Feb 12, 2009
Executives
James Kim – Chief Executive Officer and Chairman Kenneth Joyce – President and Chief Operating Officer Joanne Solomon – Chief Financial Officer
Analysts
Satya Kumar – Credit Suisse Timothy Arcuri – Citigroup CJ Muse – Barclays Capital Peter Kim – Deutche Bank Securities Eric Ruebell – MTR Securities Mike Lanier – AIG Jake Kimini – Morgan Stanley [Sunny Second – JP Morgan] Oliver Corlett – RW Press Ridge
Operator
Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Amkor Technology Inc.
fourth quarter and full year 2008 earnings conference call. (Operator instructions).
Before we begin this call Amkor would like to remind you that there will be forward-looking statements made during the course of this conference call. These statements represent the current view of Amkor management and actual results could vary materially from said statements.
Prior to this conference call, Amkor's fourth quarter earnings release was filed with the SEC on Form 8-K. The earnings release together with Amkor's other SEC filings contain information on risk factors, uncertainties and assumptions that could cause actual results to differ materially from Amkor's current expectations.
I would now like to turn the call over to Mr. James Kim, CEO and chairman.
Go ahead Mr. Kim.
James Kim
Thank you and good afternoon. This is James Kim.
With me today are Ken Joyce, our President and Chief Operating Officer, and Joanne Solomon, our Chief Financial Officer. We ended the fourth quarter with $549 million in revenue, a 24% decline compared to the third quarter of 2008.
As we noted in our press release in mid-January, the macro economic trends today are worse than they were even a few months ago. Companies in the electronics and semi-conducting industry, including Amkor, are experiencing significant declines in revenue caused by the weakness in global consumer demand.
The lack of visibility regarding the magnitude and duration of the current economic downturn makes it difficult to accurately predict our future results. Based upon the latest available information, we currently expect that our first quarter revenue will decline in the range of 30% to 38% from the fourth quarter of 2008.
Having said that, recent volatility in customer forecasts and limited divisibility have increased the risk that our actual results may differ from our expectations. We have confidence in our strategy for managing our business through this downturn.
The key elements of our strategy include a continued focus of cash flow generation, reducing costs and controlling capital spending, close collaboration with our key customers and related prudent investment in new technologies, and a sustained disciplined approach to pricing with the sharing of cost savings with our customers. We have responded quickly and decisively to the challenging market conditions.
We begin our cost cutting effort early in 2008, and our actions to date include significant reductions in head count, lowered the executive and employee compensation and shortened shifts as we continue to line our core structure with the current downturn in demand. Our global footprint also has been reduced by disposing of unnecessary factory space and real estate, and the combining of operations in several locations.
We are prepared to take further cost reduction containment action if this downturn is prolonged or becomes worse. Through packaging innovation and high quality services we have established strong relationships with a diverse group of customers.
Most families and IDN across a broad range of applications. We have continued to build upon these relationships by making selective investments with the key technologies, the need for the advanced semi-conductors.
As I stated earlier in our call, there is significant uncertainty regarding the full scope and duration of the current economic down turn. We are prepared to make further cost reductions if necessary, but we are also being careful to avoid cutting so deep that we limit our ability to respond when the semi conductor market returns to more normal levels of demand.
Even the depth of our global manufacturing operations and our position as a technology leader, we believe we are well positioned to respond to customers upside when opportunities arise. At Amkor we are preparing not only to weather the storm, but to emerge as a much stronger company when the inevitable recovery occurs.
With that, I will turn the call over to Ken to comment on the business before Joanne concludes with the discussion about recent financial results. Ken?
Kenneth Joyce
Thank you Jim. During the fourth quarter our net sales decreased $171 million, or 24% sequentially with unit shipments of $1.75 billion, down 30% compared to 2.5 billion units shipped in the third quarter of 2008.
We saw unit and revenue declines across all of our packages and end markets. Overall, our advanced laminate and flip chip packages held up somewhat better than our lead freight packages.
While our customers have been managing inventory levels down, consumer demand has been dropping at a faster rate. In view of the sharp drop in consumer demand globally, we expect continued unit and revenue declines in the first quarter.
We saw a price erosion of around 1-2% in both the third and fourth quarters. Going forward, we do not believe it is prudent to reduce price in a weakening economy just to gain market share or fill the factories.
Rather, we will continue to work closely with our customers and suppliers to eliminate costs from the supply chain, and share the cost savings with our customers. Our relationships with our customers are key to the continued strength of our business and over the past decade we have diversified our customer base.
