Belden Inc (BDC) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Belden, Inc., conference call. Just a reminder, this call is being recorded. At this time you are 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 Touch-Tone phone. Your questions will be taken in the order they are received. If you are in the question queue and would like to withdraw your question, simply press the pound key.

I would now like to turn the call over to Mr. Richard Reece, Vice President of Finance and Chief Financial Officer of Belden. Please go ahead, sir.

Thank you, Tonya, and good morning. And I'd like to welcome all of you to Belden's fourth quarter 2002 conference call. With me here in St. Louis today are Baker Cunningham, our Chairman, President and Chief Executive Officer; Peter Wickman, President of the Belden Electronics Division; and Bob Matz, President of Belden's Communication Division.

Baker, Pete, Bob and I will all be happy to answer your questions at the end of our prepared remarks. As you listen, it will be helpful if you can have handy a copy of the schedules that we attached to the press release. If you need a copy of our press release, please check our website at www.belden.com.

I do need to remind you that any forward-looking statements we provide are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment, based on information currently available. Our actual results could differ materially from any forward-looking statements that we might make. 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 in Form 10-K for a more complete discussion of factors that could have an impact on the company's actual results.

The process this morning is that Baker will give an overview of the significant events in the quarter and summarize the results for the quarter and the year by myself. And then we'll go through the detailed financial statements and then Baker will give you an outlook for how we believe 2003 will unfold. And then of course, as I mentioned before, we will open the lines for any questions that you may have. So now I'd like to turn it over to Baker.

Well, thanks, Ricky, and I'd like to begin by telling you that there's no doubt 2002 was one of the worst years in our 100 year history. Worldwide industry conditions caused us to see declines in almost every product line and almost every geographic market. It was the second consecutive year-- yearly decline that we've suffered and, assuming that 2002 was the low point, we experienced a peak-to-trough revenue drop of about 30%.

Throughout this period we've been reducing output, cutting expenses, lowering our employment levels, but as always seems to happen when there's a prolonged downturn, we had a hard time getting ahead of the falling demand and so earnings did suffer accordingly. By the second half of last year it was apparent that some more drastic actions were needed to establish a sound base for the future and that's when we activated the plans that culminated in a significant charge in the fourth quarter.

As we stated in an earlier press release, the charges to exit some non-core product lines, further reduce employment -- mostly outside the United States where it's much more difficult and expensive to change employment levels than it is here in the United States -- and to recognize the impairment of assets that have been made obsolete by newer technology or, for a variety of reasons, are clearly in excess of our foreseeable needs in the future.

So let me go into a little bit more detail. Because of the lower market demand, which is something that's really affecting our entire industry, we believe that it is necessary to reduce employment and the floor space that we devote to manufacturing in various international markets. We had made some modest reductions beginning back in 2001 but given the current situation, more was needed.

As most of you are probably aware, it's much more difficult to adjust the size of your operations in many international locations because of the co-determination laws, industry-wide union contracts, local customs and other factors. So we're in the process of discussing options with the various folks at these locations that we need to talk to, to effect the reductions that we believe are needed, which in total were about 225 people and we expect this to cost us about $8-1/2m in severance and other cash costs. This reduction in people and equipment will permit us to consolidate and reduce the amount of space we occupy for manufacturing and to achieve ongoing reductions in fixed costs.

In addition, we're going to exit a few non-core products. For example, we have been supplying wire for a special magnet coil that's used to manufacture television sets and computer monitors and our prime customer here was Philips and they and others are in the process of relocating their manufacturing of televisions from sites that are near our plant in Europe to the Far East and South America where local wire producers have a distinct rate and duty advantage.

Furthermore, we're seeing a shift to flat-screen TVs and computers, which don't need a magnetic coil at all. So our volume's been declining and it became clear that eventually we would have to either abandon this product line or to make a major investment to move production closer to the customer.

Since this is a component with no discrete Belden brand identity, we decided that now was an opportune time to make a graceful exit and the same was true for electrical shaver cords and the tinned wires that we supply to component manufacturers. We also decided to bite the bullet on single-mode optical fiber used primarily in telephony long lines and CATV trunk cable.

We've never been more than a tertiary player in this market. Sure, we could do OK when the market was in short supply, but in normal times and certainly in times of market oversupply such as we have now we found it very hard to compete with the larger, more integrated suppliers.

