CTS Corp (CTS) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2008 CTS Corporation Earnings Call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the conference over to the Director of Planning and Investor Relations, Mitch Walorski. Please, go ahead.

Thank you, Marla. I'm Mitch Walorski, Director of Planning and Investor Relations, and I will host the CTS Corporation Fourth Quarter 2008 Earnings Conference Call. Thank you for joining us today. Participating from the Company today are Vinod Khilnani, President and CEO, and Donna Belusar, 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 explanations and reconciliation are available on our website in the Investor Relations section. I will now turn the discussion over to our CEO, Vinod Khilnani.

Thanks, Mitch. And good morning, everyone.

Last evening we released our fourth quarter and full year financial results. I am pleased to report that we recorded a stronger than expected fourth quarter with earnings per share and free cash flow both exceeding our earlier projections. This was especially gratifying given the extremely difficult global economic environment which has been adversely affecting our electronic component and automotive sensor segment exceptionally hard.

Fourth quarter 2008 GAAP and adjusted diluted earnings per share were $0.16 and $0.15 respectively. Our adjusted EPS excludes previously announced restructuring and related charges of $0.04 per share and a favorable adjustment to our tax rate of $0.05 per share. Full year adjusted diluted earnings per share of $0.77 topped our previous guidance range of $0.71 to $0.76. GAAP earnings for full year 2008 were $0.81 per diluted share as a couple of favorable tax adjustments more than offset the impact of our restructuring and related charges in 2008. Donna will discuss the favorable tax adjustments in more detail a little later.

Sales in the fourth quarter of $162.8 million were 4.2% lower sequentially which was in line with our guidance of a sequential decline of 3% to 5%. Full year sales at $691.7 million were up $5.8 million or approximately 1% year over year. On a segment basis, Components and Sensors sales in the fourth quarter were $58 million, down 18% from last year, primarily due to a sharp but expected 30% decline in the automotive sensor sales while electronic component sales at $27.3 million in the fourth quarter were up slightly from last year. EMS segment sales in the fourth quarter, on the other hand, were up 7.5% sequentially.

Let me now comment on the business segment in more detail. Within our Components and Sensors segment, automotive sensors represented 19% of total CTS sales in the fourth quarter. As you all know, the automotive industry is experiencing drastically lower volumes worldwide. Light vehicle sales were down 35% in the US and approximately 20% lower in Western Europe in the fourth quarter of 2008 compared to the same period in 2007. Automotive OEMs have been shutting down their plants worldwide to cut production and they've further reduced their purchases from the component suppliers to lower their inventories at the year end.

The grim automotive industry environment globally is clearly effecting our near-term sensor shipments; however, we continue to succeed in diversifying our customer base, winning new programs and broadening the application of our sensor technology into commercial vehicles.

We won tenure awards in the fourth quarter, mostly from Asian automotive OEMs. Our total sales to the Detroit three automotive OEMs are only 5% of total CTS sales in the fourth quarter versus 9% in the same period of 2007. Our full year sales to Toyota and Honda combined doubled from $13 million in 2007 to $27 million in 2008. Our success in diversifying our customer base plus broader application of our sensor technology is giving us renewed confidence in the growth and profitability of this business beyond 2009 when many new platforms will launch.

Continuing with Components and Sensors segment, sales of electronic components in fourth quarter 2008 were essentially flat year over year due to the challenging economic environment and program push outs by some OEMs; however, we recorded 71 new infrastructure design wins in the fourth quarter, making full year 2008 a record year with 223 filter, oscillator, and RF module design wins for applications like 3G wireless, WiMAX, and repeaters which boost wireless technology.

We believe design wins are a strong leading indicator of future program revenues. In our EMS business, sales at $104.8 million were up 7.5% sequentially. As expected, sales to Hewlett-Packard declined by $19.7 million in the fourth quarter of 2008 year over year due to previously discussed end of life process which started in early 2007. Our sales to HP in the fourth quarter of $11.9 million were only 11% of our total EMS sales and around 7% of our total CTS sales. We have drastically reduced our customer concentration and based on the current run rate, there's no single customer at or above 10% of our total sales and all, except two of our customers, are below 5% of our total sales individually.

