Belden Inc (BDC) 2002 Q3 法說會逐字稿

Please stand by. We're about to begin.

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Incorporated conference call.

Just a reminder -- this call is being recorded.

At this time, you're in a listen-only mode. Later we will conduct a question and answer session. If you would like to ask a question, please press star, one on your touchtone telephone. Your question will be taken in the order they are received. If you have a question that has already been answered, you may withdraw yourself from the question queue by simply pressing the pound key.

Now, at this time, I'd like to turn the conference over to Mr. , Vice President of Finance, and Chief Financial Officer of Belden. Mr. , please go ahead.

Thank you, .

Good morning, and welcome to Belden's third quarter 2002 earnings conference call and web cast.

With me here today are Baker Cunningham, our Chairman, President and CEO, and , President of the Belden Electronics Division. Baker, and I will all be happy to answer your questions at the end of our prepared remarks.

If you need a copy of our press release, you can find it at our Web site at belden.com.

I do need to remind you that any forward-looking comments we provide are made in reliance upon the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from any forward-looking statements that we might make. The comments we will make today are management's best judgment based on information currently available. However, the Company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today's press release and the 2001 Annual Report and Form 10-K for more complete discussion of factors that could have an impact on the Company's actual results.

I'm going to go right into a review of our financial results, than Baker will have a few comments and finally, we will take your questions.

So let's look at our quarterly results. Revenues for the quarter ended September 30, 2002, were $199.5 million, down 18 percent from third quarter revenues a year ago. Sequentially, revenues declined 3.9 percent from the second quarter. Our EBITDA, or earnings before interest, tax, depreciation and amortization, was $17.1 million compared with 16.4 million in the third quarter a year ago. We had to add about 1.3 million to our bad debt reserves in the third quarter due mainly to a bankruptcy of a distributor, Communications Dynamic, Inc., or CDI, the parent of a long-time customer, TVC, whose business focus is broadband cable, CATV and telecommunications, as well as the parent of a couple of other distribution customers. A provision of 1.3 million pre-tax was about four cents per share. There was also a significant bad debt provision for in the third quarter a year ago. If we add back those items, EBITDA would be 18.4 million in the third quarter of 2002, down 6.3 million, or 26 percent, from 24.7 million in the third quarter of 2001. Net income for the third quarter of 2002 was $2.8 million compared to 3.8 million in the same period of 2001. Earnings per diluted share were 11 cents compared to 15 cents per share last year and, except for the accrual for uncollected receivables, falls within the estimates we gave you in September. Year-to-date through the first three quarters of 2002, revenues was $614.3 million, down 18.9 percent from the 757.1 million reflected in the first nine months of 2001. EBITDA year-to-date was $52.6 million compared to 77.9 million in the prior year and net income was 8.6 million compared to 24.6 million in the first nine months of 2001.

Let's now look at the results by segment. The Electronic segment had revenues of $142.1 million in the third quarter, down seven percent from a year ago and down 2.3 percent from the second quarter of this year. We had originally expected sequential improvement, but as we pre-announced on September 18th, the continued improvement was just not there. While we did not get the improvement we had expected from North American markets, there is some comfort in the fact that the sales appear to have stabilized. Sales are down only slightly over a year ago and up slight sequentially. Unfortunately, Europe and Asia remain depressed. Sales are down considerably both year-over-year and sequentially.

Operating earnings for the Electronics segment were down 22.7 percent to $10.5 million, or 7.3 percent of sales compared with 13.7 million or 8.8 percent of sales last year. This segment's share of the bad debt expense was $1 million. Without that expense, Electronics' operating income would have been 11.5 million or 8.1 percent of sales.

The Communications segment had revenues of $57.4 million, down 36.8 percent from a year ago and 7.8 percent worse sequentially. Both Europe and North America had declining sales due to the low level of spending by the major communication customers. There was an operating loss of about $600,000, but the business generated positive EBITDA of $2.7 million. Sequentially, the segment managed to reduce the amount and percentage of the operating loss on lower revenues, which illustrates just how much we have improved this business' cost structure. And we aren't done yet. Baker will discuss later additional opportunities we see to further improve this business, especially after considering the opportunities the pending acquisition of presents.

A little over $100,000 of the quarter's bad debt charge occurred within the Communications segment. For those of you keeping score, that leaves us just under $200,000 of bad debt not accounted for in the segments. That's in the column of the segment information.

A year ago, Communications operating loss was $6.1 million, including the 8.3 million bad debt charge for . I won't go into last year's events since many of you remember them, but if any of you would like to hear more, please give us a call and we'll talk you through it.

