Belden Inc (BDC) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to this morning's Belden Incorporated 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)

Matt Tractenberg, Belden Inc. Please go ahead Sir.

Thank you Lisa. Good morning everyone, and thank you for joining us today for Belden's third-quarter 2012 earnings conference call. My name is Matt Tractenberg, and I am Belden's Director of Investor Relations. Before we begin, I would like to invite our audience to attend this year's Investor Day, which will be held on Tuesday, December 11 at 1 PM in Boston. John Stroup and Henk Derksen, along with other senior management, will be providing insightful update on the Company and our continuing transformation. We hope you can join us. Please reach out to Belden's IR team with any questions.

With me here this morning are John Stroup, President and CEO; and Henk Derksen, Belden's CFO. John will be providing a strategic overview of our business, and then Henk will provide a detailed review of our financial and operating results, followed by question-and-answer. We issued our earnings release earlier this morning, and we have prepared a slide presentation that we will reference on this call. The press release and the presentation are available online at investor. Belden.com. Please note, there is no www, and that web address just investor. Belden.com.

Turning to slide 2 of the presentation, during this call management will make certain forward-looking statements. I'd 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 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.

During this call, management will reference certain adjusted or non-GAAP financial information. In accordance with Regulation G, we have provided a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. This reconciliation is in the Appendix of the presentation, and has been posted separately to the Investor Relations section of our website. I will now turn the call over to our President and Chief Executive Officer, John Stroup. John?

Thank you Matt. I'm pleased with our third-quarter results, and want to thank all of our associates for their commitment and execution of our strategic priorities. That includes the global deployment of our market delivery system, lean enterprise, and talent management initiatives. Please turn to slide 3 in our presentation for a review of our third-quarter highlights. As a reminder, I will be referring to adjusted results.

For the third consecutive quarter, we experienced gross margin expansion, both sequentially and year over year. Our gross margin increased 370 basis points to 33.1%, a new record. Up from 29.4% during the same period last year, and up 170 basis points sequentially. Our operating profit margin increased 150 basis points to 12.1%, up from 10.6% in the same period last year. We attribute the improvement in both gross and operating margins to the acquisition of Miranda, product portfolio management, a richer mix of end markets, and the benefit of previously announced restructuring actions, which more than offset the effects of changes in channel inventory, unfavorable currency, and a softening demand environment.

We generated $54 million of free cash flow, increasing cash and cash equivalents to $386 million. We believe we are on schedule to accomplish, for the eighth consecutive year, our full-year goal of free cash flow in excess of net income. Our strong balance sheet allowed us to complete the acquisition of Miranda for a net cash consideration of $342 million, in addition to continuing the execution of our share repurchase program as we purchased 655,017 shares of Belden common stock for $25 million during the quarter. Our guidance will be discussed at the conclusion of our prepared remarks. In addition to these highlights, we announced in September the planned sale of our cable assets in China for the consumer electronics end market. We expect to complete this transaction by the end of the year.

In our continuing pursuit to increase operating profit margins and return on invested capital, we are deliberately pruning lower margin bulk cable products that are not sold as part of the system. By doing so we avoid the need to add additional manufacturing capacity for products that don't hurdle our long-term ROIC goal. As a result of these portfolio actions, we are experiencing an unfavorable impact to revenues during the quarter and full year.

Please turn to slide 4 to review the third-quarter income statement. In addition to the portfolio actions described previously, changes in channel inventory positions and a soft macroeconomic environment makes revenue growth challenging. Revenues for the quarter totaled $493.2 million, down $26.5 million compared to $519.7 million in the third quarter of 2011, and up 2% sequentially. Adjusting for acquisitions and currency, revenue declined organically by 8.7% year over year. After further adjusting for the effects of copper, revenue declined organically by approximately 5%.

