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Executives

Mitchell J. Walorski – Director Planning and Investor Relations

Vinod M. Khilnani – President and Chief Executive Officer

Donna L. Belusar – Senior Vice President and Chief Financial Officer

Analysts

John Franzreb – Sidoti & Company

Handy Sasanto – Gabelli & Company

Kimberly Hall – Private Investor

Rand Gessing – Neuberger Berman

Alex [Lalap] – CTS

CTS Corporation (CTS) Q4 2008 Earnings Call Transcript January 29, 2009 11:00 AM ET

Operator

Ladies and gentlemen thank you for standing by, and welcome to the Q4 2008 CTS Corporation earnings call. At this time all participants are in a listen-only mode, later we will conduct a question-and-session instructions will be given at that time. (Operator Instructions). As a reminder this conference is being recorded.

I’d now like to turn the conference over to our Director of Planning and Investor Relations, Mitch Walorski, please go ahead.

Mitchell Walorski

Thank you, [Martha]. I am 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 relation section. I will now turn the discussion over to our CEO, Vinod Khilnani.

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 components and automotive sensors 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 a tax rate of $0.05 per share.

Full year adjusted diluted earning per share of $0.77 topped our previous guidance range of $0.71 to $0.76. The GAAP earnings for the full year 2008 were $0.81 per diluted share has 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 $152.8 million were 4.2% lower sequentially, which would inline with our guidance of a sequential decline of 3 to 5%. Full year sales at $691.7 million were up $5.8 million are approximately 1% year-over-year. On a segment basis, components and sensor 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 components sales of $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 segments in more detail. Within our components and sensor 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 U.S. and approximately 20% lower in the Western Europe in the fourth quarter of 2008 compared to the same period in 2007.

Automotive OEMs have been shutting down their plans worldwide to cut production and they further reduce their purchases from the component suppliers to lower their inventories at the year end. The grim automotive industry environment globally is clearly affecting our near-term sensor of shipments. However, we continue to succeed and diversifying our customer base, winning new programs, and broadening the application of our sensor technology into commercial vehicle.

We won ten new awards in the fourth quarter mostly from Asian automotive OEMs. Our total sales to the Detroit 3 Automotive OEMs, but only 5% of total CTS sales in the fourth quarter versus the 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 and 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 sensor segment, sales of electronic components in the 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 fourth quarter making full year 2008 a record year with 223 Filter, Oscillator, and RF Module design wins for application like 3G wireless, WiMAX and repeaters, which boost wireless signal. We believe design wins are the strong leading indicator of future program revenues.

And 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, but only 11% of our total EMS sales and around 7% of our total CTS sale. We have drastically reduced our customer concentration and based on the current run rate there is 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 and our focus areas of defense and medical. The remaining two-third 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, but 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 inline with the lower volumes driven by the weak macro economic 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 401(k) company match, cancellation of all 2009 salary increases worldwide, and a temporary 5% salary reduction for our salaried exempt workforce at all locations in the U.S., Canada and U.K. Our strong performance in the fourth quarter is partially an indicator of cost-containment actions we took quickly and orally to lower our cost structure.

Working capital and capital expenditures have also been tightened, and are being managed more efficiently. We continued to watch the economy and the business conditions closely, and we'll 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 automotive production and sales volumes in the first quarter of 2009. Electronic components 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?