Now, I'll give you a geographic breakdown of sales for the quarter. The United States accounted for 65 percent of third quarter revenues, and U.S. sales were 21 percent lower than a year ago. Europe made up 20 percent of the quarter's revenues compared to 19 percent a year ago. European sales were off 15 percent from a year ago, but the weaker U.S. dollar helped the European sales comparison. Without the favorable currency effects, European sales were off 24 percent year-over-year. The rest of the world, which Electronics and primarily Canada and Asia Pacific, was 15 percent of sales compared to 14 percent a year ago and decreased seven percent year-over-year. We had increased sales in Canada both year-over-year and sequentially, but these increases were more than offset by decreases in the Asia Pacific region.

Now, turning to our balance sheet and cash flow, cash flow from operations in the quarter was $24.6 million, bringing the year-to-date total cash from operations to $66.5 million. Free cash flow, which we define as cash from operations less capital expenditure and dividends, was $12.5 million or 50 cents per share for the quarter and 36.2 million or $1.45 per share year-to-date. We reduced our inventory $11 million to $146.2 million, which is down from a peak of $188 million mid last year. Our debt is down to $204 million, and debt net of cash was reduced by $12.2 million in the quarter, and $37.5 million year-to-date. Debt to total capital is 37.9 percent, and net of cash 36.8 percent. Our debt at September 30, 2002 is only 2.6 times EBITDA of the previous four quarters, and our EBITDA covers our interest cost five times.

Capital spending for the quarter was $10.8 million and depreciation and amortization was 9.8 million. Year-to-date, capital expenditures are $26.5 million, and we would forecast fourth quarter cap ex to be about $8 million.

Before I turn this over to Baker, I would like to address one item that has been of interest to some of you, and that is pension costs. The bear market has had an impact on the funded status of pension plans for many companies. Belden has three main defined benefit pension plans; a US plan, a UK plan and a Dutch plan. We would like to give you an idea of what we are expecting to be the impact of these pension plans on our cash flow, the balance sheet and the income statement. In 2002 Belden was required to fund a pension plan with about $7 ½ million. While we won't know the exact amount of next year's funding until after year end, when we see how the assets perform for the year, our best guess right now is that 2003 funding requirements might be $10 to $13 million.

Turning to the balance sheet impact, at year-end 2001, Belden recorded additional minimum pension liability of $3.1 million. We expect to record additional minimum pension liability at the end of 2002 of perhaps $18 million. That amount, net of tax, would result in a reduction to equity of about $11 million, or roughly 3 percent of stockholders' equity.

Lastly, the impact we expect in the income statement is for pension expense to increase from $3.7 million in 2002 to something like $5 million to $6 million in 2003, which is an increase in expense of some .03 to .06 per share. As you can see, although these amounts are not insignificant, they are very manageable.

I'd now like to turn the call over to our Chairman, Baker Cunningham.

Thanks, Ricky, and good morning everyone.

Well there's no doubt that our industry is experiencing some of the most challenging conditions of the last 50 years. And while we're certainly disappointed that we have to report weak results, I think we have to keep in mind that this is also a period of opportunity. Belden remains profitable; we consistently generate cash, we've been paying down debt, and our ability to generate cash plus our relatively conservative balance sheet should allow us to take advantage of the situations created by the weak market.

Let me start with the Communications Segment, because that's been the hardest hit, and because we recently announced that we are expanding our activities through the acquisition of the operation of . First of all, I want to remind everyone that we are focused on the copper portion of the telecom network. In the United States alone, the service providers have over $100 billion invested in the copper network. In this vital link between the consumer and the exchanges must be maintained. I know that some people believe that the existing copper network will be made obsolete by new technologies, but the current rate of spending by the regional Bell Operating companies, I think make this unlikely in the foreseeable future. In the meantime, they are spending on copper cables for maintenance, would imply a useful service life in excess of 100 years. while we know that we make very high quality products, I don't think even Belden cables are that good. As we all know, maintenance spending is somewhat discretionary. For example, you don't have to change the oil in your car on schedule. You can wait a few months. But sooner or later, in order to protect your investment in that car, you have to change the oil. So we believe that demand for copper cables will rebound at some point, because the service providers - the Bell Operating companies, will have to protect their $100 dollar investment in their copper plant. We just don't know when that is going to be. Even at lower volumes, we are continuing to reduce our costs through process improvements and modernization of equipment at our Phoenix plant, which brings me to the NORCOM operation. On October 18, we announced that we had reached an agreement with Cable Design Technologies to acquire the NORCOM business in Kingston Ontario, Canada. This plant had sales of about $50 million U.S. during the last four quarters, and that's down from about $100 million the year before. The largest customer is Bell Canada, but there are also a number of other customers in both Canada and the United States. Because of the rapid decline in volume, the plant has been loosing money. And as a small player in the market, NORCOM, I believe, had limited flexibility to both serve their customers adequately and to cut costs enough to make money. Now I don't want to go into a lot of the details since we are only closing on this transaction today, but I would like to say that we do see significant opportunities to make improvements in costs. With this aquisition, we are gaining market share and building a relationship with a major telecom service provider, when the market is down, such that our competitive position will be improved in the short run, and I think greatly improved in the long run when the market strengthens. The initial price is only about $11 million with the potential payout of an addition $8 million as certain future business materializes, and we are financing this acquisition using our existing revolving credit facility. We expect this acquisitions to become profitable and perhaps modestly around the end of the first quarter next year. Now I would like to turn to our electronics segment. Given the general softness of the markets this business, I think, is doing quite well. here in the United States, gross margins and operating margins remain fairly healthy. Sure, the weak manufacturing sector of the economy and the concurrent reductions in capital outlays for plant and equipment have depressed sales of our industrial products, but pricing remains fairly firm and I think orders are relatively steady. Entertainment products continue to be affected by uncertainties surrounding the adoption of high definition digital TV, softness in ad revenues and fewer new projects such as sports stadiums and special events like the Olympics, but once again prices have been reasonably firm and we believe it is just a matter of time before we see this market come back. In data networking, demand for Belden brand products appears to have stabilized, but we have been under some price pressure as excess capacity remains a problem for the industry. In Europe, I would have to say that our European led management team was not as aggressive as we would have liked to quickly address the downturn that we are experiencing there. Accordingly, at the end of the second quarter we did have a management change. Our new manager, , is a long-term Belden employee from the United States, but he does have 10 years of European experience as an ex-patriot.