Excluding HP, EMS sales in the quarter were up approximately 23% year over year. One-third of this growth was organic due to new and increased business in our focus areas of defense and medical. The remaining two-thirds of the sales growth came from the acquisition of Orion in early 2008.

Given the uncertain economic environment affecting many of our customers and lack of forward visibility, we are proactively managing our cost structure and cash flows on the one hand while redoubling our efforts to introduce new products and look for growth opportunities on the other. CTS has already taken steps to keep its cost structure in line with the lower volumes driven by the weak macroeconomic conditions.

In addition to the restructuring activities we started in the third quarter and completed in the fourth quarter which reduced our global headcount by approximately 10%, we have also instituted other actions including suspension of 401K Company match, cancelation of all 2009 salary increases worldwide, and a temporary 5% salary reduction for our salaried exempt workforce at all locations in the US, Canada, and UK. Our strong performance in the fourth quarter is partially an indicator of cost containment actions we took quickly and early to lower our cost structure.

Working capital and capital expenditures have also been tightened and are being managed more efficiently. We continue to watch the economy and the business conditions closely and will continue to take all necessary prudent actions proactively to keep ourselves ahead of the curve as much as possible.

Given what we know today, we expect further deterioration in global auto production and sales volumes in the first quarter of 2009. Electronic component markets are also expected to decline in 2009. EMS sales, however, are expected to be more stable, helped by resiliency in the medical and defense and aerospace markets.

Overall, we expect our full year 2009 sales to decline 12% to 18% from 2008 to a range of $565 million to $610 million. Our diluted earnings per share are projected to be in the range of $0.15 to $0.25. These projections are based on a tough first quarter with economic conditions improving gradually in the third and fourth quarters.

Now I will turn the meeting over to Donna Belusar, our CFO, who will provide further details regarding our financial results. Donna?

Thank you very much, Vinod, and welcome to everyone. We recorded a stronger than expected fourth quarter. Our fourth quarter 2008 finished with sales of $162.8 million, down 4.2% from sales in the previous quarter and down 8.7% from sales in the fourth quarter of 2007. Net earnings of $5.7 million included approximately $2.1 million of pre-tax restructuring and related charges, as well as a tax benefit of approximately $1.4 million which I will expand upon shortly. We delivered $0.16 per diluted earnings per share in the fourth quarter of 2008.

First, I will summarize the restructuring and related charges we incurred in fourth quarter 2008 which are part of the restructuring actions we announced on October 8th, 2008. These actions were completed as part of restructuring of certain operations to drive further efficiencies in cost savings. As previously disclosed in our third quarter earnings, we incurred $3.5 million or approximately $0.06 per diluted share in restructuring and related pre-tax charges in the third quarter 2008.

In the fourth quarter 2008, the pre-tax restructuring charge was $2.1 million or approximately $0.035 per share. The combined total of these charges for both third and fourth quarters' actions were $5.6 million or $0.10 per diluted share. These total actions are higher than our previous estimate of $4.4 million as we proactively addressed our cost structure and operating -- operations to maintain our competitive flexibility in today's uncertain business climate. Overall, our global headcount has been reduced by approximately 10% in the face of these difficult market conditions.

In addition, during the fourth quarter 2008, we recognized a discreet period tax benefit of $1.5 million or approximately $0.05 per diluted share primarily related to the release of deferred tax credit made possible with the December 12th, 2008 signing of the new protocol to the US-Canadian Tax Treaty. As you may recall, in the third quarter of 2008, we also recorded a non-cash tax benefit of $4 million resulting from the release of a valuation allowance due to sustained profitability of an Asian location. The combined total of these third and fourth quarter tax benefits was $5.5 million or approximately $0.14 per diluted share.

