Belden Inc (BDC) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Incorporated, Conference Call. Just as a reminder, this call is being recorded. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Frank Milano. Please go ahead, sir.

Thank you, Denise. Good morning everyone; thank you for joining us on today's Third 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 Henk Derksen, Vice President and Treasurer. John will provide a strategic overview of our business; Gray will provide a detailed review of our financials and operating results, and Henk will be available for the question and answer portion of this 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 on line at investor.belden.com. Please note that there is no www in that address, just investor.belden.com.

Turn to Slide 2 of 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 3 -- during this call, Management will reference certain non-GAAP financial information. In accordance with Regulation G, we have provided reconciliations with 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 this morning'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 ensure others have a chance to participate in the Q&A. I will now turn the call over to our President and CEO, John Stroup. John?

Thank you, Frank, and good morning, everyone. Gray will review our financial results in detail on his portion of the call. My remarks will focus on our performance relative to our strategic objectives and reference only our non-GAAP financial results.

Please turn to Slide 4 in our presentation and I will begin by reviewing our third quarter highlights. In previous calls, we've talked about the strategic priorities that were outlined in the beginning of 2010, including our market delivery system and lean enterprise initiatives, which are designed to generate organic growth in excess of market; expand operating margins; and generate cash flow in excess of net income. I'm pleased with our results and I want to thank all our associates for another successful quarter.

A significant highlight for this quarter was our free cash flow. We generated $43.4 million in free cash, or 211% of this quarter's income, from continuing operations, and ended the quarter with $296 million in cash and cash equivalents.

Let's turn to Slide 5 and look at the numbers. Revenue this quarter totaled $408 million, up 15% year over year. Organic revenue growth, which adjusts for currency and eliminates the effects of acquisitions and divestitures, was 16% this quarter. On a metals-adjusted basis, organic revenue growth was 12%.

The gross margin percentage was 30.7% in the third quarter, up 40 basis points sequentially and down 120 basis points from 31.9% in the third quarter last year. You may recall that last year's results included a 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 currency, gross margins are unchanged from prior year.

The operating margin was 9.5%, up 10 basis points sequentially, and up 120 basis points compared to the third quarter of last year. Income from continuing operations per diluted share totaled $0.43 this quarter, up 59% on a year-over-year basis, compared to $0.27 in the third quarter of last year.

Turning to Slide 6, I will review our third quarter revenue mix. Over one-quarter of our revenue is from our higher-margin connectivity and networking businesses, and 25% of our revenue is recognized in the world's faster-growing economies. Furthermore, a meaningful portion of our EMEA segment is impacted by exporting OEMs, servicing these same high-growth geographies.

Our mix by vertical market reflects the breadth and depth of our portfolio in the industrial and enterprise markets, which together make up more than 75% of our revenue. Our industrial segment grew in excess of 20%, based on the strength and reputation of our global brands and the successful integration of our industrial sales force.

Our networking business, which includes both industrial and enterprise, generated approximately $64 million of revenue this quarter, an increase of 7% compared to the third quarter a year ago. We continue to make progress with our initiative to grow our Hirschmann industrial networking products in North America and Asia.

Our results in the wireless segment continue to improve. Given the roughly $4 million year-over-year revenue decline from our OEM partners, our focus has been to improve our cost structure, expand gross margins, and grow our Trapeze-branded business. This quarter's results demonstrated substantial progress toward all three of these objectives. Order rates improved 25% year over year for Trapeze-branded products, and we've entered the fourth quarter with record backlog.

Our connectivity business grew about 33% year over year, to nearly $50 million in the third quarter. The strong growth offset the seasonal downturn typically experienced in EMEA during the third quarter.

Revenue in our cable business was almost $300 million in the third quarter, up 14% over last year, primarily reflecting strong organic growth in the Americas. Despite continued weakness in the nonresidential construction market, we generated 21% year-over-year revenue growth in the Americas. We attribute this performance to the successful execution of our market delivery system initiative.

Despite continued weakness in the nonresidential construction market, we may be near the bottom. The September [ADI] index was 50.4, up 2.2 points, marking the fourth consecutive monthly increase and the highest level since January of 2008. The ADI index is typically a forward indicator for our enterprise market, suggesting we could eliminate that headwind in 2011.

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

Thank you, John, and good morning, everyone. This is Gray Benoist and I'm Belden's CFO.

