Belden Inc (BDC) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's 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. (OPERATOR INSTRUCTIONS).

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, Theresa. Good morning, and I would like to welcome each of you to Belden's first quarter 2004 earnings conference call. If you need a copy of our press release, please check our website at Belden.com.

With me here in St. Louis today is Baker Cunningham, our Chairman, President, CEO.

I need to remind you that any forward-looking statements we provide are made in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The comments we'll 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 2003 annual report on Form 10-K for a more complete discussion of factors that could have an impact on the Company's actual results.

This morning, Baker will make some comments about our market and some of the initiatives we have in progress. I will review our financial statements including segment results and cash flow. Baker will talk about the outlook for the coming quarter. And finally, we will open up the lines for questions. I will now turn it over to Baker.

Thanks, Ricky, and good morning everyone. I would like to add my welcome and thanks for having you join us today. As you know, we have really two major strategic changes underway with the Company. The first is the merger of equals between Belden and Cable Design Technologies that we announced in February in which we believe is going to be completed during this current second quarter. And the second is an agreement to sell certain assets of our North American communications business to Superior Essex. We will discuss briefly the progress on both of those strategic initiatives during the call, but our main focus today will be on the ongoing Belden business where the news is pretty good.

We had sales growth of 11 percent year-over-year in the continuing operations of Belden. And I would like to delve into the revenue and help you understand what makes up that change. About half of the increase in revenue came from foreign currency translation, $8.9 million, to be precise. Primarily from the euro, but also the U.K. pound, the Canadian dollar, and the Australian dollar. The remainder of the revenue increase is a combination of strongly improving sales year-over-year in two businesses, our North American electronics business and the European communications business -- somewhat offset by a fall-off in sales in our European electronics business.

First, looking in North America. Our North American electronics revenue improved about 17 percent, of which 2 percent was the impact of the Canadian dollar. Our products that serve the data networking market have the greatest year-over-year increase of about 20 percent. And revenues from our products for the industrial and entertainment markets each grew around 15 percent. These year-over-year sales increases reflect a combination of our price increases, both in early January and mid-March and an increase in volume.

We would estimate that the net effect of pricing in the quarter year-over-year was in the low single digits for this business. Which means that there was also a substantial year-over-year improvement in unit volume. We believe that some of the increased volume is the result of customers buying ahead of the March price increase, especially in the data networking market. However, even after the March 15th time of the price increase became effective, sales continued at that faster pace and are continuing through April as well.

We do have pretty good visibility of the inventory of our products with our top distributors, and we have seen only a very slight increase in inventory at that level. But we have heard anecdotally that some installers and contractors in the premise market have bought ahead for their known project requirements for cable well into the summer. This core North American business showed its true colors once again with double-digit operating margins, and they proved that we are prepared to take advantage of the recovery in volume and we are able to take the improvements to the bottom line.

In our European electronics business, we discontinued some product lines over the course of last year, such as the deflection coils that we sold to Phillips for their television sets. And that made a difference of about $4 million less sales. We got about a $4 million benefit from currency exchange rates. Those two factors were basically a wash. Setting those aside, the business was off around 13 percent from a year ago with some gains in cable television and other communication applications, more than offset by weakness in networking and industrial sales.

We got very little price improvement in European electronics business this quarter, so we absorbed virtually all the effects of rising material prices. Some product lines were moved from the German plant, which we closed last year, to our plant in Benlow (ph) in the Netherlands, and we're still working our way up the experience curve in getting those lines to operate at optimal level. The result of unrecovered material cost increases and the less-than-optimal manufacturing performance was the negative operating margin for the European electronics business. Significant price increases keyed up to take effect just a few days from now, which should help the margin situation going forward.

Our European communications business has the fleeting distinction of standing alone as a business segment this quarter. After the Belden/CDT merger is completed, we will conform the two company's segment reporting and this business will most likely be reported under the proposed networking segment.

