Belden Inc (BDC) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Inc. Conference Call. Just as a reminder, this call is being recorded. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Ms. Dee Johnson, Director, Investor Relations at Belden. Please go ahead, ma'am.

Thank you, Tricia. Good morning to everyone and thank you for joining us today for the Third Quarter Earnings Conference Call at Belden. With me here in St. Louis today are John Stroup, President and CEO of Belden; and Gray Benoist, Vice President, Finance, and Chief Financial Officer.

We have a few slides on the Web. So to see those, please go to investor.belden.com and you may need to sign onto the webcast. If you need a copy of the press release, you'll find that in the same location.

On Slide 2, there's a statement about forward-looking statements. During the call today, management will make certain forward-looking statements. I would like to remind you that that any forward-looking information we provide is given 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 our 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, John will begin with comments about the performance of the business in the third quarter, Gray will review some financial results and segment analysis, and then John will speak about our outlook for the business for the remainder of 2008, and then finally we'll open up the line for questions.

So, at this time, let's turn to our President and CEO, John Stroup. John?

Thank you, Dee, and good morning, everyone. The third quarter presented some revenue challenges as the economic weakness we experienced in the United States earlier this year has spread to Asia and Europe.

Revenue was $520.5 million, compared with $561.6 million a year earlier. Excluding acquisitions, divestitures, and the effect of currency translation, the organic change in revenue in the third quarter was a contraction of 10.7%. Some of this was related to channel partners closely managing their inventory in an uncertain economic environment and the anticipation of lower prices due to the recent declines in copper. The remainder of it was due to a broad-based slowdown in our served markets and geographies. I'll talk more about our markets in a moment.

Operating margins, adjusted for purchase accounting effects, restructuring charges, and the deferred revenue impact form the wireless segment, was 10.6% of revenue. For a valid year-over-year comparison, if I exclude the wireless business, which we acquired during the third quarter, operating margin was 11.2% in the quarter, compared with 11.3% a year earlier. We are pleased that margins remained constant year over year in an environment of declining volume.

Adjusted diluted earnings per share were $0.78 in the quarter, compared with $0.77 in the prior-year quarter. One of the drivers of this sustained consolidated performance was development of Americas' segment. This is our largest segment, comprising about 38% of our revenue. They generated $46.3 million of operating profits, or 21% of their total revenue, a record performance on both counts.

This is primarily the result of that business's improved manufacturing performance. Recall that we went through a major restructuring of our North American manufacturing footprint in 2007. I'm very proud of the teams that have successfully executed our manufacturing strategy in this business over the past two years. They are solidly on target to achieve the planned cost reductions of $26 million despite having to overcome higher commodity and energy costs. This will be an enduring benefit to Belden's long-term competitiveness.

Turning now to Slide 4, please, we are reporting Trapeze as a separate wireless segment. This matches how we are managing the business and it also provides investors complete visibility into this strategic acquisition. For additional transparency, we have included an adjustment for the effects of deferred revenue accounting in our adjusted results. By doing so, we are able to describe the real operating performance of the business in a timely fashion.

When we last gave earnings guidance, the outlook included the deferral of revenue and the related gross profit, so the results we are presenting are on a different basis than you expected. Our guidance for 2008 was $3.15 to $3.35. If we had included an adjustment of $0.15 to $0.20 for the gross profit impact of deferred revenue of the wireless segment, our guidance would have been $3.35 to $3.50. That would get you an apples-to-apples comparison of these results versus guidance.

The wireless segment actually did better than we guided. The adjusted results of operations were diluted by $0.03, whereas at the time we announced the acquisition, we thought the economic dilution might be a few cents more than that. Trapeze Networks has quickly made some changes to their SG&A costs that have improved their operating results. We have aligned the sales force of Belden and Trapeze in a very short time. It's clearly too early to declare a success, but we've already experienced some good examples of commercial synergies that we envisioned at the time of acquisition.

I'd like to spend a few minutes discussing our revenue and the conditions of our markets. In North America, revenue was down about 11% year over year, but it was flat sequentially. As I mentioned earlier, channel partners are carefully managing their inventory investment. While our revenue results are negatively impacted by this inventory management, our sell-through performance with North America channel partners is actually up slightly year over year, and substantially more, sequentially. We continue to see a pronounced shift towards higher category cables and solutions in the enterprise market, especially in North America. High-end solutions grew strong sequentially and year over year, and lower-category products declined, as expected.

Turning to Asia, we continued our portfolio management activities in the LTK brand, bringing on new business and good margins, expanding high-margin business with existing customers, and purging low-margin business. We significantly raised our gross profit margin in that brand more than 200 basis points year over year through these actions. At current volumes, we have more capacity than we need; but as we localize more development brand products early next year, we will better absorb these manufacturing costs and further improve margins.

We will begin moving into the newly built Suzhou plant in early November and expect to be operational for LTK production in the new location by the end of 2008, and to have equipment in place for Belden production early in 2009. Please recall that this plant replaces our existing Shanghai plant for LTK but it is new local capacity for production of Belden products. The Belden product line has a relatively large number of SKUs at more volume than typical for LTK, so there will be a lot of start-up efforts before we achieve the full benefit of local production. We are sourcing about 10% of our 2008 Belden brand Asia volume through our LTK plant, and we have local suppliers that also provide an additional 25% of our needs today.

In our Belden brand Asia business, we saw some revenue headwinds. In India, we've had some great project wins; but in other cases, we've seen delays and even cancellations of IT projects by major multinational customers.

Turning to Europe, we always see a seasonal decline in revenue from the second to third quarter in this segment, but the business did not respond in September as it has historically. The year-over-year decline in Europe segment revenue is attributable to weaker cable revenue, partially offset by growth in connectivity and industrial Ethernet. Lower demand from the automotive industry was a major contributor, and we saw a pronounced slowdown in the UK and Southern Europe.