I will start my comments with GAAP results for the quarter, then review our non-GAAP results of operations, followed by a discussion of segment results, the balance sheet, cash flow performance, and close with a review of our global restructuring programs.

If I could have you please turn to Slide 7. Third quarter GAAP revenue was $411.5 million, and income from continuing operations totaled $20.8 million, or $0.43 per diluted share. GAAP results include $3.5 million of revenue and $1.9 million of associated gross profit which results from the recognition of the SOE-based deferred revenue in the wireless segment. GAAP results also include restructuring charges of $1.7 million pre-tax this quarter, primarily reflecting costs associated with the completion of the closure of one of our two manufacturing locations in Leominster, Massachusetts. I will focus the remainder of my comments on adjusted non-GAAP results.

As Frank mentioned, reconciliation between GAAP and non-GAAP results were included in press release, and these adjustments have been reconciled by reporting segment on Slide 20 of today's slide presentation. In addition, on Slides 17, 18, and 19, we have provided detailed GAAP to non-GAAP reconciliations by quarter, dating back to the first quarter of 2008, which have also been posted at Belden's Investor Relations website. For those of you modeling our business, we hope you find these additional disclosures helpful.

If I could have you turn to Slide 8, please. Third quarter non-GAAP revenues totaled $408 million, an increase of 15% compared to $355.2 million we reported in the third quarter of 2009. With a stronger euro this past quarter, foreign currency translation was sequentially favorable, by $1.5 million. Excluding the effects of currency, copper prices, and acquisitions, organic revenue was down 4% sequentially; it was up 12% year over year.

Non-GAAP gross profit margins, as John discussed, was 30.7% this quarter, up 40 basis points over Q2 and down 120 basis points from the 31.9% in the third quarter of last year. Adjusting for the effect of copper commodity cost changes, last year's results would have been 30.7%, and gross margins unchanged on a year-over-year basis.

SG&A expenses totaled $70.8 million, or 17.3% of revenue, in the third quarter. As a percent of revenue, SG&A was down approximately 20 basis points sequentially, and was down 190 basis points year over year. R&D expenses totaled $14.8 million, or 3.6% of revenue, up 40 basis points sequentially and down 40 basis points year over year.

This quarter, our joint venture that participates in China's mobile crane load monitoring market continued its strong performance, contributing $3.1 million to operating profit, which was comparable to the second quarter and up about $600,000 compared to the third quarter last year.

Turning to Slide 9 for a discussion of the status on the interest rate swap and cap agreements. During the third quarter, we decided to terminate both the fixed to floating interest rate swap and interest rate cap agreements entered into earlier this year. We did not qualify for the shortcut method of accounting under FAS 133, which allows for the presumption of a perfect hedge and therefore no variations to income associated with fluctuations in the underlying instruments. Instead, we applied the long-haul accounting method, which requires fair value adjustments to the income statement each quarter.

Given the earnings volatility inherent in the long-haul method, we reconsidered the merits of utilizing an interest rate swap hedge aligned with our 2019 senior subordinated notes. We'll be investigating alternative approaches to accomplish a future desired debt structure with a higher proportion of our debt at floating interest rates.

In the termination of the fixed-to-floating interest rate swap and interest cap agreement, we realized cash proceeds of $4.2 million, and a $7.1 million fair value adjustment increase to our 2019 notes, creating a future income statement benefit. We will amortize this premium over the remaining life of the underlying senior subordinated notes, resulting in an average annual decrease to interest expense of approximately $750,000 a year.

Income tax expense this quarter was $6.5 million, reflecting an effective tax rate of 24% for the quarter, and we expect a 24% tax rate for the full year. The tax rate continues to benefit from both a favorable jurisdictional mix of our profits and generally favorable resolution of discrete tax items.

Non-GAAP income from continuing operations totaled $20.6 million, or $0.43 per diluted share, up from $12.9 million, or $0.27 per share, in the third quarter of 2009.

If I could have you please turn to Slide 10 for some balance sheet comments. As John mentioned, cash increased $50 million sequentially, to $296.1 million at quarter end. In addition, we had another $205 million available under the revolving credit facility. In aggregate, we have approximately $400 million in liquidity available for strategic investments.

Debt principal was unchanged at $550 million at quarter end, and we continued to improve our leverage ratio, which was 2.66 this quarter, generally at our target ratio of 2.5 times.

Interest expense was $11.8 million, and our interest coverage ratio was 4.4 times this quarter, which compares to 4.7 times in the second quarter and 3.4 times in the third quarter of last year.

