Belden Inc (BDC) 2009 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. At this time, you are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Gray Benoist. Please go ahead, sir.

Thank you, Jennifer. Hello and good morning, everyone. My name is Gray Benoist, and I'm the CFO of Belden. Thank you for joining us today for the third quarter 2009 earnings conference call. Joining me on the call today from here in St. Louis is John Stroup, President and CEO of Belden.

First some logistics. We have put a few slides on the web. To see these please go to investor.Belden.com and sign onto the Webcast. There is no www in that address. Just investor.Belden.com. Also, if you need a copy of our press release, you will find it in that same location.

During the call today, management will make certain forward-looking statements. I would like to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provisions 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, after which I will review some additional financial results and segment analysis. Then, John will speak about our outlook for the business, and finally we'll open up the line for questions.

So at this time, I'd like to turn the discussion over to our President and CEO, John Stroup. John?

Thank you, Gray. Good morning, everyone. The realities of the global economic downturn continue to impact our year over year results in the third quarter. However, despite this challenging operating environment, we delivered better-than-expected results, including sequential revenue growth in three of our four business segments. Additionally, we realized a book to bill ratio slightly greater than one. Although, in our European segment, revenue declined sequentially due to seasonality, our focus on improving the segment's cost structure through product portfolio and restructuring actions yielded sequential improvements in both gross and operating profit.

Our restructuring initiatives which started in December 2008 generated $12 million of savings in the third quarter. This is $2 million better than planned, and we expect to be able to achieve a similar level of cost savings in the fourth quarter. This will bring our annual benefit to 2009 to $40 million with an annual exit rate of $48 million. It is worth noting that gross margins were higher than the same period one year ago despite the negative impact of substantially slower demand.

Although Gray will discuss the following in greater detail in a few moments, I want to highlight the continued improvements we have made with respect to inventory turns. We were able to improve our inventory turns sequentially and year over year to all-time Company highs. Such achievements in the face of these economic conditions are truly unique, and are an indication of our commitment to and our improved proficiency with lean manufacturing principles. For the second consecutive quarter, we generated free cash flow in excess of $40 million, resulting in a year to date total of just under $94 million. Our continued ability to generate significant free cash flow has allowed us to build our cash balance to $312 million, from $227 million at the end of 2008. Our strong cash position and solid balance sheet provides us an excellent foundation on which to build and enhance our competitive positions in all of our served markets.

We are fortunate to have such talented and dedicated associates, and I am especially proud of what they have accomplished thus far in 2009. Our Company would not be in its strong a financial or operational position without their dedication and commitment to our corporate values and strategies, and I thank them for their hard work and sacrifice.

Our demand is largely driven by overall business investment, and as such, we pay close attention to select broader macro economic indicators. Although the PMI and ABI indices, both leading indicators, have improved from June 2009 levels. And European indices are also trending positively. We have seen little evidence of improving end markets with the exception of Asia, where we are seeing real signs of recovery. Our investments in this region over the past three years have strongly positioned us to benefit from this regional recovery. On the other hand, we don't expect to see end market growth in Europe and the United States until businesses are once again comfortable making capital investments. This typically lags GDP growth by a couple of quarters.

Let's spend a few moments talking about the adjusted results in our individual businesses starting with the Americas group. Revenue within our Americas group grew 4% sequentially, despite continued channel inventory reductions and competitive price pressure. Gross profits improved 250 basis points year over year reflecting our actions to improve our portfolio and cost structure. Although this segment's operating margins declined 210 basis points sequentially to 17.2%, this result is still well within our expected range. We are pleased with this result, as the basis for the sequential decline is largely the result of volatility in copper cost. During the first half of the year, when spot prices for copper were at their lowest point of 2009, we benefited from lower cost copper due to our ability to properly manage our inventory.

Pricing remained elevated, as many channel partners worked off their inventory, which was made up of higher priced copper. As a result, we recognized a $2 million benefit, and margins were slightly elevated during the second quarter, which was highlighted in our second quarter earnings call. However, as copper prices continued to rise during 2009, the same volatility had the opposite effect on our results. In the third quarter, it had a negative impact of $2 million. Despite our improved inventory performance, we are not immune to the short-term impacts of copper volatility. However, copper pricing and volatility have no lasting impact on our business model.

Independent of copper prices, we are beginning to experience increased levels of competition, as some manufacturers are at significantly depressed utilization levels. We believe that our proactive restructuring and cost reduction plan allows us to deal with this situation better than most.

As expected, seasonality and channel inventory reductions were a sequential headwind. However, the continued implementation of our go to market strategy and our ability to expand our market share on both a sequential and year over year basis served to offset the negative impact. Our enterprise business was up 6% sequentially, and is a good example of the success we have had with our go to market initiatives.

Moving on to our EMEA segment, on last quarter's earnings call, I expressed my confidence that this segment would report double digit operating margins by the end of 2009. I am pleased to report that we were able to achieve 11% operating margins in the third quarter. Reaching our objective one full quarter ahead of schedule, as we made significant improvements in our industrial connector business. On a sequential basis, our European operations, increased operating profits approximately 47%, and expanded operating margins by 390 basis points. Compared to the prior-year period, revenues declined $66 million, while operating income only declined $1.2 million.