In the last few months, we've been taking the appropriate steps to size the operation for the current demand, and incurring the costs to do that. So, we expect to see improved performance in Europe in 2003, whether or not we have a market recovery.

As many of you know, earlier in the year we were predicting that markets would improve in the second half of the year. And as mentioned, this does not appear to be happening. So, we're now forecasting total fourth quarter sales to be down about five percent compared with the third quarter, and that's excluding any effects from the NORCOM acquisition.

Lower sales unfortunately mean lower earnings, and we expect fourth quarter earnings to be approximately 30 cents per share, including the benefits from a private label contract that we've had for several years. With the down market, the customer's not taking the product, and we expect to book about $10.6 million pretax as other operating income, similar to what we did last year in the fourth quarter.

Finally, I'd like to take a couple of minutes to talk about an issue all public companies are facing this year, and that's corporate governance. Belden has always followed good corporate governance practices, so the new requirements from the New York Stock Exchange and the Sarbanes-Oxley Act will have very little impact on us.

Ever since we went public in 1993, Belden's board of directors has always been all independent outside directors, except for the CEO, who has always been the only insider on the board.

Our audit and compensation committees have always have written charters, and have been composed solely of independent directors. We've had a formal code of ethics, and a policy against conflict of interest for more than 10 years.

We've already been doing most of the other things that will now be required of all companies.

There are two new items of significance. One is the requirement for an independent nominating and governance committee. Since we have only a seven-member board with six independent directors and very low turnover, the board as a whole has acted as a nominating committee in the past when needed. However, we will be creating a nominating governance committee composed entirely of independent directors in coming months.

The second change is the certification of the financial statements. Frankly, we've always acted as if the signing of the various SEC reports, such as 10-Qs and 10-Ks, were tantamount to certifying the statements, so we have absolutely no problem at all in making the required certification under the new rules.

Well, that completes my comments, so I'll turn the conference back to .

Thank you, Baker.

We now would like to turn it over for questions, and the operator, , who will remind you of the procedures for asking your questions.

Thank you.

Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit one on your touchtone telephone. If you'd like to withdraw yourself from the question queue, press the pound key. Once again, that is star, one for a question.

And our first question will come from Michael Schneider with Robert W. Baird.

Good morning, guys.

Good morning.

Hi.

Maybe we could spend a minute first on the communications segment. I'm actually quite impresses at the margin recovery there during the quarter, despite the volumes. Could you give us a sense -- the second quarter seemed to be lower in operating profit than I would have expected; this quarter's significantly higher. Is there some lumpiness of severance expenses or something hitting the P&L, and maybe you could tell us specifically what actions were taken in the third quarter in the communications segment.

OK, Mike. The primary driver is continued reduction of headcount, as well as managing variable expenses. We took additional reductions in people during the second quarter as it became apparent the market was not going to recover and, in fact, was going to continue to get worse, so while there wasn't actually severance, we do have a notice period under the union contract and so forth that we have to offer and then there's some minimal severance on the salaried people. So the second quarter had some inefficiencies as we went through the waiting period on the notice to reduce folks as well as some modest severance on some reductions in the selling, general and administrative. But I would say another equally large factor is just the continued efficiency out in the factory as we've made some capital investments that have made certain of the processes much more efficient and as we continue to improve the efficiency of the conversion of the product and a lot less scrap or out-of-spec material. All of these things are just continuing to gain momentum as we implement the three year plan that we laid out when we bought that business to get them competitive. And so all of that's starting to come in and it's reflected in the results.

