Belden Inc (BDC) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden CDT Incorporated conference call. Just a reminder, this call is being recorded. At this time you are in a listen only mode, and 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 CDT. Please go ahead, sir.

Thank you, Sean, and good morning. And thank everyone for joining us today for the fourth quarter earnings conference call at Belden CDT. With me here in snowy St. Louis today is Baker Cunningham, our President and Chief Executive Officer. I hope that each of you has a copy of our press release. It can be found on our website, beldencdt.com, or if you would like a copy faxed to you, please call Linda at 314-854-8000. During this call we will provide an outlook for revenue and earnings in 2005. We will also provide an update on the merger synergy savings that we expect to achieve. I must remind you that these statements, and any other 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, our 10-Q filed on November 15th, Belden's 2003 annual report on Form 10-K, and the Belden 8-K filed may 25th, 2004, CDT's 10-K, and the merger prospectus on Form S-4 filed by CDT, for a more complete discussion of factors that could have an impact on the Company's actual results.

Now, getting to the agenda of the morning. I will review the financial results for the quarter, and the year, and review some of the elements of the balance sheet and cash flow. In the second part of the call, Baker will cover some forward-looking information. He will be discussing our improving expectations for the net savings we expect to realize from the merger synergies, and update on our recent networking product launch, and our outlook for revenues and earnings. At the conclusion of these prepared remarks, we will open up the lines for questions. Within our press release, in addition to the usual financial statements, we have provided some tables that show result for the quarter, adjusted for merger-related items, severance charges, and some usual income tax items. We have also shown results for the year on a pro forma combined basis, as if Belden and CDT had been merged for the entire year. This full year schedule is also adjusted for merger costs, severance charges, and the unusual income tax items, as well as a gain on the sell of a business. We believe this information is helpful to investors, by improving the comparability across periods, and giving visibility to important trends. It should not be relied upon as being indicative of the historical results that would have been realized had the merger occurred as of the first of the year. I will be emphasizing the pro forma adjusted results, and unless I note otherwise, I'll be speaking about the results of continuing operations.

Now, let's get to the fun stuff; the fourth quarter results. The fourth quarter of 2004 was another very solid quarter for us. This is only the second quarter we have reported since the merger in July. If any of you were waiting on the sidelines to see whether the merger of Belden and CDT was going to work out, these fourth quarter results may give you some of the assurance you are looking for. Sales in the quarter came in better than expected in both of our business segments. And our operating margin was a little better than we expected, 1.1 percentage points better sequentially, and 3.5 percentage points better year-over-year. Our total revenue for the fourth quarter was $330.3 million, an increase of 21.2 percent compared with the combined pro forma revenue in the fourth quarter 2003, which was $272.6 million. Price realization was a significant factor in year-over-year comparisons, due to the increases taken back in the first quarter of 2004. Currency was certainly another factor that caused revenues to exceed prior years. Approximately 4 percent of the increase in revenue is attributable to currency exchange rates year-over-year, with much of that originating in Canada, as well as Europe.

The rest of the upside benefit in revenue was due to volume. Our telecommunication business in Europe not only was very favorable to prior year, but also greatly exceeded our forecast, with larger than expected shipments for Deutsche Telecom and for British Telecom. Because these customers work to a budget cycle, we might see volumes swing the other way during the first quarter of 2005, but it certainly worked to our benefit in the fourth quarter. We also had a very good month of December in the Networking business in Canada, with significant sales of the IBDN system solution to a division of Bell Canada which serves as a system integrator for business customers in Canada and the United States. Sales into the industrial market in North America were also strong. By segment, both our Networking and our Electronics segments had revenues above our expectations for the quarter, and significantly better than the year ago quarter. And that's for the same reasons I explained before: Currency effects, price realization, and in the year a better than expected volume. On an adjusted pro forma basis, that is with the merger cost and severance cost excluded, our gross margin for the quarter rose to 24.6 percent of sales, up from a pro forma combined gross margin in the fourth quarter of 2003 of 21.2 percent. This margin improvement within continuing operations can be attributed to higher price realization, better capacity utilization, yielding operating leverage from the higher volume, and merger synergies in the areas of purchasing and engineering.