Donna Belusar

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 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 fourth quarter 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 8, 2008. These actions were completed as part of restructuring of certain operations to drive further efficiencies in cost saving. 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 $3.50 per share. The combined total of these charges for third and fourth quarter’s 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 phase of these difficult market conditions. In addition during the fourth quarter 2008 we've recognized a discrete period of 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 12, 2008 signing of the new protocol to the U.S. 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 evaluation allowance due to the 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 would like to stand up on our results for fourth quarter 2008 and ramp 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 benefit just discussed were $0.77 per diluted share, which is a 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 its financial environment that has deteriorated significantly. Our top line sales for fourth quarter 2008 were a $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 in quarter-to-quarter 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 64% of our total sales in the fourth quarter compared to 57% in the previous quarter, while sales in the components and sensor 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 a steep decrease in sales in the components and sensor 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 is an improvement of $1.2 million sequentially from the third quarter and is primarily the result of $0.04 per share gain realize 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 this free tax benefits we've realized in 2008 for the specific agents valuation allowance in the third quarter, and the U.S., Canada treaty in the fourth quarter, which we considered 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 the annualized sales. This is an improvement from 17% in the third quarter 2008 from the working capital initiatives we had put in place in 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 $17.9 million. Accounts receivable and accounts payable net our internal expectations as we worked closely with those suppliers and our customers. Throughout 2008, we invested in restructuring development and capital expenditures as we continue to deliver leading technology in our components and sensor product family. In the fourth quarter, we invested $4 million in capital expenditures.

Our full year 2008 capital expenditures were $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 to $13 million for 2009, which is really due to the lower demanding and in 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 for 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 flow.

Our debt structure reduced from the third quarter 2008 to $100 million to a year-end to $80.5 million with a 22.5% debt to capitalization ratio. At year-end we have $52 million in available credit in the U.S. 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 has drawn against the $100 million unsecured credit agreement. There is very limited visibility and weak demand in the global economic market, and 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 at 2008 as well as the additional management actions in the area of compensation spending, which Vinod talked about.

While we expected 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 lot. We expect continued downward sales pressure and are also expecting our full year tax – effective tax rate to be in the range of 22 to 24% with the increase primarily due to some tax holiday’s expiring in our Asian jurisdiction, along with the anticipated higher earnings and higher tax jurisdiction 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 the overall market declines. However, despite this we are still over funded in our qualified pension plan, and do not anticipate any cash infusion in the near future. CTS's financial position remains solid, the positive cash balances and flexibility in our liquidity. We are well positioned to react to the challenging market condition ahead. This sums up a quick overview of the fourth quarter in the full year, with that I would like to now open the call for your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll go to the line of John Franzreb with Sidoti & Company. Please go ahead.

John Franzreb – Sidoti & Company

Good morning Donna and Vinod.

Vinod Khilnani

Good morning John.

Donna Belusar

Good morning John.

John Franzreb – Sidoti & Company

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

Vinod Khilnani

I think that sounds about right.

John Franzreb – Sidoti & Company

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 and you seem to be bucking that trend. Can you talk a little bit of what’s the difference if any, you versus some of the more well known names in that sector?

Vinod Khilnani

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 it's 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 arena, and what we’re finding out is that medical and defense areas are staying in a better shape than computers or communication or industrial. So, 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 and 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 we were able to convince the customer that CTS is a better EMS supplier than their existing supplier. So, it is a combination of those two kinds of things, which helped us in the fourth quarter and full year.

John Franzreb – Sidoti & Company

Well, that’s great. Now you said and if we still kind of to say a small word on mid and annualized basis, as Companies shutdown 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 kind of assessment is on the EMS side of business? What they are more likely to do?

Vinod Khilnani

I think it can go either way. We have seen examples where companies when they are under increased cost pressures tend to revisit some of their divisions and they outsource some of the production to improve their margin. 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 the employment higher. And so even as a case-by-case kind of a situation and we have seen examples going both ways.

John Franzreb – Sidoti & Company

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

Vinod Khilnani

Wireless business, we also saw examples where the wireless projects were pushed out. We saw some push outs from 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 market 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. And so their growth rate is down. Nevertheless they’re 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.

John Franzreb – Sidoti & Company

Okay. And can you kind of address on both segments, what your order trends look like for the month of January?

Vinod Khilnani

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 the guidance, but our confidence level as to how the order rate would look like in March and beyond March is frankly very limited. January is clearly waydown from January of 2008 as expected. So, when in some areas like automotive people announced plant shutdowns. We knew in December timeframe that those extended plant shutdowns will straddle 2008 and 2009 and they will not come back and open those manufacturing facilities in January. And as you well know, we also have some automotive OEMs who have already announced shutdowns, which go on in February and March timeframe. So, first quarter would be interesting to watch January 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 and fourth quarter, and as Donna said, we will be watching it very closely and act accordingly.