And what do you believe break-even in that business is right now, Ricky, on the communications side?

Well, it's a moving target as we continue to see opportunities to improve the efficiency, but absent any meaningful improvements from here, we probably need another 25 to 40 million or so. It's a bit of a wide range, but I'd say 25-plus million of volume in there to really get to break-even.

And ...

On an annual basis, yes.

... annually, right. OK. And then just curious on your thoughts and some of the comments out of the . If you look at the comments they're making on total cap ex expenditures they still expect to make in 2002 back into what they've spent year-to-date. You're looking at a huge fourth out of the in terms of cap ex and the numbers specifically go from 4.6 billion up to 6 billion in quarterly cap ex out of the as a whole. Seems very difficult to believe that sequentially, they're going to be up $1.5 billion, but these are the numbers they're putting out themselves as of just the last few weeks. Give me your thoughts and, you know, obviously that directly conflicts with your expectations in the communications segment for the fourth quarter. Is there some disconnect that I'm not compensating for or is it just the case where these guys are unlikely to spend what they've said they'll spend?

I think it's the latter. We've experienced now for almost two years, certainly a year and a half, that their appetite's been greater than their actual spending in terms of what they've told us, as well as what they've communicated publicly, and they've continued to cut cap ex greater than what they have forecasted and so we continue to get disappointed with that so we are a lot more conservative in our outlook for the fourth quarter.

And can you tell us where the inventory stands and how good of a read you really have on inventories in some of your largest ?

Actually, inventories have never been a big issue, but to the extent there were some, they've continued to come down. We have relatively good visibility into the inventories, as well as the--some of the service providers that do cable cutting and other kind of value-added services. They have been consolidating inventories and reducing inventories throughout the year and it's dampened, certainly, the demand for our products, but I don't know that it's had a huge impact. Clearly, the big decline we've seen has been mostly just weakness in the end demand as opposed to a big factor on inventory. But I would not anticipate inventory reductions to materially affect us any further.

OK. I'll get back in line. Thanks.

Our next question will come from Jerry Labowitz with Merrill Lynch.

Yes, can you give us a little more color on the network and cable pricing particularly the last quarter? And then the more enhanced versions versus competition, have you seen much change this quarter?

Seems to be additional pricing pressures this quarter. I think it - the pricing began to move at the - at the end of the last quarter perhaps more aggressively, and we saw that continue into this quarter. I think that there was perhaps more room to move on the - on the higher performing products, so those margins remain pretty good. So, percent-wise, perhaps there's a bit more movement there.

But on the lower-performing products, the and , that's been - that's been very aggressively priced in the marketplace and it seems like there are some folks out there who are, you know, selling at marginal cost and, you know, trying to keep their factories running. So, pricing pressure has been significant over the last three months and beginning in the last quarter.

OK, thanks, Pete.

And our next question will come from Jeff Beach with Stifel Nicolaus.

Yes, good morning.

Good morning, Jeff.

Morning.

A couple of things - the lowered expectations for the fourth quarter look like it's oriented around Electronics. Can you expand a little bit more on the segments and geographic markets there where you've lowered your expectations?

general, and then Pete may want to fill in.

And you're right, relative to expectations most of the softness is coming from Electronics. We historically have seen a strong fourth quarter in Electronics somewhat driven by major projects trying to get completed at the end of the year as well as distributors meeting certain quotas and rebate levels as well as historically, we've had a few more days just how are internal fiscal accounting calendar falls. And we were expecting a similar uptick - maybe not to the great same extent, but a similar uptick in the fourth quarter.

Based on the softness that we saw late in the quarter particularly in Europe, but the flatness, I should say, in North America, we now are forecasting virtually no improvement on the top line, and therefore, very little if any, improvement in earnings going into the fourth quarter.

And that's pretty much across each of the markets with the one possible exception being industrial. We are still seeing some pickup in the industrial, particularly our product line is seeing some continued momentum going into the fourth quarter. Networking, as Pete talked about, the major projects just aren't getting released and we're not as bullish as we once were on the networking side. And then Europe, we continue to be concerned about it as we go into the fourth quarter.

Pete, is there ...

Yes, I would just add that, again, I think the response relative to expectations is accurate; and that is that, you know, as we forecasted the year coming out of last year, we were thinking we were going to have sequential growth quarter after quarter. And we did have some growth in the first half of the year even into the third quarter. The problem with the forecast is that we continued to expect some growth in the fourth quarter, and we're not seeing that growth now. I think it remains to be seen whether in fact it will pick up some, or when it will pick up, but the lowered expectations for the fourth quarter relates to the fact that we're not seeing the growth that we anticipated, and while the business is performing at a, let's call it a reasonably acceptable level, we were anticipating really nice leverage as the volume grew, and that--it's that leverage that we're not being able to achieve.