Turning to Slide 11 for a discussion of third quarter segments results. In our Americas segment, external revenues were $232.1 million; affiliate sales were $11.8 million; and total revenues were $243.9 million. Excluding affiliate sales, third quarter external revenues decreased 2% sequentially and increased 21% year over year. The third quarter non-GAAP operating income was $39.6 million, or 16.2%, a sequential increase of 50 basis points.

In our EMEA segment, external revenues totaled $90.4 million, affiliate sales were $20.7 million, and total revenues were $111.1 million. Excluding affiliate sales, third quarter external revenues decreased 2% sequentially, and increased 12% year over year. The third quarter non-GAAP operating income was $18.7 million in the segment, or 16.9%, a 330 basis point increase from 2009.

In our Asia-Pac segment, both external revenues and total revenues were $74.4 million at the quarter. Revenues decreased 9% sequentially, and increased 11% year over year. The third quarter non-GAAP operating income was $10.7 million, or 14.4%, a sequential increase of 220 basis points, and up 440 basis points year over year.

In the wireless segment, non-GAAP revenues were $11 million, a sequential increase of 8%, and operating profit improved $1 million sequentially, and $2.1 million year over year. As John mentioned, third quarter new orders in Trapeze were strong, and we entered the fourth quarter with a substantially higher backlog than we have witnessed in the business in the past two years.

I'd like to have you please turn to Slide 12 for free cash flow. Cash flow from operating activities totaled $49.9 million in the third quarter. Free cash flow, net of capital expenditures of $6.5 million, was $43.4 million. Free cash flow was slightly improved compared to the third quarter of last year, and up significantly over last quarter's $13.5 million.

Depreciation and amortization was $12.8 million in the third quarter.

Turning to Slide 13 for a review of our key performance indicators. Inventory turns, although down sequentially, were up on a year-over-year basis to 6.8 turns this quarter.

Working capital turns improved sequentially to 9.2 turns and were down slightly from 9.4 turns in the same quarter last year.

PP&E turns declined sequentially to 5.8 turns, but were up from 4.7 turns in the third quarter of 2009.

Now, if I could have you turn to Slide 14 for a review of our global restructuring programs. Consistent with our previous presentations, we anticipate full-year 2010 cost savings from our global restructuring programs will equal $56 million, and fully implemented annualized cost savings will be $60 million. Year to date, through the third quarter, cost savings totaled $41 million, and we anticipate another $15 million costs savings for fourth quarter, meeting our (inaudible).

This completes my prepared remarks. I will now turn the call back to our CEO, John Stroup, for his closing comments regarding the outlook for the fourth quarter of 2010. John?

Thank you, Gray. Slide 15 reflects our guidance for the fourth quarter and full year ending December 31. We expect the usual seasonal benefit in Q4, and our guidance implies sequential growth within our normal range, with adjusted revenues of $420 million to $425 million, bringing our full-year adjusted revenue estimates up to between $1.643 billion and $1.648 billion. The Company expects fourth quarter adjusted income from continuing operations per diluted share to be between $0.43 and $0.46, representing full-year adjusted EPS of $1.65 to $1.68.

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

Thank you. (OPERATOR INSTRUCTIONS) Matt McCall, BB&T Capital Markets.

Thank you. Good morning, everybody.

Hello there, Matt.

In your guidance, Gray or John or Henk, could you give us an idea of what-- maybe qualitatively if not quantitatively, what the assumptions are, either by geography segment or by subsegment -- that would be even better -- within each geography. In that Q4 guidance, what's the trend that's you're looking for? Is it continuation of what you saw in Q3, or is anything assumed to change?

I think that clearly, as compared to Q3, Q4 is going to benefit from the seasonal uptick we typically see in Q3 and Q4. So if you take our revenue guidance for the quarter, compare that to the revenue we delivered in Q3, I think you'll see that the majority of the expected improvement comes from the flow-through on the revenue.

As it relates to segments, we had strong operating margins in the third quarter in Asia; I think there's a good chance we may not repeat as high a margin in Asia in Q4. But I think that with the added volume seasonally from Q3 to Q4 in Europe and the Americas, we ought to see flow-through on that.

So I think it's a fairly straightforward comparison from Q3 to Q4 -- more top-line, more fall-through. Maybe the mix of business is a little bit different in a couple of areas, but I don't think there's anything particularly out of the ordinary as it relates to our sequential plan.

