Belden Inc (BDC) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Incorporated conference call. Just a reminder, this call is being recorded. At this time, you are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions).

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

Thank you, Lauren. Good morning, everyone, and thank you for joining us for today's second quarter 2010 earnings conference call. My name is Frank Milano, and I serve as the Director of Investor Relations at Belden.

With me here this morning is John Stroup, President and CEO of Belden, Gray Benoist, Senior Vice President and Chief Financial Officer, and Hank Dirksen, Vice President and Treasurer. John will provide a strategic overview of our business, Gray will provide a detailed review of our financial and operating results, and Hank will be available for the question-and-answer portion of today's call.

We issued our earnings release earlier this morning, and we have prepared a slide presentation that we will be referencing on this call. Both the release and the presentation are available online at investor.belden.com. Please note there is no www in that address, just investor.belden.com.

Turning to slide two in the presentation. During this call, 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. Actual results could differ materially from any forward-looking statements that we make, and the Company disclaims any obligation to update this information to reflect future developments after this call. For a more complete discussion of the factors that could have an impact on the Company's actual results, please review today's press release and our annual report on Form 10-K.

Turning to slide three. During this call, Management will reference certain non-GAAP financial information. In accordance with Regulation G, we have provided reconciliations of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. Those reconciliations are in the appendix of the presentation and have been posted separately to the Investor Relations section of our website.

We will limit today's call to one hour, which will include time for you to ask questions. During the Q&A portion of this call, please limit your questions to one primary and one follow-up question to enable others to participate in the Q&A.

I will now turn the call over to our President and Chief Executive Officer, John Stroup. John?

Thank you, Frank. Good morning, everyone. Turning to slide four, please, in our presentation. I will begin with a review of the second quarter highlights.

Operationally, we executed well this quarter and delivered strong results in all areas of our business, which was consistent with our performance in the first quarter. Our strategic initiatives, such as Market Delivery and Lean Enterprise, are clearly improving our overall business performance, as evidenced by our strong organic growth and record 7.8 inventory turns in the second quarter. I want to thank all of our employees for contributing to this quarter's success and encourage everyone to remain focused on the continued pursuit of our long-term goals.

In addition to our strong operating performance, we enjoyed a favorable tax rate that also improved our bottom-line results this quarter due to a more favorable jurisdictional mix of earnings. We also benefited from a few non-operating items. Gray will take you through those details in his portion of the call.

Turning now to slide five, let's look at the numbers. Adjusted revenue of $420.8 million represents sequential growth of 7% and a year-over-year increase of more than 22%. Organic revenue growth, which excludes currency and the effective acquisitions and divestitures, was 24% this quarter. Belden's adjusted organic revenue growth was 17%.

The impact of last year's destocking and this year's restocking of our channel partners is estimated at 6%. Adjusting for these, revenue grew 11%. On a year-to-date basis, we estimate approximately $35 million of total channel inventory correction, which is consistent with our expectations at the beginning of the year. Therefore, we believe the majority of channel inventory adjustments are behind us.

The adjusted gross margin percentage was 30.3% this quarter, which was down 20 basis points sequentially and down 280 basis points from the record 33.1% we delivered in last year's second quarter. You'll recall that last year's results included about 80 basis points of nonrecurring benefit we generated due to our industry-leading inventory turns and the trend in copper prices at that time. Adjusting for this benefit as well as copper prices and FX, last year's gross margin would have been 30.5%. Therefore, gross margins are essentially unchanged from last year despite challenges with mix and a competitive market.

Adjusted operating income increased both in absolute dollars and as a percentage of revenue on both a sequential and year-over-year basis. Sequentially, operating margins increased 160 basis points to 9.4% this quarter. Again, adjusting for copper and FX, last year's operating margin would have been 7.8%. Adjusted income from continuing operations per diluted share totaled $0.50 this quarter, up 47% year over year over the $0.34 we realized in the second quarter of last year, and up 72% over our first quarter of $0.29.

Turning now to slide six, I want to highlight a few of our accomplishments this quarter. First, we announced last week the extension of our Trapeze Networks alliance with Avaya. The expansion of our agreement, which extends through March 2015, provides support for the existing installed base of over 200,000 access points and provides a seamless migration to customers that choose to transition to Avaya's future platforms, including their 8100 series. We have agreed to jointly develop software that will allow customers that have already purchased Trapeze branded access points to be supported on Avaya's 8100 series platform. We expect that software will be commercially available in 2011. The agreement also includes a strategic partnership on future hardware and software road maps between the two companies.