It's our opinion that the single-mode fiber market will not recover quickly and, given the capacity of the largest suppliers, we could be looking at many years of struggling to make this line profitable. Accordingly, we have opted to exit the market. We are going to stay in the multi-mode fiber market, which is closely aligned with our copper data cable offering, however, and where the industry over-capacity problems are not nearly as severe. Naturally, in this process we have some inventory and some special purpose equipment and tooling that are of limited or no value.

In communications we've been modernizing our equipment as part of our long-range plan to improve our competitiveness. In 2002 we installed some new, state-of-the-art gang twinners that are far, far more productive than the old equipment we inherited when we bought this business a few years ago. With the lower demand and the fact that we have more of these new machines scheduled for installation in 2003, our old twinners are obsolete and are no longer needed.

We also have some insulating equipment that was leased to an entrepreneur to produce singles for us. He's gone out of business. The productivity improvements in our own insulated lines now makes this equipment surplus to our future needs.

The total non-cash charge related to the asset impairment and other non-cash expenses for all the actions I just outlined is about $36m.

In other activities, we're continuing to consolidate manufacturing in the communications segment with the formal announcement that we will be closing the Kingston, Ontario, plant and consolidating production into our U.S. facilities. The Kingston plant has about 500,000 square feet of floor space and employed about 300 people.

We have ample capacity in our other facilities to handle the existing demand, simply by transferring a minimal amount of equipment and tooling and recalling a few of our production employees who have been laid off. So we expect to cease production in Kingston by the end of the second quarter and to be completely out of the facility by the end of the third quarter. The ongoing benefits to Belden from this consolidation are lower depreciation from reduced asset values, indirect labor savings from higher utilization through consolidation and lower occupancy costs from reduced square footage.

Although I don't want to suggest that the charges that we took were somehow not real or should be ignored, I do think that it's helpful to look at the condition of the underlying business. So if we eliminate all the noise -- both positive from the take-or-pay contract that'll be discussed a little later and the negative from the one-time charges -- the picture that emerges is that revenues have been essentially flat for a couple of quarters, pricing has been relatively stable with a slight bias on the negative side and earnings are marginally positive. And we believe that this sets the stage for 2003 and we'll get into the outlook for the future in a few minutes.

Now I'd like to ask Ricky, our CFO, to go into some of the details of the fourth quarter and the full year results.

Thank you, Baker. I'll begin with the fourth quarter results. The revenues for the quarter ended December 31, 2002, were $199.1m, down 5.8% from fourth quarter revenues a year ago. Sequentially, revenues were flat compared with the third quarter. If you back out the revenues from the business acquired during the fourth quarter, $5.7m, then total consolidated revenue is down 8.4% from a year ago and 3.1% lower sequentially.

Our EBITDA -- our earnings before interest, tax, depreciation and amortization -- was a loss of $19m after the charges, compared with $23.8m in the fourth quarter a year ago. If we back out the charges and back out the take-or-pay income from the fourth quarter of 2002, that adjusted EBITDA would be a positive $14.6m. EBITDA in the year-ago quarter, adjusted for the take-or-pay, was $15.5m. In the third quarter of 2002, EBITDA was $17.1m.

Baker mentioned the acquisition we completed during the quarter. The initial purchase price for the NORCOM business was $11.3m, with contingency payments over the next three years of possibly as much as $8.1m if we are able to maintain certain levels of business with the customers of that plant.

The assets purchased, including the inventory, receivables and equipment, net of accounts payable and the value of the working capital was $15.7m. We did not purchase the building. We accrued about $13m for the likely cost of closing Kingston.

Also during the fourth quarter, we took charges of $44.7m pretax, or $1.32 per share, related to the decisions to exit certain product lines and dispose of some excess equipment that Baker talked about earlier. $32.6m of that charge is a fixed asset impairment charge and the remainder is mostly severance cost and some inventory write-offs. Attached to our press release, you'll see schedules that break this out for you. The cash portion of the charge is about $8.5m.

The other item I'll call your attention to in the fourth quarter was the income under the take-or-pay contract, which was $11.1m, which we recorded as other operating income. I'll expand on that when we discuss the communication segment's results.

With everything in, including the charges and the take-or-pay income, we had a net loss of $24.5m in the fourth quarter of 2002 compared with net income of $6.4m in the fourth quarter of 2001. That was a fourth quarter 2002 loss per diluted share of 99 cents compared to an earnings of 26 cents per share in the fourth quarter of 2001.

If you want to calculate on a pro forma basis how we did aside from the charges, we had income of 33 cents per share. If you further exclude the take-or-pay income, the result is pro forma income of 3 cents per share, which is shown in the supplemental schedules. The pro forma 3 cents per share is equal to our earnings per share in the fourth quarter of 2001 if you net out the take-or-pay income from the quarter, as well, which was $8.3m pretax or 23 cents per share last year.