Okay. And I'm assuming we'll get more detail about next year at the analysts' day. But just as we take an initial look, it looks like you're going to do somewhere around 100 basis points of operating margin expansion this year. You had the benefit of quite a bit of restructuring, cost reduction. As we look out, I think there's less cost reductions from restructuring, so should that temper our expectations on the operating margin expansion opportunities last year?

I think the goals that we set out for-- our objectives we set out a year ago in terms of three-year objectives as it relates to operating margins, which is 13 to 15%. So now we'd be two years away from that goal. Those goals, I think, are absolutely in reach.

And you're right; the way we get there in 2011 will be different than the way we got the expansion in 2010. As Gray said, we're going to exit with approximately $60 million of cost reductions compared to $56 million in the year so you've got $4 million of benefit year over year. But a big part of the improvement next year is going to be continued volume increases.

From a market point of view, our markets seem to be stable to improving. The one market in 2010 that continued to decline, of course, is nonresidential spend. And as I said in my prepared remarks, there's reason to believe that we might either be at or near bottom. So we won't be fighting that same headwind, we don't believe, in 2011 as we did in 2010. We would expect that Asia would remain strong; we would expect that our exporting OEMs in Germany would remain strong. We expect that we'll continue to take share through our market delivery system like we did in 2009.

So in terms of operating margin expansion and earnings growth year over year, I think you're going to see a lot more of it coming from fall-through on top-line growth than cost reduction, other than the $4 million I talked about.

Okay. And then finally, you guys said that about copper. But, Gray, can you give me that impact again. I just missed the top line -- and maybe if there was a price-cost gap in the quarter. I'm sorry, I missed the copper detail.

Copper, Matt, for the quarter -- the average for the spot, or the average on the LME, either [nuggets] or the LME, was about $3.30. Last year it was $2.65. So it's up $0.65. Our rough and tough is 20 to 25 million pounds. So there's $15 million worth of increased sales, theoretically, on the pass-through associated with that copper increase on nominally the same margin dollars. And the impact of that is about 150 basis points of what could be perceived as margin degradation, but it's actually just a fluctuation of the copper and the denominator.

And so the math you just gave was on pure pass-through. What about the part of the market that is not contractually locked in from a pass-through perspective and you have to go out and get the price? Is the pricing environment okay?

I think John, on the last two calls, has stressed that it's probably as challenging a pricing environment as we've seen. We disconnect that pricing environment from copper per se. We think it's more of a capacity issue. That one doesn't necessarily decide not to pass through the value of copper; what one has to decide is whether they're willing to take incremental business at thinner margins, given that that's one of the input cost criteria.

And we have seen, especially in the low end -- the low end of category cable, the more commoditized piece of the industrial portfolio -- there has been a very, very challenging pricing environment. And we expect that to continue. But, as you can see, it still does not manifest itself in a way where margins are not able to be expanded. So I think that's the take-away, Matt -- that it's an issue. It's clearly one that we're managing, I think, effectively. And it's not an environment, or creating a situation, that has degraded the performance of the enterprise.

Yes. If I could just underscore Gray's comments -- I would say that, for the last two to three quarters, the environment for pricing has been stable. So it's not getting more challenging. It's challenging, as Gray said, but I don't see it degrading. The year-over-year comp for pricing has a lot more to do with the fairly unusual situation a year ago and less to do with the changes that we're seeing throughout the current year. So pricing environment was especially good the first half a year ago and was still pretty good in Q3 a year ago just because of the peculiarities of copper spot prices and how that flows through the channel, and the fact that our inventory turns are so much better than others'; we got to that cheaper copper sooner than everybody else.

But having said that, the pricing environment -- it's challenging because of capacity but it doesn't seem to us to be getting any worse.

Matt, for the sake of others in the queue, I'm going to ask that you dial back in so that others can.

Oh, yes. I'm finished, anyway. Thanks, Frank.

All right; thank you.

(OPERATOR INSTRUCTIONS) Shawn Harrison, Longbow Research.

Hi, good morning, everyone.

Hi, Shawn.

Sorry to ask for this clarification, but could you just-- the tax rate for the rest of the year, and then also the interest expense savings? I missed that.

Our tax rate for the rest of the year is an annual rate of 24%. So modify your fourth quarter so that your annual equals 24%. It's a fairly substantial reduction from where we thought we were previously, which is good news, associated with discrete actions that came through favorable as well as the general jurisdiction tax rate variations also being favorable.