The European communications business enjoyed a 32 percent increase in sales compared with a year ago. About half of the year-over-year improvement came from exchange rates, and about half from volume and price. March 31st was the fiscal year-end for British Telecom, the dominant customer of this segment, and it's not clear whether the current level of sales represent a new trend or just a function of BT's budget cycle. I must say it's not unusual to see fairly wide swings in our European telecom business, quarter-to-quarter, since it is a highly concentrated customer base. There is a contractual system for passing on material costs to the customer in this business, so we did recoup much of the copper cost this quarter.

Our operating profits for this segment, however, did not rise with the volume. The main reason was that we chose to outsource part of our production this quarter, which enabled us to avoid adding employment for right now. Once the Belden/CDT merger is completed, we expect to have additional in-house sourcing alternatives for these peaks.

I would like to touch briefly on our North American communications business. As you know, we agreed to sell this business to Superior Essex, so we're now accounting for it as a discontinued operation. Yesterday, we received notice of early termination of the waiting period under Hart-Scott-Rodino antitrust law. That means that we are free to go ahead and close this transaction, which we will do sometime this quarter, perhaps around the end of May. We do intend to provide an orderly transition for our customers as product sourcing is transferred to Superior. It is obviously a very sad thing to say that we will end up closing a major plant that employs 750 people. But given the overcapacity situation in the industry, we've determined that this is clearly the right thing to do.

Turning to the other major transaction, the merger of Belden and Cable Design Technologies, I know many of you are following this very closely. This week, we received a comment letter from the SEC regarding the preliminary joint proxy statement and prospectus. So, both companies have started working on the responses. We will move as quickly as possible to get all questions and comments resolved so we can file the definitive prospectus, set the date for our annual meeting, and mail the proxy materials. We expect that the annual meeting date will be sometime in early to mid-June, and if approved, the merger will become effective almost immediately after the shareholder vote.

We've had an excellent, even enthusiastic, reception from many of our shareholders, customers and distributors about this transaction. One change that has occurred since we announced the merger is that Peter Whitman, President of Belden Electronics, has decided that upon completion of the merger, he would like to retire. Peter has been with Belden since 1989 and has been instrumental in making Belden the respected company and industry leader that we are today. But, this change is giving us an opportunity to take a fresh look at our leadership assignments postmerger.

We've announced to employees that Peter Sheehan, Executive Vice President of CDT, will succeed Peter Whitman as President of Belden's electronic business after the merger. And that Bob Mattes, President of Belden Communications, will become President of the networking business of the combined Belden/CDT. I believe these leadership changes will accelerate unifying of the two cultures.

The integration team is hard at work and plans for the combined company are beginning to coalesce. We are not going to be able to answer very many questions today about how we will go to market or what changes may be made in manufacturing, but rest assured that when the merger is finalized, we'll be able to hit the ground running. The strength of our markets makes the merger an even more attractive proposition for both companies.

Now, I will turn it back to our CFO, Ricky Reece, for a review of financial results.

Thank you, Baker. Revenue from continuing operations for the first quarter of 2004 was $170.1 million, a 10.9 percent increase over revenues of 153.3 million in the first quarter a year ago. Changes in currency exchange rates benefited us by $8.9 million, and the remainder of the increase was a combination of price and volume. Sequentially, first-quarter revenue was up 8.4 million, or 5.2 percent, compared to the fourth quarter 2003. About 3.1 million of this sequential increase was due to currency.

Our operating profit in the first quarter of 2004 was $7.1 million or 4.1 percent of sales, compared with the operating profit of 5.4 million or 3.5 percent of sales in the first quarter a year ago.

Net income from continuing operations was 2.6 million in the first quarter of 2004 or $0.10 per share. This compares favorably with the income of 1.2 million or $0.05 per share in the first quarter 2003. It's also better than the guidance we gave during March. At that time, we expected sales to slacken somewhat after our mid-March price increase took effect. But as Baker reported, that has not yet happened. It is nice to actually exceed expectations for a change.