The NORCOM acquisition was dilutive by about 2 cents per share in the fourth quarter, as we expected.

So on an apples-to-apples basis, we generated 2 cents per share more earnings in 2002 on 6% lower revenues than what we had a year ago. We did a few cents better than our own expectations for the quarter and we attribute this to the successful negotiations of a property tax benefit that helped us by about a penny and will continue to help us in future quarters and to our management of discretionary spending where we were a little more successful than we forecasted.

If you look at the full year 2002 results quickly, revenues were $813.3m, down 16% from the $968.4m in 2001. EBITDA for the year was $33.6m after the charges, compared to $101.7m in the prior year and the net loss was $15.9m compared with net income of $31m for the year 2001. Results of 2001 included the take-or-pay income of $8.3m and a net gain of $1.2m from sale of our interest in a joint venture and the adoption of FASB-133.

The effective tax rate for 2002 was 32%, but because we set up some valuation allowances in various tax jurisdictions related to the charges, the net tax benefit in the year was less than 32%.

On a pro forma basis, if you set aside the charges and the take-or-pay income, net income for the full year 2002 would have been $9.4m or 38 cents per share, compared with $24.7m or $1 per share in 2001.

Let's next look at the results by segment. The electronics segment had revenues of $142.6m in the fourth quarter, down 1.5% from a year ago and flat compared with the third quarter of this year. The electronics segment had operating losses of $21m, which include charges of $29.5m. This segment's share of the fixed asset impairment charge was $17.5m and other charges amounted to $12m.

Without the charges, electronics operating income would have been $8.5m or 6% of sales compared with operating income of $10.7m or 7.3% in the fourth quarter last year.

For the year electronics segment's revenues was $567.1m, which is 10.8% lower than sales in 2001. The operating profit, including the $29.5m of charges, was $11.3m. Without the charges, the electronics segment's 2002 operating profit would have been $40.8m or 7.2% of revenues compared to an operating profit of $61.9m or 9.6% of revenues in 2001.

Let's now turn to the communications segment. This segment had revenues of $56.5m in the fourth quarter, including $5.7m from the acquired Kingston business. If you back out the Kingston revenues, then communication segment sales were down 23.6% year-over-year and down 11.5% sequentially from the third quarter.

There was a fourth quarter operating loss in the communications segment of $6.1m, which includes $15.2m of the fixed asset impairment charge and it also included income of $11.1m under the take-or-pay contract. Without the charges and without the take-or-pay income, the communication segment's fourth quarter operating loss would have been $2m or 3.6% of sales. If you back out the Kingston sales of $5.7m and the Kingston operating loss of over $700,000, the communication segment would have had an operating loss of 2.5% of revenue. Compare that to the fourth quarter of the prior year when communication operating loss was $4.7m, including $8.3m under the take-or-pay contract or a pro forma loss of $3.6m or 5.4% of revenue.

So communications reduced its fourth quarter loss year-over-year, even on lower sales, and that's whether you include or exclude the Kingston operation.

EBITDA for the segment, all-in, was negative $2.5m for the quarter, but without the charges and the take-or-pay income, EBITDA would have been a positive $1.6m for this segment.

Now I'd like to explain the take-or-pay income. When Belden acquired CSI in 1999, along with that acquisition came a pre-existing contract with a manufacturer -- not a telecom service provider, but one of their suppliers -- for our plant to provide certain telephone central office cables and data cables on a private-label basis for this manufacturer, whose identity we agreed not to disclose.

In 2000, the sales under that agreement were about $60m and these were high-value-added, good-margin business. In the second quarter of 2001, as this manufacturer saw demand for their products decline, they stopped buying cable from Belden under the contract. That triggered a provision in the contract if they didn't take a certain amount of product they had to make a cash payment that essentially replaced our lost gross margin. In 2001 that payment worked out to $8.3m, which the customer agreed to and paid.

In 2002 there were no purchases under the contract. One of the requirements of the agreement was that we would maintain our ability and readiness to produce the products for the duration of the contract. This involved keeping equipment in readiness and some inventory which was peculiar to that contract. We wrote off the remaining inventory now that the contract has expired, so what we recorded in the fourth quarter was an amount-- a net income amount net of those write-offs from that contract. The customer agreed to the amount and paid the cash to us here in January 2003.