And then the interest expense savings -- was that $1 million?

The interest rate savings is the amortization of the write-up of the 2019 notes that's required under FAS 133. And the write-up was $7.1 million and we amortized that over the remaining life of the note. And therefore if you divide it through by the remaining life, which is 8.5 years now, you get about $750,000 a year on a going-forward basis; or $250,000, $200,000 a quarter.

Okay. And then, more end-market related questions. Two parts. On the industrial side of the business, the aspect that goes to distribution. Are you seeing any type of de-stocking activities through distribution as maybe kind of the environment normalizes a bit or product lead times may get a little bit better for you?

And then, regarding LTK. It seems to be at least a seasonal period of the year that may be less than seasonal, particularly for consumer electronics. How is that affecting your business vis-a-vis the fact that I know you were seeing, at least in prior quarters, still kind of a de-stocking headwind?

Well, on the industrial side, I would say that we're not really seeing much effect, if any, from channel inventory changes in either direction. Of course, the first half, a portion of our year-over-year growth was in fact the de-stocking that happened the prior year and then the re-stocking that was happening now as volume came up.

In the third quarter, really not much movement. Distributors seem to have their inventory positions about where they would like them to be. They're typical for historical norms; really not much movement. We track, as you know, our point of sale, or sell-through, data monthly and we compare that against our sell in to our distributors. And those things are tracking real close right now. So nothing to report in terms of anybody getting ready for a significant decline or a significant uptick.

On LTK, I think there is a little bit of de-stocking going on in the channel through consumer electronics. I think that there might have been a little over-reaction in the first half of the year where some of the harness makers and some of the OEMs and assembly houses probably brought in a little bit more inventory than they needed in the first half, and I think they have taken some of that down in the third quarter. So I think that our revenue levels in Q3 in LTK were probably negatively impacted by a little bit of take-down of inventory at the harness makers.

Okay. Thank you very much and I'll hop back in the queue.

Thanks, Shawn.

Jeff Beach, Stifel Nicolaus.

Good morning, John and Gray.

Hi, Jeff.

Expanding a little bit on Asia and a little weaker than expected LTK, just comment on the rest of the business outside of LTK in Asia. The outlook for the trends looking into the fourth quarter and a little bit beyond, if you can.

And then, the margins improved pretty significantly over anything in the last number of quarters on lower volume. What occurred there?

Well, Jeff, let me start by calibrating. So growth in Asia was 12% year over year. And the LTK business was about 10% and the other parts of the business, 15%. So obviously, 10 to 15% growth rates year over year is pretty good. Not as strong as what we saw in the first half, but still pretty good.

If you look at margins in Asia, there's a couple of things going on that had a positive impact on margins. One is, mix was favorable. You know that our Belden branded cable and our Hirschmann-branded products are at significantly higher gross profits than what we see in LTK. That had a favorable impact on the business in Q3.

And copper did increase throughout the quarter and when that happens, LTK does get a nonrecurring benefit in the quarter in an environment of rising copper, just in terms of how they price and how they consume copper. So those two things did have a favorable impact on margins in Q3 in Asia. And some of that we wouldn't expect to continue necessarily in Q4.

So I think the business in Asia -- we had a good quarter. I was really pleased with the Belden-branded, the Hirschmann-branded performance. And on the LTK side, like I said before, I think that we had a little bit of an adjustment from perhaps a little bit of over-reaction in the first half from some of the supply chain.

And again, the trends and outlook going ahead here, from what you can see?

We're real optimistic with our Asia business. The growth rates seem to be good. I mean, I think that the fourth quarter, Jeff, for all of our businesses, I think we have reason to believe that top-line organic growth is going to be right in that sweet spot, that 6 to 8% that we believe we ought to be at in normal terms. Obviously, the fourth quarter is not going to have the benefit of inventory correction year over year. And of course, the comps in the fourth quarter of '09 start to get a little bit more difficult.

So I think it's consistent with where we've positioned the business, how we've designed it. 6 to 8% organic growth, I think, is the kind of numbers we ought to be delivering going forward.

And clearly, our exposure to Asia and emerging markets, which is now 25% of total, is a real nice part of that organic growth because we have other parts of the world, particularly the United States and Western Europe, that aren't going to deliver that kind of growth. So I feel good about how Q4's shaping up. I feel good about how we're entering next year.