Our global industrial networking business continued to perform well, as this business posted double digit sequential growth in the face of weak industrial demand and normal European seasonality. This is a result of continued substitution and our successful execution in expanding our served markets beyond our traditional ones, to include infrastructure, alternative energy and power transmission. Although Europe demonstrated strong results in the third quarter, we are seeing real signs of recovery in Asia. On a sequential basis, revenue increased 16%, led by 32% growth at LTK. Operating margins remain healthy at 10%, but they were challenged sequentially due to business mix and copper volatility, similar to those discussed in the Americas segment.

Our adherence to lean principles is apparent, as inventory turns improved year over year from 11.5 to 13.8. We continue to make progress with our efforts to expand the presence of the Belden brand locally by expanding the number of products being locally manufactured at our facility in Suzhou. This improves on-time delivery, reduces lead times, and supports our organic growth initiatives.

Finally, let's discuss our wireless segment. The third quarter yield improved results within the segment, as it marked continued sales growth in Trapeze brand of products, as well as a significant improvement in OEM revenue. On a sequential basis, OEM revenue was up 60%. While it appears that the majority of the headwinds are behind us, OEM sales are still down 6% on a year over year basis. We are happy to see the OEM business come back, and are encouraged by the news of the recent sale of Nortel's enterprise solutions business to Avaya. General market conditions for Trapeze are sound, and the end markets to which the business serves, healthcare and education, remain attractive, given their high growth rates and relative stability.

Gartner recently issued a report indicating that they expect the wireless market to expand at a compound annual growth rate of greater than 20% between 2009 and 2013. It is clear that customers are becoming more comfortable with the technology, and while we are pleased with the resulting revenue growth, we are disappointed with the operating result. Despite high expectations for continued revenue growth, we need to address the segment's cost structure. As a result I am personally going to spend more time supervising daily execution in this segment. I intend to take a more balanced approach, and we are not going to rely solely on revenue growth to improve profitability.

With that, I'm now going to turn the call over to Gray for a more in-depth discussion of the business results. Gray?

Thank you, John. Good morning again, everyone. I'll begin my comments with a discussion of the GAAP results for the quarter, followed by a discussion of our consolidated results of operations. Then I'll walk through our segment results, cash flow, working capital and asset management and close my remarks with comments with respect to our global restructuring initiative and cost savings measures.

In the third quarter, GAAP revenue was $355 million, and the Company reported a net loss of $0.16 per diluted share. We incurred restructuring charges of $8.8 million pretax in the quarter resulting from the continued implementation of our global restructuring initiative. Among this quarter's charges were costs incurred in the process of closing one of our Leominster Massachusetts manufacturing facilities, and costs incurred in the relocation of German connector assembly operations to the Czech Republic.

I will focus the remainder of my comments on adjusted results without these charges. For your benefit, a reconciliation table between GAAP and adjusted results has been provided as part of today's press release. We have also provided a new disclosure, which identifies these adjustments by segment, which is available on pages 8, 9 and 10 in today's slide presentation. We hope you find these helpful.

Consolidated revenue in the third quarter was $355 million, a year over year decline of 32.9%, which includes unfavorable currency translation of $8 million or 1.5%. Revenue, when adjusted for currency acquisitions, dispositions and metal costs year over year declined 24.3%. Sequentially sales grew 3.1%. The sequential impact from currency translation was a benefit of $6.5 million resulting in slightly positive organic sales growth quarter over quarter.

If I could have you turn to slide four, please. The geographic mix of revenue is shown on the left. Revenue in the United States was 43%, Canada 10%, Europe 21%, and Asia, 20%. Revenues were up slightly in the US on a sequential basis while the Canadian market delivered strong results for the second consecutive quarter, with revenue growth of 12.6% sequentially. Also, as John mentioned, indicators are suggesting a recovery is underway in Asia, as reflected in the sales increase of 11% sequentially in the Asia portion of our geographic mix.

In total, the Company's go to market programs, and its share gains through channel management, global accounts, and sales force effectiveness are taking hold, fully offsetting our traditional sequential seasonality in our Europe and US businesses. The pie chart on the top depicts revenue by vertical. The enterprise vertical, which includes our wireless segment accounts for 32% of our overall revenue, unchanged from last quarter and up 29% from a year ago. The industrial market fell to 44% of our business in the third quarter, down from 46% in the previous quarter. While our consumer OEM percentage of our total business increased 170 basis points sequentially to 8% of total revenue on the strength of LTK. Our other verticals remain unchanged from the previous quarter with video, sound and security at 12%, and transportation and defense at 4%.

If I can have you please turn to slide three. Gross profit margin was 31.9% in the quarter, a sequential decline of 120 basis points, but a 180 basis point increase from the third quarter of 2008. The sequential results are impacted by an approximate 80 basis point copper benefit in the second quarter, and a corresponding 80-basis-point copper detriment in the third quarter as outlined earlier by John. However, excellent year over year gross profit expansion continues to be delivered, through tight cost management and the benefits of the global restructuring plan, with improved gross profit percentages delivered in the Asia Americas and most significantly, Europe segments.