The after-tax loss from discontinued operations was $1.5 million, or $0.06 per share, an improvement compared with the after-tax loss a year ago of $3.5 million or $0.14 per share for this business.

Let's look at the results by segment for the first quarter. The electronics segment had revenues of $148.6 million in the first quarter of 2004, an increase of $11.6 million, or 8.4 percent from revenues of 137.0 million in the first quarter of 2003. The benefit from exchange rates from the euro, the Canadian dollar and other currencies was $6.2 million for this segment as a whole. This favorable comparison is a bit of a tale of two cities. With our American business posting a near doubling of operating profit and Europe dropping from essentially breakeven last year to a meaningful loss. Sequentially, segment revenue improved $7.1 million, or 5 percent, compared to the fourth quarter of 2003, including a boost of 1.6 million from currency.

Echoing what Baker said, the results of this segment are a combination of greater improvement in revenues in North America and a fall-off in revenues in Europe, largely due to the discontinuance of non-strategic products last year.

Operating profit for the electronics segment was 10.4 million, or 7 percent of sales in the first quarter 2004, compared with operating profit of 7 million or 5.1 percent of sales in the same quarter a year ago. To elaborate on Baker's comments, the American business has returned to double-digit operating margins despite the fact that they had not fully offset material cost increases. With the full quarter benefit of the March 15th price increase, we would expect to see this business achieve even higher operating margins.

The European business has not yet been able to recover material cost increases, nor is it seeing the economic recovery that the Americas are enjoying. Once we recover the higher material costs, and work through the inefficiencies from production moves in Europe, we fully expect this business to return to profitability.

Now turning to the communications segment. Sales from continuing operations of the communications segment for the first quarter 2004 were $21.5 million, up 32 percent from sales of 16.3 million in the first quarter a year ago. Changes in exchange rates accounted for 2.7 million of the total 5.2 million increase in sales year-over-year. Volume with British Telecom was better than a year ago and pricing was also a positive factor. The operating profit of the communications segment was $1 million for the first quarter of 2004, compared with 1.2 million in the first quarter a year ago.

In the discontinued operations, the North American communication business, our revenue increased about 5 percent, mostly from material-related price increases. Our unit volume in that business was fairly flat year-over-year, as we focused in on the contracted business. The after-tax loss from discontinued operations of the first quarter was $1.5 million, compared with an after-tax loss in the first quarter of 2003 of $3.5 million.

Turning to an analysis of revenue by geographic area. The following information is based on the continuing operations only. The United States and Canada accounted for 61 percent of first-quarter revenues, compared with 58 percent a year ago. U.S. and Canada sales were 17 percent higher than they were a year ago with about 2 percent of that increase coming from the exchange rate for the Canadian dollar.

Europe made up 29 percent of the quarter's revenues, compared with 30 percent a year ago. European sales were up 6 percent year-over-year in dollar terms, with the increase in communication sales more than offsetting the lower sales in electronics. The rest of the world, primarily Asia-Pacific, made up 10 percent of our sales for the first quarter 2004, compared with 12 percent a year ago. Sales in Asia were lower because last year some of the deflection coils sales from Europe went into Asia and that product is now discontinued.

Now turning to our balance sheet and cash flow. Within the continuing operations, accounts receivables increased $14 million from year-end, commensurate with the higher level of sales. Inventory within continuing operations has increased by $1.3 million from year-end, with currency and rising material costs being the contributing factors.

Current assets of the discontinued operations also increased by $11.3 million, which is the result of an increase in account receivables compared to a low baseline at year-end and an increase in inventory, which is a normal for this seasonal business.

Cash flow from operations, including the discontinued operations, was an outflow of 8.3 million due to the increase in working capital. Our cash balances declined 11.6 million to 83.3 million, but we're still in a very comfortable position with respect to the current portion of our long-term debt, especially when you consider that $70 million of unused borrowing capacity is available under our asset-backed credit agreement.