Thank you. And the second question I have is a little more color on the Americas. I think in the discussion on the cables when you mentioned up 14% year over year was strong -- if I got this right -- strong organic growth in the Americas, at 21%. Can you give some color on that, divided between industrial and enterprise, and talk about the ongoing trends in the Americas in your cable business?

Yes. If you look at our Americas business, which did have a real strong quarter, organic growth for the Americas business in total was about 18%. And when you adjust that for copper, it was about 12%. And there's really a tale of two cities. In the industrial side of our business, year over year, after adjusting for copper, our business was up about 25% year over year. So a really strong performance in the industrial side of the business. And that's without any benefit of de-stocking or the benefit of re-stocking.

The part of the business that struggled still is the part of our business that's exposed to nonresidential. And that business was actually down year over year if you take into consideration the Belden-branded enterprise business, which was actually up year over year because it's got the benefit of some IT sectors that are still growing, like data centers; I think we took some share there.

But if you look at the other part of our enterprise business -- for example, our Mohawk brand or West Penn brand -- that really rely a lot on new construction spending, that business was actually down year over year.

And so the good news, I think, is that in 2011 we don't expect that we'll have to face that same downward pressure in the businesses that are exposed non-res that we did in 2010. So the fact the we feel like we're nearing the bottom is pretty good news.

Thank you.

Anthony Kure, Keybanc.

Good morning, guys. How you doing this morning?

Good, Anthony; how are you?

Okay. Quick questions about the industrial networking business. I think in the past I've heard a number -- and correct me if I'm wrong -- that the market should grow somewhere between 7 to 10%. My first question -- was that a Europe number or is that a global number?

A global number.

Okay. And then, given how you've talked about what's going on in Europe, the exporters actually benefiting from the currency -- would you say that you've outpaced that in Europe over the last few quarters?

No, I think our inet share capture has been a lot more significant and pronounced in the Americas and Asia. Now, our share -- it's a lot stronger in EMEA already. And so the share capture that we've been able to achieve in Europe is not as significant. It's a little bit more difficult because we have such a high share number by comparison.

Where we've really done a good job, and where I think we've taken most of our share in inet, has been Asia, particularly China, and maybe to a lesser extent the Americas. But you're right, the secular trends in the market are positive -- somewhere between 7 and 9%. And our growth rates on our inet business in EMEA, just about 9%. And so that means that EMEA, we're holding our own in the market. And we saw better growth than that in both Asia and in the United States.

Okay, great. And then as far as the wireless business goes, I think you had talked in the past about the $18 million sort of being the quarterly revenue run rate for break-even. Just looking at that, what'd going on in the third quarter and expectations for the fourth quarter, obviously backlog sounds like it's in good shape going forward. But mixing all those two factors together, are we looking at sort of a second quarter-third quarter timeframe to maybe hit that target, or when do you expect-- will it happen it all in 2011? Just get your thoughts on that, if you don't mind.

Sure. Well yes, we're entering Q4 with a better backlog position than we have in a long time -- about 1.5 million better than we entered Q3. And we've done two things already, I think quite well. One is we have significantly improved the cost structure; that shows up in the year-over-year results. And that's a permanent fix.

Secondly, we're expanding margins. We're doing so because our mix is better -- i.e., OEM business is lower margin than our Trapeze branded. But we've also, I think, done a better job on the pricing side. That's a permanent fix.

The third thing of course that's tremendously important is volume. The fact that our orders were up so much -- 25% year over year -- is a really good trend. The fact that we're into Q4 with strong backlog is great news. And the funnel and close rate is improving.

So whether or not we're going to get to that break-even number in the fourth quarter, we'll have to wait and see. But we've certainly set ourselves up, I think, such that we have a legitimate shot of potentially doing it in the fourth quarter. And if we don't, I think it's going to happen pretty quickly in 2011.

Okay. And when we talk about that -- just to clarify and make sure we're talking about the same thing -- that number we're talking about is about an $18 million revenue run rate. That was correct?

Yes, that's the number that I've said consistently that we need to be at to break even. And if I'm wrong, it'll mean that we don't need quite that much.

Okay, great. Thank you.

Keith Johnson, Morgan Keegan.

Good morning, everyone.

Morning, Keith.

Hi, Keith.

A couple of questions. I guess first off, to make sure I heard correctly -- on the year-over-year revenue, once it's metal-adjusted and on an organic basis, consolidated was up about 12%. Is that correct?

Correct.