SG&A expenses in the third quarter were $68 million or 19.2% of revenue, which is a slight improvement as a percentage of sales of 20 basis points sequentially with an increase of 310 basis points year over year, from $85 million in the third quarter of 2008. Excluding the results of our wireless segment, SG&A expenses were $61 million, or 17.9% of revenue in the quarter, a decrease of 40 basis points from the second quarter of 2009, an increase as a percentage of sales of 230 basis points for the prior-year period. Currency translation had a favorable impact of about $2 million to SG&A year over year. Excluding Trapeze and this translation impact, SG&A was $17 million lower year over year, a reduction of about 23%. With respect to investments in R&D, third quarter expense was $14 million or 4% of revenue. Excluding the results of the wireless segment, R&D expenses were $9.3 million compared with $8.8 million in the second, and $11.4 million a year ago.

Now I'm going to discuss long-term debt and the debt covenants. If you could turn to slides five, six and seven. As we announced during last quarter's earnings conference call, we completed the issuance of $200 million in senior subordinated notes through 2019 with a coupon interest rate of 9.25% and an effective interest rate of 9.75%. The issuance allowed us to repay, as well as amend and extend, the terms of our revolving credit facility. The terms of the facility were extended to January 2013, while the size of the facility was reduced to $250 million with a further reduction to $230 million in January 2011. At the end of the third quarter, we had $590 million of total debt outstanding, consisting of $544 million in senior subordinated notes, at an approximate blended interest rate of 8%, and $46 million drawn upon the revolving credit facility. Currently availability of additional liquidity under the revolving credit facility increased to $85 million during the quarter.

Interest expense for the third quarter was $13 million, and our interest coverage ratio was 3.4 times. The Company's debt to EBITDA leverage ratio at the end of the third quarter was 3.46%, compared to 3.11% from the prior quarter. Income tax expense was $4.4 million in the adjusted results or 25.2% of pre-tax income for the quarter. The effective tax rate on our year to date adjusted results was 26.3%. The Company was successful in avoiding several anticipated deferred tax asset valuation allowances in the quarter, resulting in a favorable tax rate relative to our earlier expectations. We now expect our full-year outlook for the effective tax rate to be in the 27% range.

I would like to take a moment to discuss the GAAP tax rate. The GAAP income tax expense was $16 million or 188.1% of GAAP pre-tax income for the quarter. This is a very odd result, and it is due to an anomaly in the standard application of APB-28, which covers GAAP guidance for the quarterly tax provision. Under APB-28, a company in the current condition of estimating a negative tax rate on forecasted annual operational income must then apply this negative rate to a quarter ending cumulative pre-tax loss. This combination creates accounting income tax expense in the quarter as reported by Belden. In the fourth quarter the accounting condition will be reversed through the annual tax true-up process, and thus we expect to book a GAAP tax benefit of approximately $10 million during the final quarter of the year. This results in an annual estimated GAAP effective tax rate of approximately 24%.

Adjusted net income for the third quarter was $12.9 million, and adjusted earnings per diluted share was $0.27.

If I could have you turn to slide eight. External revenues at the Belden America segment was $192.1 million, affiliate sales were $13 million. Including affiliate sales, total revenue of Belden Americas increased 3.8% sequentially, but declined of 29.5% year over year. Adjusted operating income for Belden Americas was $35.3 million or 17.2%, a sequential decline of 210 basis points, consistent with our copper management discussion of earlier.

The EMEA segment's external revenue was $81 million in the third quarter, a 6.1% decline sequentially, and a 41.9% decline year over year. Operating income for the EMEA segment was $10.4 million or 11% of total revenue. This compares with the results of $7.1 million or 7.1% of revenue in the second quarter of 2009, and $11.6 million or 7.2% of revenue for the third quarter of 2008.

The Asia-Pacific segment had third quarter external revenue of $67 million, an increase of 16.5% sequentially, but a decline of 30% from the previous year. Operating income in this segment was $6.7 million or 10% of revenue, down 280 basis points sequentially and 220 basis points year over year.

And wireless. As you may be aware, the Financial Accounting Standards Board recently passed rules which will significantly improve the reporting of our wireless segment. Under this new guidance, software related companies will no longer need to establish VSOE -- vendor specific objective evidence, thus eliminating much of the deferred revenue many companies are required to currently report. Belden was active in the support of this accounting change. Under this guidance, the Company will no longer defer revenue on bundled Trapeze sales, which include post-contract customer support or PCS. We are very pleased that the FASB has finalized the new rules, and are currently in the process of evaluating our implementation of this guidance.

During the third quarter Trapeze deferred revenue increased $61,000 while deferred cost of sales increased $549,000. The net negative impact to cash flow and gross profit on a GAAP basis is equal to $488,000. This translates to a negative impact to our reported GAAP results of $0.01 a share in the quarter related to the VSOE. The wireless segment had non-GAAP revenues of $15 million and adjusted operating loss of $6.8 million in the third quarter. Trapeze branded sales enjoyed sequential growth of 3.3%, delivering sequential growth for the third consecutive quarter, while also improving 11.8% year over year. Additionally, Trapeze OEM revenue increased 59% sequentially, but declined 5.7% on a year over year basis.

If I can have you turn to slide 11, please. The Company had $312 million in cash at the end of the fourth quarter. $190 million is in depository accounts that are used on a day to day operation of the business, and $122 million is in short -term investment accounts, primarily investment in government issues. Free cash flow in the third quarter was $43 million comprised of net operating cash flow of $50.6 million, plus capital expenditures of $7.8 million. This marks our 11th consecutive quarter of positive operating cash flow. Depreciation and amortization was $13.8 million in the quarter.