There is a second contract related to the first contract and it's called a sales incentive agreement. This agreement is in effect now through 2005. The customer is committed to buy product with gross margin contribution to Belden of $3m per year and if they don't, they agree to pay the difference in cash. So you will see some benefit from this sales incentive agreement this year, either as actual sales and gross margin or as a cash payment and this will continue, as I said, through 2005. But the level of this income is, obviously, less than what we've enjoyed for the past two years.

Now I'd like to look at the geographic breakdown of sales for the quarter. The United States accounted for 60% of fourth quarter revenues compared to 61% a year ago and U.S. sales were 8% lower than a year ago.

Europe made up 22% of the quarter's revenues, compared to 24% a year ago. European sales were off 12% from a year ago in U.S. dollars, but the weaker U.S. dollar helped the European sales comparison. Without the favorable currency effects, European sales in the fourth quarter were off 22%, year-over-year.

The rest of the world, primarily Canada and Asia-Pacific, was 18% of sales compared to 15% a year ago and was up 15%, year-over-year, but that's because of the impact of the NORCOM acquisition. Without the acquisition, sales outside of the U.S. and Europe would have been 3% lower than in the sale quarter a year ago and 4% lower if you also remove the favorable currency effect.

Now, turning to our balance sheet and cash flow, we drew on our revolving credit agreement at the time of the NORCOM acquisition at the end of October last year but we paid all of that down by the end of the quarter and still added almost $10m of cash to the balance sheet.

We are unlikely to retire early the private placement notes, which is the sole amount left in our long-term debt, because they have a provision requiring us to make the note-holders whole for their interest income if we pre-pay. So you will likely continue to see additional cash accumulate on the balance sheet during the coming year.

Cash flow from operations in the fourth quarter was approximately $29m, bringing the full year total cash from operations to about $95m. Free cash flow, which we define as cash from operations less capital expenditures and dividends, was about $22m or 89 cents per share for the quarter and $58m or $2.32 per share for the full year.

Inventory increased in the quarter to $159.8m due to the inventory we acquired at Kingston. Without the Kingston inventory, inventory was down about 5% compared with 2001 year end. Inventories were in a good range in the electronics segment, but not as good in the communications as we would like and this is clearly something we will try to improve as we integrate the acquisition and work on our return on investment during the coming quarters.

Our debt is down to $203.2m and debt, net of cash, was reduced $10.5m in the quarter and $48.1m for the full year. Debt net of cash is 37.4% of total capital, compared to 42.2% a year earlier.

Our pension accounting had the effect of reducing other comprehensive income in the equity section of the balance sheet by $12.8m, year-over-year, reducing overall equity and increasing our debt-to-capital-- debt-to-total-capital calculation from what it otherwise would have been.

During the quarter, we also negotiated an amendment to the credit agreement, which, while it's currently undrawn, does give us access to an additional capital of $100m should we need it.

Capital spending for the quarter was $6.3m and depreciation and amortization was $10.3m. Year-to-date capital expenditures were $32.8m and depreciation and amortization were $39.7m. Next year's capital spending outlook is in the range of $30m to $35m.

Now I'd like to turn it back to Baker, our Chairman, to discuss the outlook.

Well, thanks, Ricky. With 2002 safely put into the history books, what lies ahead for 2003?

I think we can best address that question by looking at it from two perspectives, first, the external market, and second, internally at Belden and I'd like to start with the market. Unlike last year when we forecasted a rebounding market, this year we're being more conservative and are looking for revenues to be up year-on-year only in low single digits, excluding the increase due to having the Kingston revenues for the entire year.

This is a combination of further modest declines in communications and a modest pickup in electronics. The expected declines in communications are due to announced reductions in capital spending plans by the major communication companies.

Having said that, I'd like to point out that there are a couple of factors that could affect the outlook. One is the FCC-- one is that the FCC is reviewing the access fees that the telephone carriers can charge. The incumbent local exchange carriers contend that the fees are so low that they have no incentive to invest and regulatory relief could result in a loosening of their purse strings and, therefore, an increase in purchases of copper cable. Secondly, the large exchange carriers have not always been the best forecasters in the world of their own cable requirements and certainly local conditions, weather and a number of other factors, could alter their plans, either positively or negatively, as the year unfolds.

On the electronics side, we do think that we'll see some improvements in the Asia-Pacific area for data networking, our broadcast products and some industrial automation products, particularly in China, where the economy's doing pretty strong. We're also expecting a modest improvement in North America as a result of some marketing initiatives such as a CCTP program at Anixter, one of our large distributors. And this is a program of closed-circuit television over twisted pairs so that a security system can be more easily integrated into the company's computer system. And this program uses exclusively our patented bonded-pair technology.