Now, if you look at that in relation to kind of what the underlying markets grew, or what your estimates of those markets grow, I was trying to get back to how much was kind of share gain versus underlying market growth.

We think that our served markets, on a weighted basis, in the quarter grew somewhere between 3 to 5%. That's our best view. And of course, there's a lot of puts and takes there. There's some nice growth in industrial networking globally; there's some nice growth in China. And there's some recovery in the industrial markets and then that gets offset by pretty significant headwinds in the enterprise market that's exposed to nonresidential.

And when you look at our business compared to others in similar categories, and you look at the growth rates that we've achieved, I think it's become increasingly obvious that our portfolio and our execution around market delivery is really making a difference in terms of how we perform.

So clearly we took share in the quarter. And whether it's 7 of the 12 points or 6 of the 12 points, I'm not exactly sure. But I think it's probably safe to say that we're growing two times our growth rates, currently.

Okay. And kind of the underlying market trend of 3 to 5% that you saw in the third quarter, I guess maybe kind of build in the assumptions as you look at the fourth quarter guidance?

Yes, we would expect that to continue. And as I said earlier -- and I'll reemphasize it -- I think the potential good news here for us is that we might not be battling a headwind in nonresidential in 2011. Now, that doesn't mean we're not significantly off the peaks we all experienced in 2008. But it sure would be nice for it not to continue going down.

Okay. And then, just one other quick question. On the tax rate guidance -- annualized 24% for 2010. Understand we'll have the investor day coming up here shortly; more talk about 2011 then, potentially. But is that 24% tax rate something we should kind of look at as we model forward into 2011, or are there going to be some structural changes that may adjust that somewhat?

Good question, Keith. The answer lies in our discussion around the tax rates on December 7, but I can say the following. We did have a series of benefits this year that, practically speaking, are not repeatable, especially as we improved the performance of Trapeze. Trapeze is a US-based tax entity for the most part, and it will shift our jurisdictional mix fairly significantly as we improve the performance of several of our business units. And we have benefited this year on discrete items in a fairly significant way.

So when we talk to you in December, expect a return to a level close to what we had been guiding previously. And the last two years, we've talked somewhere between 29 and 30% as an effective rate to begin our discussions. And it's premature for me to be more precise than that, but for modeling purposes, I wouldn't select 24 and I would return to a more traditional tax rate.

Okay, great. Thanks a lot.

Welcome.

John Quealy, Cannacord Genuity.

Hi, good morning. Thanks for taking my question. Going back to industrial networking and Hirschmann, for the quarter can you talk a little bit about -- you said North America and Asia were the specific areas of focus, I believe, for Hirschmann. Can you talk about the end markets and the verticals that are doing well? Or just give us a characterization of the end markets, if you would, for Hirschmann?

Yes. The markets that we have traditionally served in the Hirschmann industrial networking business is (inaudible) process automation. Those are the core markets that we've always participated in and we've always been pretty strong. But there are new markets emerging. So for example intelligent network grid power transmission and distribution, alternative energy -- those have all been positive. In emerging markets like China you see a lot of investment in transportation -- like trains, things of that nature.

The alternative energy side, the windmill side, has not been good this year. I mean, I think most people that follow GE and others that make these large turbines, this has not been a particularly good year for alternative energy. But we have seen real strength in both power transmission and distribution as well as subways and other transportation markets. So it's been fairly broad-based.

And I think the thing we're most excited about is the fact that we've been able to see real growth in the Americas and in Asia year over year. So for example, I don't know if I gave a specific number, but in the third quarter our revenue in Americas in industrial networking was up almost 50%. So that's off a smaller number, of course, but it's nice growth. And in Asia, we saw growth year over year that was up about 10% -- sorry, about 15%. So again, good numbers.

And as a follow-up, when you talk about that growth, is that share or is that market expansion?

In the case of China, it's clearly-- well, it's both. In the case of China, we can point to share expansion on specific programs that we can see. I mean, in Americas clearly we're benefiting from share as well. I mean, I think that in both Americas and China it's clearly a combination of both. In Europe, it's a lot harder for us to take share and I think it's more a matter of us just benefiting from the rising tide.

Great. Thank you.

Mr. Benoist, there are no further questions at this time in the queue. I would now like to now turn the call back over to you.

Thank you. John?

Thank you, everyone, for your participation in today's call. For those of you participating in this year's investors' and analysts' day meeting, we look forward to seeing you in New York on December 7. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect from the call, and thank you for your participation.