Countless semi conductor companies accounted for approximately 60% of our total sales for 2008, and we provide services for a broad range of applications in the wireless, consumer and computing areas. While our customer base is well diversified, our top ten customers contributed 52% of our net sales in the fourth quarter.
Before turning the call over to Joanne, I would like to comment briefly about our plans with regard to capital additions. As Jim stated, discipline with regard to capital spending is critical.
We are operating under a zero-based budgeting approach that is focused on specific customer requirements, technology advancement and cost reduction programs. In the fourth quarter of 2008, capital additions totaled $23 million as we canceled or deferred all non-critical equipment purchases in response to market conditions.
Because of these deferrals, we expect an estimated $40 million of capital additions for the first quarter of 2009. We are currently planning on capital additions for the full year of less than $100 million.
With that, I will now turn the call over to Joanne to discuss our financial results. Joanne?
Joanne Solomon
Thank you Ken. While the near-term outlook for the semi conductor industry has continued to weaken, our financial position and liquidity remains sound.
We generated $80 million in free cash flow in the fourth quarter, and $220 million for the full year 2008. We ended the quarter with the cash balance of $424 million, and total debt of just under $1.5 billion.
In the fourth quarter of 2008, and into 2009, we repurchased 151 million aggregate principal amount of debt due in 2011 with $105 million cash on hand. The aggregate purchases to date have yields and excess of 20%, and improved our liquidity by $58 million as a result of the discounted price, and $12 million of reduced interest expense.
Other than annual amortizing debt of approximately $55 million, we have no significant debt due until 2011 when the remaining $289 million of seven and one-eighth senior notes and two and a half percent senior subordinated convertible notes mature. Fourth quarter first margin of 18% was unchanged from the prior quarter.
First margin benefited by an estimated $20 million from the strengthening of the US dollar against foreign currency and a $16 million reduction in labor and other costs. These benefits were partially offset by the accrual of an additional $12 million for the unpaid royalties to Tessera in connection with the final award and royalties for the period.
Although we do not expect to be free cash flow positive in the first quarter of 2009, as Jim and Ken noted, we have taken steps to improve our cash flow generation, lower costs and control capital expenditures. In 2008 and to date, we reduced our head count through reductions in force and attrition by 13%, or 2800 employees, with estimated savings of approximately $10 million per quarter.
Income tax expense for 2008 was $32 million, reflecting taxes attributable to profits in our taxable jurisdiction, as well as the establishment of an $8 million valuation allowance against certain deferred tax assets in Japan. For 2009, we anticipate income tax expense of about $1 million per quarter.
There is a recap of our first quarter 2009 guidance contained in our earnings release. Sales down 30-38% from the fourth quarter, first margin between 5% and a negative 2%.
Net loss in the range of $.34 to $.49 loss per share. Operator, Joe, we will now open this call for questions.
Operator
Thank you ma'am. (Operator instructions).
Our first question comes from the line of Satya Kumar with Credit Suisse. Go ahead.
Satya Kumar – Credit Suisse
Yeah, hi. Thank you for taking my question.
I wanted to clarify the cash flow comments you had. You mentioned that there would be free cash flow negative.
Excluding the Tessera payment, what will free cash flow be, and can you remind me again what was CapEx in Q1?
Joanne Solomon
Sure. You know, we don't guide specifically with respect to free cash flow.
You are absolutely correct in saying that the largest unexpected, alright not unexpected, but large out-of-period payment is with respect to Tessera's $64 million. We also have a timing of CapEx payment with respect to employee benefit and risk charges, you know, coming up to that go against it, and then, you know, depending on where we are with the guidance that would obviously impact it as well.
Satya Kumar – Credit Suisse
But directionally can you at least let us know if Tessera weren't there, would you have been free cash flow positive?
Joanne Solomon
Because we have such a large range with respect for our guidance I don't feel comfortable at this time.
Satya Kumar – Credit Suisse
Okay. And then a question on business trends.
Some of your peers are talking about a sign of business improving on a monthly basis from the month of January, for them to hit the Q1 numbers, what trends are you seeing on the book-to-bill on a monthly basis? What end market sectors are you seeing center weakness.
Are you seeing any particular sectors where you are seeing additional orders or fewer orders.
Kenneth Joyce
Satya, the downturn is, as we said in our release, is really very broad-based, it's across all sectors, across all product lines, pretty much across all of our sectors. It's very macro-economic demand driven.
Satya Kumar – Credit Suisse
Right. But, in terms of linearity of the quarter, as the month of February as bad as it was back in January, what trends are you seeing year-to-date?