John Franzreb – Sidoti & Company

Okay. Thanks a lot Vinod. I’ll get back into queue.

Donna Belusar

All right, thanks John.

Operator: Thank you. And our next question will go to line of Handy Sasanto with Gabelli. Please go ahead.

Handy Sasanto – Gabelli & Company

Hi Vinod, hi Donna.

Handy Sasanto – Gabelli & Company

Hi Handy.

Donna Belusar

Good morning.

Handy Sasanto – Gabelli & Company

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

Vinod Khilnani

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 peoples are lowering inventories. However, we did see impact on our component intensive side of the business and we believe that specially starting from November and December and continuing in January. Our sales were affected 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. So, we believe that our impact was magnified and probably will continue to be magnified in the first quarter because we will be affected not only by lower demand, but our customers continuing to bring their inventories down.

Handy Sasanto – Gabelli & Company

Okay. And my second question, when you mentioned about some sustainable upgrowth in defense and aerospace. When you look at your backlog, how much do you see like potential revenue stream from recurring revenue contracts awards?

Vinod Khilnani

Handy 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. So, we do to lie on those projections more than others. Having said that our forward visibility on exactly what the sales would be continues to move around. So, 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. So, 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.

Handy Sasanto – Gabelli & Company

Okay. And then given the potentials as defined coming ahead in the first quarter. I assume that you will have like a low utility stations. So, how much gross margin impact would you expect out of that?

Vinod Khilnani

We’ve don’t give guidance on a quarterly basis, so I probably will not like to break that precedence. All we are able to saw at this point is that a) 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. So, you combine those two things and our current expectations are that we will have a loss but we are not in a position to give you a better feel of the magnitude of that.

Handy Sasanto – Gabelli & Company

Okay, thank you.

Donna Belusar

You're welcome.

Operator: And next we do have question from the line of Kim Hall, a Private Investor. Please go ahead.

Kimberly Hall – Private Investor

Yeah thank you. I wanted to know with the 2009 guidance of $0.15 to $0.25, what does that translate in Q4 and EBITDA guidance, given the tax rate, and all those [this again in] parts. What does the EBITDA come out to? What’s the guidance for the earnings per share?

Vinod Khilnani

Kim. 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 40 million annual EBITDA kind of a number.

Kimberly Hall – Private Investor

Okay, that’s helpful.

Vinod Khilnani

In that range, that’s a very good question and we have that information but we just don’t have it on our fingertips, right now.

Kimberly Hall – Private Investor

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

Donna Belusar

Well in 2008, when you look at our depreciation and amortization, we averaged around 5 million a little over 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 looking forward into 2009, which we 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 it's going to come down slightly go into 2009 because of our investments have been lowered.

Kimberly Hall – Private Investor

Okay. That was very helpful.

Donna Belusar

Thank you.

Kimberly Hall – Private Investor

Those are my two questions. Thank you.

Operator

And next we will go to the line of [Roger Chu-Chen] with Lifes. Please go ahead.

Unidentified Analyst

Hi everybody. Great job in the fourth quarter and [congratulations].

Vinod Khilnani

Thanks Roger.

Donna Belusar

Thank you.

Unidentified Analyst

And I just have two questions. Number one, just curious if you could talk to how much cost savings where we able to realize in fourth quarter? And how much is less in for ’09 just in the context of everything that is being working on right now?

Donna Belusar

That’s a good question, so thank you because the leadership team of CTS has allowed all the operational leaders of the company have diligently address aggressive cause actions in 2008. Over, when you look at 2008 and they said we did about 6 million for the full year in restructuring. When we announced in October of 2008 our intention to expand upon that, we committed and identified. We thought we had about a two year of pay back 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 quater we announced on. And so you really will see those savings flowing through the 2009 time period. So, we did see some and …

Vinod Khilnani

So, if we have to give you a wild guess, I would say two-third of those savings did begin to flow in the fourth quarter. And probably one-third additional one will come next year.