I'd like to remind everyone that our customers and channel partners were still building inventory in the third quarter of 2011 before reversing in the fourth quarter, affecting our year over year measures. Following approximately a $9 million reduction in inventory balances last quarter, inventory at our channel partners this quarter was down $5 million. After adjusting for last year's inventory build, copper-adjusted organic revenue for the quarter declined approximately 3%. We believe current inventory levels are at our customers in channel partners are appropriate, and we are not expecting significant changes for the remainder of the year. Our ability to perform well in this weakened macroeconomic climate is the result of our stronger portfolio and unique business system that is proving effective in a variety of business environments. Adjusted earnings per diluted share for the quarter were $0.77, an increase of 10% compared to $0.70 per diluted share in the third quarter 2011.

Please turn to slide 5 to review our third quarter's revenue mix. I'm pleased with the progress made during the quarter on key initiatives designed to allow Belden to capture share, even in a weakened demand environment. First, our global accounts program, which recognizes strategic customers around the world that benefit from increased customer intimacy is doing very well. These accounts represent 11% of our revenue and are up almost 14% year over year after adjusting for acquisitions, currency, copper and changes in inventory. Second, revenue from selected accounts within target vertical markets, including data centers, power transmission and distribution, and oil and gas, grew year-to-date more than 42% year over year. While today these markets represent a small portion of our consolidated revenue, it is a clear example of our successful implementation of the market delivery system, and it validates the power of our product breadth and application expertise.

Before we discuss revenues by geography, I'd like to point out that operating margins expanded year over year in all segments. We are clearly making progress on accomplishing our goal of operating profit margins in the 13% to 15% range. Revenues in the America segment declined approximately 2.5% year over year after adjusting for copper, currency, and changes in customer and channel inventory balances. Weakness within the enterprise end market and the timing of orders, in combination with active portfolio management, was partially offset by solid performance in the industrial end markets, growing 3.5% year over year. We continue to be pleased with our performance in Brazil, where third-quarter copper-adjusted revenue was up approximately 43% year over year, demonstrating the success of our acquisition and integration process there.

In EMEA, revenues declined year over year by approximately 5.5%, when adjusted for acquisitions, currency, copper, and channel inventory. The segment experienced further contraction, a result of the continued economic crisis, which was reinforced by September orders that were softer than anticipated. For the third consecutive quarter we saw distinct regional differences in performance across EMEA. In northern Europe, which represents a meaningful portion of EMEA's business, revenue was up approximately 10% year over year, more than offsetting the approximate 8% decline in southern Europe, a result of the continued challenges the region is facing. Germany was down approximately 7.5% year over year after adjusting for copper and currency. The decline, largely driven by lower demand among European machine builders for connectivity and networking solutions, is supported by recent economic data, indicating a decline in German industrial output. The softer demand can also be seen in our third-quarter industrial connectivity performance.

Given these challenges, I'd like to compliment the team in their ability to act quickly and maintain operating profit levels of 16.9%. In Asia Pacific, revenues declined by approximately 1.5%, after adjusting for currency, copper, and inventory balances, mainly a result of de-emphasizing lower margin business. I'm pleased to report the second consecutive quarter of double-digit operating profit margins. Our 11.2% operating margin for the quarter includes products for the consumer electronics market, which negatively impacts our operating margins by approximately 500 basis points.

Next, let's review revenues from a vertical market perspective, where we experienced some shifts in our revenue mix. The industrial end markets, which constitute 51% of our consolidated revenues, grew by approximately 1% year over year, after adjusting for acquisitions, currency, copper, and channel inventories. This was driven by stable demand for our industrial networking solutions, which saw growth of 7% year over year, after adjusting for currency, acquisitions, and channel inventory. The enterprise end market, which provided 23% of our consolidated revenue, was impacted by active portfolio management during the quarter.

Applications driving adoption of enterprise connectivity, such as data centers and cloud computing, continue to provide opportunities for growth going forward. The broadcast end market, providing 20% of revenues, was impacted by the timing of new product launches. This end market now includes Miranda, which contributed $32 million to the quarter. And finally, from a product platform perspective, our networking and connectivity platforms now contribute 33% of consolidated revenues, compared to 30% in the year-ago period.