Now I'd like to expand upon our results from fourth quarter 2008 and wrap up the overall full year financial performance for 2008. Full year 2008 sales were $691.7 million which is an increase of 0.8% from 2007 sales. For the full year 2008, we delivered $0.81 diluted earnings per share versus the full year 2007 diluted earnings per share of $0.66. This is a 23% increase over 2007. The adjusted diluted earnings per share excluding the cumulative restructuring and related and cumulative tax benefits just discussed were $0.77 per diluted share which is 8.5% higher than the full year 2007 adjusted diluted earnings per share of $0.71 per diluted share.

These total year end results, both the top line sales and earnings per share, are positive in spite of an overall economic and financial environment that has deteriorated significantly.

Our top line sales for fourth quarter 2008 were $162.8 million. Gross margin as a percentage of sales was 18.3% in the fourth quarter compared to 19.6% in the third quarter 2008. The decline quarter to quarter in gross margin was due to an unfavorable segment mix impact as we saw a steeper decline in sales in the Components and Sensors segment which inherently has higher gross profit margins than the EMS segment. Sales in our EMS segment represented 54% of our total sales in the fourth quarter compared to 57% in the previous quarter while sales in the Components and Sensors segment were 36% of our total sales compared to 43% in the prior quarter.

Actions we have taken have allowed us to lower our Selling, General, and Administrative expenses, or SG&A, to a level of $19.1 million or approximately 11.8% of sales in the fourth quarter of 2008 which is down from $20.8 million or 12.2% of sales in the third quarter of 2008. Research and Development, or R&D, expenses were $4.7 million or 2.9% of sales in the fourth quarter of 2008 versus $3.6 million or 2% of sales compared to the same period last year.

This year over year increase is primarily due to our continued focus on developing new commercial applications for our sensor technology and initiatives driving opportunities in our electronic components products. Despite a decline in sales and the unfavorable segment mix with the steep decrease in sales in the Components and Sensors segment, particularly the automotive sensors, we were still able to take actions and report adjusted operating earnings of $5.9 million or 3.6% of sales for the fourth quarter 2008.

Total other expenses, which included items such as interest expense, interest income, currency translation gain or loss, and other non-operational expenses or gains were $0.2 million income for the fourth quarter 2008. This was an improvement of $1.2 million sequentially from the third quarter and is primarily the result of a $0.04 per share gain realized on the discounted purchases in the open market of $27.5 million of the $60 million convertible debt which I will talk about later.

If we exclude the discreet tax benefits we realized in 2008 for the specific Asian valuation allowance in the third quarter and the US-Canada Treaty in the fourth quarter, which we consider both of these to be one-time in nature, our adjusted full year tax rate would be approximately 17%.

To summarize our full year 2008 consolidated earnings, we delivered net earnings of $29.9 million or $0.81 per diluted share, adjusted net earnings, excluding restructuring and related charges and the tax benefits, was $28.3 million or $0.77 per diluted share. The $0.77 per diluted share in 2008 represents an 8% increase over the 2007 adjusted net earnings of $0.71 per diluted share.

I would now like to shift our focus to CTS's balance sheet. 2008 finished with a solid financial performance. Our controllable working capital which includes accounts receivable and inventory less accounts payable for year end 2008 was $93.8 million or 14% of annualized sales. This is an improvement from 17% in the third quarter 2008 from the working capital initiatives we had put in place in both third and fourth quarters to streamline operations, to reduce our inventories, and to improve accounts receivable and accounts payable. Inventories decreased by $17.2 million from the third quarter 2008 to finish the year at $70.9 million. Accounts receivable and accounts payable met our internal expectations as we worked closely with both suppliers and our customers.