SG&A cost on a pro forma basis were slightly lower as a percent of sales in the fourth quarter of 2004 than they were a year ago, reflecting the contrary trends of having removed duplicate corporate cost, and having incurred higher costs for compliance with Sarbanes-Oxley. Our adjusted pro forma operating profit was $31.2 million or 9.4 percent of sales, compared with $16 million or 5.9 percent a year ago. We recorded other operating income of $3 million from the sales incentive contract that we retained when we sold the Communication business earlier this year. We did not eliminate this in our pro forma analysis, because this has been a recurring element of income for several years, and continues into 2005. But if you did choose to look at operating margins without the sales incentive income, the operating margin in the fourth quarter of 2004 would be 8.5 percent. Still, a significant year-over-year improvement, a sequential improvement from the third quarter, and we believe, one of the best results in the industry in the last few years. Interest expense for the quarter was $3 million compared with pro forma combined interest expense a year ago of $4.2 million. This reflects the benefit of having reduced our debt by $64 million on September 1st.

Income tax expense for continuing operations was recorded at an effective rate for the quarter of 64 percent. The reason for this unusually high tax expense, is that in the fourth quarter, we recorded a valuation allowance with respect to our tax asset representing a portion of the loss carry-forward in the Netherlands. The amount of this valuation allowance was $9.4 million. Looking at our historical losses in the Netherlands, we had to conclude that there was at least a good chance that we may not be able to generate enough income in that country to use all of the loss carry-forward. If profitability in the Netherlands improves, then we would be able to use more of the loss carry-forward, allowing us to reduce the valuation allowance in profitable periods, which would lower our effective tax rate in those periods, if and when that occurs. And while we're talking about taxes, I will digress for a moment to the discontinued operations. In the discontinued operations, we had a favorable tax event, having to do with the North American telecommunications business that we sold earlier this year. We recorded an income tax benefit of $11.2 million in the fourth quarter because we completed restructuring steps necessary to deduct our tax basis in the stock of this operation. This tax deduction more than offset losses from discontinued operations in the quarter.

Now, let's return to our continuing operations. Net income from continuing operations in the fourth quarter was $8.6 million. Adjusting for the merger-related items, severance and the tax valuation allowance, net income from continuing operations was $20.4 million, or $0.39 per diluted share. For the diluted EPS calculation, we had 53.7 million average shares for the quarter. This includes about 6.1 million share dilution from the convertible debentures. For basic EPS, the average shares were 46.9 million shares.

Now, let's look at the year-to-date pro forma results. Pro forma combined revenue was $1 billion $241 million, an increase of 15.9 percent over pro forma combined revenues in 2003 of $1 billion $71 million. Adjusted pro forma operating earnings for 2004 were $85.3 million or 6.9 percent of sales, compared with adjusted pro forma operating earnings in 2003 of $57.7 million, or 5.4 percent of sales. The adjusting items in 2004 included the fourth quarter tax valuation allowance of 9.4 million, partially offset by a favorable tax item from the third quarter of $2.4 million. Also severance charges and merger-related items totaling $30.6 million, and the gain on the sale of a European business earlier in this year of $1.7 million. The pro forma 2004 results also included the adjusted, unaudited results of CDT for the first 5.5 months of 2004, prior to the merger. On an adjusted pro forma basis, net income from continuing operations for 2004 was $45.1 million, or $0.90 per share. We used 53.3 million average shares in figuring the pro forma earnings per diluted shares, as if Belden and CDT had been combined all year, and including the dilutive effect of the convertible debentures. The comparable pro forma adjusted net income from continuing operations for 2003 was $23.4 million, or $0.50 per diluted share. Here we used 49.4 million average shares for the 2003 pro forma EPS calculation, which reflects the dilutive effect of the convertible debentures from their inception on July 8th, 2003 onward.

Now, briefly, let's review our results by segment. Our Electronics Segment had revenues of $196 million for the fourth quarter, which represents 59 percent of total Company sales. Excluding the severance charges and merger-related items, the segment's operating profit was 14.4 percent of sales. The Networking Segment had revenues of $134.3 million for the fourth quarter of 2004, which was 41 percent of total sales. Adjusted operating profit for this segment was 6.5 percent for the quarter, including the benefit of the $3 million in incentive sales agreement income. Excluding this, the operating margin would be 4.2 percent. We've decided not to try to segment the prior year on a combined pro forma basis. The prior year reported amounts represents Belden operations only, and they are given in the press release. Before I move on to the balance sheet and cash flow, I'll give you the geographic break down of sales. The geographic distribution of revenue in the fourth quarter was as follows: The U.S. and Canada made up 59 percent of sales; Europe was 32 percent; and the rest of the world, 9 percent.