Turning to slide 6 for our key performance indicators, working capital turns were 9.6, relatively flat year over year, and up sequentially from 7.6. Inventory turnover was 6.6 in the third quarter, down 0.8 turns year over year, and down 0.6 turns sequentially. Excluding the impact from Miranda, inventory turnover would have been 7.3, down slightly year over year from 7.4. We continue to focus on driving lean initiatives across the company, and I'm confident Miranda will show the benefits in coming quarters as they adopt many of these techniques.

I'll now ask Henk to provide additional insight into our third-quarter financial performance. Henk?

Thank you, John. I will start my comments with GAAP results for the quarter, followed by a review of our adjusted results of operations and segment results, a discussion of the balance sheet, and close with our cash flow performance. There were a number of significant normal non-recurring events that impacted our third-quarter results. I will provide details on these items and how they impacted both operating income and earnings per share.

Please turn to slide 7. Third-quarter GAAP revenues were $490.4 million, down 5.6% year over year, and up 1.3% sequentially. A loss from continue operations of $1.14 per diluted share included recent debt refinancing costs of $0.76 per share, impairment charges of $0.57 per share, primarily resulting from the pending consumer electronic asset sale, restructuring charges of $0.27 per share, purchase accounting effects related to acquisitions of $0.19 per share, and amortization of intangibles of $0.12 per share. As you can see, we have been busy this quarter. We completed four significant strategic actions in the period, which impacted our GAAP financial performance. First, in July we closed on the acquisition of Miranda Technologies and completed our preliminary assessment of the purchase accounting treatment of that transaction. This resulted in acquisition-related expenses of $12.1 million. I would like to note that Miranda is off to a slow start, contributing approximately $32 million of revenue and $0.08 of earnings per share during the quarter on an adjusted basis.

Second, as we discussed on our last quarter's call, restructuring actions were taken that resulted in approximately $17 million of charges during the quarter, or $2 million more than contemplated. Given the further softness in our EMEA segment, we believe it was prudent to take these additional steps. We expect that this restructuring program will result in an annualized savings of approximately $22 million, of which roughly $7 million will impact 2012. Third, we completed our debt restructuring and improved our capital structure by replacing $532 million of our outstanding notes at an average interest rate of 7.7%, with $700 million of new senior subordinated notes maturing in 2022, with an interest rate of 5.5%. I'm very pleased with our ability to increase our liquidity by roughly $120 million, while reducing interest expense from outstanding notes by more than $2 million per year, or $0.03 per share.

And finally, we announced an agreement to sell our consumer electronics assets in China. We expect the transaction to close by the end of the calendar year, and as a result, we are now accounting for these assets as held for sale. And we have recorded an impairment charge during the quarter of $26 million. We expect the consideration to be $43 million. Revenues for 2013 will be reduced by approximately $100 million to $120 million with no significant impact on operating income. As a result, consolidating operating margins will improve by 60 to 70 basis points. We believe that these four strategic actions better position us to deliver value to customers and shareholders, given the current challenging environment that we, and many of our peers, see ahead.

Please turn to slide 8. Third-quarter adjusted revenues totaled $493.2 million, down $26.5 million year over year, or 5.1%. Revenues were unfavorably impacted by currency translation of $13.3 million year over year as a result of the strengthening of the US dollar. This includes unfavorable impacts on the euro and Brazilian real denominated sales of $10.7 million and $2.6 million, respectively. After adjusting for currency and acquisitions, organic revenue declined 8.7% year over year. After adjusting for the unfavorable impact of lower copper prices of approximately $16.5 million year over year, and unfavorable channel inventory collection of approximately $13 million year over year, revenues was down 300 basis points.

On sequential basis, revenues increased $9.2 million, or 1.9%, from $484 million to $493.2 million. After adjusting for the effects of acquisitions and currency translations, organic revenue was down 4.3% sequentially. On a copper-adjusted basis, revenues declined approximately 3.5% sequentially. Gross profit margins, at the record 33.1%, increased 370 basis points year over year, and 170 basis points sequentially. On a currency- and copper-adjusted basis, gross margins increased 340 basis points year over year, and 140 basis points sequentially. During the quarter we benefited from the Miranda acquisition, which added 180 basis points, or productivity gains of 30 basis points. Portfolio management with an impact 20 basis points, and pricing and mix, combining from the impact of 80 basis points year over year.