Throughout 2008 we invested in Research and Development and capital expenditures as we continued to delivered leading technology in our Components and Sensors product families. In the fourth quarter, we invested $4 million in capital expenditures. Our full year 2008 capital expenditures was $17.7 million. We will continue with our effective management of working capital. This will include reducing capital expenditures to a targeted range of a 25% to 40% reduction from the 2008 spending levels to approximately a range of $10 million to $13 million for 2009 which is really due to the lower demand and the fact that we have adequate capacity.

Operating cash flow in the fourth quarter was $18.6 million; with capital expenditures of $4 million, our free cash flow, which is operating cash flow less capital expenditures, was $14.6 million in the fourth quarter 2008. Our ending cash and cash equivalents was $44.6 million. With an uncertain economic environment, 2009 will be a difficult year for us to predict the financial performance; however, we do expect to have a positive free cash flow.

Our debt structure reduced from the third quarter 2008 to $100 million to a year end of $80.5 million with a 22.5% debt to capitalization ratio. At year end we had $52 million in available credit in the US revolving credit facility, an additional $12.6 million available under our international credit facilities to support our operational funding requirements. In addition, as I stated earlier, we had $44.6 million in cash and cash equivalents in various parts of the Company.

As previously mentioned, we purchased at a discount on the open market, $27.5 million of the convertible debt, leaving a balance of $32.5 million. In addition to the $32.5 million convert, our bank debt is $48 million which is drawn against the $100 million unsecured credit agreement.

There is very limited visibility and weak demand in the global economic market. In response to anticipated lower sales, we will continue to have diligent focus on our efforts to reduce manufacturing cost and operating expenses, evident by the proactive restructuring actions we took in 2008, as well as the additional management actions in the area of compensation and spending which Vinod talked about.

While we expect 2009 to be very challenging, our full year diluted earnings to be in the range of $0.15 to $0.25 per share, the first quarter will be under severe pressure and we are expecting to show a loss. We expect continued downward sales pressure and are also expecting our full year effective tax rate to be in the range of 22% to 24% with the increase primarily due to some tax holidays expiring in our Asian jurisdictions, along with anticipated higher earnings and higher tax jurisdictions, like the United States.

In addition, in 2009, our pension income will be lower than 2008 as the pension assets are down year to year consistent with yield around market declines; however, despite this, we are still overfunded in our qualified pension plan and do not anticipate any cash infusion in the near future. CTS's financial position remains solid with positive cash balances and flexibility in our liquidity. We are well-positioned to react to the challenging market conditions ahead.

This sums up a quick overview of the fourth quarter and the full year. With that, I would like to now open the call for your questions. Thank you.

Thank you. (Operator Instructions) We'll go to the line of John Franzreb with Sidoti and Company. Please, go ahead.

Good morning, Donna, Vinod.

Good morning, John.

Good morning, John.

Actually, my first question is surrounding the EMS business, the organic revenue growth in the fourth quarter. I think if I heard correctly it was around 9% or so? Does that sound right?

I think that sounds about right.

Okay. Could you talk a little bit about trends in the EMS sector? I know we had some of the larger competitors report last night, it seemed like they had a down quarter. You seem to be bucking that trend. Can you talk a little bit about what's differentiating you versus some of the more well-known names in that sector?

John, I will tell you, as we have said in the past, that EMS business, it's easier to talk about trends on an annual basis, sometimes difficult to talk about trends on a quarterly basis because, as we have said, EMS business tends to be lumpy. Having said that, we had sales growth, as I indicated in my comments, more in defense and aerospace and medical arenas and what we are finding out is that medical and defense areas are staying in a better shape than computers or communication or industrial.

We do have industrial customers which clearly saw their demand go down and did affect us adversely; however, we were able to more than offset that with either customers in defense which increased purchases from us. We also saw at least one example where CTS benefited from the weakness of a competitor where the competitor had some cash difficulties and I believe the bank took over one of their facilities and closed them down and we were able to step in and because of our global footprint, were able to convince the customer that CTS is a better EMS supplier than their existing supplier. So, it's a combination of those two kind of things which helped us in the fourth quarter and full year.