In Europe we expect to see some improvements in the data area as a result of some new shielded products that we have introduced that will give us a more complete product line for the German, Swiss and Austrian markets that prefer shielded versus unshielded solutions.

We expect pricing to continue to be under pressure, particularly in the distribution markets, because of general over-capacity in the industry, but it should be confined to very low single digits, on average. In communications, I'd like to remind you, the vast majority of the business is done on long-term contracts with fixed prices, except for raw material pass-through provisions.

Inventory in the channels is generally clean and we don't expect further inventory liquidation. Many distributors have increased their turns so, if anything, it's more likely that inventories could be rebuilt, but we're not counting on that.

Turning to factors internal to Belden, we expect to see lower costs in 2003 compared to 2002. During 2002 we had some downsizing costs, other than those included in the fourth quarter charges, and these should not recur in 2003. We have the ongoing operating savings as a result of the charge such as lower depreciation, reduced occupancy cost and lower overhead spending. We also have the increased efficiency and improved overhead absorption from the Kingston closure.

On the negative side, like most companies, we're also experiencing increased benefit costs for our employees, especially medical costs. Our pension costs will also increase, but this is because of lower investment returns that our pension funds have earned in the last couple of years. Our general liability and other insurance costs are also going up, along with everyone else's. And, of course, we will not have the benefit from the take-or-pay contract that we enjoyed the last couple of years.

So net-net-net, we're pretty optimistic that our earnings performance in 2003 will exceed the pro forma 38 cents that we posted in 2002. In the first quarter, we expect results to be pretty much in line with the pro forma results from the fourth quarter of 2002. First and fourth quarters tend to be our seasonal lows and we don't see anything to upset that pattern in 2003.

We'll also have very little benefit from the international head-count reductions during the quarter. While the expected severance costs have been accrued in the fourth quarter charge, the current wages and salaries continue to hit the P&L as long as people remain on the job. In many countries, transitioning to lower employment levels is a multi-month process of consultation and negotiation with various workers' representatives and the benefits of the personnel reductions of approximately 225 people at various locations should begin to show up later in the year.

Well, that concludes my remarks, so back to Ricky.

Thank you, Baker, and now I would like to ask Tonya to come back and remind you of the procedures for asking your questions and we look forward to addressing any questions that you may have. Tonya?

Thank you. Again, if you would like to ask a question during the Q&A session, please press star-one on your Touch-Tone phone. If you would like to withdraw a question, please the pound key. And we will pause for just a moment as we assemble our roster.

Mr. Reece, your first question comes from Jeff Beach with Stifel Nicolaus.

Yes, good morning.

Good morning, Jeff.

The NORCOM or the Kingston acquisition generated a moderate loss in the fourth quarter. Can you talk about what you might see as a revenue contribution and the impact on the first quarter from the acquisition?

Yes, Jeff. The run rate here in the seasonally low time, particularly given the cold winter that Canada is seeing, will continue at a similar run rate at what we saw in November and December, which is just, you know, $2m to $3m a month. So we would be looking, you know, at that kind of revenue contribution for the first quarter. Clearly, we'll pick up by late March and then going into the spring as they get out of that seasonal slowdown.

From an earnings standpoint, we would anticipate they continue to be negative for the quarter, but, as Baker said, our plans, Jeff, are to get out of the plant by the end of the second quarter in terms of production. So those savings should start being realized, certainly, mid-year to the second half of the year.

We're not going to be able to really track the contribution of Kingston much longer because we've already begun transferring sales and integrating production, so it's going to all get commingled within the communication segment's results, but best we can see you're going to look at, you know, say $2-1/2m to $3m a month contribution for the first quarter and continue to see modest negative earnings.

And one followup in the communications side. Is it-- am I reading it right that the communications pro forma lost $2m including $800,000 from NORCOM?

That's correct.

So the loss from your existing business is $1.2m in the fourth quarter. Looking into this first quarter, it appears that there's a reasonable chance for you to be break-even in the quarter. Is that fair?

We certainly have put that challenge out, but, again--

Excluding NORCOM, I'm sorry.

Yeah. But the first quarter, again, is seasonally slow, similar to the fourth quarter, so a lot of it's going to depend on the revenues. But if revenues stay at levels similar to what we saw in the fourth quarter, then our results we would hope to be similar, if not slightly better, based on continued improvements in cost reductions. In fact, Bob may want to speak to some further head count reductions that they've made, even here already in 2003.