Capital spending was 1.9 million for the quarter, compared with 4.2 million in the first quarter of 2003. Depreciation and amortization were 6.5 million, all in, which includes .9 million that was booked in the North American communication business before we applied the assets held for sale treatment in March. The depreciation and amortization of the continuing operations was 5.6 million in the quarter, compared with 6.2 million in the first quarter of 2003.

Our debt stands at $201 million, of which 64 million is the face value of the current portion. We don't prepay the long-term notes because of the onerous makehold (ph) provisions. We calculate net debt, debt less cash, as a percentage of total capitalization to illustrate how far we could reduce our leverage if we were to repay the notes -- prepay the notes. Net debt to total cap is now 30 percent, compared with 36 percent one year ago. Net debt to EBITDA from continuing operations is 2.4 times.

Before I yield the floor to our Chairman and CEO, Baker Cunningham, for some concluding remarks, I'd just like to talk briefly about what you can expect for the quarter ending June 30th.

We believe the merger will be completed sometime during June. We've done some work on the accounting integration and expect to be able to report the results of the combined company for the June 30th quarter by the end of July. For accounting purposes, Belden will be the acquirer and we will apply purchase accounting to the assets and liabilities of CDT. The preliminary prospectus contains pro forma financial that give you an approximation of what that post-merger balance sheet might look like.

In the income statement, we will have a full quarter of Belden's results and two or three weeks of CDT's results, with a pro forma comparison that will combine the income statements of the two companies for the entire period. As Baker said, there's a lot of integration planning being done now so that we can make decisions and execute them quickly once the merger is finalized. There could be restructuring charges in the second quarter as we make these decisions and begin working on the merger synergies.

I'd now like to turn back to our Chairman, Baker Cunningham.

Well, as we've indicated, we were pleasantly surprised that sales did not taper off after our mid-March price increase. April sales in our North American electronics business have continued at the same pace as March. There's definitely some true recovery in market volume. But, we are cautious because we really don't know exactly how much of the volume increase in the first quarter was pre-buying and how much was the real trend in demand.

We do have visibility into the inventory at major distributors, and we don't see any problems building at that level. But we believe that some customers beyond the primary distributors have bought ahead for their current needs. And if so, could decrease their purchasing when they feel that prices have stabilized. We're also cautious about Europe, because our forecast includes a double-digit price increase in electronics. And until that is implemented, there remains some uncertainty about that.

So the guidance we are giving for sales of Belden's continuing operations for the second quarter is a sequential increase of 5 percent or more. I know this seems conservative. I'm sure that some of you are thinking the full quarter impact of our March 15th price increase in North America should get us that much, and any actual volume increases would be additive to that. But, we don't know exactly which way the volume is going to go -- onward and upward or temporarily backwards if the supply chain readjusts its inventory. So I prefer to be conservative.

We believe that the full-quarter effect of our recent North American price increase, and as our European price increase takes effect during the quarter, we'll see improvements in operating profit and net income. We expect earnings per share from continuing operations to increase sequentially. And at the high end of our expectations, earnings per share could double from 10 cents in the first quarter to as much as 20 cents in the second quarter. This is consistent with the full-year guidance that we gave you in February for Belden on a stand-alone basis.

This is probably our last quarterly conference call as Belden Inc. If we consummate the merger in June, as we expect, the next time we talk with you, we will be Belden CDT. Belden has been through a number of transformations in its 102-year history, from startup to a public company, merged into another company, then into Cooper Industries, then our IPO in 1993. Some of the member companies of CDT have been around even longer than Belden. We are all turning the page to another chapter, and we will do our best as we can for you to make the story better and better in the future.

That completes my prepared remarks. Now, back to Ricky.

Thank you, Baker. I would now like to ask the operator, Theresa, to remind you of the procedures for asking your questions.

(OPERATOR INSTRUCTIONS). Devlin Lander, Morgan Joseph.