Wow. That's very -- now, you said we should -- kind of look to -- a small vote, you know, maybe on an annualized basis. As companies shutter production, are they more apt to outsource material before bringing production back on themselves or are they more apt to keep as much production in house as possible. What's your kind of assessment on the EMS side of the business, what they're more likely to do?

I think it can go either way. We have seen examples where companies when they are under increased cost pressure tend to revisit some of their decisions and they outsource some of the production to improve their margins. We have also seen examples where a customer had excess capacity sitting around and they were already cutting their manning levels and to avoid further cuts, they were inclined to bring the production back into their own facilities to keep their capacity at a higher level and keep employment higher. So, it's a case by case kind of a situation and we have seen examples going both ways.

Okay. Could you just talk a little bit about the strength in your wireless infrastructure sales and the component side of the market? What's driving that?

Wireless business, we also saw examples where the wireless projects were pushed out. We saw some push outs from third quarter 2008. Fourth quarter 2008 to first quarter and then some programs were pushed out from first quarter to second quarter. So, we did see some push outs. But on the other hand, we also saw some pockets of strength in the wireless infrastructure markets, especially in Asia, where I believe there will still be growth opportunities in countries like China and India which are still continuing to expand their wireless networks. So, their growth rate is down, nevertheless, they are still growing. So, that is benefiting us since we have now customers who are taking advantage of infrastructure growth in countries like China and India.

Can you kind of address on both segments what your order trends look like for the month of January?

You know, as Donna pointed out and we pointed out, compared to in the past, we feel that the forward visibility is extremely poor. It's clearly much worse than in the past. So, although we have given guidance, our confidence levels as to how the order rate would look like in March and beyond March is frankly very limited. January is clearly way down from January of 2008 as expected.

So, in some areas, like automotive, people announced plant shutdowns, we knew in December timeframe that those extended plant shutdowns would straddle 2007, 2008, and 2009 and they would not come back and open those manufacturing facilities in January. As you well know, we also have some automotive OEMs who have already announced shutdowns which go in February and March timeframe.

So, first quarter will be interesting to watch. January is clearly starting off extremely slow, as expected. I think the key thing to watch would be March and April and we hope to see some stabilization of the deterioration in the second quarter and as we indicated, we expect some very modest recovery in the third quarter and fourth quarter and as Donna said, we will be watching it very closely and act accordingly.

Thanks a lot, Vinod. I'll get back into queue.

Thanks, John.

Thank you. Our next question, we'll go to the line of Hendi Susanto with Gabelli. Please, go ahead.

Hi, Vinod. Hi, Donna.

Hi, Hendi.

Good morning.

Good morning. I have a question. How much impact of inventory reduction do you see in the EMS markets?

If you're talking about the impact on our sales because people are reducing inventory, I don't believe we saw a large impact on our sales because other people were lowering inventories; however, we did see impact on our Components and Sensors side of the business and we believe that especially starting from November and December and continuing in January, our sales were effected not only because the overall demand was low, but I think that got magnified because in addition to low demand, there was inventory in the supply chain and the customer stopped ordering because they were trying to bleed their inventory. We believe that our impact was magnified and probably will continue to be magnified in the first quarter because we will be effected, not only by lower demand, but of customers continuing to bring their inventories down.

Okay. My second question, when you mentioned about some sustainable type of growth in defense and aerospace and you look at your backlog, how much do you see potential revenue stream from recurring revenue, contracts, or awards?

Hendi, our contracts are longer-term in defense. We have said in the past that one reason we like the defense side of EMS is because the business tends to be more sticky in the medical and defense side. In other words, people will not move around for small changes in the prices from one vendor to another or one EMS supplier to another because those are obviously mission-critical components or sensitive components in the medical area. So, that is more sticky. We do rely on those projections more than others. Having said that, our forward visibility on exactly what the sales would be continues to move around. People will give us an estimate of what they will pull from us in EMS on medical and defense, but it's very easy for them to shift it from one month to another or one quarter to another. We have a high level of confidence on medical and defense side of the business; however, that doesn't necessarily mean that we have a very reliable forward back order which we can use to predict our sales on a quarterly basis.