Third-quarter SG&A expenses were $88 million, or 17.8% of revenue. R&D expenses for the quarter were $18.1 million. Both SG&A and R&D expenses increased sequentially, and year over year, as a result of the addition of Miranda. After adjusting for the impact of foreign currency and Miranda, SG&A and R&D expenses combined were down more than $3 million year over year. We continue to execute on our restructuring actions so we can protect our strategic investments.

For the third quarter 2012, we recognized $2.6 million in operating income from our equity method investment in our Hirschmann joint venture that services the Chinese crane manufacturing market. I am pleased with the third-quarter operating profit margins of 12.1%, up 150 basis points year over year. And I'm proud of the fact that on $26.5 million less revenue, we were able to generate $4.5 million more in operating profit. Our ability to expand margins through acquisition of attractive companies like Miranda, productivity gains, portfolio management, and end market mix, despite the absence of leverage on growth validates that the business model is solid, and is delivering results. We believe we are on track to accomplish our goal of operating profit margins in the range of 13% to 15% by 2013.

The adjusted effective tax rate for the third quarter was 23.5%. This was lower than the 25% rate estimated in the company's previous guidance, primarily due to a jurisdictional mix of income as well as the timing of favorable discrete tax items. For financial modeling purposes of fourth quarter, we suggest using a 27% effective tax rate, which will result in an annual rate of 21% for the full year.

Turning to slide 9 for segment revenue mix. On a consolidated basis we made progress with our product portfolio transformation. Networking in EMEA was impacted by the continued softness and demand for our products sold into the mobile crane markets. In addition, industrial connectivity end markets were unfavorably impacted by lower German industrial output. Networking and connectivity increased in the Americas from 22% to 28% during the quarter, largely as a result of the addition of Miranda. In Asia Pacific, networking and connectivity now account for 24%, up from 20% last year, due to strong performance in our industrial networking business of 22% year over year growth.

Turning to slide 10 for segment results. As John mentioned earlier, I'd like to highlight that each segment saw year over year improvements in operating profit margins. In our Americas segment, external revenues totaled $326.9 (sic - see press release $326.9 million). Affiliate sales were $9.1 million, and total revenues were $336 million. Third-quarter external revenues were up 50 basis points year over year. After adjusting for the effects of acquisitions, currency, and copper, year over year revenues declined by approximately 5.4%. After further adjusting for the effects of channel inventory, revenues in the Americas declined by approximately 2.5% year over year.

Third quarter 2012 operating income was $48.3 million, or 14.4% of revenues, up 170 basis points year over year when adjusting for the effects of currency and copper, driven largely by favorable input costs and productivity gains, with a combined impact of 130 basis points. Sequentially, operating income decreased 20 basis points when adjusting for the effects of currency and copper, as a result of lower volume off set by productivity gains. The team is executing well, as evidenced by the ability to achieve operating margins within our long-term goal of 13% to 15%.

In our EMEA segment, third-quarter 2012 external revenues totaled $83.3 million. Affiliate sales were $32.6 million, and total revenues were $115.9 (sic - see press release $115.9 million). After adjusting for acquisitions, currency and copper, and changes in channel inventory, external revenues decreased approximately 5.5% year over year, and decreased approximately 8% sequentially, with a sequential decline mainly as a result of seasonality. Operating income in the third quarter 2012 was $19.6 million, or 16.9%, up 50 basis points year over year when adjusting for currency and copper, driven largely by productivity gains resulting from restructuring actions. Sequentially, operating income declined 70 basis points when adjusting for currency and copper, driven by lower volume.

