Belden Inc (BDC) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated second-quarter 2015 earnings release conference call. Just as a reminder, this call is being recorded. (Operator Instructions)

I would now like to turn the call over to Matt Tractenberg. Please go ahead, sir.

Thank you, Don. Good morning, everyone, and thank you for joining us today for Belden's second-quarter 2015 earnings conference call. My name is Matt Tractenberg. I'm Belden's VP of Investor Relations, and with me here this morning are John Stroup, President and CEO, and Henk Derksen, Belden's CFO.

John will provide a strategic overview of our business, and then Henk will provide a detailed review of our financial and operating results followed by Q&A.

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, presentation and transcript of these prepared remarks are currently available online at investor.belden.com.

Turning to slide 2 in 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 these information to reflect future developments after the 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 in our annual report on Form 10-K.

Additionally during today's call, management will reference 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 Investors section of our website.

I'll now turn the call over to our President and CEO, John Stroup. John?

Thank you, Matt, and good morning, everyone. As a reminder, I'll be referring to adjusted results today. Please turn to slide 3 in our presentation for a review of our second-quarter highlights.

On our first-quarter earnings call, I shared with you some concerns regarding customer demand in a few of our served markets. A strong US dollar, the impact of lower energy prices and a lackluster Chinese economy are impacting demand for our industrial segments. Furthermore, it's now clear that our broadcast customers will defer capital spending on traditional infrastructure equipment as they navigate through a number of important industry transitions.

As a result, we believe it's prudent to adjust our revenue expectations for the remainder of the year and take swift action to align our cost structure and profit margins.

Before I proceed, please know that I'm extremely disappointed to make a mid-year revision to our full-year revenue and earnings guidance. As you know, we have a long track record of accurately predicting the economic environment, and we do not make it a habit to fall short of our commitments.

It is important, however, for me to highlight that my team and I remain fully committed to delivering outstanding shareholder returns, and I'm confident that we'll do just that.

For the full year, we now expect revenues between $2.36 billion and $2.39 billion. As a result of these changes, the expected range of adjusted income from continuing operations per diluted share is now $4.70 to $4.90, which represents earnings growth between 11% and 16%.

As a reminder, if not for the impact of currency translation, earnings growth projections would have been 18% to 23%.

This revised outlook includes the expected benefit of a cost reduction program within our broadcast platform to align our cost structure with the current demand environment. The program, which requires an investment of $30 million, will result in $30 million in annualized savings. Henk will provide more information on the specifics of the program and impact to our margin profile.

First, let's review the second-quarter performance. Total revenue in the second quarter was $598.5 million, an increase of 5.2% on a constant currency basis. The stronger US dollar had an approximate $38 million unfavorable impact on revenues year over year. After adjusting for copper, currency and acquisitions, revenue declined 2.6% from the year ago period.

Record gross profit margins were 41.7% for the quarter, an increase of 470 basis points from the year ago period and continue to be best in class. EBITDA margins were 16.7%, an increase of 190 basis points from the year ago period.

We generated earnings per diluted share of $1.21 in the second quarter, an increase of 15.2% from the year ago period. Please turn to slide 4 for a review of our business segment results.

Broadcast revenue in the quarter was $219.4 million as compared to $252.3 million in the year ago period, a decrease of 8.6% after adjusting for changes in currency rates. Strength in our broadband and commercial audio/video businesses partially offset the weakness for Grass Valley products in the professional broadcast market.

EBITDA margins were 14.4%, increasing 200 basis points year over year, a result of productivity gains. Grass Valley demand has been impacted by a stronger US dollar and a number of important challenges facing our traditional customers.

On a full-year basis, we now expect revenue outside the United States to be down 18%. This is notable because these markets are currently not facing many of the industry-specific challenges that I'll address momentarily.

For some of our customers, capital spending has been impacted by government austerity programs, and in other areas -- Russia as an example -- they simply don't have sufficient purchasing power to make necessary investments.

In the United States, where we expect revenue will be down 8% on a full-year basis, our customers are dealing with the reality of reduced advertising spending, fewer subscribers and unbundling. As a result, many of our customers have redirected their capital budgets to fund their own over-the-top platform.