Second, we achieved record adjusted operating margin in our EMEA segment of 18.1%, up more than 1,000 basis points, compared to 7.8% in the second quarter last year. And last, PP&E turns totaled 6.2 turns this quarter and have trended upward in each of the past five consecutive quarters, returning to the level we achieved in the third quarter of 2008. This reflects the benefits of our global restructuring actions.

Turning now, please, to slide seven, I will profile our three global product groups -- Cable, Connectivity and Networking -- which is the pie chart at the top of the slide.

In the second quarter, Cable revenues represented 75% of our total revenue, and our Connectivity and Networking businesses represented 10% and 15%, respectively. Organic growth of these segments is above Company average, and therefore we expect these percentages to increase.

This quarter, our Connectivity business had particularly strong results with $44.2 million in revenue, up $10 million, or 28%, year over year. Sales strength in Europe drove the majority of the increase, but an increase in our fiber optic connectivity solutions also contributed to this quarter's performance.

Our Networking business, which includes both industrial and enterprise, generated $63.7 million in revenue this quarter, up $8 million, or 14%, year over year. The expansion of our industrial networking business in the Americas and Asia-Pacific is the primary driver of this growth as we continue to benefit from our integration of the Hirschmann and Belden sales forces.

In Europe, our Industrial Networking business enjoys a market leadership position, and results benefited from the fact that we sell into a number of export-oriented vertical markets, which performed well due to recent trends in the euro exchange rates.

Our enterprise Networking business totaled $13.9 million, which was down 1% year over year. As we have mentioned in previous earnings calls, our decision to de-emphasize the low margin carrier business in China coupled with continued weakness in our OEM business led to the decline in top-line results this quarter. However, our Trapeze branded revenue grew 18% sequentially. This is, of course, the most significant ingredient to the long-term profitability of Trapeze, and looking ahead, the execution of the Avaya agreement is expected to help us as well.

Cable products represent our largest business, with revenues of $313 million, up $59 million, or 23%, year over year. Excluding the effect of rising copper prices, organic revenue growth was 16% year over year. We are pleased that margins have remained strong despite stiff competition.

Our market delivery system, which includes both end user and channel management initiatives, continues to have a favorable impact on our cable business, where we are clearly capturing share. This slide also provides a vertical market perspective on the right. Our mix was unchanged from last quarter, with all verticals changing less than 100 basis points.

Looking at the geographic mix on the left-hand side of slide seven, I want to call to your attention the fact that our revenue in Asia-Pacific now equals the size of our European business. This is the first time in our history that our mix by geography has reflected this achievement.

That completes my prepared remarks. I will now turn the call to Gray so that he can discuss the quarter in further detail. Gray?

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

If I could have you turn to slide eight, please. GAAP revenue was $426.1 million in the second quarter, and the Company reported income from continuing operations of $19.8 million, or $0.41 per diluted share. We incurred restructuring charges of $5 million pretax in the quarter resulting from the execution of our global restructuring initiatives, and $2.7 million in noncash charges associated with derivative accounting. This quarter's restructuring charges are primarily costs incurred in the continuing process to close one of our two manufacturing locations in Leominster, Massachusetts.

Further, on our GAAP derivative accounting, included in the second-quarter interest expense is a noncash $2.7 million loss associated with the interest rate swap and cap agreements we announced last month. We've applied the long-haul hedge accounting method to the interest rate swap and realized a $1 million net loss associated with the measured gap in effectiveness of the swap. The remaining $1.7 million noncash loss represented the quarter's end mark-to-market valuation of the interest agreement -- interest rate cap agreement. My apologies. A thorough discussion and disclosure of our derivatives and hedge activities and accounting will be reflected in our second-quarter Form 10-Q filing.

GAAP results also included $5.4 million of revenue and $3 million of associated gross profit that results from the recognition of prior periods VSOE-based deferred revenue in the Wireless segment.

I will focus the remainder of my comments on adjusted results excluding these items. For your benefit, the reconciliation between GAAP and adjusted results has been provided as part of today's press release, and these adjustments have been reconciled by reporting segment on slide 20 of today's slide presentation. We hope you find these disclosures helpful.