In our Asia Pacific segment, third-quarter external revenues totaled $82.9 million. Affiliate sales were approximately $800,000, and total revenues were $83.7 million. Third-quarter external revenues were up 1.3% sequentially and down 8.6% year over year. After adjusting for currency and copper and changes in channel inventory, revenues declined approximately 1.5% year over year. This was due to active portfolio management and a softer enterprise market, offset by strong demands in industrial markets. Third-quarter operating income was $9.3 million, or 11.2%, an increase of 300 basis points year over year, driven by deliberate portfolio management, productivity gains, and favorable product mix. Sequentially, operating income was down 50 basis points when adjusting for the effects of currency and copper. Although we were challenged with organic revenue growth, we are pleased with the improvement in operating margins.

If you will please turn to slide 11, I will begin with our balance sheet highlights. During the quarter we were able to front the purchase of Miranda, while also continuing to repurchase Belden stock. I'm pleased with the fact that cash and cash equivalents totaled $385.6 million at the end of the third quarter, an increase of $48.3 million from the second quarter. Day sales outstanding was 56 days in the third quarter, a five-day improvement both year over year and sequentially, mainly due to the improved business model. Working capital turnover was 9.6 turns this quarter, up 2 turns from the second quarter, which is consistent with seasonal patterns. Total outstanding debt principal increased to $972.4 million, as a result of a $255 million term loan used to facilitate the Miranda transaction, $700 million of newly issued debt, and $70 million of remaining 2019 notes. I'd like to point out that for modeling purposes, interest expense will amount to approximately $14 million per quarter. Based upon our current strong cash position and the liquidity available under the unused debt facility at the end of the quarter, the Company had $640 million of dry powder, which allows to continue our M&A strategy in combination with our shared repurchase program.

Please turn to slide 12 for a few cash flow highlights. Cash flow from operating activities year-to-date for 2012 was $93.3 million, compared to $99.5 million in the year-ago period. Net capital expenditures year-to-date totaled $30.6 million, compared to $20.6 million in the year-ago period, as a result of timing of projects within the year. We expect full year net capital expenditures to be approximately $35 million. Year-to-date free cash flow of $62.7 million decreased $16.2 million as a result of the expenditures just mentioned.

We are confident that we will, as consistent with prior years, achieve our annual goal of free cash flow in excess of net income. As we previously indicated, our Board of Directors authorized a $150 million share repurchase program. This program is open-ended. In the third quarter we purchased 655,017 shares of Belden common stock for $25 million under this authorization, totaling up to 3.71 million shares repurchased under this program, at an average price of $33.72 per share. This leaves $25 million remaining available under this program.

That completes my prepared remarks. I would now like to turn this call back to our CEO, John Stroup, for the outlook and his closing comments. John?

Thank you, Henk.

Please turn to slide 13 for our outlook regarding the fourth quarter and full-year 2012 results. Clearly, the weak demand environment presents challenges and the uncertainty affects our visibility. We believe this climate is likely to continue. Therefore, we will focus on driving improvements to the business through the implementation of our strategic plan. Despite these pressures, we remain committed to our full-year EPS guidance. Therefore, we expect our fourth-quarter 2012 revenues to be between $500 million and $510 million, and income from continuing operations per diluted share to be between $0.72 and $0.77.

As you know, Q3 is a seasonally weaker quarter in Europe. Because of the slow July and August, September is often used as an indication of demand for the fourth quarter. For us, September was weaker than expected, and as a result, we were more aggressive in our restructuring actions in the quarter within Europe. To be precise, $2 million more than the original $15 million we spoke about on our second-quarter call. The adjustment to our full-year 2012 revenue guidance, without a reduction to our EPS guidance, is a result of this dynamic. For the full year 2012, the company expects revenues to be $1.94 billion to $1.95 billion, and income from continuing operations per diluted share to be between $3 and $3.05.

That concludes our prepared remarks. Lisa, please open the call to questions.

(Operator instructions)

Tony Kure, KeyBanc.

Hey. Good morning, gentlemen. How are you?

Good, Tony. How are you doing?

Okay.

Let's start with the networking product group. Just looks like it was up sequentially, up to $100 million in the third quarter. First, I'm assuming Miranda is categorized in there. Is that a good assumption to make? Second, if that's true, what was networking up sequentially, ex-Miranda?