Although a consumer trends that appears to be permanent, this has no impact on the long-term need to invest in high quality content. With nearly two-thirds of grass Valley's revenue tied to the live production of sports, news and live entertainment, we are confident this is a pause in spending rather than a permanent reduction.

Moreover, project win rates are healthy and stable, and the funnel continues to build, albeit partially the result of fewer projects being awarded than typical.

It's important to note that while these new consumption models negatively impact Grass Valley in the short term, our broadband connectivity business, brand name PPC, sees continued growth ahead from the increased need for higher bandwidth and more robust infrastructure. Our broadband component of this platform grew revenues by 5.2% on a year-to-date basis.

Shifting business platforms, I'm very pleased with the results from our enterprise and network security segments with organic revenue growth of 4.2% and 10.9% respectively, both on a year-over-year basis. Congratulations to both teams on a strong quarter.

The US nonresidential recovery is having a favorable impact on our enterprise business, and the team is managing their resources well with solid execution. End customer demand remains robust as evidenced by 6% sales growth through our distribution partners.

Equally strong was revenue from connectivity solutions within the enterprise platform growing by 12% during the quarter, highlighting the continued shift to a higher value portfolio.

The network security platform once again exceeded our expectations, providing revenue of $39.6 million and EBITDA margins of 22.1%. I'm particularly pleased with our progress within the utility market where the partnership between Tripwire and GarrettCom is clearly working. Here Tripwire sales more than doubled, and our industrial IT platform drove 18% revenue growth, both year to date. Customers are racing to comply with upcoming NERC standards, and we're very well-positioned to help them protect their critical infrastructure.

Revenue within our industrial platforms on a combined basis was up slightly during the period. Project revenue from customers within oil and gas applications represent approximately 8% of the two platforms combined and declined by approximately 20%.

Moreover, project win rates within our industrial connectivity platform have fallen as certain competitors that are more exposed than us to the oil and gas market have gotten more aggressive as they battle factory utilization challenges. The industrial platforms also derive approximately 20% of their combined revenue from machine builders. Revenue declined here in the mid-single digits. These customers are impacted by a weak manufacturing sector, a strong US dollar and softer demand within China.

We anticipate these issues to persist for the remainder of the year. A clear bright spot, however, is our MRO revenue, which represents approximately 25% of the combined platforms revenue. It grew by 6% year over year. This is clearly faster than market and is an indication of outstanding execution by our industrial sales team.

I will now ask Henk to provide additional insight into our second-quarter financial performance. Henk?

Thank you, John. I will start my comments with results for the quarter followed by a review of our segment results, discussion of the balance sheet and close with our cash flow performance.

As a reminder, I will be referencing adjusted results today.

Please turn to slide 5 for a detailed consolidated review. Second-quarter revenues were $598.5 million, a decrease of $6.6 million or 1.1% from $605.1 million in the second-quarter 2014. On a constant currency basis, revenues increased 5.2% with acquisitions contributing $53.3 million in the quarter.

Currency headwinds of $38.2 million on a year-over-year basis offset much of this benefit. On an organic basis, revenues declined 2.6% from the year ago period. Sequentially, revenues increased $29 million to $569.5 million, in line with typical seasonality.

Gross profit margins were at an all-time record of 41.7%, increasing 470 basis points from the year ago period due to the successful execution on our M&A strategy. Sequentially, gross profit margins increased 110 basis points due to the favorable impact of lower input costs.

Second-quarter SG&A expenses were $125.2 million or 21% of revenue. After adjusting for the impact of currency acquisitions, SG&A expense declined $3.3 million on the year ago period, primarily a result of productivity initiatives implemented in the prior year.

R&D expenses for the quarter were $36.2 million or 6% of revenues. This represents an increase of 100 basis points year over year as a percentage of revenues as we continue to invest in more innovative products and services for our customers.

By the challenging environment, the Company generated record EBITDA margins of 16.7%, up 90 basis points year over year and [120] basis points sequentially.

The acquisition of Tripwire had a favorable impact of 60 basis points on a year-over-year basis, while the other platforms have been executing well on productivity initiatives, allowing for an improvement of 90 basis points.

Net interest expense for the quarter was $24.8 million, an increase of $6.7 million year over year, a result of the additional senior subordinated notes issued in June and November of 2014. Given the current exchange rates, our capital structure provides for an expected interest expense of approximately $25.5 million for the quarter going forward.