If I could have you, please, turn to slide nine. Consolidated revenue in the first quarter was $420.8 million, an increase of 22% compared to the second quarter of 2009. Currency translation based on the net effects of a stronger Canadian dollar and weaker euro was unfavorable by $1.3 million year over year, and was $8.8 million unfavorable on a sequential basis. Adjusted for copper commodity prices, currency effects, acquisitions and dispositions, organic revenue growth was 16.5% year over year and 8.9% sequentially.

If we could return to slide seven for a discussion on revenue mix. John covered the favorable strategic trends we are experiencing in our product mix of businesses across the Company and that the current geographic mix of business is exceptionally well diversified, with our European and Asian businesses now representing the same proportion of our total mix.

I will complete the revue of revenue analytics with comments on the second-quarter vertical market mix. This quarter's vertical market mix of 48% industrial, 29% enterprise, 12% video, sound and security, 8% consumer, and 3% transportation and defense shifted sequentially to become slightly more industrial oriented, as our core industrial businesses grew 28% year over year and 10% sequentially. The consumer vertical, anchored by LTK, grew 49% year over year. The enterprise vertical grew 9% year over year, and, significantly, the North American enterprise business grew 23% year over year.

Please turn to slide nine, and we'll discuss -- we'll continue down the income statement. Adjusted gross profit margin was 30.3% in the second quarter, down 20 basis points from Q1 and down 280 basis points from the record 33.1% we delivered in last year's second quarter. As John noted, last year's results included about 80 basis points of non-recurring benefit we generated due to our inventory turns performance and the trend in copper prices at that time. Adjusting for this benefit as well as copper commodity prices and current currency translation, gross margins are essentially unchanged from last year despite challenges with our business mix shifted towards lower-margin LTK consumer business and generally a competitive global market for our products.

SG&A expenses in the quarter were $73.8 million, or 17.5% of revenue. SG&A as a percent of revenue was down 100 basis points compared to Q1 and down 190 basis points year over year. R&D spending was $13.4 million in the quarter, or 3.2% of revenue, down $1.4 million sequentially and down $800,000 year over year.

As we indicated last quarter, the strong performance of our joint venture operation in China, which is operationally aligned with our European-based Hirschmann business, has met a level of materiality where, consisted with GAAP, we present the results as part of operating income. These results were previously reported in other income, and we've made the conforming adjustments to our prior-period presentation to reflect this change.

Income tax expense during the quarter was $6 million, and the adjusted results reflect a 20.1% effective tax rate for the quarter. The adjusted tax rate is lower than anticipated primarily due to favorable jurisdictional mix of forecasted earnings and a series of favorable tax recoveries and reduced exposures to current tax positions.

Additionally, as outlined on slide 10, pretax profit benefited from several favorable recoveries recorded below operating income in additional to the favorable tax rate. For financial modeling purposes, we believe a new annual effective tax rate of 25% is warranted at this time.

Adjusted income from continuing operations this quarter totalled $24 million, and adjusted earnings from continuing operations per diluted share were $0.50.

I will now discuss debt and debt covenants, so let's please turn to slide 11. At the end of the second quarter, we have $550 million of total debt outstanding consisting exclusively of senior subordinated notes at a blended interest rate of 8%. During Q1, the Company repaid the entire outstanding balance of $46.3 million that we had previously drawn under the revolving credit facility. Our liquidity under the revolving credit facility as of the end of the second quarter was $171.9 million.

Interest expense was $11 million for the second quarter, and our interest coverage ratio was 4.7 times. The Company's debt-to-EBITDA leverage ratio at the end of the second quarter was 2.79, compared to 2.90 in Q1 and 3.11 at the end of Q2 2009. The improvement in the leverage ratio is approaching our general target of 2.5 times.

If I have you turn to slide 12, we'll discuss our second-quarter operating segment results. External revenue in the Belden Americas segment was $236.9 million, affiliate sales were $12.2 million, and the total revenues were $249.1 million. Excluding affiliate sales, total second-quarter revenue of Belden Americas increased 8.7% sequentially and 26.9% year over year. Second-quarter adjusted operating income for Belden Americas was $39.1 million, or 15.7%, a sequential decline of 20 basis points.

External revenues in the EMEA segment were $92.2 million, affiliate sales totaled $17.9 million, and total revenues were $110.1 million. Excluding affiliate sales, total second-quarter revenue in EMEA increased 1.8% sequentially and 6.9% year over year. Adjusting for currency translation and dispositions, year-over-year growth in EMEA was 23%. Adjusted operating income in EMEA was $19.9 million and, as John discussed, a record 18.1% of total revenue, up 330 basis points sequentially and up more than 1,000 basis points year over year.