In addition to the effects of lower volume, we suffered margin degradation in Europe because it takes longer to adjust capacity in Europe. So we could not flex costs fast enough to match revenue.

On the automation side of our European business, our industrial Ethernet and connectivity businesses grew year over year, but clearly the rate of growth is impacted by the economic slowdown. Nevertheless, the businesses we have acquired continue to have a significantly better growth profile.

Turning to Slide 5. In the third quarter, we generated $39 million in free cash, and free cash flow exceeded that income. That bring cash from operations for the year to $128 million and free cash flow, after subtracting capital expenditures, to $95 million. Cash increased to $215 million and our interest coverage ratio was 8.1 times. Net of our $215 million in cash, that is 25% of total capital. Besides the cash balance, our liquidity includes another $103 million of capacity to borrow under our revolving credit agreement. We feel that this is a strong, conservative balance sheet that will be an important advantage to Belden if conditions turn out to be as difficult as we expect over the next few quarters.

To summarize, it's a challenging period and we need to be prepared for lower revenue in the next few quarters. We remain committed to our strategic plan, but we are evaluating the timing and amount of investment given the current economic environment. And now I'm going to turn the call over to Gray for more discussion of the business results. Gray?

Thank you, John, and good morning, everyone, and thank you for joining us this morning. I'll begin my comments with a discussion of the consolidated results of operations for the third quarter, then turn to the segment results, followed by cash flow, asset management liquidity, and working capital.

I'd like to have you turn to Slide 6, please. Third quarter revenue of $520.5 million was 7.3% lower than a year ago. With the strengthening dollar, we realized less benefit from currency translation than in earlier quarters. The currency effect this quarter was $17.1 million, or 3%. Year-over-year organic revenue growth without the effects of currency, acquisitions, and divestitures was a negative 10.7% for the quarter.

Lower organic growth revenues resulted, as John noted, from market, channel, and portfolio activity. Sequentially, North America volume was stable, whereas both Europe and Asia experienced sequential revenue decline. Geographic mix of revenue is shown on Slide 6 on the left, please.

Revenue in the United States was 43%; Canada 7; Europe 25; and Asia, 20%. The US and Canada generated 50% of our revenue in the quarter, which is contrary to our recent revenue trends, and indicative of the market conditions we faced in Q3 in our Europe and Asia businesses.

The pie chart at the top depicts revenue by vertical market. We've included the revenues of Trapeze Networks, now our named wireless segment, in the enterprise vertical. So enterprise has expanded to 29% of revenue, up from 25% of revenue at year ago. As has been the pattern all through 2008, we continue to see year-on-year growth at higher bandwidth, enterprise, structured, cable, and solution, and a fall-off in demand at the low end of enterprise product family. A good trend for us, and consistent with our expectations.

Revenue in the industrial market was 42% of total revenue. Sales in this vertical included cable products, industrial Ethernet, and our industry connectivity business. In North America, industrial cable revenue was stable sequentially, but lower year over year. In Europe, industrial cable volume declined sequentially more than seasonally expected, and declined significantly year over year for reasons discussed earlier. The Europe-based industrial Ethernet and connectivity businesses grew year over year and experienced a modest seasonal decline sequentially.

The video, sound, and security market remains at about 12% of total revenue; the transportation and events vertical at about 4; and the consumer electronics and consumer OEM market served by LTK was again about 13% of the revenue this quarter.

If I could have you turn to Slide 7, please, on our adjusted results. In the third quarter, GAAP earnings per diluted share were $0.67. As we mentioned in our press release, we incurred an asset impairment charge of $753,000 related to our North America manufacturing restructuring initiative. We also have identified an adjustment of $1.2 million of one-time purchase accounting effects related to the July 16 acquisition of Trapeze Networks.

In order to improve transparency and deal effectively with the complex accounting associated with SOP 97-2, software revenue recognition, we've adjusted revenue and gross profit for the effects of all revenue deferrals at Trapeze Networks. John's earlier comments captured the current circumstances with respect to Trapeze operationally. I will add some additional color on the state of vendor-specific objective evidence and revenue recognition later in my remarks.

I would like to focus the remainder of my comments on adjusted results without these charges. For your benefit, reconciliations between GAAP and adjusted results have been provided as part of today's press release and are also available at the end of today's slide presentation.

Gross profit margin was 30.1% in the third quarter. Now, that's 210 basis points improvement year over year and just 20 basis points lower, sequentially. With respect to the regional manufacturing rationalization program and our commitment to deliver $26 million in annual savings in 2008, as John said, we're on target to deliver on the commitment despite third quarter cost increases and logistics, most notably (inaudible), and in compound materials, which contain significant petrochemical content. Our ability to hold gross profit margins sequentially, given the abrupt decline in revenue in Europe and Asia, coupled with an unfavorable commodity market, is testimony to the effectiveness of the manufacturing rationalization initiative we've been focused on delivering these past 18 months.

Third quarter SG&A expenses were $85.1 million, or 16.1% of revenue. Excluding the results of the wireless segment, SG&A expenses were $79.9 million, or 15.6% of revenue. In making comparison to 2007, you will recall, we were not identifying R&D expense as we do today. Thus, prior-year SG&A includes R&D expenses of that period.

In an apples-to-apples comparison, SG&A, excluding the wireless segment, is $6.1 million lower in dollar terms sequentially; and $5.2 million lower year over year. Currency translation with respect to year-on-year strong euro, added approximately $3.8 million to SG&A year over year. Excluding this translation impact, SG&A was $9 million lower year over year. A weaker global economic environment demands continuing cost vigilance in both manufacturing and the backlog of operations. And the third quarter results were achieved by continued good cost controls in all of our operating segments.

Cost controls at the business level, first, facilitated the maintenance of double-digit operating profit margins in the quarter; and secondly, enabled investments to be made in both R&D and in our strategic initiatives, lean, talent management, and our newest initiative in global sales and marketing.