If I can have you turn to slide 12. As John discussed earlier, we are very pleased by our operational success in driving our inventory turns to record levels. Inventory turns in the third quarter were 6.6, up sequentially from 6.1 turns in the second quarter, and more than a full turn higher than the 5.5 turns we reported in the third quarter of 2008. Working capital turns also set new highs, as third quarter working capital turns were 9.4, a 2.1 turn increase sequentially, and a four-turn improvement year over year. We continue to stress the fundamentals of lean, and our third quarter results put us ahead of our commitment to deliver a one-turn improvement in working capital again in 2009. Property, plant and equipment turns were 4.7 turns, higher than 4.6 turns in the second quarter, but lower than the 6.2 turns in the year-ago period.

And finally, to summarize the restructuring activities, if I can have you please turn to slide 13. During the second quarter call, we forecasted third quarter cost reduction benefits of $10 million. We are pleased to have exceeded this forecast by an additional $2 million bringing our third quarter results to $12 million in savings. As a result, we are increasing our full-year 2009 estimated cost savings to $40 million from $38 million with a forecast savings of $12 million 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 outlook. John?

Thank you, Gray. If you could please turn now to slide 14. We are pleased with our performance in the third quarter, and we are encouraged by stabilizing end markets. As we look ahead to the fourth quarter, we expect the operating environment will remain competitive, driven by the need of some to improve manufacturing capacity utilization. For the fourth quarter of 2009, we expect adjusted revenue and diluted earnings per share to be in the range of $365 million to $375 million, and $0.27 to $0.32, respectively . We expect free cash flow generation in the fourth quarter to be in excess of net income.

I would like to remind you that we will be hosting an investor event in New York on December 9th, to which you are all invited. For additional information, please call 314-854-8054. 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, Jennifer, will remind you of the procedures for asking your

(Operator Instructions) Gray Benoist, your first question comes from Matt McCall from BB&T Capital Markets.

Good morning. This is Sean Connor for Matt. In looking at the guidance for Q4, our calculation at the midpoint assumes really only a 25% contribution margin sequentially, and I know that you guys have got more cost savings in Q3 than anticipated, so it takes out that incremental benefit there. We thought there would have been a little bit more flow-through as the volume improves sequentially I just want to get an idea of how we should look at that going forward, maybe what's pressuring that. Is it strictly price? I want to get a little bit more detail there.

Okay, John. This is Gray. We have a $10 million to $20 million increase in sales sequentially. Some portion of that is margin driven, I'd say most notably around the seasonality effects that we witnessed in the third quarter, which should reverse themselves in the fourth quarter, most notably around the EMEA segment. But the other portion of increased sales were really not contributing to the bottom line based on just general levels of increase in copper. So the copper we ran in the third quarter results, somewhere around $2.62, $2.65. Here in the fourth quarter, we're already looking at somewhere around $3 copper as of today. So the way to look at our fourth quarter guidance right now is an increase in our sales, just associated with that copper increase without margin contribution.

Okay. In Asia, I imagine that we'll continue to see seasonal strength there. Is it possible for Asia to show year over year growth in Q4?

Sean, this is John. It's not clear to us whether or not that's possible or not. The business, though, let me just say qualitatively, the business showed really nice improvement in Q3 versus Q2. And we started to see a decline in Asia, in early Q4. So whether or not those will intersect in Q4 is not clear to me, but we do have an expectation that we're going to see the business in Asia in Q4 be as good as it was in Q3, and I think there's a chance it could be better. But whether or not we can actually do better than the prior year, I think that would be a stretch.

Okay. In looking at Trapeze, I know that you said that you're going to increase your focus in that market or in that segment, and I just wanted to get an idea of what the game plan might be, maybe a time line or estimates on when breakeven might be possible. Just what type of actions could be taken there? I know most of the costs there are R&D related, and I'm not sure how much can be cut out of that.

Sean, I think that we're going to be in a good position at our investor's meeting to share with everybody our expectations for all of our businesses, including our wireless business in 2010. So I'm going to go ahead and address that question at that meeting; but let me just make this comment. It's clear to me that we have a good end market that's healthy, customers are increasingly comfortable with the use of wireless technology, and we're beginning to see wireless become even more accepted outside of the early adopting markets of healthcare and education. So the markets themselves are growing. They're strong, and they include end markets that are less volatile. So of course, we love all of those things.

From an operating point of view, though, we're not performing at a level that is acceptable. And my view is that we need to have a much more balanced approach in that business between the expectations with regard to revenue growth at or slightly above market, but also looking at how we become far more efficient in the way we run that business. There's really two major cost drivers. R&D, as you mentioned earlier, which is significant. The other, of course, though, is the sales and marketing investment that we make on the Trapeze branded product. And as I have discussed in previous times, our ability to get a return on the sales and marketing investment is also important. So I have confidence that we're going to see sequential improvement in this business, but I think it would be appropriate for me in December to share with you my expectations for 2010.

Just finally you had $300 million in cash. Is the M&A arena opening up any? What's the use, what's the projected use for that cash? Any more repurchase opportunities down the road? Maybe some ideas there.