Joanne Solomon
That is certainly something that we poured over over the last several weeks to see if there is any linearity trends. Again our guidance is so wide with respect to revenues, it is hard to conclude whether we go up from January, flat from January or down from January, there is just, you know, while we get six-month customer forecast, it's hard to give any weight to actually predict from there.
Satya Kumar – Credit Suisse
Okay. And to the cost reduction, I think you said $22 million I think on the press release, how much of that is going to come off COGS, SG&A and R&D – what are the clean OpEx numbers that should be modeling for Q1?
Joanne Solomon
Okay, are you, with respect to if you compare Q4 to Q1, I would see, I'm just doing the math in my head, about $15-$16 million is COGS, whereas $6½ is SG&A and that should get you to the total point to volume, if I did the math in my head correctly.
Satya Kumar – Credit Suisse
Okay, thanks.
Operator
And our next question comes from the line of Timothy Arcuri with Citigroup. Go ahead sir.
Timothy Arcuri – Citigroup
Okay couple things. Joanne just to clarify what you said, are you saying that SG&A is going to be down by about $6 million in March?
Joanne Solomon
As comapred to Q4, that is a fair characterization.
Timothy Arcuri – Citigroup
Okay, okay. Second thing, just to clarify also.
So the $64 million Tessera payment, that's coming in the March quarter as well, right?
Joanne Solomon
Yes.
Timothy Arcuri – Citigroup
Okay, and then there's no further payments to them after that.
Joanne Solomon
No. We are an ongoing licensee of Tessera so we'll have an ongoing role key obligation which is insignificant,
Timothy Arcuri – Citigroup
Right.
Joanne Solomon
But the final word is behind us.
Timoty Arcuri
Right, okay. And then, you know Jim, one thing for you.
I guess when I compare, if I just look at the SIA data, and if I compare your units and I look at you know other big peers you know peers of yours and I compare your kind of unit share relative to what the SIA data says, and you know even if I strip out memory, it looks like your share of the overall SIA unit pie in, you know, in December was down you know much more quarter on quarter than it really ever was back in, you know, you say, you know, 2001 downturn, so it looks like there's something a bit different happening this time where it seems like some of the O-sats (ph) have declined a lot more and they've lost more share of you know kind of the overall unit pie, during, or you know, kind of earlier in that, you know, shifting that down turn. Is that, is there something different happening this time in that there is more, you know, insourcing potentially, where all your customers are making the better effort to keep their own factories fuller, is that what's happening here you think?
James Kim
I think that is a very good question Tim. In fact, we were reviewing those numbers just before the conference call, going through our focus model, you know, what happened 2001 to today.
One characteristic I can tell you, again I don't know the reasons or, you know, I don't, I have no data, but it dropped much faster than 2001. So, you know, again, as you know, nobody really knows the outlook at the moment other than very wide ranges they are giving you because every week our customers' focus changes, so reliability of their focus itself becomes an issue.
It's a good question but I've never done the study on that so all I see is that the downturn is faster than 2001.
Timothy Arcuri – Citigroup
But do you think, Jim, just from kind of a structural perspective, do you think that, talking to your customers, is there some change whereby they're going to work harder to keep their own factories full so that maybe off the bottom you know there's some sort of a different thing for you off the bottom where, you know, business might not snap back as quickly because the customers are basically trying to keep their own factories fuller?
James Kim
You asked me several questions there together, I noticed, because whether the snap-back is there or not, I don't think our customers factories really matters. If the demand snaps back the way 2001 to '02, or that they reshape, then we will participate.
On the other hand, because of the overall economy which Ken explained to you earlier, demand is weak from that angle, then it is gonna last for who knows? Maybe a couple more quarters.
So frankly I'm telling you we are all in the dark at the moment how fast it can recover, but in fact if I want to ask you I think IDNs are struggling themselves, because even though they are pulling back, I hear from our customers, they're course is not coming down because whatever the market is, it's not big enough to send to their factories. So there is a lot of talk going on what to do with those factories, and maybe first time in our last 40 years of business I may see real restructuring occurring at IDN level which would influence us.
You know everybody talks about restructuring through our three or four competitors but they are not the restructuring source. They are the outsourcing guys, and I'll tell you real restructuring will come through the IDNs, in my opinion.
Timothy Arcuri – Citigroup
Right, okay. Thanks Jim.
James Kim
Thank you.
Operator
And our next question comes from the line of CJ Muse with Barclays Capital. Go ahead.
CJ Muse – Barclay Capitals
Yeah, good afternoon. Thank you for taking my question.
I guess, first question, can you talk about OpEx and how we should think about that beyond Q1 in terms of some of the cost cutting that you've outlined, and where that could go into Q2 and Q3.