R&D expense was $14.4 million in the third quarter, or 2.7% of revenue. Excluding the results of the wireless segment, R&D expense was $11.4 million, compared with $10 million in the second quarter of 2008 and $8.5 million just one year ago. Investment in new product development in Belden Automation remains a critical differentiator for our advanced product positions and an increase in R&D spending is consistent with our attention to technology development and maintaining leadership in each of our product categories. Similarly, technology investments to expand on the industry-leading position we acquired with Trapeze Networks is of equal importance.

Other income in the quarter, which represents the income from non-consolidated manufacturing and marketing joint ventures in China, was $813,000.

If I can have you turn to Slide 8, please. Interest expense for the third quarter was $8.7 million and our interest coverage ratio was 8.1 times, reflecting the desired state of strong EBITDA and conservative leverage, which we had planned in the 2007 recapitalization of the company. I'll talk about changes in the structure of our debt in a moment.

Income tax expense was $12.7 in the adjusted results, or 25.6% of the pretax income for the quarter. The effective tax rate on our year-to-date adjusted results was 28.4%. During the quarter, we recognized a tax benefit of $2.2 million from the release of valuation allowances on a portion of our Netherlands NOL. Despite the third quarter performance in Europe generally, we continued to manage and deliver significant improvements in the Netherlands operating results, now six consecutive quarters of positive pre-tax income, enabling favorable accounting treatment for the NOL valuation reserve we carry on the balance sheet. In future periods, we will continue to evaluate whether current results and operational forecasts provide enough positive evidence to release additional NOL valuation allowances. Due to the impact of the valuation allowance release, we are reducing our full-year outlook for the effective tax rate from 30 to 29%.

Net income in the adjusted results was $36.8 million, with average diluted shares for the third quarter at 47.1 million. Adjusted earnings per diluted share was $0.78.

Slide 9, please, has our segment results. External revenue of the Belden Americas segment was $202.6 million, increasing 1.3% sequentially, but 12.5% lower than a year ago, and our divisional sales were $17.6 million. Including the inter-divisional sales, total shipments of Belden Americas were $220.1 million. In addition to demand and inventory considerations, we continued to diminish our participation in the market for low-end networking and certain low-end industrial products that will impact current near-term volume but increase profitability over the intermediate term as the margins that can be earned on this business today are not at acceptable levels; nor are they expected to improve in the future.

Year-over-year segment operating income was $46.3 million, or 21% of revenue, which represents record high profitability for the division, accomplished in a very challenging quarter. The 21% adjusted operating income is an expansion of 170 basis points over the second quarter adjusted operating income figure of $42.3 million, or 19.3%, and a 350 basis point expansion over the prior year.

The Specialty Products segment external revenue in the quarter was $56.5 million, which is lower by 6.7% compared with the third quarter a year ago, and lower by 5.2% as compared to the previous quarter. The division's revenues from affiliates was $15.9 million. This represents a 40% and 13% decline from the previous year and previous quarter, respectively, primarily due to the Connecticut site coming off line and Americas production, previously sourced out of the Mohawk facilities, shifting to the Americas site in Nogales, Mexico.

Operating profits for the third quarter, adjusted by $900,000 for restructuring charges, were $8 million, or 11.1%, down 400 basis points sequentially. As we complete the transfer of products to Nogales, operating margins for the Specialty Products segment are expected to return to historical levels.

The EMEA segment's external revenue was $164.4 million in the third quarter, a 4.4% decrease year over year and an 17.5% decrease sequentially. Operating income of the EMEA segment was $12.9 million, or 7.6% of total revenue after a small severance adjustment. This compares with the prior-year results of $15.8 million, or 8.8% of revenue; and prior-quarter results of $27 million, or 13.2% of revenue.

The EMEA segment results reflect seasonality, channel inventory, weakness in the automotive sector, and deteriorating economic conditions in many European companies. Our ability to flex manufacturing costs and align more capacity to more favorable cost environments has accelerated in importance, bringing an updated European footprint plan to better manage this volatility into the near-term planning.

The Asia-Pacific segment had third quarter external revenues of $89.2 million, a sequential decrease of 8.3% and an 8.5% decline from the previous year. The lower comparative revenue is driven by desired portfolio management decisions at LTK, partially offset by increases in demand and new product wins with China OEM customers.

All of these actions benefit operating margins. However, we have delayed the benefit of these actions slightly by keeping extra production resources in place to advance our localization efforts of the Belden product portfolio into our new Suzhou manufacturing site. As a result, segment operating income was $8.8 million, or 9.9% of revenue, down from $11.3 million in the previous quarter and $10.3 million in the previous year.

With respect to the new wireless segment, we're making transparency a high priority in our reporting; and we're striving to assist our public's comprehension of the required GAAP revenue complexities. You may note in the condensed cash flow statement the inclusion of two new line items -- the first, deferred revenue, with an impact of $8.7 million; and the second, deferred cost of sales, with an impact of $3.3 million. The net benefit to cash flow -- the two items added together -- and the corresponding deferral of gross profits for GAAP is equal to $5.4 million. This is the net impact to our GAAP results in the third quarter related to Trapeze's revenue recognition. It translates to a negative impact of around $0.06 related to VSOE and is narrower than we had originally forecasted.

Much progress has been made by the wireless team in creating processes, managing documentation, and establishing solid business practices to achieve VSOE in a timely fashion. We'll be updating our progress, and the impact for 2009 guidance, at our Investors' Conference in December.

The wireless segment had non-GAAP revenues of $16.6 million in the third quarter. The business had strong year-over-year growth, as external billings increased 27% compared to the same quarter last year. The segment had an adjusted operating loss of $1.2 million for the quarter. These results reflect less than a full quarter of activity, however, most notably in SG&A expenses, as the transaction did not close until mid-July.