Okay. Also, can you comment on the--your expectation for the take-or-pay payment this fourth quarter?

Yes. First, just to clarify, the take-or-pay we anticipate recognizing it here in the fourth quarter, and would expect receiving the cash, if not in the fourth quarter, very early in January. The predominant portion of the take-or-pay does expire this year. There is a small amount, more in the 2 to 3 million potential opportunity if they don't purchase product, although again, we would prefer them to purchase the product, but if they don't purchase product, the take-or-pay amount for the next several years after 2002 is only $2 to $3 million.

And you expect to receive that payment at this point?

At this point, we have not been provided any forecast from this particular customer, beyond this year, so not sure whether they will take sufficient quantities to consume the 2 or 3 million or not. Just haven't had any conversation with them beyond this year.

All right. Thanks.

Our next question will come from Devlin Lander at Morgan Joseph.

Thank you, I just wanted to ask a couple of questions about . What is the--what's the capacity utilization in your Phoenix plant now, and what would happen if you moved the business to Phoenix, or can you do that, or what are the different specifications? Because it's, you know for versus you know the US RBOCs?

I can deal with some of those; some of them we're still developing as we close the transaction today. In terms of the capacity utilization, in Phoenix, we're currently at about 50 percent of capacity in total. Again, it varies greatly by certain product lines, but in total, we're at about 50 percent of capacity, so from a theoretical standpoint, just answer your question, you could relocate all of the production in Canada within the existing capacity of Phoenix, from just a theoretical standpoint. The product mix is very similar; does have a different specification that it revolves around certain aspects of the primarily outside plant cable, and those would be issues that would require some different tooling, and those types of changes in order to produce that outside the facility in Kingston. We are looking at all of the opportunities that acquisition presents, as Baker talked about and have not announced any decision at this point as to whether we'll be moving production between the various plants and so forth, but certainly we'll be looking at all those opportunities.

Okay, great, thanks.

Our next question will come from , .

Can you give us a little bit of an idea on the Communications Segment, because it's so depressed, and what you're going through here, but looking at it a little bit longer term, what you expect to--the operating profitability margin potential in this business, given that you have taken so much of the cost out. Really don't have a good sense of what the upside of your this segment is now, given what you are doing.

Right. We'll just kind of go back a little in history. When we acquired the business two-and- a-half plus years ago, most of the rest of the market with similar products was enjoying EBIT margins in double digits in most cases, and low key. And at that point, we committed ourselves in a three-year time horizon to get that business to at least double-digit operating margins - earnings before interest and taxes. And actually have exceeded the cost reduction objectives we had set three years ago. Unfortunately the market has collapsed and therefore haven't come close to seeing the double digit operating earnings, but certainly the cost reductions have enabled us to sustain that business and keep moving with it. So I do believe when the market recovers and as Baker said, we certainly believe it will, maybe not to quite the peak levels we saw in 2000, but certainly will recover. I think double digit operating margins will still be a target. Obviously pricing will be interesting to watch as new major contracts come up and as the industry to absorb some of the excess capacity, but the industry appears to be addressing that. There have been quite a number of plant closures and some limited consolidation going on, so certainly our long-term expectation is to get that business back to double digit operating margins, and that will be a combination of further cost reductions, obviously increased volume and then a much improved mix, one of the more profitable product lines out of that business is central office cable, which is virtually a nonexistent market today, but we'd except that to recover. So with the added volume, further cost reductions and then improved mix, we are still hopeful over the long term to get back to double digit operating margins.

Can you give us a sense of - in terms of a cap - capacity utilization likelihood as to what would be required to potentially attain, or get something close to that? Whether you would have to be at 50% improvement from where you are today, in terms of the nature of your business there?

We would target having capacity utilization in excess of 80% in order to get appropriate level of efficiencies in the fixed costs there, would love to get it to closer to 85% to 90%, never want to get all the way to 100%, because you need to react to spikes and all that occur. But would want to and would need it to be over 80%, probably, to see those double digit operating margins.

OK, and then one other area. On the contracts, as they fall off here for next year, and the follow , should this customer not come back in here, what are your plans to try and replace that business?

We will look to certainly replace the central office portion of that business, and have been aggressive through out the year in getting our products approved, because part and parcel of the agreement we had was a non-compete, so until actually this current year, 2002, we were prohibited to participate in most of that market out of that Phoenix operation. So throughout the year, we have been positioning ourselves and have developed the products and have gotten approvals from virtually all of the end customers for that product. As I mentioned before, that market is flat on its back, so we haven't enjoyed much sales, but when that market recovers, we hope to take our product direct, and replace a meaningful percentage of what we had been doing on an indirect basis due to private label on the central office side.