Now, turning to some selected balance sheet and cash flow items. We ended the year with cash of $188.8 million, an increase of $36.4 million from September 30th, due to strong cash flow from operations of about $45 million in the quarter. Regarding our LIFO to FIFO change in inventory accounting, as you read in our press release, we made a change to conform our inventory accounting policies across all operations. As of the beginning of the fourth quarter, we converted the North American former Belden inventory from LIFO to FIFO. This was only about 17 percent of our total inventory. The balance sheet effect was to eliminate a LIFO reserve, which increased inventory by $21.1 million. We restated results of all prior periods, as if we had been on FIFO forever, and this restatement increases gross profit in the results previously reported for the first 9 months of 2004, by $2.5 million. Depreciation during the quarter was $10.1 million, and capital spending was $10.6 million. Our forecast of depreciation for the year 2005 is about $38 million, and we are currently expecting about 25 to $30 million in capital expenditures. For the last couple of years the capital budgets of both Belden and CDT have been about half of depreciation. The reason that this will be higher in 2005, is that we will be investing in information systems. We will be moving each of our major operating units, Electronics, Networking, and Europe, to a common manufacturing and enterprise management platform. Europe is also implementing a shared service concept, which over the next couple of years, should put in place significant savings in SG&A.

Now, some elements of cash flow. A 10 million portion -- a $10 million portion of the selling price for our North American Communication business was held back for 9 months. It currently appears that the conditions have been met that would make that payable to us in March. We have several parcels of real estate that we have listed for sale. Certain parcels are already under contract, and we expect to sell those during the second quarter, which could bring in additional cash proceeds of about $25 million. We continue to expect that we will not pay cash U.S. income taxes during 2005. Cash tax payments for some local and foreign jurisdictions will occur, but not for the U.S. income tax. Pension funding is expected to be about $25 million in 2005, an increase of approximately $10 million compared with 2004. With that, I'd now like to turn things over to our CEO, Baker Cunningham.

Well, thank you, Ricky, and good morning, everyone. There are a couple of recent developments that I'd really like to discuss this morning. First, is an update on our pricing, and, second, some new products. As you know, the price of copper remained high in the fourth quarter, and into the first quarter. As we said in November, we are committed to recouping rising material costs in our pricing. Industry behavior, with respect to product pricing, continued to firm up during the fourth quarter, and price realization was a significant contributor to the year-over-year improvement in revenue for the fourth quarter. The largest business units of Belden have all announced price increases, taking effect during the first quarter of this year. For Europe, the effective date of the price increase was January 1st. For our larger North American units, price increases took effect in early and mid February. These increases involve our data networking products, and our core electronic products. All indications are that we're going to realize these price increases, and that the net effect will be between 3 and 4 percent revenue increase due to pricing. We estimate that the increases keep us at least even with material cost increases. We also have a strong commitment among our business unit managers to continue to raise prices, as needed, to keep pace with any further increases in material costs. Now, we believe that the industry conditions will permit this to occur.

Another exciting event since year-end that merits comment, is the launch of the new Belden IBDN 10GX system. This is Belden CDT's highly advanced offering for 10-gigabit ethernet. If you're not familiar with the idea of 10-gigabit speed, this is is a new level of performance, for which the standards have not yet been agreed, and it certainly pushes the copper cable performance to a speed that until now, was only available with optical fiber. Customers saw this product unveiled at the Bixy (ph) show in Florida in mid-January. I'm now pleased to tell you that we are presently shipping the 10GX product for a major customer order. It's a project for the National Aeronautics and Space Administration at the JFK Space Center in Florida. We believe this is one of the largest 10-gigabit projects in the market, and we're very proud that our technology was chosen for this prestigious installation. I believe that the reason NASA chose our 10GX system, is it's the best system on the market. Incidentally, the "X" in 10GX means extended performance, beyond the proposed 10 Gig standard. It also stands for a set of technical innovations. Instead of just tweaking existing products to the limits of their capability, this product line involves a lot of new proprietary technology, that we believe makes it the most effective and robust 10 Gig solution in the market today. So I'd like to extend my congratulations to our Networking Division on this product launch, and on winning the confidence of NASA in landing this significant order.