Free cash flow in the third quarter was $39.1 million, comprised of net operating cash flow of $53.3 million less capital expenditures of $14.2 million. Free cash flow for year to date is $95.4 million.

Depreciation and amortization expenses were $14.9 million in the quarter. And, with this reporting, we have broken out the amortization of intangibles on the face of the income statement. Since we are an acquisitive company, the identification of this element is important, not only because it is a significant non-cash expense item impacting our operating income, but also to aid in analytic comparisons of our results with others, as some companies in our industry set aside this expense as a pro forma item. Amortization of intangibles in the third quarter amounted to $3.8 million.

If I could have you please turn to Slide 10, I'm going to talk about debt, cash, and interest. The Company had $215 million in cash at the end of the third quarter. $95 million is in depository accounts that are used in the day-to-day operations of the business and $120 million is in short-term investment accounts centered on government issues. We communicated earlier in the quarter our call of all of our 4% subordinated convertible notes for redemption as of July 31, 2008. As a result of this call for redemption, holders of the notes had the option to convert each $1,000 principal amount of their debentures and receive value in combination of cash and shares of Belden common stock. All holders of the notes elected to convert their notes. On August 29, 2008, we completed the conversion. In connection with the conversion, we distributed to the note holders $110 in cash for the principal amount of the notes, and 3,343,509 shares of the Company's common stocks. Issued shares had an average value of around $38. There was no dilution effect with respect to the conversion, as the shares issued had been accounted for under the fully diluted share measurements in previous reporting.

At the end of the 2008 third quarter, we had $590 million in outstanding debt, $240 million bearing interest at 4.75% under our revolving credit facility, and $350 million bearing 7% interest in senior subordinated amounts. The Company used the amounts drawn under the revolving credit facility to fund the acquisition of Trapeze Networks in July and to fund the cash portion of the conversion of the subordinated convertible notes in August.

In addition to the cash on the balance sheet at the end of the quarter, the Company has $103 million in additional liquidity available under its revolving credit facility. The facility is fully supported and runs through the end of 2010.

If I could have you turn to Slide 11, please. Given the abrupt shift in our revenue expectations for the quarter, we had setbacks in our asset turn ratios. Inventory turns in the third quarter were 5.5, down sequentially compared with 6 turns in the second quarter and well short of the 6.2 turns we experienced in the 2007 third quarter. Absolute inventory dollars increased around $4 million sequentially, which is approximately equal to the inventory of the acquired business.

Working capital turns, at 5.4 turns this quarter, also fell short of prior quarter and prior year, as total working capital did not contract in line with revenues. Property, plant, and equipment -- turns were 6.2. This is less than the 6.8 turns of the second quarter, but still an improvement from a year ago. Our asset-light approach has served us very well and we expect to have several good opportunities to monetize assets in the fourth quarter.

At this time, I'd like to turn it back to our CEO, John Stroup, for a few remarks about our 2008 outlook. John?

Thank you, Gray. Visibility has greatly diminished, but we are making a significant revision to our outlook for the remainder of 2008 based on expectations of lower revenue in the fourth quarter. We remain true to our stated long-term strategy but we will accelerate or delay certain actions as a result of economic conditions. Several actions are under consideration for the fourth quarter to best situate the Company for the difficult environment ahead.

Those include new footprint actions in America and Europe in both cable and connectivity production and reducing our administrative resources while continuing to invest in our go-to-market strategies, lean enterprise, and the technologies that drive our success in cable, industrial automation, and now wireless.

We are adjusting our revenue outlook for the full year to $2.1 billion. This is a reduction from a range of $2.2 billion to $2.3 billion given earlier in the year. This implies that revenue in the fourth quarter will be much closer to $500 million than to $600 million. Our revised outlook includes the continuing benefit of manufacturing footprint and portfolio management actions we've accomplished over the past two years, which are helping support gross margins. But it will be difficult to overcome the impact of expected lower volume.

We do expect that our operating margin for the full year will be greater than 10%. We expect our net interest expense will be higher in the fourth quarter because of a full quarter of interest at higher rates on our floating rate debt and lower rates on our invested balances. And compared to the third quarter, in which our effective tax rate was lower in the quarter, as we adjusted to a lower full-year tax rate, the fourth quarter tax rate will be normalized. Each of these will impact EPS by a few cents sequentially.

Our 2008 outlook for adjusted diluted earnings per share is $2.95 to $3.00. As I discussed earlier in the call, we have changed the basis for our guidance and this guidance is adjusted for the deferred revenue accounting in the wireless segment. Our previous guidance of $3.15 to $3.35 did not include this adjustment, which we estimated would be $0.15 to $0.20 during the second half of 2008. If it had included this adjustment, our previous guidance would have been $3.35 to $3.50. So the new range of $2.95 to $3.00 should be compared to the range of $3.35 to $3.50.

As we look ahead to 2009, we envision a very challenging economic environment. We feel that our balance sheet and liquidity will work to our advantage and that as a lean company we can be nimble and opportunistic to satisfy demand when channel inventories are slim. We feel we've been taking the right steps to be ready for difficult times, consistent with our management philosophy and historical actions. And we will do the best we can for our customers and our shareholders.

Thanks to all of you on the call for your interest in Belden. This concludes our prepared remarks. We now have some time for your questions. Our operator, Tricia, will remind you of the procedures for asking your questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Celeste Santangelo, Merrill Lynch.

Good morning.

Morning, Celeste.

So a question -- the operating margins that you talked about for '08, above 10% -- can you just talk to that relative to your prior comments, long-term targets of around 15%. And does that still hold, or what kind of timing or margin progression should we be looking at for '09?