There have been some head count reductions and staffing reductions in Phoenix that took effect the first week and second week of January. So that should impact, pretty much, full year performance.

All right. Thank you.

Our next question will come from Stephen Fox with Merrill Lynch.

Yes, good morning. Could you talk about a couple things? One is the impact from higher material costs this year. As you noted during your introductory comments, there are some pass-throughs that are available, but is there a risk that that could hurt earnings? And then secondly, Baker, do you see any low-cost competition from Asia, particularly China, affecting the networking cable business currently and over, say, the next two or three years?

OK, Steve, I will take the material costs and then I'll turn it over to Baker and Pete, maybe, on the competition offshore. On the material costs side, as you pointed out, Steve, we do have the opportunity on virtually all of the communication business, or at least the contracted business, to pass on copper and, in about half of our business, changes in compounds, the plastics and plasticizers and resins and so forth that we purchase. So there, rather than a delay effect, which we try to manage by purchasing forward, we shouldn't have much of an earnings squeeze.

We are seeing some pressure, certainly, in rising material cost, again, in those two areas. Copper, of course, is up about 10%-plus, year-over-year, and we're seeing some increase in resins and plasticizers and so forth. We are looking to pass that on with price increases. In fact, we're scheduling to have a price increase here in the first quarter of 2003 on many of our product lines -- not all, but many of the product lines -- to try to recover that increase in cost.

But on the positive side, somewhat from the combined volume with the NORCOM acquisition, somewhat from some negotiations that we have done -- because, obviously, the suppliers have seen their business down and are a little more vulnerable to negotiating some price concessions -- we've been able to offset some of these increases with price reductions in other areas of raw materials such as some of the more exotic compounds where-- like Teflon and so forth where we've been able to negotiate some offset. So it is a little bit of pressure, but it's not significant and we are intending to try to pass on those increases in prices here later in the first quarter in 2003 on the electronics side where we're not committed to prices based on contracts.

Baker, did you want to respond to the influx of competition?

Yeah. To date, we have not seen a major in-flow of product from China. What product has been coming in is typically at the lower end of the technology spectrum. As a matter of fact, we're still exporting to China certain high-end data products.

I do think, if you look forward a few years, that we certainly can-- would expect to see attempts by the Chinese to try to take a bigger market share here. Certainly, that's in the United States.

In the region, they are making an impact in the Pacific region where it's getting more difficult and that's one of the things that's bringing pricing under pressure, particularly at the lower end. Maybe Pete would want to comment.

Yeah, I would comment and say that, you know, where there has been some pressure is, perhaps, on the OE side where the manufacturing operation has, in fact, moved to Asia and those local operations have made initiatives to obtain local supply in place of what had been coming out of the U.S. And we're having ongoing conversations with a number of these OEs to look at sourcing their needs from an Asian location, which is where they want it to be.

The other side of it is the networking side and certainly a number of Asian manufacturers have been more active, but generally that's limited to a private label arrangement. In the market dynamic as it exists today with demand being relatively soft, all they really have to sell is price. They don't have brand name and they have a difficult time pushing their own product into this market.

They are doing some private labeling, but they, of course, kind of figured out where the price points are, so most of the incremental profit stays over in Asia. Again, I would also point out that the U.S. market tends to be more biased on the networking side towards the higher temperature product that provides less of an opportunity for Asian participation.

I would add, in Europe, similarly, we're not seeing a big influx of Asian, or even Eastern Europe, although there is some of that product coming in to Europe and certain something we'll watch, but the trends we're talking about in the U.S. would pretty much mimic what we're seeing in Western Europe.

Yeah, I think to follow up on Pete's point with the Asian suppliers, they really don't have a distribution presence and that does provide a barrier to entry for someone just coming in strictly on a price basis, because they can't supply the service, the backup supplies, et cetera. So, you know, we still have certain advantages here that do protect us somewhat from that, although, you know, I don't think we can ignore it.

Thank you very much.

We will take our next question from Devlin Lander with Morgan Joseph.

Hi. Just a quick question. In the telecom business, if you look at the-- you know, if you exclude the NORCOM, was it down primarily because of any particular RBOC or was it just down overall? And then also in the electronics segment, if you could go into a little more detail, revenue was pretty flat sequentially although the operating income was down. If you could go into a little more detail, that'd be great.

I think on the communications side, it was down-- excluding Kingston, it was down pretty much across all RBOCs. We didn't see anything in particular. It was pretty much across the board.

I think pretty consistent with the seasonality that we had expected. It was pretty much in line with what we had forecasted revenues for communication, given the seasonal decline.