Unidentified Analyst

Okay. And you said it's a two-year pay back right. So, we're talking...

Vinod Khilnani

Approximately

Donna Belusar

Approximately a two year pay back yeah.

Unidentified Analyst

Okay. And how - just in light us more challenges ahead as you've pointed out. Could you talk about potentially other restructuring activities? And how do you think about the magnitude and nature and cause – nature of those relative to what we announced in the fourth quarter?

Vinod Khilnani

Roger, in Q3 we did restructuring, Q4 we did more compensation kind of thing, which we talked about in the press release 401-K matches and things like that. Anything beyond that, 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.

Unidentified Analyst

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

Vinod Khilnani

I won't go that far, I will repeat couple of things what Donna said. So, 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 so that helped us. As Donna pointed out, we had a lower effective tax rate, which helped us. So, 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 with a guidance, but 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.

Unidentified Analyst

Okay, thank you.

Operator

And next we will go to the line of Rand Gessing with Neuberger Berman. Please go ahead.

Rand Gessing – Neuberger Berman

Hey, how are you doing?

Vinod Khilnani

Good morning Ran.

Donna Belusar

Good morning.

Rand Gessing – Neuberger Berman

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 you think about free cash flow?

Donna Belusar

Well, one of the things we really talked about in our comments is that, we had very strong working capital initiatives in 2008, where we are focussing 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. And looking ahead to 2009 all things been equal and given the uncertainty in the economy I wouldn’t expect that that too much of a change in the relationship in that working capital line.

Rand Gessing – Neuberger Berman

Okay. But since you have lower level of revenues I would imagine you might feel extract a bit?

Vinod Khilnani

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

Rand Gessing – Neuberger Berman

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

Vinod Khilnani

In these days, it’s the free cash in your pocket.

Rand Gessing – Neuberger Berman

Okay.

Vinod Khilnani

And keep it tight.

Rand Gessing – Neuberger Berman

Okay, gotcha. Any more opportunities on the convert or cuts that people or the institutions that are willing to sell that and sort of liquidity is dried out?

Vinod Khilnani

I think that’s a very good question, it’s funny we were getting [liquidities] in December timeframe and we accepted them and we’re seeing them.

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

In the first quarter, so my guess is that people who are trying to improve their liquidity…

Rand Gessing – Neuberger Berman

Right.

Vinod Khilnani

For the year-end picture taking and so they were desperate to get some cash back and certainly that need has gone away. So, we are not expecting anymore discounts in the first quarter because people, the maturity date is so close now in May that I think they rather wait until May and get paid.

Rand Gessing – Neuberger Berman

I just want to get a rough sense for the EMS business, the puts and takes on it. Should we think about it seems fairly well resilient, it’s the top line for you in '09 and obviously most of the top line erosion will be in the components and sensors business, but I was trying to get a sense for EMS how resilient you thought it would be?

Vinod Khilnani

I 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 reasons…

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

As to the volumes and the market condition, 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 kinds of a thing 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.

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

That it is not more. So, I probably can tell you I can quantify it but, what has helped CTS is that interesting mix and diversification of our businesses. It is true that EMS business is less profitable than our components and sensor business, but in this environment it has helped CTS to stabilize the impact on our top line.

Rand Gessing – Neuberger Berman

And the on the EMS side the HP roll off in this environment should we expect that [U.S.] can do a bit more aggressive rolling offs than you would have, it’s before being communicating?

Vinod Khilnani

No, I think the environment doesn’t change that at all.

Rand Gessing – Neuberger Berman

Okay.

Vinod Khilnani

And I think the rollout will not be affected by the economy. They have the clear end up life of those platforms and depending on the sales of those platforms actually last time we heard from HP they were at least giving the impression that the end of life may linger on little bit longer and rest of it’s coming to a screeching halt in the mid 2009. It may go on beyond that. So, that’s not a function of economy but, that’s the function of their own internal planning of exactly when to draw the line in the [sand] to complete or stop the product. So as long as they see the market for that it may continue. The good news, if it is a good news is that we saw the largest declines, which we have to offset in 2007 and 2008.