The Asia-Pacific segment had external revenues of $81.4 million and total revenues of $81.5 million. Excluding affiliate sales, total second-quarter revenue in Asia-Pacific increased 7.2% sequentially and 41.4% year over year. LTK continues to drive our revenue performance in this segment.

Adjusted operating income was $9.9 million, or 12.2% of revenue, up 250 basis points sequentially and down 60 basis points year over year. Second quarter external revenues and total revenues in our Wireless segment were $10.2 million, up 2% sequentially. As John indicated in his remarks, we experienced 18% sequential growth in Trapeze branded product revenue this quarter. Operating profits improved by $800,000 sequentially and $1.7 million year over year.

It is noteworthy that our three largest segments -- Americas, Europe and Asia -- recorded double-digit operating profit in the quarter, results moving closer to the long-term operating profit margins we expect as a Company.

If I can please have you turn to slide 13, we'll discuss free cash flow. Cash flow from operations was $18.7 million in the quarter, and net of capital expenditures, free cash flow was $13.5 million. With the increased sales generated during the quarter, we did invest $41 million in accounts receivable to support the growth. Our DSO slightly degraded sequentially by 1.6 days, but improved 2.8 days from last year. High organic growth does produce circumstances that makes the accomplishment of our annual cash flow in excess of net income goal more difficult. Depreciation and amortization was $14.1 million in the second quarter.

If I could have you turn to slide 14 for the discussion of our inventory, working capital and PP&E turns. Inventory turns in the quarter were a record 7.8 turns, up 1.7 turns year over year and up 0.8 turns sequentially. Working capital turns this quarter were 8.8 turns, up 1.5 turns year over year and a decline of 0.2 turns sequentially. Property, plant and equipment turns were 6.2 turns, representing our fifth consecutive improvement in asset utilization. Compared to the year-ago period, we improved 1.6 turns, and sequentially we improved 0.7 turns, and we are now within 0.6 turns of the second quarter of 2008 all-time high.

And finally, to summarize our restructuring activities, please turn to slide 15. On last year's earnings call, we forecasted full year 2010 cost savings from our global restructuring programs will total $56 million. We're well on our way towards achieving that goal after generating $26 million in savings on a year-to-date basis. This reflects $13 million in savings during the second quarter, an improvement of $3 million compared to the same period last year. We expect savings of $15 million in both the third and fourth quarters of this year, and fully implemented annual realizable cost savings of $60 million.

At this time, I'd like to turn it back to our CEO, John Stroup, for a few remarks about our outlook for the third quarter of 2010. John?

Thanks, Gray. In summary, we are pleased with our results for the quarter. They were balanced from a product and geographic perspective, and organic revenue growth had a positive impact on earnings and margins.

The rate of market growth does appear to be slowing, however. Reports on consumer confidence and durable goods as recent as a few days ago suggests the economy may have already begun decelerating from first-half levels. Such macroeconomic uncertainty makes it difficult to accurately forecast market growth in the second half. For that reason, we have developed guidance based on an assumption of stable demand. Our own order pattern statistics in June and continuing through July support this assumption.

Slide 16 reflects our guidance for the second half of 2010. We expect third-quarter adjusted revenues of $410 million to $415 million and adjusted income from continuing operations per diluted share of $0.38 to $0.41 for the third quarter. We anticipate the normal seasonal pattern in our business will result in a decrease in sequential revenue from Q2 to Q3, particularly in our EMEA segment, and we expect historical seasonality trends will result in a sequential revenue increase from Q3 to Q4.

For the full year ending December 31, we expect adjusted revenues will be between $1.640 billion to $1.655 billion and adjusted income from continuing operations per diluted share of $1.55 to $1.65.

That completes my prepared remarks. I would now like to ask Lauren to open the call to questions.

Thank you, sir. (Operator instructions). Mr. Stroup, your first question is from Shawn Harrison with Longbow Research.

Two questions. First, just kind of looking back at the second quarter, maybe you could talk a little bit more in terms of the sequential gross margin degradation, particularly in the Americas region and any other factors that pushed down gross margins the 20 bps sequentially.