The adjusted effective tax rate for the second quarter was 18% compared to 23% in the prior year. For financial modeling purposes, we continue to recommend using a 20% effective tax rate for the third and fourth quarters, resulting in 19% tax rate for the full-year 2015.

Income from continuing operations per diluted share was $1.21, an increase of 15% from the year ago period.

Please turn to slide 6. I will now discuss revenues and operating results by business segment. Broadcast Solutions generated revenues of $219.4 million during the second quarter. Compared to the year ago period, revenues decreased $32.9 million from $252.3 million. Organic revenues declined 8.6% on a year-over-year basis.

Grass Valley is navigating both the impact of a stronger US dollar on international demands, as well as an evolving consumption model and its near-term effects on the allocation advertising budget.

EBITDA margins of 14.4% within the Broadcast segment increased 200 basis points year over year and 70 basis points sequentially. The year-over-year improvement is a result of productivity improvements identified and executed following the addition of Grass Valley last year. After a thorough analysis, we've identified an additional [$30] million in annual cost savings at Grass Valley, which provides for a more [focused] broadcast platform margin in the current business environment.

The areas of focus are within manufacturing overheads, general and administrative and sales and marketing in specific regions. We expect a benefit of approximately $0.13 in EPS this year with the majority occurring in the fourth quarter.

Required investment will approximate $30 million, much of which will impact free cash flow in the second half of this year. The income statement impact of required investment will be excluded from our adjusted results.

Our Enterprise Connectivity segment generated revenues of $117.3 million during the second quarter, a decrease of $4 million year over year from $121.3 million and an increase of $12.6 million sequentially. Organic growth was 4.2% on a year-over-year basis and 12% sequentially.

Please note that the year-over-year performance includes headwinds from portfolio actions initiated last year.

The Enterprise segment generated record EBITDA margins of 18%, an increase of 180 basis points year over year and 470 basis points sequentially. The improvements both year over year and sequential are primarily the result of an improved portfolio and leverage on both.

In addition, margins were favorably impacted sequentially by the timing of lower input costs. We believe that EBITDA margins on a year-to-date basis of approximately 16% is representative of the platform performance in the remainder of the year.

Revenues within our Industrial platforms increased 30 basis points organically from the year ago period, and EBITDA margins increased 100 basis points on a combined basis. Industrial Connectivity segment generated revenues of $160.9 million. Organic revenues declined 3.1% year over year, largely due to the decline in oil and gas margins.

EBITDA margins of 17.8% increased 130 basis points year over year and 200 basis points sequentially. Decreases are a result of productivity improvements. Industrial IT segments generated revenues of $61.3 million. Revenues increased $8 million year over year with acquisitions contributing $10.3 million. This was offset by $8.6 million of currency headwinds. Revenues increased 12% organically, a solid performance that benefited from an easier comparison.

EBITDA margins of 16.6% were essentially flat year over year and declined from 60 basis points sequentially. The sequential performance includes investments in customer-facing resources, as well as product innovation, allowing us to capture share on an ongoing basis.

And finally, our Network Security platform continues to perform well, generating revenues of $39.6 million, up 11% on an organic basis. EBITDA margins were 22.1%, which included an incremental investment of $1.4 million in product innovation, allowing us to execute the strategy ahead.

Tripwire is off to a solid start and is on track to meet expectations shared with you at the outside of this year.

In summary, I'm pleased with our ability to expand EBITDA margins across all of our platforms, especially in this environment.

If you will please turn to slide 7, I will begin with our balance sheet highlights. Our cash and cash equivalents balance at the end of the second quarter was $208 million compared to $445 million in the year. Inventory turnover of 6.0 turns down 0.9 turns year over year, driven primarily by the insourcing of manufacturing at Grass Valley.

Days sales outstanding 64 days in the second quarter, an increase of one day year over year. PP&E turnover was 7.3 turns, flat year over year. Our debt balance increased $360 million or $1.56 billion in the second-quarter 2014 to $1.92 billion in 2015. Net leverage was 3.9 times net debt to EBITDA at the end of the quarter. Our goal of improving this metric to a level of approximately 3.0 in the near-term remains intact. Please turn to slide 8 for a few cash flow highlights.