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

And if you look at our run rate in the fourth quarter, we now have a run rate of approximately $40 million from sales [and its] based on the fourth quarter. And 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.

Rand Gessing – Neuberger Berman

Right. Okay, given the environment - what’s your thought about doing a couple of additional acquisitions?

Vinod Khilnani

That’s a very good question, on the one hand we continue to keep our [antennas] up for small accretive bolt-on kind of acquisitions and I continued to look at and…

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

On the other hand, I would say that those acquisitions at least in the 2009 environment will be contingent or may finding some debt to fund it.

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

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] 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…

Rand Gessing – Neuberger Berman

Right.

Vinod Khilnani

In May and we are seeing overall for the year remedy we had a positive free cash flow. So, we are very comfortable, but given the fact that the things are very uncertain and the visibility so poor, I would be reluctant to go to Donna and take $10 million, $20 million away from her…

Rand Gessing – Neuberger Berman

Yeah.

Vinod Khilnani

For an acquisition. So, I think I will be more conservative and cautious and the acquisition will depend on the funding and we do keep hearing from some of our bank group that the funding is available to CTS assuming that acquisitions the right kind of acquisition. So, we will keep look at.

Rand Gessing – Neuberger Berman

Okay. All right great job, I appreciate the time. Thanks.

Vinod Khilnani

Thanks.

Operator

And we do have a followup from John Franzreb with Sidoti. Please go ahead.

John Franzreb – Sidoti & Company

[Vinod] was kind enough to ask rather my followup despite on, Donna if I can involve the first, second what was the final full year depreciation and amortization number?

Donna Belusar

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

John Franzreb – Sidoti & Company

$24.2 million.

Donna Belusar

Yeah.

John Franzreb – Sidoti & Company

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

Donna Belusar

Let me give that for you John.

John Franzreb – Sidoti & Company

I'm sorry.

Donna Belusar

Keep in one of my schedule here. All right my final intangibles at the end of the year and balance of goodwill was $70 million.

John Franzreb – Sidoti & Company

And the net prepay pension number. Will that comes down to?

Donna Belusar

It is approximately, John I may [answer] that for you.

John Franzreb – Sidoti & Company

Okay, I just – I imagine again down now in this.

Donna Belusar

It did – it did so, I [appreciate] that for you.

John Franzreb – Sidoti & Company

Okay, that’s all I got guys. Thanks a lot. Nice job.

Vinod Khilnani

Thank you.

Donna Belusar

Thank you.

Operator

(Operator Instructions). Yes, we do have a followup from Handy Sasanto with Gabelli. Please go ahead.

Handy Sasanto – Gabelli & Company

Hey one more question. With regard to the share buyback should we expect more share buyback in 2009?

Vinod Khilnani

Again Handy, I will give you the similar kind of answer…

Handy Sasanto – Gabelli & Company

Okay.

Vinod Khilnani

We do have that 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've probably will be inclined not to do any buyback at this point.

Handy Sasanto – Gabelli & Company

Okay, thank you.

Operator

And we do have a question from line of Alex [Lalap] with CTS. I’m sorry I mispronounced your name. Your line is open.

Unidentified Analyst

Good morning Donna.

Donna Belusar

Good morning.

Unidentified Analyst

I have a question regarding your dividend right now. Does CTS having any kind of plan to cut the dividend at this moment because of the economic environment?

Donna Belusar

No, I mean its – that the dividend is a question that's in the discussion that we do have with the Senior Executive Team and Board of Directors for the company. And our strategy and our track record has been up to now that we do maintain and pay our dividend. At this point I have not had a discussion with the Board for relative to 2009.

Unidentified Analyst

Okay, thank you.

Operator

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

Mitchell Walorski

Thank you. I would like to remind our listeners that a replay of this conference call will be available from 1:30 pm Eastern Standard Time today through 11:59 pm on Thursday, February 5, 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.

Operator

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.

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