As you can imagine, at the start of the year, there was a lot of focus on making sure that cash reserves were appropriate, making certain that cash flow was in line with debt covenants, and clearly the situation that we're in now is a very good one, especially compared to others and especially compared to where we all were at the beginning of the year. We have the same strategic focus and discipline on acquisitions now as we've always had, which is that we're only going to make acquisitions that make good strategic sense, and then secondly, financially it needs to hit our hurdle rates. Earlier in the year, one of the issues we faced was that sellers were using the past as the valuation model, and I would say that's starting to change a little bit. I think sellers are becoming more realistic with regard to the economy they're in now and what the prospects for recovery are. And, therefore, I think that the possibility of doing smaller bolt-on acquisitions that are aligned with our strategy, I think that's very possible. .

Okay. Thank you very much.

Your next question comes from Shawn Erickson from Longbow Research.

Hi, good morning, Gray and John.

We always like to have our Seans sequentially.

Looking at Trapeze, on another topic, in terms of just the operating losses this quarter, assuming the VSOE issue wasn't there, it looks like it would have lost $6.3 million on the EBIT line. Is my math correct?

We lost $6.8 million pro forma, and we lost $7.3 million in GAAP.

I'm sorry. I had it the other way. But then as we look into 2010, I thought there was an EBIT balance sitting somewhere that would roll on. How should we model that?

Here's the exact methodology to do so. And within the boundaries of our cash-flow statement within the disclosure, you can see the balances and the change in those balances year on year associated with our deferred accounts. But at the end of the third quarter, we had over $21 million worth of deferred revenue on Trapeze. Of that, $17 million and change was short-term and $3 million of that was long-term; ie., longer than a year. Let's just deal with the $17 million or 18 million that's the one-year current deferred revenue balance. That will roll off next year, and it will roll off proportional to the way it was established on the balance sheet in 2008 and in 2009. And consistent with our accounting for Trapeze this year, we pro forma-ed all of that negative impact. So when we discussed the results of Belden, we excluded the VSOE. But that said, there is $14 million worth of operating profit, or somewhere around $0.20, $0.22 a share of GAAP EPS performance next year, that, again, is consistent with that Trapeze accounting. I think our position will be that we will continue to pro forma Trapeze so that you get a good operational view of the performance of the business rather than the accounting view.

Okay, that's extremely helpful. Getting back to profitability going forward, just on a short-term aspect, if I take your comments on copper prices, it sounds like you're going to see pass-through benefit of adjusting sales prices for the higher copper prices you experienced during the past three or four months. But then there's also going to be probably an incremental margin headwind because of that $0.35 variance per pound, at least where it is right now and where spot copper prices are to you. Is that correct?

Let me make a comment and then Gray can fill in if I haven't given you the specifics you're looking for. When copper is as volatile as it is right now we are subject to some short-term variation in our results. And we described those in Q2 as being approximately $2 million favorable and we described it in Q3 as being approximately $2 million unfavorable. In the long run it doesn't really matter. But in the short run it can create a little bit of variation.

The other thing we pointed to was that we do think, given these sustained depressed levels of demand compared to prior year, that the market will deal with some capacity utilization issues, and, therefore, we've been very focused on and guarded against pricing pressure, having nothing to do with copper, just having to do with capacity. And I think we're in a great position to deal with that given the amount of focus we put on cost. But I think that we can see some challenges in the next few quarters dealing with just the issue of capacity utilization and how some companies are dealing with that through lower prices to try to focus on variable margin as opposed to overall profitability.

Okay. Would you pick out maybe either regionally or maybe the industries that you're seeing the most negative pricing?

I would say the greatest challenges right now are probably the United States, and they're probably in categories, where we tend to compete with cable companies, whose portfolio includes lower margin products. So there are certain cable companies that tend to operate in segments that historically have had lower operating margins than ours. When we do compete with them they have a different perspective on what a reasonable level of profitability is.

Okay, and then just two brief follow-ups. Operating expenses as we move to 2010, a lot of companies are seeing some costs come back. What is your thought there? And then how should we model the tax rate in 2010? I know it's just a guess right now, but any range would be helpful.

Let me do the operating expense and I'll let Gray comment on the tax side. On the operating expense side, we feel like most of what we've done is, in fact, structural and consistent with where we want to take the business. Let me use Europe as an example because I have a lot personal experience in that over the last six to nine months. I would say that more than 75% of what we've done as it relates to operating expense reduction will in fact stick on rising volume. That is to say, we will get leverage as volume goes up, because the things we did were structural in nature. There were some other things that we did with regard to cost containment that I would say are a little bit more temporary in nature that we would be interested in trading up over time. But I think when we share with you our thoughts about 2010 in December, we're going to be able to give you enough information to gLean how we view the cost structure going forward and how we would expect to get really very good leverage on incremental revenue.

And then with respect to the tax rate, Shawn, right now, we have a pretty good jurisdictional mix, but again, the more we improve certain businesses, ie, most notably Trapeze, while as we improve Trapeze that moves the jurisdictional mix back to the US. Again, the US is a jump ball with respect to what we really think is going to happen with tax rates over both the near term as well as the long term. So right now for modeling purposes this would be for EPS modeling purposes, I think you can use 30. That's generally what we've been selecting as that conservative level of taxation. That noted, it won't work for cash flow, because again, from a cash flow perspective, our tax rate will be less than that. If you want to have a conversation in more detail about what those drivers are, we'd be happy to do so.