Shawn, sequentially, from a gross margin perspective, there was a little bit of FX that worked against us, and that's probably something that people had expected as the euro had come down. From the Americas perspective, the comps year over year are challenging, as we talked about. From a sequential point of view, we did invest a certain amount of the incremental profit, operating profit, into initiatives. Some of that was in the gross profit line, some of that in OpEx, particularly around our Lean initiative in our Americas business, to continue our progress with our Lean initiatives.

And then lastly, I would just say that from a sequential point of view, the pricing environment continues to be competitive. I wouldn't say it's a substantial difference from the prior quarter, but we are -- in our Cable business, which is the majority of our Americas business, we are certainly dealing with an environment that is fairly competitive.

Okay. And then, in terms of the outlook, if you could maybe parse it down even a little bit further. It appears that you're looking for further margin degradation outside of EMEA into the September quarter, but at the same time, within the guidance, it sounds like sequentially you'll have some high restructuring savings and then potentially, versus where you were in the second quarter, lower copper prices running through the P&L as well. If you could just maybe parse it down a little bit further to help flesh our some of those factors.

Yes, from Q2 to Q3, there's really two things that have an impact on our mix. Seasonality from Q2 to Q3 is most pronounced in EMEA, where our margins are higher, and also Americas. And therefore, we'll see a little bit more contribution relatively in Q3 from our LTK business, where margins are, of course, a little bit lower than average. So there is a little bit of impact, you're right, Shawn, from mix sequentially from Q2 to Q3 that's unfavorable. And, you're right, it is, in fact, offset by some of the benefits of restructuring.

Okay. There's no other -- you're not assuming, I guess, based upon your general guidance commentary, that market volumes change or pricing dynamics change. It's more of mix that anything else.

That's correct. Our assumption is that, excluding the seasonality that we spoke about, that we're anticipating the market demand in Q3 to be similar to what it was in Q2, and we're not expecting any change in the pricing environment.

Okay. Thank you.

Thank you.

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

Thank you. Good morning, everybody.

Hey, Matt.

Hi, Matt.

So your seasonality comments -- I don't have a lot of historical data, but I have enough, and my historical data actually paints a little different seasonal pattern. I mean, it looks like historically you've seen a bit of a bump higher Q3 versus Q2 and then even more of a bump higher Q4 versus Q3. Now, I know that there have been some acquisitions, and I know the impact of LTK. Is that it? Is that what you're seeing? Because it sounded like you were talking about more stable trends June and July, which would impact -- maybe indicate normal seasonal patterns. Just explain that seasonality comment.

Sure. We always experience seasonality in Europe from Q2 to Q3. I think it's probably fairly well understood that most of Europe does take an extended holiday in the third quarter. That's fairly typical. And we do see a little bit of seasonality in the Americas. I think when you go back and you look at your history -- and I don't have the data in front of me that you're looking at -- it can be difficult to see at times when you're dealing with acquisitions, as you talked about. But also recall that last year we were seeing general economic pickup throughout the year. So there was, in fact, economic improvement in the second half compared to the first half that would have disguised some of that seasonality, and also channel inventory correction. So the seasonality that we typically see from Q2 to Q3, it's something that we would always expect to see, and then, you're right, we typically see that come back again in Q4.

And can you talk about -- what was the year-over-year trend like from a month-to-month basis through the quarter? You said June and July -- I think you said it had stabilized or flattened a bit. Can you talk about what you saw in the first two months of the quarter and then how that relates to what you've seen more recently on a year-over-year basis?

Well, I think if you take our Q2 results and you look at them in total compared to the prior year, our growth was 24% year over year. When you adjust that for copper, it's about 17% year over year. And in April and May, rates were improving compared to where they were in the first quarter, and then in June we saw them plateau compared to where they were in May. And in July we've seen them plateau again compared to where they were in June. So for us, it appears, anyway, as if the rate of growth is beginning to slow. It's not that things are appearing to decline, but from a sequential point of view, it does appear to us that it's [beginning] to stabilize.

And is that an across-the-board statement, industrial Networking, all segments, all geographies?

I would say it's fairly broad-based, yes. The trend is reasonably similar across all geographies and product lines, albeit at different relative levels. So we had 40%-plus growth in the second quarter in our Asia business, so you can imagine that the rate there was much steeper, but, yes, it's a fairly general trend.

Okay. And then, finally, just an update on one of the initiatives, the key account initiative. I just wondered if you could provide an update there, any color or benefit that you saw in Q2.