James Kim
You talking CapEx?
Joanne Solomon
No.
CJ Muse – Barclay Capitals
No, I mean OpEx.
James Kim
Oh, okay, okay.
Joanne Solomon
No, SG&A and R&D, I can take that one. You know it's, we're obviously forecasting it a drop from Q4 to Q1 here.
Specifically with respect to SG&A, as we announced in some of our public filings we made some significant cuts to US-based payroll compensation and the executive compensation by reducing salaries by 10% and eliminating the bonus for 2009. So we start to see those savings coming in Q1 and that is reflected in our guidance.
Further cuts heading beyond what we are forecasting for Q1 is clearly within the realm of possibility. There are two components to SG&A as well – there's a corporate SG&A and a factory SG&A and the factories are working equally as hard to bring down these SG&A expenses.
We have some offsetting things that may keep savings at bay. One is if we can continue to go through our ERP implementation here in the US so we should see a spike up with respect to a couple million dollars in support of some consulting costs.
So I think, consistent to a downward trend it may be reasonable.
CJ Muse – Barclay Capitals
Okay but I guess you said there's a slight spike up a couple million in Q2 related to ERP?
Joanne Solomon
That is hopefully being deferred by cost savings.
CJ Muse – Barclay Capitals
Okay. And then I guess the along similar lines, can you share with us given the cost savings that you have outlined for 1Q what your EBIDTA break-even is?
Joanne Solomon
Sure. Looking at EBIDTA break-even for Q1, Q1 includes some reduction in force charges, separation payments.
If you take those out and then you obviously have to assume a constant mix and no adverse changes from currency to a very steady state, EBIDTA break-even would be about between 300 and 3 and a quarter.
CJ Muse – Barclay Capitals
Okay.
Joanne Solomon
We have really brought down the break-even point from last quarter as a result of the cost savings that have been implemented so far.
CJ Muse – Barclay Capitals
Great. And then on the CapEx front, can you, you talked about, well the press release said about $100 million, on the conference call you said less than $100 million, shall we assume roughly around $100?
And you talked about $40 million for Q1, how should we think about the seasonality of that remaining $60 million throughout the rest of the year?
Kenneth Joyce
It's roughly around $100 million is what the outlook is at year right now based on what our visibility is to our customer orders. The forty million for Q1 as we said has been a carryover from year-end when we have actual customer contracts that support that spending and that's why we are moving ahead with that.
How we go forward quarter to quarter as we said during the call here is very much zero-based. We are looking at everyone very carefully.
It will be really hard to tell until we can see where these quarters come in and where the demand comes out from our customers,. So to be very very careful, we will fund orders in response to solid orders from customer backed with solid contracts.
CJ Muse – Barclay Capitals
Okay and one last question. In terms of pricing, can you talk about the pressure you are seeing from your customers and clearly there is always pressure, but do you think that just sharing the supply chain savings that you are getting with your customers is sufficient given where we are at the depths of the down turn?
Any help or color there would be very much appreciated.
James Kim
Well, it would depend to some extent in the portfolio of products or packages that we have with our customers. Obviously some of your older V-Frame packages are under more pressure let's say than some of your more leading edge flip chip or wafer bump type of package so the demands in the overall mix of what those products are, it depends on the mixes of increases -- increased volumes can make a difference with respect to pricing.
But with that being said, our overall position with our customers has been, and I think you would understand it has to be that our ability to reduce prices is really kind of subject to our ability to (1) either increase volumes or (2) reduce costs, and to the extent that we do reap costs either with taking costs out of supply chain, we'll share that. But to just reduce costs to, I mean reduce prices to fill the factories, there's a strategy that you know has not worked in the past and we've learned form that.
So we're not going down that road, we'd rather reduce the overhead, take the cost out, idle factories, whatever we have to do rather than this fill-the-factory strategy, it doesn't work.
CJ Muse – Barclay Capitals
Thank you.
Operator
Thank you. And our next question comes from the line of Peter Kim with Deutche Bank.
Go ahead sir.
Peter Kim – Deutche Bank
Thanks for taking my question. You didn't mention anything about how much you expect to lower the R&D expenses in the next quarter, did you?
Joanne Solomon
You know, we will obviously continue to invest in technology to the extent that there is a salary component, we would get some savings. Let me just take a quick look-see if, I would suggest you would see about a half a million maybe savings from the fourth quarter level.
Peter Kim – Deutche Bank
Okay. With regards to the question previously with respect to the EBIDTA rate, break-even rate in Q1, considering that you are still in the process of taking corrective action in terms of cost reduction, do you see the break-even level declining even further in Q2 or do you think that it is going to arrest at some point?