Okay. Given the potential sales decline coming ahead in the first quarter, I assume that you will have a low factory utilization. How much gross margin impact will you expect out of that?

You know, we don't give guidance on a quarterly basis, so I probably will not like to break that precedence. All we are able to say at this point is that first quarter is traditionally our weakest quarter, on top of it, we will probably see from an economic conditions point of view the toughest first quarter. You combine those two things and our current expectations are that we will have a loss but we're not in a position to give you a better feel of the magnitude of that.

Thank you.

You're welcome.

And next we do have a question from the line of [Tim Hall], a private investor. Please, go ahead.

Yes. Thank you. I wanted to know with the 2009 guidance of $0.15 to $0.25, what does that translate into for an EBITDA guidance given the tax rate and all the different moving parts? What does EBITDA come out to if that's the guidance for earnings per share?

Tim, I don't have that number handy. I will give you a very broad, rough estimate. My guess would be that that number would roughly translate to maybe a $40 million annual EBITDA kind of number.

Okay. That's helpful.

In that range. We frankly -- that's a very good question. We have that information, we just don't have it on our fingertips right now.

Okay. The second question was what is the depreciation-amortization run rate for '09?

In 2008, when you look at our depreciation and amortization, we averaged around $5 million, a little over $5 million, $5.5 million per quarter, the combination of depreciation and amortization. That is driven by an investment of $17.7 million of capitalization in 2008. When you go look forward into 2009, which we've shared in our guidance, we expect to reduce our capitalization expenditures 30% to 40% going over to 2009. So, your $5.5 million average run rate per quarter is going to come down slightly going to 2009 because our investments are being lowered.

That was very helpful.

Thank you.

Those were my two questions. Thank you.

Next we'll go to the line of Roger Chuchen with Weiss. Please, go ahead.

Hi, everybody. Great job in the fourth quarter and the cost discipline.

Thanks, Roger.

Thank you.

I just have two questions. Number one, I'm just curious if you could talk to how much savings -- cost savings were we able to realize in the fourth quarter and how much is left for '09 just in the context of everything you're working on right now?

That is a good question. Thank you because the leadership team of CTS, as well as all the operational leaders of the Company have diligently addressed aggressive cost action in 2008. Over -- when you look at 2008, as I said, we did about $6 million for the full year in restructuring. When we announced it in October of 2008, our intention to expand upon that, we committed and identified, we thought we'd have about a two year payback from those restructuring actions. We did realize a little bit in the third quarter and an additional in the fourth quarter, but in the fourth quarter, we announced them so you really will see those savings flowing through to a 2009 time period. But we did see some.

If we had to give you a wild guess, I would say two-thirds of those savings did begin to flow in the fourth quarter and probably one-third additional ones will come next year.

Okay. And you said it's a two year payback, right? We're talking --

Approximately.

Approximately a two year payback. Yes.

Okay. And how about just in light of more challenges ahead, as you pointed out, could you talk about other, potentially other restructuring activities and how we think about the magnitude and nature of those relative to what we announced in the fourth quarter?

Roger, you know, in Q3 we did restructuring. In Q4, we did more compensation kind of things which we talked about in the press release, 401K matches and things like that. Anything beyond that we will --- we are continuing to watch it and look at it and we don't have anything specific to announce at this point, but we probably will keep a close eye on our business conditions and determine those additional actions as and when the conditions change.

Alright. And also my second question is it seems like in the fourth quarter '08, despite all the macro headwinds, we were able to come in above the high end of the EPS guidance which is certainly exemplary because I don't know too many companies that were able to do that. Is it fair to say that just in the context of this full year '09 EPS guidance, the approach behind is very similar to how you looked at 4Q?