Another major product in that take-or-pay was data networking type cable, and what we're looking to do there is just relocate that equipment over into our electronics business in some portions of the world where we're a little bit strained on capacity, or will be when the market recovers. And so, we'll reduce some of the cost in Phoenix by relocating that equipment and capability, and we'll avoid capital expenditures that we might otherwise have had in the electronics business, but are not looking at one-for-one replacing that business within the communications segment.

Thank you very much.

Bob, I'd also like to make a little comment to put some historical perspective on it. Throughout the 90s, the telephone companies of the United States spent annually about one and a quarter billion dollars on copper wire. And that was considered sort of normal maintenance, normal routine, and that dates before the Telecommunications Act. After the Telecommunications Act, there was not a big change. We did not have a big spike up in demand the way they did in fiber. And currently, they're looking at spending something on the order of $700 million.

So, I think that the one and a quarter billion for the industry domestically is a much more normal spend rate, just to maintain and do the routine things with their networks than their current level. So, we should see significant capacity improvement -- improvement in the capacity utilization just when they get back to kind of spending what they kind of normally would spend, without having any big advance from what their historical patterns have been.

Thank you very much for that.

Next question will come from at Capital.

Gentlemen, thank you for taking my call.

Actually, two questions, if I could. First, I'm wondering actually how confident you are that that take-or-pay customer actually will pay in cash within the next 60 days, or whether there's a chance you might have to reserve for it.

We're extremely confident that they'll pay. We had the same thing last year. They paid us in cash pretty promptly at the end of the year, and we've had communication with them throughout the year, and are extremely confident that they will pay in cash.

That's great. And then, a second question, if I could. You mentioned beside the NORCOM acquisition -- and also, you mentioned that the European sales team next year will be stronger than they were in 2002. What sort of other levers of growth should we be thinking about for business for 2003?

Well, we're doing some activities, particularly in Asia and in the Pacific area. With respect to penetration we're looking to gain share in those markets. We also have a number of initiatives in the U.S. where we see market growth opportunities. We're looking at some channel changes, perhaps some retail, which may be a stretch for us. But, our interest is to try to get to the guy who's buying from retail today, so we're looking at some channel issues that we'll have to deal with, and a number of market initiatives within the U.S. market for further penetration and share gain. New products, in particular, I think are gonna be of some benefit on the home-networking market, which is beginning to pick up nicely.

In communications besides NORCOM we continue to see great opportunity in the distribution market, which had not been a major channel for our communications business in the U.S., or for that matter, in Europe. And we are seeing opportunity today. The pricing is a little bit challenging, but particularly, as we continue to improve our cost position, could be big growth opportunities. That's historically a $60-plus million market of which we've had a very small piece of--well in excess of 60 million actually--of which we've had a small piece of. In Europe, while we, with the management change, are looking at opportunities, we're also looking to expand on the communications side into potentially growing markets in Eastern Europe. We have a factory in Hungary that is very cost competitive and are looking to maybe stretch their geographic reach with that very cost competitive product to where there are some opportunities in Eastern Europe that we here before have not served. And then there's always opportunity in Central Europe in communications. We mainly were just serving the U.K., but with the management change we're trying to realign and get a more European--Pan European, focus for communications.

Well, even discounting the sales a bit, on the cost side we're continuing to invest in more efficient equipment, particularly in the communications area, but also in the electronic area. So, you know, we're kind of working on all fronts to try to improve our competitive position, both from a cost and from a market standpoint.

Any follow-up on Mr. Yellon?

No, thank you. Thank you very much.

We'll next go to with Sigma Capital.

Thank you and good morning. I'm wondering if you guys, looking at the balance sheet, have any plans going forward to start accruing for some bad debt given that we've had events such as what happened this quarter for last couple of three years or so?

You sound like my audit committee.

Yes

Well, you know, just looking at the balance sheet, there doesn't appear to be any accruals in that and I'm wondering if, in the best of times, we had some things come up, what the thoughts are going forward and if we should model that in for next year and the following year?

We--very good question and we are looking at that. Just to give a perspective, until the last two or three years, bad debt expense has just really been a non-event for our business and when we acquired the communications part of our business, they had never really had a bad debt situation given that they're selling to the big regional Bell operating companies and other large service providers. Obviously, that has changed in this current environment and we've had, while not a lot of individual problems, we've, unfortunately, had two or three reasonably large problems. So we are looking at not only how we reserve for bad debt, but actually more important, how stringent our credit approval process is and how we manage credit and try to reduce our risk on the front and then, obviously, need to factor in the recent history as we look forward. However, I wouldn't expect a big issue in terms of a need for providing for bad debt and what--that's a combination of we still predominantly--if you look at our biggest customers, they're predominantly very stable communication providers or major distributors that seem to be in adequate financial condition. On the smaller ones we're going to address that with a very aggressive managing of our credit policy and risk, but we will likely be looking at some, based on recent history, need to provide some general reserves ...

Do you have some sort of sense at this point, Tom, I know it's pretty early to start thinking about things like that, but what should--what would a prudent number to think about for next year be?