Cash flow from operations were $53.3 million compared to $43.7 million in the prior year period. Net capital expenditures for the quarter were $11.7 million, increasing $1.1 million compared to last year. Free cash flow was $41.6 million in the second-quarter 2015 compared to $33.1 million in the prior year period, an increase of 25%. We expect free cash flow in fiscal 2015 to be approximately $180 million. This includes the impact of restructuring investments made at Grass Valley, and as a result we expect free cash flow to be at 85% of net income for the full year.

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

Thank you, Henk. Please turn to slide 9 for our outlook regarding the third quarter and full-year 2015 results, which have been updated to reflect the current revisions I discussed earlier.

We expect third-quarter 2015 revenues to be between $580 million and $600 million, and adjusted income from continuing operations per diluted share is expected to be between $1.05 and $1.15. For the full year, we now expect revenues between $2.36 billion and $2.39 billion. Slightly more than half of the reduction in revenue can be attributed to the Broadcast platform with the remaining amount in the Industrial platforms. The expected range of adjusted income from continuing operations per diluted share is now at $4.70 to $4.90, which represents earnings growth between 11% and 16%.

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

(Operator Instructions). John Quealy, Canaccord Genuity.

First, on broadcasting within Grass Valley, thank you, guys, for giving us some updates and some micro and macro commentary, but can you dive deeper? I know there's been a change in the channel or some recharacterization of the channel since Grass Valley has been consolidated under the brand. Did any channel issues play into the lower visibility here, or is it clearly some of the macro and then I have got some follow-ups?

John, that's a great question. We believe it's macro, and I'll tell you why we think that. So, first of all, the size of the funnel that we track, the project funnel that we track, has been steadily building. On the surface, that would seem like all good news. However, one of the reasons it's been building is because less has been coming out of the funnel than typical. Our win rate is about 50%. That's historically where we typically been, so we're winning half of the opportunities that we pursue. That's also a healthy level.

And if we look at our best benchmark, which is [Eberts], the most recent data that they released was through April, their orders were off 28% on a year-over-year basis. And, of course, in this segment, we have very intimate relationships with our customers.

So we don't feel like we're losing share. That, of course, doesn't mean that we're not incredibly disappointed by the results. But we think what it means and what our customers are telling us is that in the face of reduced advertising spend, particularly in the US, with new entrants around streaming and over the top, they have diverted more of their CapEx towards building their own over-the-top solutions, and that their needs for infrastructure, the kinds of things we provide like cameras and light switchers and routers, those sorts of things, they are postponing those investments for some time.

Now, they can't postpone them forever, and we are confident that the volume will return. But it's difficult for us to predict, and our orders in the quarter were disappointing. So we fell short of revenues, but we fell short even greater on the order side. And, therefore, it became increasingly clear to us at the end of June that it was going to be difficult for us to achieve our budgeted results in the second half from a broadcast point of view.

Let me also emphasize that the revenue decline on a full-year basis that we are projecting is larger outside of the US than it is in the US, and those countries are not dealing with a lot of the things I just mentioned. And so they are dealing with things like austerity in Western Europe where we've seen declines. I mentioned Russia where they are dealing with a very weak currency. Of all places Saudi Arabia, for example, has reduced their spending significantly as their revenues from oil and gas have come down.

So we do believe it's macro, we do believe it's temporary, but we didn't see a way forward to offset it in the back half of this current fiscal year.

Okay. Thanks. And then if I could go back to the cost out program that you mentioned, so I just want to make sure I'm clear. $30 million of expenses or investments coming in the next two quarters, is that right, with the benefits of that just $0.13 by the time we get to Q4? Is that the right math?

So the math is to follow, and I'll let Henk clean it up to make sure that I haven't misstated. So we plan to invest $30 million that we believe will generate $30 million in annualized cost reductions, and we believe that in this current calendar year, we'll realize $7 million of reductions, which is approximately $0.13.

That's correct, John.

Okay. But the $30 million incurred in the back half of 2015?

So I would expect the $30 million to be incurred substantially complete by the end of this calendar year.