And on the electronics side, as she suggests, revenue was sequentially flat, operating earnings were down. Contributing to that was an unfavorable geographical mix. Business in Canada was a lot stronger than it was in the rest of North America. We had some strength in Asia that's lower margin than what we normally experience in the U.S.

We, you know, paid the price for extended shutdowns in the fourth quarter. It cost us some earnings on usage of the plants. Some slightly negative raw material costs that we were unable to pass through in the fourth quarter on copper and some PVC that we're expecting to now get back in the first half. And finally, I'd say that we had some acceleration of medical costs in the fourth quarter as we recognized the increased costs for the full year and some additional pension costs as well.

So I think that pretty much summarizes the dilution in the operating margin on flat revenue.

OK. That's great. Thank you.

If there are any additional questions, please press star-one on your Touch-Tone phone. We will now hear from Jason Yellan with Forest Capital.

Thank you. Two quick questions, if I might. First, it appeared sequentially there was a major increase in accounts payable by about $39m. I'm wondering if you could help us walk through that?

And secondly, I was just wondering, just because the estimates for the Street are pretty wide, if you could help us flow for the take-or-pay contract next year that $3m down to the EPS line? What I was doing was just tax-affecting it by 32% but running the rest of the $3m down to the EBIT line. Thanks.

OK, first on the increase in the accounts payable and accruals, several items, several large items. First and foremost were the charges that we took in the fourth quarter. Many of those, the severance-related charges, particularly, were recorded there, so you had the $8-1/2m or so increase related to that.

The Kingston coming in added pretty substantially to that line item, as well, not so much their accounts payable -- although they had $4-1/2m or $5m of regular trade payables -- but we recorded in that line item the severance cost of around $13m, severance and other cost of around $13m, related to the shutdown of that facility.

And then the contingent payment that I spoke about, we actually had to accrue that under GAAP. Even though it is contingent, you do record that as a liability and, of course, we'll adjust that based on updated information as it becomes available as to the likelihood of payment.

So that amount is also included in that line item and then the last item of some significance, certainly, is in the pension area as we had to recognize the amount that I spoke of in the comprehensive other income minimum liability requirement under pension accounting. The other side of that entry, a portion of that, is recorded in current accounts payable and accrued liabilities because we're going to have to fund some of that shortfall here in 2003 and that was about $11-1/2m added to that line.

And then there was some modest increase, I think it was around $10m or so, in just normal trade payables, just reflective of the activity and when they get paid, which, you know, can fluctuate some throughout.

As to the take-or-pay, Jason, in 2003, the $3m, again, it's possible that a portion of this will just get recorded as additional gross margin as we make sales against it and that will be tax-affected at the full 32%, which is our outlook at the moment for 2003. Should we-- should the private label customer not purchase the full amount, then we would expect a payment that we would record in the fourth quarter of next year for the difference and, again, at this point we would expect that to be tax-affected at 32%, as well, similar to how we recorded it this year, we'll have it as other operating income as a gross amount and then a tax amount at the 32%.

Thank you, gentlemen.

Michael Gresens with Robert W. Baird has our next question.

Hi, gentlemen.

Good morning.

I'm wondering if you could detail how the $15m in products that is going to be discontinued to come off in this quarter and the next couple of quarters.

OK. First, it's probably worth noting virtually all of that will be in the electronics segment and it, too, will be back-end loaded. The biggest portion of the $15m is this special wire that Baker talks about that goes into the TVs and computer monitors and our expectation -- although we're in discussion with Philips at the moment -- but our expectation is that they will continue purchasing that for probably a couple of quarters to build up some safety stock as they try to transition and find alternative suppliers to that. So the fall-off on that portion, which is well over half of it -- probably two-thirds of the number is that -- will be second-half related.

The fiber optic business -- unfortunately, we weren't really selling any of that anyway, so it's immediate, but it was a small amount of the $15m. And then the other ancillary stuff, which is relatively small, will be reasonably pro rata throughout the year.

So looking at maybe a few million in the first half and most of the $15m decline will be on a pro rata basis in the second half.

All right. And the $3m in take-or-pay income, are you expecting-- are you going to be required to keep the production equipment in place until 2005 when the contract wears off?

Yes, but the product that this comes under is product that we make pretty routinely otherwise, so it won't require as much of special, dedicated equipment and, of course, $3m is a relatively small amount, so it shouldn't really have much of an impact on extra cost we have to carry to meet our end of that commitment. But we certainly have to be in a position to make it.