Aside from the Belden IBDN 10GX, the rest of the Belden IBDN line of system solution is also winning broader acceptance in the marketplace. Our technology has long had a leading share of the Canadian data networking market, and since the merger we're able to be more effective in obtaining broader distribution and customer orders. Turning to the benefits of the merger, a year ago, when we announced the intent of Belden and CDT to merge, we had identified specifically $25 million in net annual savings that we could achieve through the merger. And we've been giving you progress reports over the last few months. We now are going to increase our estimate of the total savings, from $25 million to $35 million. This increase comes mainly from 2 areas: First, the savings from the plant closing and related manufacturing moves. These changes give us opportunities to move some of the equipment to where it can best be utilized. As we continue to refine our manufacturing plans, we're finding and creating additional opportunities to cross source semifinished goods and finished goods, and concentrate production to similar products.

Second, we have increased our estimated net savings in selling, general, and administrative expense. Just as with manufacturing, as we work out detailed strategies and plans for the marketing and information technology at the division level, we are uncovering additional opportunities to save money. By the end of the 2005, we will have taken the steps that get us to that $35 million run rate. But net savings for the year 2005 are estimated to be $25 million, and that's because we're implementing some of these changes at different points during the year. Recognize that some of these savings are the result of eliminating about $5 million of annualized pretax losses in merger-related discontinued operations. So please don't just add all of it to our operating results for the continuing operations. We expect to get the full savings of $35 million in 2006. Naturally, we continue to look for additional opportunities to make money and save money, in all aspects of our business.

Finally, let me turn to the outlook for 2005. The outlook we are giving is for continuing operations only. As a base line, we begin with our pro forma 2004 revenue of $1.2 billion. Ignoring any effects from currency exchange rates, we would expect revenue to grow for 2 reasons: Price and volume. As I mentioned, we have broad-based price increases enacted during the first quarter in the low single-digit range, that we think will offset recent material cost increases. If we experience additional cost increases during the year, we will act on pricing, again. But future price increases are not built into our revenue guidance. We expect the recovery in our major markets to continue in 2005, but at a somewhat slower pace than 2004. So we're expecting a few percentage points of volume growth in both segments. Therefore, we expect that total revenue will increase between 5 and 10 percent year-over-year, compared to pro forma combined 2004 results.

Our operating profit is also expected to improve during 2005, and we anticipate operating profit to be between 8.5 percent and 9.5 percent of sales. The amount of the improvement will depend partly on the level of sales. If the low end of our sales range prevails, then we would expect operating profit to be at the lower end of this range. On the other hand, if our revenue comes in at high end of our estimated range, then we would expect operating margins to also be at the higher end of the range. Ricky has already shared our expectations for 2005 taxes, depreciation, and other cash flow components. For the first quarter, we expect that revenue will be in the range of 305 to $310 million. This would be a little bit lower sequentially compared to fourth quarter, but that's very normal for our business. We expect our first quarter operating margin to be in the mid single-digit range.

As Ricky said at the beginning of the presentation, we're very pleased about how the merger is working out. We find more opportunities all the time and very few disappointments. We're still in the process of delivering what we've promised, but the outlook for synergies has now improved. Our balance sheet is very solid, and we're very pleased with our market position, the value of our brands, and the recognition we are getting for our newest technology. Belden CDT continues to generate excellent cash flow, and we continue to seek growth through acquisitions. Frankly, we think we're the best positioned company in our industry. Well, that concludes my prepared remarks. So thanks for your attention, and now back to Ricky for a wrap-up.

Thank you, Baker. I now would like to turn the call over to our operator, Sean, who will remind you of the procedures for asking your questions.

(OPERATOR INSTRUCTIONS). Jeff Beach, Stifel Nicolaus.

A couple of questions, primarily revolving around volume increase, or revenue increase in '05 over '04. Where you are right now with pricing, either in place in January, or being implemented in February, how does that pricing compare with the first quarter of '04, for the combined companies, roughly?