I don't have the specific number of our global account program in front of me for the second quarter. That's information that I have not yet looked at specifically, but I can tell you this. As you look at the market delivery system in total, of which the global account program is a very important piece of it, we're very pleased with the progress in the second quarter. If you exclude the things I talked about earlier, which is, of course, the copper FX, [acquisitions] and the impact of channel inventory, growth in the second quarter from market and share was in excess of [$40 million]. And it's our view that the overwhelming share of that $40 million is share capture that we've taken as a result of our market delivery system. So of all the things that we're really excited about in the second quarter, I can tell you, without hesitation, it's the execution of that program that we're the most pleased with.

Okay. Thank you.

Thank you.

Our next question comes from Anthony Kure with Keybanc.

Good morning, guys. A couple questions about the agreement with Trapeze. Just if you can maybe break down a little bit in the first half how much Trapeze-branded sales comprised the total wireless sales in the first half.

I believe that in the first half, Trapeze-branded sales was approximately 75% of our total.

$16 million of the $20 million.

So it was $16 million of the $20 million? Is that what you said?

So, 80%.

80%.

Okay. And then how do the growth rates historically -- when you had the Avaya agreements in the past, how did the growth rates differ between Trapeze-branded and OEM-randed? Were they about the same, or was there some different dynamic going on there?

They were about the same. At the time of the acquisition, the growth rate -- at the time, that would have been, of course, Nortel. The growth rate of that business was very similar to Trapeze. Now, the only thing that would be different from a percentage basis is the Trapeze-branded business was so small that sometimes it would benefit from just the math on a small number. But clearly the growth rates were the same between the two end markets.

Okay. And then just going forward, I mean, do you expect that this starts ramping here, the OEM-branded Wireless sales here in the third quarter, or is this more sort of a fourth-quarter dynamic that starts to ramp up?

I think that it's more of a fourth-quarter item because of the following -- Avaya Nortel is going to have to re-engage and retrain their sales force. This is obviously a very positive outcome for us, and we believe a very positive outcome for Avaya as well. We do think it's going to take them a little bit of time to get their commercial programs in order to be able to take advantage of what we think is a really important initiative for them with regard to wireless being a part of their next-generation solution.

Okay. I'm sorry, one more question. Is it fair to say that profitability is higher for Trapeze-branded versus OEM, or is that a wrong assumption?

That's correct.

Okay. Thank you.

Our next question comes from Jeff Beach with Stifel Nicolaus. Please go ahead.

Good morning, John and Gray.

Hey, Jeff.

Hey, Jeff.

A couple of questions. In Asia-Pacific, can you expand a little bit more about this rapidly growing joint venture that Hirschmann has there and where the sales level is and expand a little bit more on the growth outlook looking out actually, let's say, into '11?

Well, Jeff, the part of the business that's associated with this JV partner is within our industrial Networking business, and it includes some application-specific items for mobile cranes. And of course, the construction market in China is driving this growth. And so in the first half we saw very, very strong demand for the products that go on these mobile cranes to support the construction. And so in the second half, it's our expectation that that will begin to moderate a bit. We're not expecting that it's going to decline significantly compared to the first half, but we think that that rate of improvement in the second half is not going to be as strong as it was in the first half, just because we think the Chinese economy is probably going to cool a little bit.

The revenue levels of a JV partner is not something we disclose, but the profit improvement that you've seen year over year and sequentially, you can expect that the profit margins in this business are similar to our Networking business in general.

Okay. Second, getting very strong growth in Asia-Pacific from LTK. Can you talk about the progress of penetrating Asia with legacy Belden products and the combined effort here of LTK and, hopefully, improving legacy Belden sales? It sounds like it may be leveraging that plant. Can you talk about capacity utilization of that plant and expand a little bit more about the opportunity to drive the margins higher?

Yes, Jeff. We are, in fact, making good progress on the localization of our Belden-branded products in Asia. As you referenced, we are utilizing that facility better than we did before. We're taking advantage of shorter lead times. And our Belden-branded business in Asia had nice growth in the second quarter. It wasn't as strong as what we saw in LTK, but it was still very, very strong. And I think a big part of that has to do with the fact that we are leveraging that manufacturing location locally. And as you recall, it wasn't that long ago that we had to import all this product from the US and from Europe.

From a utilization point of view, Jeff, though, we're still significantly away from fully utilizing our capacity in Asia. So we wouldn't expect any additional CapEx investment in Asia for some time, even at the significant growth rates that we have seen.

Can you even give us a ballpark about whether you're at half or two-thirds of capacity or something like that?