Well, Celeste, in December we're going to have an analysts' meeting where we're going to update our thoughts and our goals going forward. So that'd be the best time for us to comment on that. But clearly, in the fourth quarter we're expecting that the economic environment is not going to be good. We think that that will continue at least into the first half of 2009 and therefore that's going to have, I think, some impact with regard to the timing of the goals that we set for ourselves. But clearly our path is the same, our strategy is the same, our expectations are the same. I think it's really a matter, Celeste, of what's a reasonable period of time for us to set for us to get there, given the fact that the economy is, our view, deteriorating quite substantially from the last time that we updated those goals and those targets.

Right; okay. And then, just a quick question on the delays, project delays and cancellations, that you saw in India. Can you just provide maybe a little more detail -- what kind of projects those were, and maybe the timing of it? Did that all happen the last few weeks of September?

We saw a pretty significant change in September from what we saw in July in the second quarter. August is always a tough month for us because we've got parts of the world that slow down. And then of course, with the Olympics in China, that made it even a little bit more difficult to understand what was happening. But September was fairly pronounced in terms of a decline in business.

But as it relates to the project delays, they come across-- or I should say, they exist in many different end markets. But I would say that they're the most acute within the IT sector, and especially within the financial community. So financial institutions that were spending fairly robustly in IT are slowing down dramatically. We saw projects get pushed out, we saw projects get delayed, we saw projects get cancelled. And we think that these companies will continue to manage their cash flow very tightly, manage their IT spend very tightly, and we think that that's a trend that we should prepare for.

Right. Thank you.

Thank you.

Our next question comes from Matt McCall, BB&T Capital Markets.

Thanks. Good morning, everybody.

Hey, Matt.

Hi, Matt.

Gray, I think you talked about some of the impact from inflation in the quarter. I guess if you look at some of the trends, at least in some of the spot data that we have, you referenced logistics and compounds. Specifically with oil prices coming off, are you expecting any benefit to show up in Q4; and if so, is that baked into the numbers? And if not, should you see some as we move into '09?

The inflation reference is really more sort of like commodity volatility, is a better descriptor. And yes, we saw significant price increases from many of our suppliers in the third quarter. It affected the quarter by about $5 million. And because of our FIFO methodologies, a lot of that is still on the balance sheet because of the first-in, first-out methodologies that we follow with inventory. So we're still going to still have a little headwind here in the fourth quarter.

We have seen pricing easing from many of our big suppliers, their recognition that their core costs, petroleum-based costs, have indeed been reduced. We're starting to see the relief associated with the end prices associated with those commodities and resins here in the fourth quarter; and that should be beneficial to the first quarter in 2009.

Okay. And then, remind us -- that's-- the $5 million was a headwind for Q3. Holding everything constant, knowing what you know today, what would be the headwind for Q4? And then, what would that make the total for this year?

I think we're thinking the total is about $15 million across the entire year. And I would suggest that the fourth quarter will see little degradation; or, little improvement, if you will, associated with that condition. So for the fourth quarter right now, we're expecting the inventory position that we've established to dictate the results for the quarter, and not necessarily changes in the underlying cost of the commodity.

Okay. And the $15 million, does that include the impact of copper? With copper off as much as it is over the past month or so, what's the impact going to be? I assume there's not an impact based on FIFO -- there's not an impact in Q3. But what about the impact of copper as we move forward?

The discussion we just had was around non-metals-based variations in our cost of goods sold. With respect to metals, the volatility in copper has been remarkable, to say the least -- I think it was at $1.82 yesterday for at least a little while. And again, we're on FIFO so there's a period of time under which the third quarter purchases will need to purge through our cost of goods sold. But we turn around-- as we mentioned, we turn around 6 times, so that's about 2 months of inventory that has to run through the cost of goods sold. And then in December, we'll start to recognize the October level of copper purchases.

But that's accounting. The real economics under these circumstances is our price is holding in those markets. And right now, prices are holding. Prices through October have been fairly stable. There have been some pass-throughs, as you would expect; and desired pass-throughs, in order to be able to win good project business and sort of forward-price on the metals benefit.

But our business model -- and we've said it previously and we'll reiterate here, Matt -- is totally indifferent to copper. The value sits on top of the copper; it's not part of the copper. And our job, and our responsibility every quarter, is to neutralize the effect. And we work, obviously, a lot harder during times of volatility, both up and down, to neutralize that impact. And that's what we're seeing right now, is a lot more management energy centered around assuring that we're neutralizing the impact of the underlying commodities -- whether they're copper, by the way; or, conversely, to minimize the impact associated with other commodity changes that we just articulated with respect to compounds and freight expenses.

Okay. Well I guess as I look at the guidance, and I look at Q4, I think John said-- you said around $500 million. I look back and you've been-- Q1 of this year was around 511; you're 530 here. But yet, it looks like the implied margin range is in the 9 to 9.5% range and I guess I'm trying to understand, outside of commodities, the over-all volume levels don't seem to be that much lower. I'm trying to understand what's causing that deterioration in such a quick fashion.

Well, Matt, if you look at the revenue makeup in Q4, you're right about the operating margins. Remember, the fourth quarter revenue would include the Trapeze acquisition. If you were to compare us, for example, to first quarter, where were right at $500 million, it did not include Trapeze. So what we're expecting in the fourth quarter is that our legacy business is going to see deterioration from the third quarter in terms of revenue. So I think as you do the projections, what you'll see is that the projection that we have for the fourth quarter as it relates to coming down from the third is really volume based.

Okay; that helps. I'm sorry I missed that. All right; thank you.

No problem.

Your next question comes from Jeff Beach, Stifel Nicolaus.

Yes; good morning John, Gray, Dee.

Hi, Jeff.

I have three questions. One, you've talked about inventory, your channel partners. It appears as though the steep decline in demand is kind of backed up in the system and it appears as though, looking in to the fourth quarter here, as the channel partners correct inventories and then you do, that you'll probably do some idling of plants versus second quarter, third quarter, more; fourth quarter more. I'd like to know if that's the case. And can you expand a little bit on this and how this is impacting the guidance? It appears as though it's going to be a meaningful impact in the fourth quarter.