Joanne Solomon
I think it can decline further from there. The cost savings that we have included in the first quarter are ones that have already been initiated or are well underway at being initiated, so there isn't a lot of risk with respect to those cost reduction initiatives.
There are other things that Jim mentioned in his prepared remarks that continue to take a look at depending on the state of the industry, so there are other opportunities to continue to reduce that going forward.
Peter Kim – Deutche Bank
Okay, and with respect, you know it looks like, during the quarter you bought back additional debt, about I guess thirty-three and nine million, face value, roughly?
Joanne Solomon
That's right, that's what we bought back.
Peter Kim – Deutche Bank
Right, and so I'm wondering, you know, given that your outlook is, for the current quarter is negative cash flow, are you still comfortable buying back debt on an ongoing basis, or have you decided that maybe it is time to reserve cash?
Joanne Solomon
You know our focus has been on the near-term maturity so far, so we bought back exclusively the 2011 instruments. We do look at debt repurchases from time to time and we do have to obviously balance on what our liquidity position is today, and with the demands on liquidity are between a maturity date to make sure that our liquidity will remain sound.
So we are obviously prioritizing cash flow, cash flow generation, we are prioritizing making sure that our liquidity is sound. So we may or may not move forward with it.
Peter Kim – Deutche Bank
Okay, and last question, you know, Mr. Kim you spoke about, you know, maybe your customers potentially looking at restructuring.
In that event do you see a larger percentage of the packaging and test business coming off to the O (ph) sides, or, how do you see that working out?
James Kim
Certain I hope it comes to us, but again, remember there are three, four sizable competitors out there who (inaudible). I think it is very healthy for our factories to have that kind of restructuring happening.
Everyone will benefit from it, I don't think there's no, you know, there plenty out there, in fact you can look at, you know, in fact, there are almost scores of them.
Peter Kim – Deutche Bank
More specifically, I mean, do you think that when your customers are thinking about restructuring, do you think that they're pondering whether or not they want to shed their own packaging and (inaudible) capacities internally in favor of (inaudible).
James Kim
Oh, I think that is what is going to happen, especially as many of them have old factories and their technologies are behind. So, those are the ones that will be shared, and also remember, they are also cutting back their manpower, engineers, and so on, so their ability — and assembly is not their key aspect.
They need to keep other quite advanced technologies, therefore they're going to be shedding those and where else are they going to get those technologies?
Peter Kim – Deutche Bank
Okay. Thank you very much
Operator
Thank you. And our next question comes from the line of Eric Ruebell with MTR Securities.
Go ahead.
Eric Ruebell – MTR Securities
Hi. Thanks for taking my questions.
Joanne, a couple of quick questions for you and then a follow up for Ken. Could you breakout the bond repurchases between the 2.5 and the seven-and-one-eighth?
Joanne Solomon
With respect to the 2009 repurchases or including the 2008 as well?
Eric Ruebell – MTR Securities
If you could do both, sort of the additional 10 just for Q4.
Joanne Solomon
Okay. Through 2008 we purchased 70 million of the 2.5 converts and 40 million of the seven-and-an-eighth senior note.
In 2009 we repurchased a total of 33 million, of which 32 million was the senior notes.
Eric Ruebell – MTR Securities
Okay, great. And, Joanne, what was the fixed and labor cost in Q4 either in terms of a percent of revenue or total dollars?
Joanne Solomon
Sure. With respect to labor included in cost of sales for Q4 was $80 million that represents 14.6% of sales.
There's other labor dollars in SG&A, but the lion's share is in cost of sales.
Eric Ruebell – MTR Securities
Okay. And the 12 million that was accrued for (inaudible), that we would sort of think of it as a one time?
Joanne Solomon
There's a piece of it that was at a period relating to the amounts that were owed prior to September 30. That's the 9 million, so I would describe that as out of period.
Three million was the recurring royalties associated with the fourth quarter.
Eric Ruebell – MTR Securities
Okay. You announced a $15 million China facility just recently taking place here in Q1.
I assume that came from cutting your basket for foreign borrowings. What kind of additional flexibility do you have there, and also with respect to the US first lean revolver, what can you do to kind of extend the maturity on the US facility?
Joanne Solomon
Absolutely. We did just close a working capital loan in China for $15 million so that supports the working capital of China, which would in turn, provide additional liquidity into the (inaudible) ecosystem, so that helps sore up — that helps provide short-term liquidity.
