me comment on it from a market standpoint.

What's driving the growth is new products, primarily, I talked about these before. It's the pedal modules, the belt tension sensors, the actuators, turbocharger sensors, the -- and with that comes from some acquisition of new customers, and observe talked about that. As you know, we have a fairly significant share of our business that comes from the big three, even though we are broadening out our customer base and in 2005, the big three lost share relative to transplants, and we're seeing the big three again soft starting '06, and so that plays into it. But it's offset by the new product growth.

Okay. And also you mentioned that Ford dropped you on the OCS platform. Does it the impact on of your other programs?

No.

It doesn't?

No.

And it's not included in your forecast, was it?

No.

It never was.

Never was, right.

Can you talk a little bit beyond 2006 and say what you see happening in the auto industry? Do you think the current challenges persist, or are you anticipating some sort of change? I know it's far out, but I'm just trying to get a sense of what you're planning for.

Sid, we have never commented or given any guidance or color beyond the 12-month period, so harder for us to comment or give any guidance or color beyond 2006. We can say this. We have talked about the fact that we've been very successful winning platform positions with new products, and we've talked about that in the past. And as you know, many of these, you win the position, and the actual launch of the product on the platform might be 18 months or two years out, and it ramps up, and there's pretty good visibility from that standpoint, and there's pretty good stability to those kinds of things. The market demand in general, obviously fluctuates a little bit from year to year and given manufacturers go up and down, so that could affect the outcome, but when we look at the success we've had with new products, we have stated that we expect to see our automotive products grow on average over the next several years in the double digit range. And I don't see what is going on in the market today as changing that outlook dramatically.

Okay. Can you also tell me how much was HP in terms of say percentage revenues for the quarter and the year?

The percent?

Yes. If I recall it right, the concentration with HP was sort of trending lower.

Yes. Yes.

Okay.

The -- we can look at the percent and see, but HP sales in the -- if you look at full year 2005, were close to 173 million 174 million, very similar to the number which was 177. So the unit volume was up, but because of pricing, the dollar volume is slightly lower than '04.

Okay. And Motorola. ?

Motorola as we talked about, the big EMS base station volumes which we did not get in '05, that was a key driver in that, because of that, Motorola sales in the EMS segment were --

We don't break it out.

Okay. We haven't broken it out. So if you just look at total Motorola -- do we have it? Full year 2005 was 50 million, compared to 2004 of 70, so that's a 20 million drop.

Okay.

Primarily coming from what we have talked about consistently all year 2005, about the volume in China.

It was driven by one customer in China.

Can you say more specifically about that particular customer yet, or would you not --

We do not expect that - volumes from that to I'll say, come back.

Okay.

The way we had expected them originally in 2005. I'm not saying the customer is not going to continue to buy, but we had expected some pretty significant buys in '05, that is not in our expectations going forward.

But can that still -- I mean come in as a surprise at all?

Anything can happen. I didn't expect it to not to occur in '05, and I have no clue.

What I'm trying to guess is, if the business is there, its yours.

I think there have been some indications that they're going to shift their capital purchases away from CDMA, which is what we were supplying into the GSM side, and I don't know who they would go to as a provider for that. We do work in the GSM area as well as the CDMA area, but I don't really know how it --

Depending on where they go, we will participate in that, but the level of participation can vary. And coming back to your earlier question, Sid, Hewlett-Packard business as a percent of total company was 33% in 2004, and came down to 28% in 2005 as we continued to diversify the customer base.

Also one final question is can you talk a little bit about your pension return and discount assumptions, and also whether that changes any of the outlook as far as funding goes for the plan?

Easier to answer the funding thing. We're still considerably overfunded in our defined benefit pensions, and the last projections we saw from our external actuaries people indicated that there is essentially very low or no possibility of any need for funding over the next five, six, seven years. So from a cash flow and funding point of view, we don't see that happening over the next four or five years, at least. From an assumptions point of view, we again take the guidance from Hewitt based on our liabilities going forward and looking at how the funds are invested, and we are fairly middle of the path from our assumptions point of view. Our returns are assuming that our pension funds would earn roughly 8.5% a turn, and I believe the discount rate to discount the future liabilities is around 6%. And we do run sensitivities of 25 basis points change in that number does not have a substantial impact on our numbers.

Okay. Thank you very much.

And our next question is from the line of Kevin Kessel from Bear Stearns. Please go ahead.

Good morning.

Good morning, Kevin.

Again, going back to the gross margins, when I take a look at that, and I think you said your assumptions are for that to be relatively flat on the year over over year basis, but obviously loaded towards the back half of the year in terms of improvements from burn. So when I take look at that, one of the things I'm wondering here is the start up expenses from the Czech Republic having a negative impact. I'm wondering how that's going to be allocated. It seems like -- I know you guys announced it in October, it's supposed to be up and running by the middle of the year, but sounds you're expecting about 1.6 million or so in start up expenses. Is that heavily loaded toward this March quarter? Is it evenly distributed in the first half of the year?