So yes, Miranda is included in the networking segment. You are correct. And the networking business year-over-year, on an organic basis, when you adjust for metals, organic growth, and channel, it was up 2%. Sequentially -- Henk, do you have the sequential numbers?

I will get them for you, John. Think sequentially we were roughly flat, excluding the Miranda transaction.

Okay. And then, I don't know if you have granularity -- I mean, you talked a lot about Germany being impacted, or the industrial networking being impacted by Germany. Was that actually down in the quarter sequentially?

I don't have the sequential numbers in front of me, either, but, I believe, yes. I believe the networking business in Germany was down sequentially. I know it was up in Asia sequentially. The European and German dynamic specifically was interesting. So, what we saw was continued weakness in the domestic market of Germany. We did, though, in September begin to see pretty nice year-over-year growth on export of machinery. And I think that, that is a result of some improvement within China demand of machinery exported out of Germany.

So, we saw a net decline in Germany year over year, as we mentioned, of 7.5%. But we sort of see the domestic market continuing to weaken, and we see the export market starting to improve.

Along those lines, I think you have talked about maybe some stimulus actions, or specifically, transportation spending in China, may be helping that. Is that what you think is driving that turnaround in September?

In the third quarter in our Asian business, the networking business saw nice activity within power transmission and distribution as well as transportation. And a lot of those programs do have impact from government spending. I think the export of machinery out of Germany to China is probably less connected to stimulus spending and more connected to recapitalization in Germany for the industrial business.

So I'm encouraged by the improvement in export machinery in September. That was the one nice piece of news that we saw in September. And I think it gives us reason for a little more optimism moving into Q4.

Okay. Great.

And then if I could just -- on the fourth quarter guidance assumptions for the contribution from Miranda, could you just break down what that top line and EPS contribution might be? Or what's factored into your fourth quarter number?

Yes. This is Henk, Tony.

We included roughly $46 million of revenue contribution from Miranda on a year-over-year basis, spot of our guidance for Q4.

And you did, I think, $0.08 in the third quarter, so it would maybe bump up a little bit in the fourth?

A little bit. The full-year assumption for your model should be around $0.16 accretion for 2012 over both quarters.

Okay, great. Thank you.

You're welcome.

Matt McCall, BB&T Capital Markets.

Thank you. Good morning, everybody.

(multiple speakers) Hi, Matt.

Actually, I want to follow up on that last question. So, $0.16 -- it sounds like a little bit of a bump. I'm sorry, no -- $0.08 and $0.08, so that would be $0.16. Is it another benefit of $0.16 that we should expect next year?

We guided when we disclosed the Miranda transaction $0.45 on the full-year basis.

Sorry, I'm working remotely. So I'm trying to go through all these notes.

So, on the restructuring, you said you ramped it up. You'll have to refresh my memory here as well. You ramped up the spending, got a little more aggressive there, and I think in the remarks you said $15 million, I think, is the benefit for next year. Is that the full -- if I have that right -- is that the benefit you had called out before, or is that up, given that you got more aggressive?

As part of our Q2 release, we announced a restructuring charge of $15 million. As a result of the softnesses in EMEA, we increased that now to $17 million. The annual savings as a result of the $17 million is roughly approximately $22 million, of which $7 million is included in our 2012 numbers, Matt.

And, how did that $17 million compare -- I'm sorry, how did that $22 million compare to what you said previously?

We said $15 million of charge and $20 million of savings.

Okay, so $2 million more. All right. Thank you.

The pruning efforts, John -- this is a little reminiscent of what you went through a few years ago when you first took over. I remember focusing more on high-margin products. Can you get more specific into what products you are targeting, and then what geography? I know you mentioned as you went through some of the segments, but -- and then you said no impact in Q4, but is there going to be -- I'm trying to think the way the math would work on a year-over-year basis next year, assuming the products don't come back.

So, there's really two filters that we apply. The first is that if we don't see the cable being included as part of the solution, then we don't give it the same priority. And we have a number of examples still, although it's becoming a much smaller percentage of cable products that are sold by themselves as bulk cable. So that's the first filter.