With respect to there is a basket for additional foreign borrowing, so we do have the ability to do more, and then with respect to the first lean revolver that matures in November 2009. We are in communication with the institutions to work on alternatives.
Eric Ruebell – MTR Securities
Okay. Then lastly, Kenneth, I just have a quick one.
There's been kind of some talk about orders improving in January, maybe some talk about rush orders at some of the other OSATS (ph). Your comments, I kind of take that from in your perspective of the trends, you can't really draw any significant trends about future linearity based on what you've been seeing through January.
Kenneth Joyce
I think that's a fair statement. I did read some of the press releases that you're talking about, the rush orders.
I think they were in China and I think that was with TSMC and I believe they announced the packaging was going to ASCM's build, so we would have not benefited from that. But that being said, as far as the linearity in Q1, we really can't comment on that right now.
Eric Ruebell – MTR Securities
Okay, great. Thank you.
Operator
And our next question comes from the line of Mike Lanier with AIG. Go ahead, sir.
Mike Lanier – AIG
Good afternoon. Do you have a feel for the weakness you saw or are seeing in Q1 — how much of that has to do with all the shutdowns in production as opposed to actual drop in demand?
James Kim
Well, I don't know how to distinguish that because I'm sure those guys who shut down didn't see the demand. For the memory supply chain, we're at the bottom, so it has to start from consumer demand.
As I said earlier, consumer demand comes down, that reflects the distribution channels and ultimately the manufacturers. So, it is wide throughout and I'm reading the same things you read.
Many of the foundries and IDMs are shutting down or slow down their labs, so that's affecting us and I'm sure it'll affect us in the future. Their direction will affect us also.
Kenneth Joyce
I have one other point, Jim, as a point of reference that's about 60% of our mixes with fabless companies and about 40% is with IDMs. The IDMs have been internalizing in the near term, but as Jim said, the good story is as we go through the year I think that's going to create a lot of opportunities for the OSATS (inaudible) of some of these non cooperations.
I think you've seen that a number of the IDMS have made announcements that they're going to be closing packaging operations around the world and I think that'll create some opportunities for us as we go forward for the entire sector.
Mike Lanier – AIG
By the way, what was the — I think you gave a quote, or did you, on utilization in Q4 and given your guidance for Q1, what would that infer?
Joanne Solomon
Utilization for Q4 was 61%. It's a hard number to forecast, but I would infer that utilization be about 40%.
Mike Lanier – AIG
And when the demand has come down, has the mix changed? Is most of the damage on the simpler packages versus the more sophisticated?
Is there a trend in that area?
Kenneth Joyce
It's been very broad based, as we said. This is really very much macro demand driven, so it's affecting all of your product lines, all of your end markets.
Quarter over quarter, as we indicated in our release I believe, is that some of the more advanced packages fared a little better in the mix between Q4 and Q3, but that's not the same going forward. Going forward is very broad based.
Mike Lanier – AIG
And the 100 million CapEx, how does that compare to what you would consider maintenance CapEx?
Kenneth Joyce
That includes maintenance CapEx. The thing you have to remember is, is that our installed capacity is far greater than the level of demand that we see.
We're not getting guidance for the full year, but from what we can see, the levels of our installed capacity far exceed the demands that we'll need. So, the level of 100 would indicate handling maintenance CapEx plus some individual orders that may come along.
Mike Lanier – AIG
And right now you don't have any plans to shut in any material capacity so far?
Kenneth Joyce
Could you rephrase that for me?
Mike Lanier – AIG
Do you currently have any plans to actually mothball some capacity to just kind of shut it down for an extended period?
Kenneth Joyce
Well, we've been doing some factory combinations, and that's been publicly announced. We did it in 2008 and we're continuing to do it this year.
Joanne talked about some of the restructuring charges, so yes, we have done some of that.
Joanne Solomon
The other thing we take a look at is, and Jim mentioned it in his prepared remarks, it's really compressing work weeks, so that in essence takes capacity off the line without removing it.
Mike Lanier – AIG
Just a couple more; one is, where is your comfort level with cash? I mean, what level of cash —
Joanne Solomon
It's a great question. It's a question we ask ourselves every day.
We describe minimum cash of around $200 million. The challenge is, is you have to focus on both positive and negative contingencies.
You make the assumption that you have limited access to the market so it's the how low would you let it go. Three-hundred million total liquidity, that is an internal benchmark we've used from time to time, but I would describe cash between 100-200, more closely to the 200.
Mike Lanier – AIG
And when we look at the cash that's on the balance sheet now, where is it? How much is freely available for you to push around without taking a big tax hit or without strings attached?