Thank you, Jeff. We, of course, would have seen the benefit after that, of at least 2 rounds of price increases, because the first round was implemented late in the first quarter of '04. And that was in that mid single-digit area. And, then, now, we've had this one in the low single-digits. So, you would be looking at upper single-digits, year-over-year for the first quarter.

And that includes both the data, Networking and Electronics, and, I guess, data networking?

Yes.

Combined?

I would mention, though, Jeff, that first quarter 2004 price increase we put in late in the quarter, was only in North America. In Europe, in part, because of the currency changes, it was not that easy to implement pricing in Europe until late in 2000 -- later in the year in 2004.

Okay. And second, on volume. As your businesses move through 2004, from the first quarter to the fourth quarter, did you see a general strengthening among most of your end markets?

Well, it's a little interesting as we go through the markets. I think that comment is fair for our industrial business, particularly our higher performance specialty-type products. We saw that gain strength throughout the year. In Networking, it was a little bit of strong beginning. We had a very strong first quarter 2004, that was both Belden and premerger CDT. Some of that, as you may recall, was predicted by us to be due to people buying ahead of the late first quarter, early second quarter price increases here in North America. And then we had a pretty slow middle year in data networking. And then, a pretty strong finish late in '04. So, there, it didn't have a continued upward rise. It kind of started strong, and then waned a bit and, then actually finished strong, largely due to strength we saw in Canada. But we did see some picking up in North America and Europe as well. So, in summary, Electronics, pretty sustained increase throughout the year; Networking started strong, waned, and then recovered some late in the year.

Okay. The reason I wanted to get a flavor for this is, it seems like if you continue to see strengthening in your electronic markets through '05, the volume increase seems like it ought to be greater than 5 percent. And then data networking, I guess is a little harder to call. But volume gains this year of 5 percent, plus, don't seem to be too aggressive.

We hope you're right.

No -- are there -- and last -- are there any soft markets? And then I'll jump -- I'll get out of the queue.

I think a couple of relatively small sub markets for us that we saw soft late in the year. One is CATV, that was a little weaker for us, not a big part of our business here in North America. We do supply some of the drop cable for CATV. And then in Europe we provide a little more broader-based offering in CATV. That was a little weaker for us in the fourth quarter. Again, not a big part of our business, but a little weaker. And then our professional broadcast business was a bit weaker in the fourth quarter, and that was coming off real strong performance earlier in the year, due to the Presidential conventions here in the U.S., and some major sporting events, like the Olympics and UEFA (ph) Cup and so forth, that benefited us earlier in the year. Those 2, at least on a sequential basis, were about the only areas we saw some weakness. Otherwise it's pretty broad-based in the quarter.

(OPERATOR INSTRUCTIONS) Devlin Lander, Morgan Joseph.

In the networking business, I was wondering if you could elaborate. You said part of this strength was due to significant sales to Bell Canada. Is that going to continue throughout '05, or is that kind of a 1 time?

I think much of the incremental strength we saw beyond our expectation there, was the lumpiness that that business can have. And I won't say it won't continue. We'll see, hopefully, some other lumps, but it's not quite as sustained. We, I think largely due to the holidays, there were several major projects that they were scheduled to install during the holiday breaks in late quarter, and they were ordering up the cable ahead of that. Another big positive that benefited our Networking Segment, in the fourth quarter, Devlin, was the telecommunication business in Europe. We mentioned in the call, both Deutsche Telecom and British Telecom we saw very strong demand in the fourth quarter, particularly as it relates to British Telecom. We think it will soften here in our first quarter, because it's their fourth quarter, and we believe they pretty much spent the budget, given how much they bought in our fourth quarter, and given some of their constraints that are put on their ability to exceed budgets. We may see that soften. Having said that, British Telecom has launched what they call the 21st Century Network, which is a very aggressive campaign to offer voice, video, data to all of their customers, or at least a large majority of the customers through the U.K. And are forecasting pretty strong demand for certainly optical cable, as they push that, which doesn't have as big an impact on us, but also for the copper. So I think we'll see it's softer in our first quarter, but maybe return back to similar levels later in the year as they get their budget reloaded.

And can you quantify what the revenue was from the European Telecom business?

European Telecom business is running at an annual rate of a little over $100 million. That's a combination of British Telecom, Deutsche Telecom, and then we sell a little bit into Eastern Europe to MATAB and a couple of others. In the fourth quarter, it would have been above that run rate. I don't have the exact number, Devlin, but it would have been higher than a quarter of that number, due to the strength we saw.