I wouldn't go that far. I will give you --- I will repeat a couple of things that Donna said. One thing is in the fourth quarter, we had help from getting the converts. So, we had the discount from them. So, we took advantage of our positive liquidity and took that off the market at a very attractive discount. That helped us. As Donna pointed out, we had a lower effective tax rate which helped us.

So, you know, we had some of those things and we probably expanded our restructuring because the restructuring which we ended up doing in 2008 was a little bit higher than what Donna had talked about in the third quarter. So, we did those things and we were able to report a very good quarter. We keep all those things in mind and we came up with guidance. I don't think we can tell you to rely on the guidance any more or any less than what we have put in the earnings release.

Okay. Thank you.

Next we'll go to the line of Rand Gessing with Nueberger Berman. Please, go ahead.

How are you doing?

Good morning, Rand.

Good morning.

Let's see. I was wondering about with the business sort of coming down hard this year, top line, what do you think about the working capital line as we think about free cash flow?

One of the things that we already talked about in our comments is that we had very strong working capital initiatives in 2008 where we were focusing on reducing our inventory, tightly managing our AR and accounts payable, and we had an improvement in our overall percent working capital relative to sales from 17% to 14% in the fourth quarter. Looking ahead to 2009, all things being equal and given the uncertainty of the economy, I wouldn't expect too much of change in the relationship in that working capital line.

Okay. But since you have the lower level of revenues, I would imagine you might be able to extract a bit?

Yes.

Yes. I think Donna is saying the percent will be in that range to the extent that percent is applied to the sales. That's exactly right. That should bring the absolute dollars of working capital down.

And then how would you guys anticipate deploying the free cash?

In these days, you keep the free cash in your pocket and you keep it tight.

Okay. I got you. Any more opportunities on the converts or do these sort of got the people, the institutions that are willing to seal that? That sort of liquidity is dried up?

I think that's a very good question. It's funny. We were getting inquiries in December timeframe and we accepted them and we're not seeing them in the first quarter. My guess is that people are trying to improve their liquidity for the year end picture taking and so they were desperate to get some cash back and suddenly that need has gone away. We're not expecting any more discounts in the first quarter because the maturity date is so close now in May that I think they'd rather wait until May and get paid.

I'm just trying to get a rough sense for the EMS business, the puts and takes on it. Should we think about it as being fairly well resilient? The top line for you in '09 and obviously most of the top line erosion will be in the Components and Sensors business. I'm just trying to get a sense for EMS, how resilient you thought it would be?

I'll give you a relative comment on that and what we have seen so far is that from a top line point of view, automotive sensors have been affected the most for obvious reason as to the volumes and the market conditions. Electronic component business for CTS has been affected less than automotive, has provided more stability and that is because within that business we are very diversified. We have Piezo product where the applications can be defense and oil and gas exploration, those kind of things, and we have components which go in the wireless infrastructure markets which are very global and to some extent are still seeing some activity on the Asian side.

So, that business has been more diversified and more -- in a better situation than the automotive. And EMS is even one more notch on the stable side, is at least what has been our experience so far, again, because it is so diversified because we are in medical and defense and communication and computer and industrial that it's not more. So, I probably can't tell you, I can't quantify it, but what has helped CTS is this interesting mix and diversification of our businesses. It is true that EMS business is less profitable than our Components and Sensors business but in this environment it has helped CTS to stabilize the impact on our top line.

And on the EMS side, the HP roll off, in this environment should we expect that it's going to be a bit more aggressive rolling off than you would've heretofore been communicating?

No. I think the environment doesn't change that at all and I think the roll out will not be effected by the economy. They have declared end of life of those platforms and demanding on the sales of those platforms, actually, last time we heard from HP, they were at least giving us the impression that the end of life may linger on a little bit longer and this stuff had coming to a screeching halt in the mid-2009. It may go on beyond that.