Joanne Solomon
It's largely freely available. It is around the globe.
We have cash around the globe. Our largest factories are in Korea and in the Philippines, and then obviously we're here in the US so that's the principle locations of cash.
Mike Lanier – AIG
And the last one is, if you know, stays ugly — EBITDA gets really de minimus. I mean, do you have covenants that could be tripped in this environment?
Joanne Solomon
We don't. We're very fortunate in that we have covenant light instruments, both the bank debt overseas as well as our public debt here in the US.
We do have a restricted payment basket that because of the goodwill impairment charge we no longer meet the restricted payment test, but we do have some strategic and other baskets available even for restrictive payments.
Operator
And our next question comes from the line of Jake Kimini with Morgan Stanley. Go ahead.
Jake Kimini – Morgan Stanley
Hi. Just had a question for clarification on the CapEx.
You said in 2008 the CapEx is 342 million, but there's also a change in related accounts payable of 44 million. So, CapEx is really 386 million.
So, when you say next year CapEx is going to be 100 million, is that 100 plus some reduction in payables or is that the fully loaded number?
Joanne Solomon
So, there are two ways to look at cash. One is, is when you bring it into your factories and you add it to your (inaudible), the other is when you pay your vendors for that CapEx.
The 342 is the CapEx that we brought into our factories. To the extent it’s a change in payables, that's what we paid the vendor during the year.
Similarly, when we talk about the 100 million, that's what we're brining into the factory. The payments to vendors are actually a little bit higher.
Jake Kimini – Morgan Stanley
So including the time of the payments, what do you think that is going to be for 2009 in the aggregate?
Joanne Solomon
We don't typically guide to that, but —
James Kim
I would say —
Joanne Solomon
Yeah. I would say around 40-ish million, maybe carrying in.
Jake Kimini – Morgan Stanley
Okay. So it's really more like 140 fully loaded?
James Kim
No. It's not true.
Joanne Solomon
On the cash.
James Kim
Yeah, but cash where you're also paying (inaudible) 45 days also.
Joanne Solomon
Jim's right.
James Kim
Yeah.
Joanne Solomon
So you said it's in the fourth quarter, there could be a sale that goes into 2010, so it's really hard to give guidance for the year on that.
Jake Kimini – Morgan Stanley
I understand. I just want to make sure I kind of understand it apples to apples.
One-hundred million is apples to apples with the 342 and then there's going to be some other payables that's comparable to the 44, but not.
James Kim
100.
Jake Kimini – Morgan Stanley
Okay. And then can you give me some color on what you think the depreciation and amortization expense will be in 2009?
Joanne Solomon
Sure, let me just take a quick look. I would expect depreciation and amortization to start to come down because of the lower levels of capital intensity.
We're investing at a lower rate than our deprecation. So, I think for Q1 deprecation and amortization would be about 80 million.
That's total depreciation and amortization, not just what's in cogs.
Jake Kimini – Morgan Stanley
Okay.
Operator
And our next question comes from the line of Sunny Second (ph) with JP Morgan. Go ahead.
[Sunny Second – JP Morgan]
Yes. I had a question on RP basket.
You mentioned the RP basket as zero. Can you purchase debt further than the RP basket being zero?
Joanne Solomon
Yeah. Hi, Sunny.
We would still be permitted to do further debt repurchases to the point the convert is a subordinated instrument so that would have to go against a basket unless there was a light for refinancing or with equity for some other flexibility, but that's correct.
[Sunny Second – JP Morgan]
And so you cannot purchase, convert — but you can purchase seniors as much as you want?
Joanne Solomon
So we're freely able to purchase the seniors. We have some limitations with the amount of converts we would be able to buy back.
[Sunny Second – JP Morgan]
Great. Thank you.
Operator
(Operator's instructions) And we would ask that you limit it to one question and one follow-up question please. And our next question comes from the line of Oliver Corlett of RW Press Ridge.
Please go ahead.
Oliver Corlett – RW Press Ridge
Thanks for taking the question. Just to go back on the pricing one more time.
You're forecasting a gross margin of 5%, or between 5% and -2% for the next quarter. It's kind of hard for me anyway to see that that wouldn't include a fairly large decrease in average selling price.
Could you tell me, do you have any kind of quantitative guidance about how much of a forecast on your sales is down due to price and how much to volume?
James Kim
I don't think we can break that down like that because our fixed base is too large. That's why gross margin dropped as the revenue dropped.
It's not necessarily the price itself. (Inaudible) depreciation, other cost of goods sold, material maybe only through labor we cut down, so maybe little variables, but they are a huge base.