Hi. How are you? Just wondering if you can at all quantify how much the rising copper prices hurt you in the quarter?

I don't have a precise quantification. To add a little color to it, as we made in the prepared remarks, really very little, if any, impact on the European communications business, because the contractual mechanism there works through very quickly. Obviously, there was a significant negative impact reported in discontinued operations. Probably similar to what we saw in the fourth quarter, because copper continued to rise pretty rapidly throughout the early part of the first quarter of this year. So probably well in excess of a million to closer to $2 million negative impact reported in discontinued operations.

In core businesses, the U.S. or North American electronic business, we did put in a price increase effective early in January, which did not recover all of the copper, but did recover a fair amount of it. And then we had a more significant price increase that we put through at March 15th, designed not only to recover the full amount at that point of copper, but also increases we had seen, primarily in Teflon, which is used in our high-temperature products in the U.S. So it did have a negative impact on the electronic business in the first quarter, but would not be able to quantify it precisely, Devlin.

And can you give us an idea of what gross margins -- just for the electronics business. What were the peak gross margins?

Oh, I think if you went back into the late '90s, which was a little bit different era in terms of our mix of business, but back then it would have been in the mid to upper 20s, as I recall. We can look and get a more precise number going back to our reported segment data. But I recall it being in the upper 20s versus now being in the lower to mid-20s. I don't recall whether we might have even touched 30 percent at the very peak.

Okay. And what percent of the European telecom business is British Telecom?

It's probably approaching 85, 90 percent.

Okay. Great. Thanks very much.

(OPERATOR INSTRUCTIONS). Steve Bach, Merrill Lynch.

Actually, this is Celeste Lorenzano (ph) for Steve. Good morning. Quick question -- I was wondering if you could run through some sequential trends that you saw in Q1, maybe by product line and by geographic region?

Okay. Sequentially, we saw improvement pretty much across the board in North America, but declines in Europe, which in some cases, may have offset that. But looking at the electronics business by some of the bigger markets that they participate, if you look at industrial, which is a major part of their business sequentially, the total business was up around 2 percent or so, compared to the -- . In the U.S. -- let me get this right -- sequentially, yes, we were up about 3 percent sequentially in the total industrial market.

The networking market, we saw sequential improvement over 20 percent. And the only other significant market would be entertainment. In the entertainment business, where we are beginning to see some catalysts from the Olympic Games in Athens, which we are a provider to, as well as starting to see a pickup due to the U.S. presidential elections -- starting to enjoy some improvement there with the U.S. business being up in the low- to mid-single digits. But we were down in Europe, primarily because of the pruning of the deflection coil, which we reported in that entertainment business.

So, very nice strong improvement sequentially in networking; solid improvement in industrial; and low single-digit type of improvement -- if you ignore the impact of discontinued product lines -- in the entertainment business. Of course, Manchester saw, I think we reported that, in the mid-single-digit, kind of, sequential improvement. All of these, of course, were benefited by currency that impacted that as well.

Geographically, again, North America had very strong improvements. I think I gave most of those numbers in the prepared remarks, so I would refer you back to those, Celeste. But just as a general summary, nice improvement in North America. Negative in Europe. And clearly, if you take out currency, it would have been negative in Europe. The rest of the world, the 10 percent of the business, which is the rest of the world, was down primarily due to the discontinued product lines in Asia-Pacific.

Okay. And then looking at the networking, you said that was up over 20 percent sequentially. Any way to break out how much of that would be price increases and how much was actually unit increases?

Yes. Price increase there actually would not have been that large year-over-year. Because networking prices had been declining throughout much of 2003. We enacted a price increase in January to overcome most of that decline we had experienced. And then, of course, had a major increase in that product line on March 15, of which obviously, we didn't get much.