Thank you very much. It's very helpful, see you in December.

Your next question comes from Gary Farber with CL King.

Thanks. Just a couple other questions. On raw materials are there any other inputs that are rising and could impact the results?

Nothing significant, Gary Nothing on the raw material side that's of concern

And the sequential revenue pickup you're saying is solely copper in the fourth quarter.

No, not solely. It's really two things. One is the copper piece we talked about. But remember our European business always takes a seasonal dip in Q3, and then we see it come back in Q4.

Okay. And I don't know if you touched on other income in the quarter. What was in there?

Other income for us is largely the joint venture in China, with our business in Germany, the industrial networking business we have in Germany includes a specialty device business where we have a very successful operation in China. And as China recovered in the third quarter, as I talked about, we did see benefits in the joint venture income.

And just lastly, any updates on the European management structure.

The European management structure is the same as it has been with me the acting President of Europe, but we are getting, I think, quite a bit closer to a long term solution, and if we're fortunate we might even be able to have details in December.

Okay. Thanks again.

Your next question comes from Nat Kellogg from Next Generation Equity Research.

Good morning, guys. Thanks for taking my question. Just two things. One is LTK, it sounded like there's a nice pickup in business there, and I think last quarter and also on Q1 you guys had said you were restructuring the product portfolio there and moving on to some of the consumer electronics that they historically had a big role in because the margins weren't meeting your standards. But yet it sounds like business has picked up there. So just curious if you could give us an update on where they're focused and any changes that have been made, and how that affected the numbers in this quarter?

Sure. When we describe our Asian segment, Nat, the LTK business, of course, is in there, and the LTK business has great resources, manufacturing and insuring resources, especially, that we have, in fact, been moving over into what I would consider our more traditional markets. So the manufacturing capacity, as an example, is being modified to deal with the Belden brand. Some of the engineering resources have been focused on the Belden brand. That's really where we've been focusing, some of the change of focus on the resources.

But you're right, the LTK traditional business, the LTK branded business had a very nice pick up from Q2 to Q3, it was over 30%. Some of that, of course, is the channel inventory correction that we saw starting really in Q4 through a very long supply chain we think coming to an end. So as we had expected and as we had forecasted, that that was going to end, and we would begin to see returning levels of performance.

But I think we're also seeing, beyond that, some improvement in the end markets, as well. So it's hard to know exactly how much is each. I would say that the majority of the 30% is the end of the channel inventory correction, but I think some of it is real end market demand pickup that we're seeing in Asia.

Okay. And on Nortel, I know that you guys have said that the way this unfolded is a positive for you, but least in the short-term my understanding is that Avaya had talked about some product rationalization when they combine Avaya and Nortel. And the deal doesn't close until December so my guess is into Q1 we're going to have this product rationalization. So I was just curious if you can give a little more color on how you think that's going and if you're seeing that affecting your business. From what I've heard, folks are delaying on the Nortel side just because they're trying to see how this will all shake out. And maybe when you expect that demand to come back.

I certainly don't think that the issues or the things we have to deal with as it relates to Nortel, the bankruptcy and then sale, is behind us. But I think our view is that in the third quarter we did see customers begin to get more comfortable in making decisions around Nortel than they were in the first half, and that we benefited from. We said earlier we saw 60% sequential growth in our OEM business and Nortel, as you can imagine, was a chunk of that. As it relates to our long-term relationship with Nortel, there's obviously still more work to do. Because as you know and as you said, Nortel and Avaya are trying to work through product rationalization and obviously we want to be a positive part of all that, and that's still yet to be done. So I would say that the situation has improved. We're more optimistic than we were before but there's still more work to do as it relates to that relationship and that particular customer.

And then just one more question and I'll hop back in queue. Can you just give a little more color on industrial automation. Obviously it's a big end market for you and we just didn't hear much about it so maybe if you can give a little color on how that business performed sequentially and where you guys are seeing any relative strength or weakness and how you expect that to trend over the next couple quarters. That would be helpful and I'll just hop back in queue, thanks.

If you look at pure industrial automation companies like Rockwell, as as an example, or even to a smaller extent, a partner, [Anafin], you can see that that market is off significantly year over year. And other than inventory correction, I think, being largely behind them there's not a lot of real end market improvement happening in the area of industrial automation. And we're seeing the same thing. But I would say this. We saw sequential improvement in our industrial connector business in Germany, as I think the German export machine builders are working through their inventory corrections. We saw some improvement there. Our industrial networking business which bucks all the trends because of the substitution effect and because of the fact we're now taking the technology beyond industrial automation, we saw a real nice performance sequentially in that business, and it's hung in real well year over year. The industrial business, I think year over year comparisons are still really tough. And as I said in my earlier remarks, until you see I think a couple of quarters of real good solid GDP growth, I don't think we'll see a lot increased investment in the area of the industrial markets and industrial automation, which is to be expected. People want to get a good sense that the recovery is underway before they make significant capex investments, and that's why we think that we need to see that before we're going to see any significant recovery.

Okay. Thanks for the color, I'll hop back in queue.

Your next question comes from Jeff Beach with Stifel Nicolaus.