The second filter is we are beginning to run into some situations where we are getting near capacity, and so we're at a decision point as to whether it makes sense to add incremental capacity. We are looking at those scenarios on a case-by-case basis. In the third quarter we had a number of examples where we felt like it was better to walk away from some cable-only business than to invest in additional capacity that we felt was not going to hurdle our long-term return on invested capital goals.

So that is how we think about it. I think in the fourth quarter there is always a chance that there could be a little bit more, probably similar on a year-over-year basis, maybe not much more on a sequential basis. And the kinds of things that we've been looking at are things you probably expect -- low category networking cable, obviously, the consumer electronics business we are taking care of in a different way, through the divestment of the business. But there is also some industrial cable that sold by itself at lower margin that we're also pruning as well.

So, it's not a huge impact. It's about $5 million in top line for the quarter -- more than we expected. Probably leaking 20% gross margin. And it's clearly a way -- a small way that we continue to drive operating margin expansion.

Okay. And that leads into the final question I had.

You talked about the elimination of LTK adding 60 to 70 basis points to your margins, and then you reiterated the 13% to 15% target. Again, refresh my memory -- was there an assumption in getting to that 13% to 15% target that you would be receiving the benefit of the divestiture? Was there also an assumption that you're going to see the benefit of some of this product pruning? Were those in there? I'm trying to remember exactly what the components were. I don't remember those two.

So, remember that when we shared that goal -- it was a number of years ago that we shared that goal. And, we talked about a number of things that got us there. One was our efforts with lean and productivity, which we continue to see benefits from. Secondly, was leverage on growth. And third was mix. And so, clearly, the actions we take on pruning and the divestiture of our consumer electronics business are great examples of the benefits of mix in terms of how we achieve that goal.

Now, when we're together in December we're going to have an opportunity to update for you our thoughts with regard to our goals, including operating margin, and we look forward to sharing with you what we think may be possible. I will remind you that our gross margin in the quarter was, I think, very impressive -- 33.1%. And as you compare as against our three peer group partners -- we really have three companies that we compare ourselves against -- and I think everybody knows who that is -- our gross margins now are equal to or greater than those companies. So, we are very excited by what's happening with our gross margin and what we think will happen to our operating margins.

That sounds like there might be a little opportunity relative to that 13% to 15%, given these other moves that you've made.

We look forward to seeing you in December.

I hear you. Thank you, John.

Thank you, Matt.

Shawn Harrison, Longbow Research.

Hello, guys. Can you hear me?

Yes, Shawn. We can hear you fine.

Okay, perfect.

Just wanted to get back to -- first off, a quick clarification on the restructuring savings. The mix between COGS and SG&A for both this year and next year, if you could just elaborate a bit?

In terms of the savings, the majority of the savings will impact SG&A. There will be a component -- there will be a component, Shawn. Shawn, you're breaking up. There will be a component -- let's say, of the $22 million of savings -- there will be a component, roughly $8 million to $9 million that will impact our cost of sales.

Okay. And that -- the incremental expected for '13. Is that the run rate at the end of the year? That's not the full-year amount?

$22 million is a full year, an annualized number, and we included roughly approximately $7 million in our current run rate.

Okay.

And then my follow-up just has to be -- is on capital deployment currently. You closed Miranda. It looks like it is off to a great start. You've refinanced it and you have a lot more dry powder. How do you think of the buyback? Will you complete that by the end of the calendar year -- what is remaining? And then just maybe valuation, when looking at M&A right now -- is it attractive?

So, we have $25 million remaining on the current authorization. We will be updating the Board later this month, as we do every three months, on the balance sheet as well as the state of the funnel. The funnel is in a very nice shape, as it has been. I mentioned that we've been employing more resources there, so we continue to be excited by that.

But we're also very excited by the valuation of Belden. We think that if you look at the multiples of Belden today, it is a fantastic buy. And so, as we talk with our Board later this month, we will make certain they are aware of what we think that opportunity is.