I think it to some extent spreads over full year, but the heavier pieces are going to be in the first two to two if and a half quarter, so first and second quarter will probably take a disproportionate hit.

And then going back to what you said earlier on HP. You said there were Rojas transition issues. Can you expand on that, please?

As understand it, there are some customers that are saying that they want the Rojas compliant versions, and some customers are not pushing for that, and that creates just transition issues for them, in terms of their ability to -- I think, as I understand it, their ability to meet the needs of all of the customers in the quarter while they're still transitioning these products.

So that will negatively impact in March for you guys as a kind of hold up and figure out what the customers want?

Yes, we see sales lower in the efficient because of that.

My question is, you guys Rojas compliant today is that not true?

Yes.

So it's no issue on your end?

No, it's not.

It's just customers.

Right

And what they're requesting. At this point is there an order of magnitude in terms of what you're expecting storage and them to be down percentage wise December versus March, or maybe just EMS as a result of this?

Well, you look at it in the context of year over year and and the quarter, it's a pretty significant driver.

Down double digits year over year?

No, it's not that much, but it's a significant driver.

Okay.

And and of it -- I don't mean to imply it's all due to that, because the first quarter of 2005 was unusually high from the normal pattern of things with -- demand with HP, so there was things that drove that one up, and there are some things that are suit of driving this one down, so it's not all due to that issue.

And the relationship that remains still strong, no changes?

Oh, yes.

Okay. And then going -- looking at the EMS wins, you said five wins?

Yes.

Any rough guesstimate in terms of what that could contribute on an annual basis?

I don't have that, I'm sorry.

Okay. You also said, you know, three aerospace, one industrial, one consumer. Can you talk about what that consumer product type is, what kind of products are you guys doing in consumer today?

I don't know.

Okay. And then, Vinod, when I look at again the start up expenses were they primarily cost of goods sold focused, or also SG&A?

I think there will some SG&A also, Kevin.

Okay. Where do you expect SG&A dollars to kind of be as we go forward here? Is it 20 million, 20 to 21 million range kind of where you're thinking?

Yes, thing like we have said earlier, you know, excluding unusual things like we are adding a facility or something like that, we expect our SG&A expenses to essentially grow with inflation, and as long as we are growing sales faster than inflation, as Don talked about, we should continue to see some leveraging in that area.

Okay. And just -- if I could get what -- I know that you guys haven't been breaking it out very specifically, but do you have an estimate for what SMTEK sails were there in the first quarter, what they were for the full year?

Full year, that number was a little over 100 million, and that's 11 months, obviously, and the number is becoming a little bit muddier as they have progressed, frankly, because we have consolidated plans and shared plans, and shared, obviously, as we integrated them more and more, it became tougher and tougher for us to very clean break it out, but approximately the full year or 11-month sales for 2005 were a little over 100 million.

Okay. Great. I'll let somebody else jump on.

And we go to the line of Greg McGowan from Value Line. Please go ahead.

Thank you. Looking at components and sensors, I was wondering if you could tell me how much the sequential margin improvement, excluding the gain associated with divestiture, how much of the margin improvement was mix versus better cost controls?

You're talking about only component and sensors?

Correct.

Okay. If you look a component sensors, and we talk about operating margins, and not gross margins, but, you can extrapolate that and draw your conclusions. If you look at from a -- from a quarter over quarter point of view, look at Q4 2005 and Q4 2004, the operating margins imprisoned almost double from 10.5 to 19.5.

Right.

If you -- if you look at sequentially Q3 '05 versus Q4 '05, they went from 11.8 to 19.5. And there is an element of mix, it, as we are growing our automotive sales faster, and as within in the electronic components, as Don has pointed out several times, that we continue to come out of the handset products and frankly 2006 will be the last year when we are doing comparisons with '07, that will be behind us. And as we grow our infrastructure sales and lower our handset sales, that is also giving us a favorable contribution to improved margins.

Right.

So those mix improvements within that segment, combined with leveraging of the expense base as we increase our sales, are both helping to improve the margins.

Okay. But looking fourth quarter of '05, versus fourth quarter of '03, I believe there is -- you cited that there was effective -- excuse me. There was some improvement due to cost savings that you had, some cost restructuring initiatives. Can you tell me how much of the margin improvement on a sequentially basis was the better mix versus the cost controls? Can you break that out at all?

We have not traditionally broken it out within the segment, but I think both were significant.

Do you consider this 15.7% as margins as sustainable?

You mean 19.5?

I'm sorry, yes.

I think -- I think we -- we have not, again, broken out individual segments. We have consistently said in the last we'll a few quarters that we have improved our segment margins quarter over quarter and year over year for the last several years, and the pressure at the top level in our margins was primarily driven by a bigger percent of sales going into EMS and so the mix between EMS and component and sensor business had somewhat negative impact on the consolidated margin.