Yes. Good morning. First, you're shifting production this year of a number of Belden brand products into China. Where are you on that shift, and can you give us a sense of how much sales you'll do in China this year? I know that's hard versus, I guess you can't do the last year of the market. But I'd like to know where the run rate is, if you finish this shift, and how much we might see at a run rate over what you've done this year to get a sense for cost savings maybe next year.

Yes. Thank you, Jeff. This is Gray. I'm just going to remind everybody of what our plan of record is with respect to the situation in Suzhou the construction of that site, the purchase of LTK and the fundamentals behind it. Again, we do at the purchase point about $60 million of Belden branded product across Asia. That is all imported from higher-cost locations, most notably the factories in Europe as well as in the Americas. And we have calculated maybe a 1,000 basis point improvement that's available associated with the shifting of that production out of the US and European locations into the Suzhou site. So that's the basis for a lot of the rationalization and the justification associated with the expanded investment in China.

With respect to the current position, we've only done somewhere around 20% of that shift. So we still have about 80% in front of us, and we're gaining momentum, and it's nice that now that momentum is being conflicted by the fact that we have a nice uptick in the LTK volume as well. So you can imagine when the order rates came back off of the inventory correction or the renewed demand creation for LTK, and 30% sequential growth on the LTK brand, it makes you scramble through your priorities, which is a great problem to have. So again, Jeff, much of the improvement is still ahead of us, and again, we'll be moving as much of that production. It's a priority for the regional team associated with the things they need to accomplish here over the next several years. And again, much of the benefit is still ahead of us.

Can you give us a sense as to a time frame here or at what point a majority of this sales volume will be shifted?

I would like to think we'd have it all done within the next two or three years.

Okay. This is a long process.

It is, because of the complexity of the portfolio. The constructions that we're importing are highly complex constructions; and therefore,, the time necessary to be able to make those transfers with high quality are sometimes protracted.

Just a couple of other things. Can you talk a little bit more about your division in general, or even specific about your split in your enterprise between CAT5 and all (inaudible). You talked about the overall sales growing. Have we seen a stabilization of sales in CAT5? Can you give us some color there?

Stabilization of sales in CAT5 is never expected. We expect a continuing decline in CAT5. We expect expansions in CAT6 and CAT6A, which again was saw this quarter. We do a fairly detailed analysis of those particular elements, and those, again, are global products, so it has regional organization as well. But this was the first quarter. Last quarter, we got very very close to shifting to have more of our enterprise business sitting on the high-end rather than the low-end. We were just below 50/50 in Q2. And Jeff, here in Q3, the split between the two, it's within less than a hundredth of a percent. So it's as close to 50/50 as 50/50 can be without being 50/50. So again, we're seeing that transition to the high end, as expected. It's a bandwidth gain, and more bandwidth means more high end category cable to serve the applications that many enterprises and industrials require. So the shift continues and this is our first quarter where we hit 50/50.

And in terms of the pricing for the two different, CAT5 and gigabit, I'm assuming CAT5 is one of the areas where you're really seeing significant competition, but can you talk about the current competitive environment?

Yes. Certainly on the low end of the data cable that's always historically been the area where you see more competition, and we saw some of that in the third quarter, and we expect that will be with us at least in the fourth quarter and maybe in the first half of 2010. The other area that we see competition, Jeff, is in some of the more generic industrial cables, the products that are more difficult to differentiate. And again, we saw pressure there.

The pressure comes really from two areas. One is smaller privately held smaller companies that are cash-flow focused, and then you have bigger companies that are just used to dealing with much lower margins, and I think, as their volume comes down, they're scrambling to figure out how to fill up their factories. That's the area where we see the most price competition. Again, it's completely independent of copper. Not only for us, we took a lot of very, I think, appropriate actions, starting three years ago by getting our footprint in line, and so, from a cost point of view, we think we're in a better position than others, and we can deal with it.

Okay. The last question, can you just expand broadly on industrial cable and connector sales in Europe and distinguish maybe a little bit between such as some of the industrial automation, industrial networking that's really aimed at productivity versus cable and connector sales that they may be more related with general capital investment and not productivity. Give us a sense there for what might be rebounding earlier in the cycle versus a little later.

Let me put our industrial networking products aside for a moment, and let me just talk about our traditional industrial cable and connector business. Jeff, we haven't seen any signs of recovery in that business yet. It's just as flat as can be. When we see any improvement, It's almost always tied to inventory correction. There's really just no signs of people spending more capital in the area of the industrial segment, and it's really just very, very stable.

On the industrial networking side, as we've talked about before, which includes the industrial switches from Hirschmann but also the Belden industrial ethernet cable that we sell with it, that has done well this year, as we expected, because people are using it at a higher rate than what they used to use with regard to proprietary systems. So that business is growing. It was up double digits sequentially. It almost actually had organic growth year over year. So that business has done well. And we expect it to continue to do well because of the things we've talked about, but also we're taking that technology now into new markets. We're taking it into infrastructure, alternative energy, transportation, and other rugged applications, like industrial, but not tied directly to industrial CapEx. As a result of that, we think we'll see good growth again in Q4, and we think we'll see good growth next year.

Again, back on the outside of the networking, just generally the other markets you serve with the industrial cable and connectors, can you give us, is there a sense even about how much is productivity just among the standard industrial products and connectors, what's productivity versus maybe project-oriented capital expansion.