Okay. And then can you tell us kind of where you are from a capacity utilization standpoint? And how much of the operating improvement going forward will be from improved capacity utilization? Or have you already realized most of that?

Okay. First, we currently are measuring our capital -- capacity utilization assuming a 5 day, 24 hour operation, even though in certain areas we do go 7 days, where we have bottlenecks. On that basis, throughout the Company, we're running in the 80 percent or so range. And that is a mix, a little bit, between where we are in Electronics and tele -- or, in Networking. In Electronics we would be above that level. And most of the synergy benefits and shrinking the footprint in the Electronic side is factoring into that utilization rate. There's still a little bit of capacity that we're taking out here in the first quarter, that will increase that utilization, assuming demand stays. But most of that, we're at where we want to be. That's not the case, yet, in Networking. Networking, where we're running below the Company average rate. There, we are still seeing opportunity to increase utilization, as we continue our rationalization of capacity there. There we had some multistaged moves that are dragging that out a little longer than what we had on the Electronic side.

(OPERATOR INSTRUCTIONS) Alan Mitrani, Copper Beech Capital.

You talked about the 10 Gig product in your press release. Can you talk about the kind of margins you'll see from that? How much higher than your typical margins, and how big can that be this year?

I think, first on the margins, currently we would expect significantly improved margins on that product, compared to the standard, we call it our 1200, but the 5e type of networking system, which is a lot more competitive. Significant being, quite a bit more. I don't want to exactly quantify it, but let's say it is meaningfully more. Unfortunately, though, I don't know that we are seeing a huge spike in moving to the 10GX system, away from a 5e or a 6. There certainly are going to be those customers, such as NASA, such as big data users, and some of the financial services areas, maybe some of the other government or possibly even the educational area. But most of your business users are probably going to have a hard time justifying going to 10GX until they are going to have to move and rebuild their office space, or redo their system, to upgrade would probably not be something that we would see. At least not in '05 for the basic enterprise business user. So demand, we think, will continue to grow. But we're not forecasting, Alan, a meaningful move to 10GX for most of our end customers in '05.

Can this be 5 percent of your sales in '05, or something of that nature? Or is that not even realistic?

I think that would be maybe, a bit optimistic.

Okay. Also, what percentage of your cost of goods sold come from material cost, raw material costs?

About 60 percent. Again varies widely from different products, but on balance, around 60 percent.

And how much do you expect that to be up this year?

On the cost side, it will be up I think, when we rolled the standards, we were seeing about upper single-digit type of increases in materials. Again, commensurate with the price increases we've taken.

Okay. And given the move that's gone on so far in the first quarter, in aluminum and copper and even oil and others, you're not expecting further cost increases in the next 6 months?

Well, the increases we've already taken here in January and February, anticipated almost $1.50 copper. We weren't quite that negative on copper, or that bullish, depending on how you look at it. But where our pricing has pretty much recovered that, aluminum is not a big component in most of our products, it is in some. And in those where it is a big component, which is the case in some of our specialty aerospace and transportation products, we actually reprice that on a weekly basis to recover those types of costs. So that we're getting back. We don't have near the content of steel or aluminum that many other wire and cable, just given the mix of products that we have. So copper is the big one. Oil is not as big an element, although it's an element, as natural gas is. Natural gas is a big feed stock in a lot of the compounds that we use in our jacketing and insulation. And there, we've recovered where it is today. And as Baker mentioned in his comments, if it goes up more, we're certainly expecting our businesses to recover it.

And then also just a couple of quick questions. Of the debt that you have, of the 249 that you have on your balance sheet, short term, long term, what's the size of convert?

110.

110. So either count it as equity or count it as debt. Don't double count it. Got you. And then, do you feel you're gaining share in your business on Networking side or on Electronics? And if so, who do you see losing share?