Most of what it is, going forward, is communication-type cables that we make anyway and just would make on a private-label basis for this particular customer.

To add a little bit to that, the larger take-or-pay we've had last year and the year before and so forth, that was a specialized product that we did not make normally under our own brand and we had dedicated lines and special equipment and we do not have to maintain that anymore. So there will be some changes there.

And is that going to be coming off in the first quarter or have you already done that?

On the equipment? We are looking to relocate that equipment as a capital avoidance measure when the market comes back and we need it. At the moment, it's just kind of moth-balled. No real major change has been made, but we obviously won't have to man or be prepared to quickly man that equipment. But it is good equipment that we use-- can reconfigure to use in other parts of our business when we need the capacity.

And is there any severance related to that going to be in your operating income?

No. Not that we anticipate at this time, other than maybe some modest depreciation.

OK. Thank you very much.

We will now hear from Dennis Cannel with Rutabaga Capital Management.

Yes, hi, Baker and Ricky. Just a couple of quick questions on the free cash flow that you might expect for this year. It sounds like you'll under-spend depreciation and amortization again and then it is $8m of cash for the restructuring program that will be paid out in '03 and for severance and so on or is it more than that?

It will be more. It will be $8-1/2m related to the charge and then there'll be -- I don't think it will be the full $13m of the accrual we made for NORCOM -- but a significant amount of that, say at least around $10m of that accrual we recorded at the acquisition date will be cost that we will incur here in 2003. Again, most of it's severance. Some of it is other types of cash costs. So you'll see, you know, say $15m to $20m, anyway, of cash cost in 2003 other than earnings.

OK.

That will negatively affect cash flow.

OK. So-- and then-- you'll have to make, is it an $11m payment for the pension fund, cash contribution for the pension fund this year? Or is that something that will be stretched out over a few years?

We are looking at a sizable payment in 2003 that will be close to that level, which is up-- that's the gross amount we're kind of looking to pay. We've been paying some in the past, but we're looking at a meaningful increase, year-over-year, of about $7m increase. We've been paying around $4m or so in the past and are looking at that $11-1/2m or so next year. And that will be next year's, primarily internationally, interestingly, in Western Europe where their requirement to make up any under-funding based on performance of your assets is much more accelerated than the requirements here in the U.S.

OK. But, you know, unless-- unless we see a pretty significant rebound in earnings, even with the lower cap spending, you do have a dividend that you're paying, I-- unless you've got a lot more cash coming out of working capital, I would see you as a cash user for the year, not generating cash. Am I--

Well, one item, very significant item that we've already seen the benefit for, is the take-or-pay that we accrued at the end of December of 2002.

OK, yep.

And that-- and actually the gross amount we mentioned, we netted that for write-offs of inventories and all that we had, the gross amount of that was over $12m.

Got you.

So as I'm sitting here today, we've increased that $19m of cash you saw in the balance quite significantly, largely due to that.

Got you.

Otherwise, your comments are relatively well-taken. There is some opportunity in working capital, but I don't think it'll be at the same level of benefit as we've enjoyed the last couple of years.

Yeah, absolutely. And then, when-- in Baker's guidance about, you know, this year we're not projecting or forecasting a big improvement in the market as we did last year, are you-- when you say EPS up a little bit, that includes the impact of the take-or-pay or the incentivized sales contract on the communications side?

I guess a couple of comments. One, we didn't put an adjective to how much it might be up over the 37 cents or the 38, so your comment of, ``a little bit,'' we haven't really quantified other than to say we're confident we'll do better.

Fair enough.

But that pretty open-ended comment would have incorporated the benefit from the $3m.

OK, fair enough. That's great. Thanks a lot.

And, Mr. Reece, there are no further questions at this time. I'll turn the conference back to you.

Well, thank you very much, Tonya, and thank you, everyone, for listening in. As Baker opened in the call, it's certainly been a very difficult 2002, but we do believe that we have made quickly and properly the decisions we need to, to strengthen the business going forward and believe we have the financial strength to continue to do respectable, even in this down market and hope to do much better when the market recovers.

I do apologize for some of the confusion in all of the numbers. We've tried to provide supplemental schedules to aid you as you try to better understand our results and look at what that means, going forward, but myself and Dee Johnson are certainly available to take your additional calls if you have questions or difficulty in trying to understand what we certainly appreciate has been a little bit difficult quarter to dissect.

But thank you so much for your interest and your patience as we talked through that and, more importantly, your support throughout the last year and, hopefully, going forward. Thank you very much and have a great day.