Well, Jeff, I think first of all, as I mentioned, the sell-through data that we had in the third quarter was far better than our revenue comparisons, which means that our product going out of our distributors' door to customers was a lot better than the shipments from us to our distributors, both sequentially and year over year. So clearly part of the revenue decline we experienced in the third quarter is a change in inventory manage in our channel partners. Which is understandable -- they're preparing for a weaker economy, they're managing their working capital more closely. They're trying to figure out what to do with commodities coming down -- should they wait for better prices? These are all understandable.

In the fourth quarter, what's not clear to us is whether or not there'll be any change in that direction with our channel partners with inventory. And at this point, we're not expecting that we're going to see any sort of meaningful inventory increase at our channel partners in the fourth quarter. And we think that the end market's going to deteriorate from the third.

So as we think about how we manage through that, Jeff, what we're trying to do is really twofold. One is make certain that we're true to our long-term strategy as it relates to the investments that we want to make in the Company and having the right competitive footprint globally. So we're evaluating whether or not there are actions we should take now that were already part of our long-term strategy that perhaps should be taken sooner.

And then secondly, of course, we're going to flex our cost structure in all parts of the world in a way that's appropriate with our current demand -- above and beyond our footprint strategy. So we're looking today at our headcount around the world to make certain it's appropriate given what we think is going to be a recession that will be here with us for a while and make certain that we're appropriately prepared for it and have the right headcount.

So for us, Jeff, I think what you'll see is any actions that we take will be entirely consistent with what we've laid out over the last three years as it relates to the strategic direction of the Company. And I think Gray mentioned we want to make certain that we have a good regional manufacturing footprint; we want to make certain our capacity makes sense; we want to take advantage of low-cost regions wherever we can. And we're just going to continue doing so and some things might happen a little sooner and some things might get a little delayed, given the economic environment.

All right. The other two questions -- I'd like you to expand a little bit on Specialty Products. The margin was hit pretty hard in the second quarter and I know that you were going through this shift of closing production and shifting it into Mexico. So in trying to describe the margin degradation in that area, can you address how much is meaningful of that related to plant closings?

And then discuss for a minute what's happening in Category 5 cable profitability -- if the volume is declining there and really pressuring the margins abnormally relative to other product categories.

And then as the third question, Gray had said earlier he had come back and mentioned VSOE and I may have fallen asleep, but I don't remember him or you going through that a little bit. And the expectations of when you might achieve it.

Okay. Jeff, let me start with the second. I'll turn it over to Gray on VSOE. There's really two things within Specialty going on that have really little to do with end markets, so let me address those and I'll do end markets.

First, as Gray mentioned, there's a change in the amount of inter-company revenue within that segment which has an unfavorable impact on their profitability. And as you said, there are costs associated with the relocation of the Connecticut factory that, once those get behind us and we have our production in Nogales, Mexico, that'll get substantially better as well.

From an end-market point of view, there's two things that we did deal with in the third quarter. One is, as you said, margins have been pressured on the lower-end category products and that affects our Mohawk business. That's a real trend that we're working against. And of course, our manufacturing footprint's a big part of that strategy.

The second issue is that within our Thermax business, which supplies cable equipment to the aerospace industry for in-flight entertainment, we've seen a real weakening in demand as our domestic customers, US airline companies, are delaying spend associated with upgrades of their aircraft. So that business continues to be strong on the international side of the business but domestically it has weakened somewhat and that has affected the margins of our Thermax business.

Let me pass it to Gray to talk about VSOE.

All right; thank you, John. Jeff, we've got a lot of progress with respect with where we need to be on VSOE. There's really three elements -- and that is the fundamental documentation that you're collecting; the processes under which you collect that documentation and organize that documentation for review. But probably most importantly, it's the behaviors and the action of the business group to put it in place with standard methodologies to assure that you sit, and your data sits, around a certain point for clarity that defends the fact that you've got an arm's-length third party transaction on a bundled sale.

So those are the three pieces, and I'm encouraged by the efforts in all three areas. Trapeze has made remarkable progress. I will say that there was an opportunity in the quarter for us actually to claim a subset of the revenue this quarter, much, much, much earlier than we had anticipated in our original guidance. And that is because the processes that sit at Trapeze are a lot more mature than what we originally believed to be the case when we gave the original guidance.

But there were two elements that made us decide otherwise, and I'd like to spend a little time on that. And then, when we're together in December, we'll give more specifics associated with where we stand on VSOE and, most importantly, what that means for 2009.

But the first is, we had a discussion with so many of our investors and analysts, including you, that suggested that the level of transparency that we should be providing on VSOE should be very, very high. So management decided that we were going to pro forma all of the VSOE, irrespective. And therefore, the need, or desire, to accelerate in this particular quarter or any quarter was diminished because now you can see the segment results as if VSOE has been accomplished. And therefore the transparency to the real operating performance of the business unit.

The second is with respect to the literature. And the literature is enormously complex. It's subject to broad interpretations. There are many specialists that don't necessarily agree. And even these levels of experts -- and their competence, and our certainty around their competence -- was not high enough at the end of the third quarter for us to proceed with that level of confidence that you would want.

So therefore we saw no benefits of accelerating VSOE until sort of the vagaries of the expert opinions could be consolidated and we'd be comfortable, with great certitude, that we could take VSOE and not look backwards.

Just as a final, do you still expect VSOE to be achieved in 2009 so it becomes essentially a non-issue?

In my comment, Jeff, I actually said there was a subset. That it was accelerated on a-- that we potentially could have taken here in Q3 2008. So I'd say we're way ahead of schedule associated with what our expectations are. Except for the following -- we're way ahead technically. We're way ahead process-wise. We're way ahead in terms of elements that you have to do to fulfill VSOE. But we're not way ahead associated with sort of the vague reason in the interpretations. And again, our understanding and the opinions that you get, even from experts, are challenging; are complex and challenging.