I think at this point, we believe we're holding our share in the Networking area. I think that as we've looked back, there probably was a period, to be honest, in the middle of the year, as we were pulling the merger together, and so forth, that we may have lost a little share. Took us a while, obviously, late in the year because of antitrust reasons to get the sales forces together and start putting the marketing plan together. We weren't allowed to do that until the merger closed, even though we announced it way back in February. So we do believe as we look back, Alan, that there probably was a period, late second quarter into the third quarter, that we may have lost some traction and some share. Having said that, since we've launched the Belden IBDN product, which we did 6 weeks after the merger, and then now, with the launch of the 10GX system, we believe we've begun recovering that share that we lost. But I don't know that I'd predict that net-net we've gained share back beyond what we may have lost a little on. But we really feel good about the momentum that we had late in the year, and seems to be holding early this quarter.

And what's a realistic turns number? Because you turns are about 3 times, right? Your inventory turns? Seem to be pretty low.

I would say that's an opportunity that I certainly see, and we're pursuing. There is some of our businesses that sell primarily through distribution, that do much better turns than that, where we can certainly get the value and the benefit that a distributor can have and carry in some of that inventory in the channel. But we also have some business, some very high-margin businesses, where we choose to carry higher inventory and provide that service level that enables us, we believe, to get that higher margin, by having same-day delivery or next-day type delivery. And we're willing to accept, in those situations, the higher inventory levels. But certainly there's been significant improvement in logistics and supply chain management, and we're beginning to take advantage of that. We took a lot of working capital out in 2003 as Belden. And here in 2004, we saw some improvement in working capital early in the year. And then a little bit in the second half. As I look into 2005, though, I would agree with you. I think there is an opportunity for us to wring several 10s of millions of dollars possibly, of working capital out, both in inventory as well as managing the receivables and payables better. And we're pursuing trying to realize that, to not only improve our cash flow, but lower our investment base to improve our return on invested capital.

Thank you. Also, what's the strike price on the convert?

It is $18.06, -- 18.069, to be exact. That will -- at the risk of full disclosure, that will go down modestly as time goes on, assuming we continue to pay a dividend on our common stock. There is a formula in the convert agreement that causes, as we continue to pay a dividend on the common stock, to lower that stock price -- strike price. Our forecast currently suggests that will not happen until the third quarter of this year. And it will go down a few percentage points from that.

But does the -- do the shares increase then, in terms of how may shares get -- it gets converted as?

That's correct. You would take the 110 million and divide it, instead of by the 18.069, it now would go down. I think we're looking at about $0.16 reduction in the third quarter, if we maintain the current dividend rate. And it depends on where the stock is trading, and so forth. But call it in that range. So you would, instead of 18.069, you would need to reduce it by about $0.16 per share, and redo the calculations. So it would go up. Not a huge number, but I did want to -- in the fair disclosure, mention to everybody that that number will go down if we continue to pay a dividend on the common.

Kevin Sarsany, Langenberg and Company.

Just a quick question on the networking side. With the release of the 10G, typically when you upgrade your product line, the legacy products kind of are somewhere in the cycle, pricing and competition. Can you talk about where you think you are in your legacy products? And how that is going to play out?

Yes. I think we can. Certainly, we would agree that it is, anytime you launch improved and new products, it will begin cannibalizing some of the other, but not only in demand, but also in price. I think the category 5 product is in our business, and at least in Belden CDT, is not -- it's gone. We're not pursuing that market, and as an RK has been displaced by higher bandwidth products. 5e still is a major part of the mix of what people install. think it's a lower percentage for Belden CDT than the market, as a result of that. And we are certainly seeing a migration for our customers from 5e up to 6 and 6 plus. Again, as we mentioned, I don't think we're seeing a huge move yet, or forecasting a huge move, yet, to the 10G. Good news for us, each time they up, it's higher margin. And we continue to try to lead that market curve in being there, at least percentage-wise, above. But certainly, Kevin, fair to say that we will see additional competitive pricing in that 5e area, and hopefully we can see the migration to 6 and above quickly enough to more than offset any margin erosion that might occur.

And we have no further questions. Mr. Reece, I'll turn the conference back to you for any additional or closing remarks.

Well, thank you, Sean. And I'd like to thank each of you for joining us today for the conference call, as I hope you sensed, we're feeling very comfortable about the merger and the momentum that we ended the year and going into 2005 with. And I hope everyone has a great day. If you have additional questions, please don't hesitate to call either me, or our Director of Investor Relations, Dee Johnson, here at St. Louis. Thank you, and everyone have a great day.

That does conclude today's conference call. Thank you for joining. Have a great day.