Okay. All right. Thank you.

[OPERATOR INSTRUCTIONS] We go back to the line of Kevin Kessel. Please go ahead.

When we look at the tax rate going forward, should that be now 25%?

Yes.

Okay. And then in terms of depreciation and amortization, Cane get what that was in the quarter and then what your expectations are for 2006?

Depreciation in the quarter was 6.4 million, compared to Q4 of '04 was 5.9.

Okay.

And let me give you amortization, also. Amortization expense in Q4 '05 was 800,000 versus 600,000 in the same quarter 2004.

Okay.

On a full-year basis, therefore, the depreciation expense in '05 is 23.6, versus 23.8, in 2004, so fairly similar, you know, that comparing '04 versus '05, we added SMTEK into that, and amortization expense in '05 full year was 3.4 million versus 2.3 million in '04, and the delta was caused primarily due to SMTEK acquisition.

And then for '06, you're thinking it should be -- you're obviously going to have to depreciate the new plant as it comes on and the equipment there.

I don't see a substantial change between '05 and '06.

Okay. Okay.

And there should be very little impact because of the new location, because that location would have lease facilities and a lot of equipment are transferred from one entity to another. So very little incremental depreciation due to Czech start up.

Okay. In terms of -- in terms of the OCS system, can you guys expand at all in terms of why you believe Ford decided not proceed with that, and do you believe they were going to proceed with another supplier?

Well, they have to have some solution, because its mandated.

Mandated by 2008?

It's mandated right now in vehicles that you have an occupancy classification system. What we were working on was new generation system for them, so they have several options. They can obviously stay with what they are doing right now, and there are several other technologies out there, and, you know, to be honest, if you had asked us in December what we thought, I thought the odds were that it was going to go forward, and then things changed fairly quickly. I don't know to what extent resource issues might be playing into what they're doing and what they can handle in terms of change versus other issues. There was, from a performance standpoint, we were passing all of the tests, et cetera, so that was not an issue, so I don't know what they're doing for a solution, but they have to have one.

Your solution was lower cost than their existing solution, correct?

It's my understanding.

Right. And while you say they don't plan to proceed right now, does that early mean it is in effect dead, or can they come back to you at a later point in time and reconsider?

They can come back.

Well, they con come back.

But it's unlikely at this point?

I would think so.

All right. And then in total the share repurchase, Vinod, is there any expiration at all on that authorization, and if so when is it?

I believe it's for two years.

Okay. And the LTCC is completely off the books now, correct?

That's correct.

Did have it any sequential impact in terms of revenue, like a negative sequential impact in terms of transitioning out, there was some in September but zero in December?

Minor.

Yes. There was essentially nothing in the last quart per.

So nothing in December, and what maybe a million or two in September, or nothing in September either?

I think -- I think there was probably a million dollars worth of impact.

Okay. And my last question is on the credit line, it looks like you paid that down to zero. Is that on tap now, is that correct?

That is correct.

Great. Thanks so much.

And we also paid part of our 6.5% coupon convert.

You paid a part of that down?

Yes. We -- remember that originally was 25 million, we had paid last year, I believe, 5 million, we started the year with 20, and we have now paid 14.5 million of that 20, so I have only 5.5 million left on that original 25 million paper.

Only 5.5 million let on the 6.5?

6.5 coupon.

6.5, right, coupon. You have 5.5 left. And I guess the intention there is to what, probably take that down in '06? Are you able to take it all the way out?

We can't force them to put it to us.

When is that?

Because they have to put it to us, we cannot call it without giving them some kind of a premium, and so we were -- we encouraged them put the 14.5 million, and they did it, and it was in our favor from an arbitrage point of view interest rate, because 6.5 seems a little high to us, and we will continue to encourage the last one to put it so that we can pay it off.

If there's just one holder is what you're saying?

Yes.

Great, thank you.

and we also go back to the line of John Franzreb. Please go ahead. Could you just discuss your appetite for acquisitions in the year ahead?

John, we are always scanning for opportunities. So we look at them every day, every week, all the time, across the businesses, and if we find one that we think is -- represents a good opportunity for the shareholders, with clear value capture, we'll do it. I can't say -- we don't feel compelled to do anything. It's -- it is an important part of our strategy going forward, but we're going to be careful, and make sure it's a good one.

So the pipeline isn't active, Don?

The pipeline is always active.

Oh, it is.

Yes.

Okay. Would you prioritize which --

In the sense that we're always, you know, out there looking, and talking to people, and stuff like that.

And evaluating.

Yes. So --

If given a preference, would you prefer to add to the EMS side or the component side of the business?

I don't have a preference that way. I can see acquisitions benefiting either side. It just depends on finding the right one.

Okay. Thank you very much.

And we have no further questions. You may continue.

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