Therefore, as your revenue drops sharply like we are experiencing, that's dropped right down to the gross profit and gross margin.
Oliver Corlett – RW Press Ridge
But material and labor tend to be in the sort of 50-55% range?
James Kim
No, 38-40% area it's been going for a long time.
Oliver Corlett – RW Press Ridge
And labor I mean.
Joanne Solomon
Right. Material is 38%, labor is —
James Kim
Around 14-15.
Joanne Solomon
Yeah. Around 14-15.
James Kim
14-15% area.
Oliver Corlett – RW Press Ridge
So, are you saying that the rest of the costs are typically fixed?
James Kim
Well no, not necessarily, but cost of goods sold can be also a variety of factors which can influence the rebate. That's what we are doing.
Right now — it used to be labor was very much fixed, but we've been cutting labor costs significantly in the last 12 months.
Oliver Corlett – RW Press Ridge
Right. I also remember from the last downturn, there was a tendency to give away a lot of services to customers sort of as an inducement to stay.
Is that also kind of factored in? Do you see that happening this time around?
James Kim
I don't think so. Again, we all learned from last downturn that reducing the price didn't serve anybody.
That's why I can't explain to you clearly how we are handling those — yeah, of course there is a strong price pressure everyone is facing, but we are wiser this time so we are trying to manage that better this time.
Oliver Corlett – RW Press Ridge
Sounds very fascinating. Thank you very much.
James Kim
Last time (interposing) remember, we didn't react quickly to the cutting costs for labor because everybody expected the large V-shaped kind of recovery.
Oliver Corlett – RW Press Ridge
Right. There was also a big bulge in CapEx before that downturn.
I think it wasn't really as bad this time around was it, industry wide?
Kenneth Joyce
That's correct. There's less installed capacity this time than there was at the last downturn in 2001.
That's absolutely correct.
Oliver Corlett – RW Press Ridge
Right. Okay.
Thank you very much.
Operator
And we have a follow up question from Satya Kumar with Credit Suisse. Go ahead.
Satya Kumar – Credit Suisse
I just wanted to clarify on gross margins. The clean gross margin for Q4 should exclude that $9 million additional accrual for (inaudible)?
Joanne Solomon
I'll leave it to you as to what to normalize, but I would say that that was out of period.
Satya Kumar – Credit Suisse
Three is the real ongoing expense on that one, right?
Joanne Solomon
I wouldn't necessarily describe that as ongoing expense because it's obviously contingent on volume, but that was what it was for the period.
Satya Kumar – Credit Suisse
All right. And what interest expense should we model in Q1 and the other income?
Joanne Solomon
For interest expense, I would expect after we (inaudible) for the repurchases, it would be in about 28 million a quarter.
Satya Kumar – Credit Suisse
Twenty-eight? Okay.
And lastly, I think earlier you mentioned that labor was 80 million. That's a drop of 27% sequentially.
Is my math right on that? How much of that is this currently related savings versus the cost that you have actually taken out?
Kenneth Joyce
That's a good question actually —
Joanne Solomon
Yeah. I mean, the numbers we gave in the press release break out the margin impact between how much was with (inaudible) how much with savings, so I would say I would follow that same trend.
The Q4 was 80 million, and I think when you look at Q1 labor, we would expect a rate of about 78 million, but that includes about 5 million for a RIF charge, so a normalized labor would be 73.
Satya Kumar – Credit Suisse
Excellent. Thank you very much.
Operator
And we also have a follow up question from Timothy Arcuri with Citigroup. Go ahead, sir.
Timothy Arcuri – Citigroup
Hi, Joanne. Can we expect any more restructuring charges in the March quarter or in June as well?
Joanne Solomon
Yeah. It's a great question.
So we announce the ones that we know and have been announced. We continue to look at our work force and make sure we stay right size for the current environment.
So then potentially we could have something that we're not anticipating in guidance.
James Kim
Tim, unless there is a huge grand market condition change downward, then obviously there might be. But I think I made it in my prepared remarks that I also look at the possibility of market moving up too.
So, I think we have done what we have to do. It's more important how we implement all these cost cut programs over — nothing can be done over one month or two months, but hopefully within next three, four, five, six months, we can implement everything.
So, you're going to see continuous cut in our expenses.
Timothy Arcuri – Citigroup
Okay. Thanks.
Operator
And I am not showing any further questions at this time. I will turn it back over to management for any closing remarks.
James Kim
Thank you very much and I will talk to you again next time. Bye.
Operator
Ladies and gentlemen, that does conclude our conference for today. (Operator Instructions).
Thank you and have a good day.