So, that's not a function of the economy, but that's a function of their own internal planning of exactly when to draw the line in the sand to complete or stop a product. So, as long as they see the market for that, it may continue. The good news, if it is good news, is that we saw the largest declines which we had to offset in 2007 and 2008 and if you look at our run rate in the fourth quarter, we now have a run rate of approximately $40 million in sales based on the fourth quarter. In 2009 that number would be lower and we don't know if that number will be $25 million or $20 million or $15 million. But one thing is certain, that my year over year delta in 2009 versus 2008 would be lower than what I had in 2008 and 2007.

Right. Okay. Given the environment, what's your thought about doing a couple of additional acquisitions?

That's a very good question. On the one hand, we continue to keep our antennas up for small, accretive, kind of bolt-on acquisitions and I continue to look at them. On the other hand, I would say that those acquisitions, at least in the 2009 environment will be contingent on me finding some depth to fund it. As Donna said, we are at this point in a comfortable liquidity position. We have roughly $50 million of unused revolver. We have roughly $40 million of cash available. That's $90 million. And we have probably another $10 million or so international lines. So, we have $100 million and we have probably the remaining $32 million convert coming in May. And we're seeing overall for the full year, we may be -- we are positive free cash flow. So, we're comfortable. But given the fact that things are very uncertain and the visibility is so poor, I would be reluctant to go to Donna and take $10 million, $20 million away from her for an acquisition. I think I will be more conservative and cautious and the acquisition will depend on the funding. We do keep hearing from some of our bank group that the funding is available to CTS assuming that the acquisition is the right kind of acquisition. So, we will keep looking.

Okay. Alright. Great job. I appreciate the time. Thanks.

Thanks.

And we do have a follow-up from John Franzreb with Sidoti. Please, go ahead.

Rand was kind enough to ask a lot of my follow-ups. But, Donna, if I can bother you for a second, what was the final full year depreciation and amortization number?

Let me get that for you. The full year depreciation and amortization, the combined total of both of them, would be $24.2 million.

$24.2 million.

Yes.

And where was the final intangible net number on the balance sheet?

Let me get that for you, John.

I'm sorry.

Deep within one of my schedules here. All right. My final intangibles at the end of the year and balance of goodwill was $70 million.

And the net prepaid pension number? What did that come down to?

It was approximately -- just a second. John, I may have to get that for you.

Okay. I imagine it came down though.

It did. So, I have to get that for you.

Okay. That's all I've got, guys. Thanks a lot. Nice job.

Thank you.

Thank you.

(Operator Instructions). Yes. We do have a follow-up from Hendi Susanto with Gabelli. Please, go ahead.

One more question. With regard to share buyback, should we expect more share buyback in 2009?

Again, Hendi, I'll give you the similar kind of answer. We do have a buyback plan approved by the board; however, my inclination at this point would be that given the uncertainty in the environment and our need to keep a strong position on the liquidity, I probably would be inclined not to do any buybacks at this point.

Okay. Thank you.

We do have a question from the line of [Alex Lallaparda] with CTS. I'm sorry. I mispronounced your name. Your line is open.

That's okay. Good morning, Donna. I have a question regarding your dividend right now. Does CTS have any kind of plan to cut the dividend at this moment because of the economic environment?

No. We don't. The dividend is a question that's in a discussion that we do have with the senior executive team and the board of directors for the Company. And our strategy and our track record has been, up to now, that we do maintain and pay a dividend. At this point, I have not have a discussion with the board relative to 2009.

Okay. Thank you.

At this time, there are no further questions. I would like to turn the call back to Mr. Walorski. Please, go ahead.

Thank you. I would like to remind our listeners that a replay of this conference call will be available from 1:30 p.m. Eastern Standard Time today through 11:59 pm on Thursday, February 5th, 2009. The telephone number for the replay is 800-475-6701 or 320-365-3844 if calling from outside the U.S. The access code is 980787. And with that, thank you for joining us today.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.