Okay. And I guess just a brief follow-up.

Henk, what is the share count you're using for the fourth quarter in terms of the guidance?

It's around 46 million shares.

Okay. Thanks so much.

Alek Gasiel, Barrington Research.

Good morning, everyone.

Good morning, Alek. How are you? (multiple speakers)

All right.

This question I apologize on, but relate to the fiscal year guidance with the $1.94 billion and the $1.95 billion. Is that excluding -- I assume that's also excluding the sale of the consumer electronic area?

No, these numbers includes consumer electronics. We think we'll close this transaction at year-end. So, the $120 million to $100 million revenue impact is a 2013 impact, Alek.

Okay, just wanted to be sure on that.

And then, on the comments concerning the active portfolio management pruning -- what was the impact on the quarter? Was it -- I heard like $5 million?

It was about $5 million in revenue, and approximately $1 million in gross margin.

In gross margin.

And to further talk about that, you mentioned about the non-core assets. Now that you have sold the consumer electronic, is it possible to say -- how much non-core asset represents total revenue at the moment?

It's difficult to quantify, but there are examples. Within the portfolio, cable products that are not being sold as part of a solution -- i.e., we're not selling it with a connector, or were not selling it with a networking switch. And we're always evaluating those groups. Sometimes there are larger groups that might be part of a divestment, like we've done with our consumer electronics assets. Other times they may be product lines, as we do within our enterprise segment.

So, we continue to evaluate it. As you can look at, the percentage of our revenue now that comes from networking and connectivity products, we're at 33% in the quarter. Obviously, in the fourth quarter that is going to go up because we are going to have three months with Miranda. In the first quarter of next year it will go up even more, because we won't have the $25 million of consumer electronics business. And, we will continue to drive that mix, continue to see expansion in gross margins and operating margins. And I think you should expect us to continue doing so.

Follow along the lines with the non-core assets -- you do have some assets that are material enough that would do similar selling of the assets. Is that correct? Because I know you still have an aerospace segment.

So, we do have cable products that do go to the aerospace and defense end market. You are correct. Most of that is actually under a brand name called Thermax. And that is an example of where we do not have connector assets, and we sell those as cable-only products. So, yes, that would be an example of something that would fit into the category I described previously.

Okay.

Quick question, Henk -- on the SG&A level, is that something that you can [expansion] your model in for looking at Q4 into fiscal '13? If you could provide any color on that?

Yes, I think the SG&A levels currently are impacted by the benefits of some restructuring costs. So you will see a little bit more reduction there, offset by the addition of one month of Miranda.

Okay. All right. Thank you so much.

Thank you. You're welcome.

Chris Dankert, Longbow Research.

Good morning, everyone.

Just following up to Shawn, quick. I was wondering, could you shed a little bit of light on what you are expecting for SG&A next quarter?

We incurred SG&A expenses this quarter of roughly $89 million. For next quarter, will probably run at $92 million to $93 million.

Great. Thanks so much.

Brett Levy with Jefferies.

Hey guys.

There is a decent gap between your Moody's rating, which is mid-BB, and your S&P rating, which is high-B. Are you seeking to change either of those, or have you articulated to either the market or the rating agencies a long-term leverage percentage that you are comfortable with or you are aiming at? Say -- I guess the question -- it's sort of a two-part question. Are you trying to change one of your ratings, and also, what is your long-term leverage level?

So, we have an active relationship with both agencies. We visit them typically once a year. We lay out our capital structure objectives. And our objective is to get leverage over the long term back to a 2.5 ratio. So, that is our capital structure objectives. Short-term, with the opportunity of an acquisition, we would go a little higher, with the objective to go back to that 2.5 leverage within the next 12 to 18 months.

And are you talking S&P about potentially getting an upgrade?

We always talk to S&P about an upgrade.

All right. Thanks very much, guys.

You are welcome.

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

Great. Thank you, everybody, for participating in today's call. If you have any further questions for us, please reach out to the Investors Relations team here at Belden. We hope to see you at our Investor Day on December 11 in Boston. Have a great day, everyone.

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