Jeff, I think what we're seeing now is that MRO spending in the industrial markets, I think, are now at normal levels. I think in the first half, people actually did some things with their MRO spending that they wouldn't normally do, but they had to do because they were so focused on cash, cash flow, and covenants that they actually delayed MRO. I think MRO is back at its normal rate given the size of our economy. We are not seeing any significant improvement yet on large project business, and I don't think we will, Jeff, until we get a couple of quarters of real GDP growth, and CEOs start to feel like they ought to be investing in capital, because they need more capacity. And until that happens, I don't think we're going to see a significant change in that business.

All right. Thank you.

Jeff, thank you, and Jennifer, time for one more question, please.

Your next question comes from Dana walker from Kalmar.

I have several if that's all right, Gray.

Okay, we'll make an exemption, Dana.

You can always cut me off. In the way you described Trapeze where the non-GAAP versus GAAP performance in Q3 was relatively similar, have you adjusted the way they contract so that the deferred revenue implications of the way they do business today is different than what the original book was?

We have made modifications to some of our contracts. And herein lies the curiosity. The accounting rules dictating how you want to conduct business with your customers. And to be perfectly frank, we'd like more flexibility on how we deal with individual circumstances with customers, as any supplier would prefer. The accounting rules around vendor specific objective evidence, Dana, constrain you. You expect a normal distribution associated with those transactions. Therefore, your desire to have flexibility on how you deal with customers is contrary to establishing the SOE. Therein lies the disconnect of business desire and accounting desire. And, therefore, the change, a more common-sense approach, and it's under EITF 8-01, is common sense where judgment now comes back into the process, is powerful from both dimensions. It's powerful from an accounting perspective, because no longer will we have to worry about the GAAP versus a pro forma result in business. And probably more importantly, it drives a lot more common sense into your contractual relationships.

If the SOE has lightened its pressures on your business, aside from having the deferred revenue roll into your results in 2010, if you've made modifications in the way you contract,, what true implications does the VSOE evolution have?

The implications is just as I had mentioned. The implications are more flexibility to call vendors in terms of how they construct their agreements with their customers if they so desire to establish this accounting capability. Not every company will wish to accomplish that. I think there's several customers that enjoy not having VSOE. But in Belden's case it just gets in the way of us trying to explain what's really going on in the Trapeze business. So again, the most important thing for us is the flexibility that it now allows us to have with our relationships, which is a fundamental business desire. So it's very beneficial, and that's why we're so supportive of the change away from 97 to VSOE for Trapeze.

John or Gray, in what time frame would you expect your inventory to stop taking the leap-frog jumps that it's taken? The inventory turn number, to stop taking the leapfrog jumps that it's been taking.

It's actually quite unusual for turns to improve when revenue is falling. Usually it's exactly the opposite. Most companies experience inventory turn improvement as revenue increases because that helps you, it makes it easier. The fact that we're doing as revenue comes down is very very unusual and quite remarkable. I think it has everything to do with the fact that we're really making significant traction on our Lean initiatives. And if you believe in Lean like I do, you have to answer that it will never end, because we'll continue to make improvement. I think that if we get a tailwind again on revenue, as we would expect to get as markets recover, in some ways our job gets a little bit easier. So, I don't want to suggest that every year is going to be like this one, because I think we have done just some enormously positive things, but I will tell you this. The things we're doing to deliver these kind of results are real process changes in the way we run our business. And therefore we have a high degree of confidence that they stick.

All of which is great in terms of the way we consider invested capital in the business and returns on invested capital. But unless your business is different, there are operating profit drag issues as your inventory turn goes up, particularly when revenues are down.

Especially if you're a company that doesn't flex your cost based on real demand, but as you know we're a company that does.

Okay. A couple last quickies. If Europe is making more progress sooner, why was their result -- and this might be a naive question -- why would they not have been more pressured by the copper issue? And do we set new goals for Europe now that they've once again gotten back to 10% plus?

As a percentage of our total revenue, cable is actually quite a bit smaller in EMEA than it is in any other segments. So therefore any effects that we have on copper -- and we had similar effects in Europe that we had in other segments -- they're not really as material to the overall results of the segment and therefore they didn't come up as a topic point for today's review. But they're there.

Do you set new targets for Europe? Have you gotten it 10% faster than you thought?

I'm gratified that we got to the numbers than we had originally set as a goal for ourselves. I think there might have been some people who actually thought obtaining that level of profitability by Q4 was difficult, not possible. As you can imagine, we're going to continue to try to improve our results, and we're not going to stay satisfied at our current level.

I presume, though, that if 15% is the corporate target, which, of course, is a corporate number after overhead, then for Europe to fully contribute to that number, it needs to get above 15% in time.

I would agree with you.

My final question would be this. What did you see that was either encouraging or not encouraging on the market capture initiatives that you have in place?

I think from a market share point of view the two highlights for me are, I thought we did a very good job in our industrial networking business, and I think we're gaining real traction there and I'm very very happy. The other thing I'm really happy about right now is the performance year over year and sequentially in our global account program. We're doing better there than the Company average, we're doing better than our served markets. It's clear to us we're taking share, and for me, that was a real highlight.

I'll see you in December. Thank you.

Thank you, Dana. Jennifer, thank you very much, and thank you very much, everybody, for your good questions this morning. 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 a call for follow-up questions. This concludes our call today, and thank you very much.

Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect from the call, and thank you for participating