I would guess at this point that our capacity utilization in Asia is probably approximately 50%.

That's pretty good margins. Lastly, can you expand on the Industrial Networking or Ethernet? I think that the large part of that still is in Europe. You're talking about seeing signs of slower economies. What do you see as the outlook for that part of the business looking out into the second half and into next year?

Well, we remain very bullish on that business. As we've said consistently, the secular trends of that business are very positive. The substitution rates continue to be driving good, strong growth. And our view of that business is still very, very positive for the second half and for next year. Market growth for that business typically is somewhere around 7% to 10%, kind of depending on the sector.

And we're also making good progress and growth in Asia and the Americas, which is historically where Hirschmann was not as strong, as we've taken advantage of the Belden sales force. So our view of that business is, even in times where the market growth might come below areas that we would desire, we would still continue to see growth in that business that would be above average.

All right, thank you.

Thank you, Jeff.

And our next question comes from Errol Rudman with Rudman Capital Management.

Can you speak to the generation of free cash flow in future quarters?

Errol, I had difficulty hearing your question. I think it had to do with free cash flow.

Yes. Can you speak to the generation of free cash flow in future quarters? And if you haven't disclosed your estimates for EBIT, maybe you could just give the other items and we can fill that in.

Errol, on free cash flow --

I'm having trouble hearing you now.

Okay. Can you hear me better?

Yes, I can.

Okay. On free cash flow, Errol, this year is, I think, an especially challenging year for us to meet our objective on free cash flow in excess of net income because our rate of revenue growth is so much higher than what we would expect in a normal year. So the funding of the receivable, as Gray talked about, is a necessary ingredient in revenue growth.

So we are still committed to one turn inventory improvement in the business year over year. We're off to a fantastic start. We're still committed to investing in CapEx below the rate of depreciation. Again, we're off to a great start. And in the second half, we would expect that our free cash flow generation would be significantly better than it was in the first half. And the question as to whether or not we're able to exceed it for the full year I think is one that we're not completely sure on. But I think that even if we didn't exceed it, we would be enormously close to meeting the net income, which in today's growth environment I think is a tall order.

With regard to your second question, we have -- we've given you the guidance for the third quarter in revenue and in earnings. We haven't disclosed guidance for earnings before interest and tax. But I think that if you assume that the items that Gray disclosed as some of the nonoperating items that we experienced in the first quarter -- without those present, I think you can get to the sort of operating income level that we would expect to generate to drive the EBIT that we described -- or, sorry, the (inaudible).

Thank you. Thank you.

You're welcome, Errol.

(Operator instructions). Our next question comes from Shawn Harrison with Longbow Research.

Hi, a clarification. If you could just run through again quickly -- I apologize -- just where exactly the settlement with Hirschmann fell in the quarter just one more time for me so I can be clear on that fact.

Yes. Hi, Shawn, it's Gray. Are you talking about its location on the income statement?

Location in the income statement.

Yes, there's -- it's an other income item, and it's a recovery of prior period taxes that we paid since the acquisition of Hirschman. So the original debits are in 2007, '08, 09. They're in the tax line. And the recovery associated with FAS 141R requires that those go against income rather than against the tax line. So it was an other income item of approximately $1.5 million.

Okay. Thank you for clarifying that. I'm sorry.

The second question just has to do with Trapeze. I know there was talk last quarter about the -- and even at the Analyst Day late last year of getting the business close to breakeven by the end of the year. With the new agreement with Avaya, trends you're seeing in that business, do you think the business can still reach a breakeven level or get close to that by the end of the calendar year? And is the revenue rate to get there still somewhere in the high teens?

Yes, the revenue level we think we need quarterly in Trapeze to break even is $18 million, and to get from where we are in Q2 to $18 million by the end of the year is a tall order. The team is absolutely shooting towards it, and whether we get there or not remains to be seen, but I think if we don't, we'll get close. I think that the Avaya agreement helps a lot. I think that the rate of improvement on Trapeze-branded revenue that we experienced in Q2 is a very encouraging sign, and I think that the way that we're managing the business with our current leadership with respect to engineering efficiency and cost control gives me reason for optimism with respect to if we don't get there, we're going to get there real close, and we'll get there shortly.

Okay. Thank you for that, this additional clarification.

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

Thank you, everyone, today for participating in today's call. We appreciate your interest in Belden, and we look forward to talking to you again next quarter.

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