Don't really have a number to offer at this time, no.

Gotcha. And then just big picture, another question, I'm trying to understand the business a bit more. If my understanding of the RBOCs and their posturing on cap ex is going to be something down next year I've heard estimates all over the place, but directionally down, I'm wondering, you know, sort of tailing on the last question, how we're supposed to think about growth going forward given that the major portion of the sales comes from the RBOCs.

Put a - put a perspective, yes, about 20 percent - 25 percent of our total sales would come from communications service providers on a worldwide basis. We are certainly committed to try to get back to break-even at the operation earning line. Even at these depressed levels, we've been fortunate to be able to stay positive EBITDA, but want to try to get that to operating earnings. And we'll be striving for that next year without recovery, but I think the key is, as Baker mentioned before, it's hard for us to envision, despite the cap ex forecast that the RBOCs have put out, that they can continue to spend at what is roughly half of historical levels or almost half of historical levels of the maintenance on copper cable. So we think it will pick up, but absent that, we're committed to at least keep the business at break-even.

Got you. Thank you very much. Have a good one.

Next question comes from , Robert W. Baird.

m?: Morning.

Good morning.

Wondering if you had any schedule of when the major RBOC contracts are coming due.

We - I can give you that. We've got Qwest is the next one that is coming up, and that will come up in early 2004, I think - either late 2003 or early 2004. The next one will be SBC. We're only about two years into that five-year contract. And then the last one is Verizon, and they actually manage the Bell South copper procurement as well, so that's all into the same contract, and we're only about a year-and-a-half or so into that one. British Telecom - getting outside the U.S., B.T.'s contract does come up fall of next year - September of 2003, and we're actually currently in discussions with them, hoping to be able to extend our current arrangement. But absent that, the contract would come up for renewal fall of next year.

But, and I would also add to that one, even if there were some negative impact on the B.T. contract from the standpoint of the volumes that we would enjoy versus some of our competitors, that really couldn't affect next year because by the time they make the transition, it would no doubt be 2004. So, the first impact, really, is going to be 2004 impact of any of these contracts.

And I guess another I ought to mention, since we're hopefully tomorrow I'll be servicing them, will be Bell Canada. Their contract comes up next summer. June - they tended to have one or two-year type contracts currently that arrangement is on a little more informal basis just given the long history that they have had with the Kingston operation. It's not quite as formalized and they have tended not to go out and as broad an RFQ process, yet no guarantees it'll stay that way, but the current arrangement based on historical practice is - would come up for renewal this summer.

One final question related to the acquisition - I believe their employment contract for the - for the building comes due in February. Do you intend to renew that union contract?

You're correct, their union is the Canadian Auto Workers, and it does come up for renewal in February, and we're still too early to announce anything on our intentions there.

Thank you.

As a reminder, star one for an initial question or follow up. We do return to Jeff Beach of Stifel Nicolaus for a follow up.

Yeah, I'd like you to comment a little bit on the troubles by two of the largest cable manufacturers in the country. I think, at least prior to this, a lot of the price--severe pricing has come from them, and I just wondered if there's a new round of pricing pressure, if it seems to be emanating from the players that are struggling more, and in the past, I've heard that the price reductions really didn't result in a lot of volume, but are you taking market share from some of the financially troubled people? Are they starting to make some headway to take markets share from others through the pricing? Can you talk a little bit about that?

Yeah, I think I would say that we feel like we've taken share in this down market, but at this point, our intelligence suggests that we continue to be relatively the high price guy. Our conclusion is that we don't--I mean, the last thing in the world that we want to do is lead price down, but we're prepared to follow. We know our cost position is competitive, and we're prepared to respond as required, but we certainly don't want to lead price down. We do feel like we're taking share--there are some players out there that are struggling. The problem today is the volume is just not there; the demand is just not there, and you've got way too much capacity chasing not enough demand, and as one of our competitors found last year, I think, a you know, a wholesale--a huge wholesale price cut may yield a bit more volume, but not nearly enough to make up for the differential in price, so we'll follow it down as--if it continues to move down, but we're not going to lead, and we're going to try to be very cautious in making further price cuts.

I would further say that if you are thinking of the same two that I'm thinking of, we really only compete with them on the Communications side, that's where the major competition would be. Most of that business is done on fixed-price, long-term contracts, so that that pricing would not be a big issue. A little bit perhaps in the Distribution business, but in the big area of their business, we're an observer of the industry, if you will, it appears to me that they may be under more price pressure. Those are areas where we don't compete with them, and don't have offerings. Building wire, magnet wire, things of that sort.

All right, thanks.

And we return to Michael Schneider with Robert W. Baird.