So Celeste, year-over-year in networking, I would suggest it was pretty much flat, and all of that increase was volume, which is the area, I think as Baker mentioned, we are probably the most concerned there might have been some buying ahead. So I don't know that we've seen enough fundamentals to suggest that market has improved that strongly and in demand. It would be nice if it had, and we would certainly take it. But that might have been the area where there may have been the most buying ahead. Primarily because that's the area where we had the largest prices, because it's the one where the Teflon is primarily used.

Okay. Thanks.

David Friedman, Bear, Stearns.

Good morning. A couple question, if I may. First off, I think you were talking about having a price increase in Europe. Are you expecting -- are you seeing any volume surge ahead of that price increase at that point? And are you sensing the competition following your price increase so that it may stick?

As far as any volume surge, no. We have not really seen any of that in that market. It's a pretty fragmented market throughout the various countries, and not quite as well-established a distribution channel that you would see such that, while we've announced it, the news isn't as quick to travel.

As far as following, certainly all of the wire and cable companies are experiencing the same challenges with rising material costs. Some of whom, I think, have already been out there with some price increases in certain of their markets. And, clearly, we would expect that we would see other competitors follow as they need to recover their raw material price increases just as we do.

Okay. Now, you also mentioned that you could have recognized extra profit had the CDT merger been completed and you had been able to not outsource? You mentioned you had outsourced some just so you didn't have to hire people for the quarter. Can you quantify that in some way so we have an idea of how much benefit there would be?

I would estimate it to be in the few hundred thousands of dollars that we paid a premium versus what we believe we could manufacture in-house. Of course, it depends where it is manufactured. But, one of the facilities that CDT has that does make products similar to what Manchester makes is in the Czech Republic, where certainly labor costs and their overall cost structure is pretty favorable. I would estimate it to be a couple of hundred thousand dollar opportunity for us if we can bring that in-house and save on the premium we paid to the outside supplier.

How up-to-date are you at this point on whether CDT's operations are seeing the same kind of trends that you are seeing at this point?

I really wouldn't want to comment on their results.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Dennis Skenell (ph), Ritterbago (ph) Capital.

Hi, Baker and Ricky. Just a couple of follow-ups on those previous questions. In Europe, you guys are the price leaders? Is that the kind of position you guys are staking out and seeing if other folks are going to follow? Or has anybody else raised prices to date?

I would not say in many of the markets there we would be a price leader. Certainly, Belden alone certainly pales in comparison to the size of the Nexans (ph) and the Dracas (ph) and the Pirellis (ph) in Europe and in most of the markets. They would hold a much greater opportunity to lead in price. I did mention certain ones have already raised prices, and so we will certainly not be a leader. Now, there are certain markets where we have a strong position and certain geographies where we might be the leader. But Dennis, I absolutely would not characterize us as a price leader in terms of making moves that others would follow.

Okay. Generally speaking, the price increases we're talking about in Europe on the electronic side, you're catching up to the leaders?

I think, generally, that is true.

I would concur with that. We also have a slightly different product mix and the way we go to market with more direct business and less distributor business. And in real-life, if you will, the distributors act as your allies on raising prices. Because that makes -- they can make a bigger dollar gain on -- because they get the same percentage on a higher volume per dollar sale.

In Europe, when you're dealing with end users directly, a lot of the gamesmanship that goes on as you try to raise prices -- they beg for delays and these other things that go on. So it's a little harder and more fragmented if the implements were across-the-board price increases. You almost have to do it customer by customer. And that tends to take longer on the one hand, and sometimes just in the give-and-take of discussions and negotiations, you end up giving some time concession on when they're going to become effective and so forth. So, it's a little bit different situation in Europe than it is the United States. But I also would concur with Ricky; we are not in the same strong market position in Europe in many product lines as we are here in the United States.

I would want amplify, though, that Europe -- the impact of the increasing raw materials is not as great as what we have seen in the U.S. for two reasons. One, the Teflon product is not used in Europe. It's a 0-halogen type product, so you're not seeing the significant increase that we are in that product affecting the Europe market.