I'm going to spend a little extra time with you and discuss some of the inputs we've received from the various expert sources so you get a better feel for it.

All right; thank you.

Sure.

(OPERATOR INSTRUCTIONS). We'll go to Nat Kellogg, Next Generation Equity Research.

Hi, guys. Just a couple of quick questions -- I think most of the stuff has been answered. But John, I was just wondering if you might be able to touch on-- I know there were some questions about sort of the impact of falling commodity prices on margins, but just curious. I mean, I would assume, obviously, this does have the benefit for you guys of being able to sort of accelerate some of your dollars in working capital down over the next couple of quarters. And I'm just wondering if you guys can give us any sense of just how meaningful that might be over the next six to nine months.

Well, I think, Nat, you're right. I think on a quarterly basis, on average, the amount of copper that we purchase is roughly--

30 million pounds.

Yes, 30 million pounds. So the average spot price in Q3 of copper was $3.50, roughly. As Gray mentioned, it's traded as low as $1.85 in the last couple of days. There's obviously an enormous amount of volatility right now, so it's difficult to predict with any certainty where it's going to be. But as we manage through this cycle of purging out the older, higher-cost copper and we start purchasing lower-cost copper, it's going to have a positive impact, of course, on our turns. It could have a positive impact on our margins, depending on how pricing goes.

So I guess the one good news about a slowing economy is the commodity prices fall and that can have a benefit to our income statement. But as Gray says, we always manage the business as copper-neutral and we think the value is really independent of copper and I think we've done a pretty good job of managing that on the way up and the way down in the past, and I think we'll do that again.

But going into 2009, I'd say the one thing right now that looks fairly good is the fact that commodity prices are easing, which is positive. And if they could be stable, that would be even better.

Yes, I think that would make everyone's life easier -- you guys on an operating basis and us on trying to look out and see what's going to happen down the road.

Sure.

Given the fact that you guys are going to generate some cash over the next-- going forward, can you guys talk a little bit about sort of priorities for how that might get spent?

Yes. How we use our cash is always a top priority for us. And I would say that for us, our priorities are unchanged. The first priority, always, is to make certain that we have sufficient liquidity to run our business appropriately and make certain that we have the cash on hand to make good CapEx investments in technology and organic growth initiatives, making certain that we have cash on hand to make good investments in our regional manufacturing footprint where it makes sense. That's always our top priority.

And then following that is good, strategic acquisitions that can make sense. And right now I would say that we're far more cautious about acquisitions than we were six months ago, given the economic environment. I think as visibility improves and our confidence level improves in terms of what the economy's really doing, then we would be, of course, anxious and interested to make high-quality acquisitions that would be a positive addition to the Company. But right now, we're just very, very cautious about that given the economic environment.

Okay. And then, just last question for Gray. I don't want to beat a dead horse with the VSOE, and I realize to some extent it's sort of accounting semantics. But I think you guys had originally said that you really didn't expect to achieve it until the end of 2009, that we'd see sort of things on a normal basis in 2010. It sounds like, if you could pull some of this-- So I guess two questions. One is, if there a chance that this is going to happen a fair amount earlier than maybe you had previously spoken?

And then the second question was, it had been my understanding it was sort of an all-or-none thing. And it sounds like maybe that might be more incremental; that you could pull some of the revenue into the normal GAAP results but not all of it and it sort of may be a stair step-type of thing. So I'm just wondering if you could answer those two questions for me.

Absolutely, Nat. So the answer to Question No. 1 is yes, that our conservatism with respect to how we guided and our knowledge around VSOE in general indicated that we wanted to be prudent with respect to what we guided. And we clearly are accelerated off of that schedule. So the answer is yes.

With item No. 2, this is a very interesting curiosity; the curiosity being, is it an all-or-nothing kind of orientation associated with a single pool of transactions? Or conversely, do we have five pools of transactions? So that's one of the areas where the experts don't necessarily agree. And when the experts don't agree, take a step backwards, is our position, and make sure that you have the underlying principles understood so that when you do argue a position, you've got all of the experts' opinions taken into consideration.

We did not feel we were in that position at the end of third quarter to take a subset. It would have been one of five subsets that's now been identified; or potentially identified for independent evaluation for VSOE. So management here said, "No, we're going to wait and continue to vet the circumstances under which a subset could be recognized; make sure that it's validated with respect to a broad set of experts; and then at that point in time, if that's the case, we will begin the revenue recognition position."

But basically, it looks as follows -- we've got two fundamental different business models; one's OEM, the other one's direct sales. The direct sales has three regional orientations, and the diversification of the portfolio of OEMs really falls into two categories. So we have five subsets that we're looking at right now and all of them have individual or independent elements. But they also have collective elements, and therein lies the complications we're dealing with. I know that's a long-winded answer, but the fundamental is yes, we're in better condition than we thought we were; and yes, subsets are possible, not just aggregates.

Okay; that's helpful. I realize it is complicated, so I appreciate you taking the time. That's all I've got for now, guy, so thanks very much, as always, for taking my questions.

You're welcome.

Thanks, Nat.

We'll go to Keith Johnson, Morgan Keegan.

Morning.

Hi, Keith.

Hi, Keith.

Just a couple of questions; you covered most of the subjects. You talked a little bit on project delays, I guess, in India earlier in the call. What about North America -- what are you guys seeing in that market from a project standpoint?

We're seeing the same thing. We're seeing project delays in North America as well. And that's actually-- I'd say the amount of delay has increased here recently. We actually had a pretty good third quarter in our enterprise business because I think we did a better job in managing our project business that we did in Q2 or a year ago. So we might have been a bit of an outlier in Q3 in our enterprise business. But in the fourth quarter, we're seeing delays, push-outs, cancellations. We're also seeing a lot of push-outs and cancellations in the Middle East right now; we're seeing it in Europe as well. So yes, I had a comment about India, but I would say it's very global in nature right now. IT spending is really coming down significantly. We don't know how long that's going to last, but we think it's going to be with us for a while.