I'm wondering if you could spend a minute on just and the DSL roll out? Obviously, Ricky, we've talked about project for some time, and the fact that it's basically been stalled. I understand the SEC is set to rule on some of these access provisions, and it looks as if and these guys are going to get their way. Do you have any color on what you've heard out of these guys, and what it may mean for your business in 2003, if indeed they restart these programs after winning their access battle?

I don't have anything that I've heard, other than what's public, in terms of our conversations with . Our opinion though is, once regulatory relief is granted, that it would be a great catalyst, not only in broadband, but just overall, in releasing some purse strings on some of the maintenance cap ex, because I think some of the political pressure they're putting to bear is not only on the project pronto being cancelled at SBC, but all of their service providers wanting to send the message that without some regulatory relief, we are going to really be tight on our capital spending. So I think it would even go beyond that. The only visibility I would have to add support to the opinion, is in Oklahoma. That is one of the states that we service for SBC, and when the state offered some regulatory relief, immediately SBC increased significantly their capital spending plans in that state to kind of send the message , giving them the regulatory relief, but also sending a message to other states that if you do this, there is some economic benefit for you. So there was at least that one example where very quickly upon getting some regulatory relief, they did increase their spending, so certainly see nothing negative and would think it would be positive how quick it would be, is obviously hard to forecast, but I would think it would be very positive, if regulatory relief is granted. But it may then need to roll out at each of the states. There is just so much the federal government can do, and then it's got to be addressed at the state level as well.

OK, and then Peter, maybe you could comment on Europe just generally. It sounds like it took a material step down during the third quarter for you, and we obviously have seen all the GDP figures out of Germany, France, etc., that remained disappointing. Is there anything more than that going on in Europe this quarter?

No, I don't think so. I think - you know, Baker made the comment that perhaps we weren't being as aggressive as we should be in the market, and you know, we took some moves in the first half to address that situation, but I think that clearly what we are seeing is market driven reductions, and it's not share loss or anything like that.

OK, then could you give us some similar color on Asia?

Your Asian volume is actually up. From a volume standpoint, we are up reasonably nicely, and I can say that. The problem is pricing is under pressure, and so we don't get enough - the volume increase is not sufficient to offset the negative pricing, but demand over there is reasonably good, and we have added some people over there. You know, we've put in some inventory in some strategic locations, so I think we are doing OK over there. Price pressure has been reasonably difficult and we are responding - we are looking for some lower costs manufacturing venues and trying to get some lower cost product out of that - that region, but demands been OK, price is under pressure.

One qualifier on the demand there, it does make a negative year-over-year comparison as the fiber, we were -

Yeah.

-- doing some fiber business in Asia-Pacific a year ago. We do have a fiber capability in the plant in Australia. That business is evaporated, so Pete's comments are excluding the impact of loosing that fiber business -

Correct.

-- a year ago.

OK. That's helpful. Thank you. Final question, I guess just a more macro question. We have seen the contract manufacturers and their OEM customers rapidly moving production from the US over to Asia and into Eastern Europe. I was just wondering what strategies, or what model you guys have put in place to try and capture that transfer production, because if - clearly this outsourcing trend has picked up an amazing pace, especially overseas, and I am wondering if your US decline and only modest gains in Asia reflect that you guys maybe aren't capturing all of the production that your customers are putting overseas?

I think that's a possibility, but I don't think it's severe. I would tell you that one of the things we're doing to put inventory in in Asia is -- because we're servicing customers over there who have moved over there to do their contract manufacturing that's coming back to the U.S.

So, we're strategically putting inventory into Asia to service those customers who have gone over there. And that movement has been significant, as you suggest. It may mean that some of that some of that's been down in the U.S. Perhaps, I don't know.

But, we do have some additional plans to try and capture that increment of volume that's occurring over there. And, you know, we'll stay with it.

I want to also add, and I think it's very important that a relatively small piece of our business goes into somebody else's piece of equipment that then is sold in the U.S. Most of our product is deployed directly to the end-use customer here in the U.S., whether it's data networking, or whether it's telecom. And the same is true in Europe.

And so, the ability -- the fact that a lot of these contract manufacturers are moving offshore to do the assembly work and for a lot of OEM type products, is gonna have a relatively small impact on us, even if we end up losing that business because it does go offshore with them.

And some support to that -- is the one exception where we do sell quite a bit to these assemblers and so forth, and their business is up very nicely. So, while may be losing a little bit, it's not showing up in any meaningful way.

OK. Thanks, you guys.

At this time, there are no further questions. I'd like to turn the conference back to Mr. for closing remarks.

Well, thank you very much, . And thank you, everyone, for participating in our call today. As Baker said, it's a very challenging market out there at the moment, but we think we're doing the right things in the short term to maintain profitability, but also the right things for the long-term to be in a position to take more than our fair share of the recovery when it happens.

So, thank you very much for your interest. And if you have any further questions, don't hesitate to give me or Dee Johnson a call here in St. Louis.

Thank you, and have a great Halloween.