And secondly, a portion of the copper increase is due to the weak dollar when you look year-over-year. So, in the euro sense, it has not been as great. Still up meaningfully, but not as great.

And then lastly, the economy there is not as strong as in the U.S., and it's obviously a lot easier to get price increases when demand is growing than when it is not as robust. So I think all of the industry is finding it more difficult to get price in Europe for those factors and others. But eventually we're confident that we'll be able to recover at least the raw material increases.

Okay. And then on the communications business, I'm not sure I fully understand why we did not see better margin performance. It sounds like the outsourcing was actually a small piece of it. Can you talk a little bit more about that?

Yes, I think there are a variety of items affecting that as we had to rapidly ramp up for this 30 percent increase in demand in Manchester. Certainly the outsourcing -- we did a million dollars versus a million two last year on 30 percent rise in sales. Of course, some of that increase was due to currency. But I would concur with you; you would have hoped more that incremental margin would've gone to the bottom line.

Several hundred thousand of that, as I mentioned -- and that is an estimation -- but certainly, several hundred thousand of that was a premium we paid to the outsourcer. We also saw a little less favorable mix in that business as we've got a variety of products, obviously, that we sell to BT. And some of the ramp-up was in the more commodity-ish products where we do not make as much.

A major contributor to our profit in that business is the services that we provide in addition to the products. We enjoy a situation with the BT business where we are their supply chain partner in terms of delivering cable right to the job site at the requested length, cut exactly to length. We manage the inventory and the warehouse for them, vendor manage-type inventory. There are other types of supply chain services. Those didn't see the same level of pick-up as we saw in the products sales. So that had -- the margin we got on the products is much less than we enjoy on the services.

And then there was a little of this and a little of that in some of the incentive comp and other types of items related to the ramp-up in demand that dampened some of the improvement that we saw. We mentioned that business can be a little more volatile with roughly a single customer in the mix between service and products. So, yes, a little disappointed with what was there, but is primarily the outsourcing of the products. And then mix with less in the service side and more on the product side, and didn't see the same contribution you might have expected.

Would it be fair to say that the average, or expected margin, would be more on the high single-digits, which is where you were a year ago versus what we saw in the first quarter of '04?

Yes, we're still anticipating that business to be in the upper single-digits. The price is fixed, so there's no change in price. As we mentioned, we get to pass through not only copper but increases in compound costs under that contract. So, other than mix changes, we wouldn't see any reason that we should not still be in that upper single-digit level, and would anticipate for the full year to get back to that.

Great.

As Ricky mentioned, as you are ramping up production in the early stages, you do have some loss of efficiencies just because you're changing things and trying to push people to work overtime and do some of those sorts of things. And that business, given the relative size, a couple hundred thousand dollars (indiscernible) a percentage point.

Absolutely. And then just finally, the 65 million, is that what will be paid shortly? When will you actually be able to pay that?

Okay, the 65 million -- actually, it is 64 million. And then we have an interest rate swap that's valued at about a million that expires -- both of them are in September 2004.

Okay.

So that is when that is due. In addition to the cash that we have, the cash that CDT's has, we would clearly expect to have collected on the sale of the North American communication business, which will contribute up to 85 million by that time. There's a 10 million contingent payment that would stretch beyond the due date of that. Clearly, we will be in a very strong cash position before and after making that payment.

Absolutely. Sounds great. Thanks.

Mr. Reece, there are no further questions at this time. Please continue.

All right, Theresa. I would like to thank everyone for joining us this morning on the call and sharing with us the results of our first quarter. As we said, it was a pleasing quarter and that it did beat the expectations we had. And we hope there's the beginning of continued improvement in U.S. market, at least, and hopefully throughout the world. Thank you, and we appreciate your interest in Belden and look forward to talking with you in about three months as Belden/CDT.

Thank you, ladies and gentlemen. This concludes our conference call for today. You may not disconnect from the call. And thank you for participating.