Okay. So these projects you're talking about being delayed or cancelled fully -- just trying to make sure in my mind I'm thinking about them correctly. Are we talking about projects that potentially a company takes a conservative stance and says, "We're not going to anything in the first quarter; see where this plays out; and by the time we get to first quarter of '09, maybe it's not as bad as we all think it's going to be; those projects are right back on." Or are these very large-scale projects that, once you pull them off the drawing board, to get them cranked back up again you're talking about a six-month delay?

Well, I think the projects themselves, in most cases, have good economic returns. I think the matter is whether or not they're affordable for the customer. And so I think the customer can turn them back on as soon as they have a sense of confidence. The question that we all have, of course, is when are they all going to get a sense of confidence?

Right.

And we don't know that.

Of course. When you talk about-- I think you made a comment about looking-- a recessionary-type position. As we kind of enter into 2009 a little bit earlier, if you kind of look at what you're thinking in relation to your fourth quarter guidance, how does that stack up against a recessionary environment under your model today versus where you guys were in early 2000?

Well, I think there are a lot of things that are substantially different about our Company today than the last time Belden went through a recession. I think you already see it in our results. First of all, our Company's a lot more diversified geographically, a lot more diversified, from an end-market point of view, and a lot more diversified from a product point of view. We've mentioned a number of times that in the last recession, we had an enormous telecom exposure, for example, that we don't have today. So I feel very good about the Company's ability to manage through a recession. I think the revenue decline we saw in the third quarter compared to a year ago, and the fact that we're able to maintain our operating margins in that kind of environment, I think that speaks to the fact that this business is far better positioned to deal with economic shocks than it's ever been.

So I feel, actually, quite optimistic about our ability to navigate through any sort of difficulties. I think we have a good portfolio of businesses, I think we're greatly diversified from end markets and geographies. I think we have a much better handle on our cost structure than we've ever had before. I think we already have a plan going forward on our footprint; now it's just a matter of executing, perhaps faster, than we would have otherwise. So the balance sheet's incredibly strong. None of us like these sort of environments, of course. But these are great opportunities for companies like Belden, I think, to differentiate itself as a clear leader, and that's the way we're thinking about it.

Okay. I guess just one last question. When you talk about inventory management within the different channels, to some extent North America has been slowing earlier than what Asia and Europe have. Were customers already adjusting inventory balances coming through the summer in North America and just gaining a little bit more pace, or was it a significant adjustment as you came through September quarter?

Well, we've seen some amounts of inventory management throughout the year, and we talked about that earlier. But we saw a much, much greater attention to it in the third quarter, and especially September. September was a dramatic change from what we've seen earlier in the year.

Do you think a lot of that is related to more credit issues or underlying market demand?

I think it's three things. I think there's credit concerns that our customers and our channel partners, that they have to be mindful of their working capital. I think that they're clearly preparing for a slowdown. And I think, thirdly, with commodities so volatile, they're wondering whether or not their inventory position is overpriced given what might be happening in the future, and therefore they're being cautious.

Okay, great. Thank you.

Thank you.

We'll go to [Alvin Metranie], [Golden Lake] Asset Management.

Okay, thank you. Just a quick question; thank you for all the color you've given. You haven't really told us what your competitors are doing in this environment and how some of the smaller companies that you compete with -- I'm thinking more of the enterprise cabling business and some of the other areas -- are doing. Can you just talk about what the competitive response has been? Whether it's competition with price, or trying to, or cutting inventories or doing something? And also talk about some of your larger competitors and how you expect that to play out?

Well, I think it varies by region. We've already seen some of our larger competitors in Europe come out and say that their demand is weakening. Some of those companies are not blessed with the same balance sheet that we have, and therefore they may not be able to do all the things that they would want to do; some of the things that we're going to be able to do.

I think what we should expect around the world is that the environment is going to be competitive; that people are going to be looking very, very carefully at any opportunities that exist. I like our position, obviously, a lot better than theirs. I like the fact that we've got outstanding channel relationships that we can build upon. I like the fact that we've got an improving sales organization that creates end-user demand and creates real hard specs. And I like the fact that we've got a strong footprint to be able to take advantage of a cost structure and therefore be aggressive when we need to be on business.

So in the third quarter, I wouldn't say we saw an enormous change in competitive environment. I would say that we're looking probably even more closely now than we ever have been in terms of how we go after projects, and making certain that we're smart about our project business. Clearly, as I mentioned, our LTK business continued to do great things in the third quarter on purging low-margin business. We'll continue to attend to that. So I think the environment might get a little bit more competitive here going forward, but it really isn't a great concern of ours because I think we're well positioned to deal with it.

Okay, great. And then, also just-- I may have missed it, but can you just give us an update as to what you think Cap spending will be for 2008, and where you can see it leveling out in '09 and 2010?

Well, I think our Cap guidance for 2008 is unchanged. We have projects -- and that's $60 million -- we have projects committed to -- the new factory in Suzhou, for example, that we're going to finish, of course. And then, we've not really updated our CapEx for 2009 and going forward. We'll do that in December, when we're all together. But we're going to look at everything, including CapEx, to make certain it's appropriate with the new environment.

Thank you.

Thank you.

We are over time; do we need to cut off, now? Tricia, I think we'll have to stop here. Thank you very much, everybody, for good questions. If we didn't get to you, please give us a call this afternoon. Thanks again for joining us on the Belden Earnings Conference Call. We sincerely appreciate your interest and we'd be happy to entertain calls for follow-up questions. This concludes our call.

Thank you. Ladies and gentlemen, this concludes our call for today. You may disconnect from the call, and thank you again fro participating.