I got you. And then last question. So, Henk, debt to EBITDA calculations are I know there's been prior to this outlook, there was a hope to get closer to under the 3 times, and this is clearly going to put a dent in that.

What are your expectations about debt to EBITDA? You gave us some free cash-flow guidance, but how should we think about the deleveraging initiatives in the next couple of quarters? Thanks, guys.

Yes, that's a good question. So we remain committed to get to 3.0 net debt to EBITDA leverage levels. By year-end, will be closer to 3.3%, 3.4% based upon the current planned investments in restructuring programs.

Does that answer your question, John?

Yes, I'm good. Thanks.

Shawn Harrison, Longbow Research.

I wanted to delve into the implied fourth-quarter guidance because at least what the market is telling us this morning is they are not exactly sure how you can bridge the gap between the third and the fourth quarter. And you gave us $0.13 in terms of restructuring benefits, but there's another $0.30, and a lot of that looks to be volume leverage or other factors. And so maybe if you could just help me just bridge the gap between the third and fourth quarter? And I think there's also an implied high single-digit sequential revenue uptick. So any granularity there would be helpful.

Yes, Shawn, so it's an obvious question. So, as you correctly pointed out, we see benefit from Q3 to Q4 in the cost reduction program with Grass Valley, and then there are two other major items in Q3 to Q4.

First is the seasonal pattern of Tripwire is much stronger in Q4 typically than Q3, and now the Tripwire is on Belden's calendar, which doesn't end on the month, on the calendar month but rather is a 5-4-4 progression. It moves a little bit more to Q4 as our federal customers typically spend a lot of their money by the end of September, and that would fall into our Q4. And then also Grass Valley typically has a stronger Q4 than typical.

We have guided such that it would be a typical pattern. To be honest with you, it wouldn't surprise me given how they've spent money this year that it might be a little bit more pronounced from Q3 to Q4, but we've not put that into our guidance. And those are the two major drivers from Q3 to Q4.

I guess to that final point, John, and Grass Valley seeing an uptick sequentially given what you've seen to date and kind of the implication of the third-quarter guidance. Is there something that you're seeing in the order patterns or projects being released that gives you the confidence to say you'll at least see some type of budget flush?

So we are entering the third quarter, Shawn, with more backlog than we entered the second quarter. So our book to bill at Grass Valley in Q2 was 1.15. So we are entering Q3 with a much healthier backlog book than we entered Q2, and we have, by historical patterns anyway, we've got a much better backlog situation in Q4 than we had entering Q2 as well.

As I mentioned earlier, win rates have been very stable. They haven't really changed at all. What has been more difficult for us to predict than typical, Shawn, has been the amount of projects that have been let in a given month. They've been fairly erratic, and customers have moved things around. In some cases, they've canceled things. In other cases, they've just postponed them.

But our customers do typically pay attention to how much they spend in the full calendar year because that ends up being part of the equation for how much capital they have next year.

So we are mindful of the fact that we typically see a peak towards the year, and that, of course, 2016 is the year of the Olympics and the US presidential election. And so some of these investments are going to have to be made to support that, and typically that starts happening in the second half of the year prior. So, those two things, Shawn, I'd say give us comfort and confidence that this guidance is appropriate given the circumstances that we are encountering.

And then as a follow-up, just the Grass Valley and cost reductions, it seems very appropriate when the other half of your guidance is probably about a 5-point cut in the revenue outlook for the industrial businesses. Has there been a thought there of also revisiting the cost structure? Because who knows about low oil prices and how long that will persist along with what's going on in China. Some of this demand weakness may be here with us for a while.

So we are closely examining cost opportunities in all of our businesses, but as you point out, particularly within industrial connectivity, we think there's opportunities for us to address the cost structure in a way that wouldn't require restructuring these like is the case in Grass Valley.

So we're going to watch that closely. We're going to make certain we protect our margins, and we're -- I think -- Shawn, I think we demonstrated over an extended period time that we're good at keeping a close eye on the cost structure, keeping a close eye on the margins, and we'll do that absolutely with the industrial businesses as well.

Very helpful, John, thank you.

Yes, thank you.

William Stein, SunTrust.

Thanks for taking my question. I apologize if I missed this. I think someone just recently asked about the big profitability improvement that the guidance implies for Q4, but I'm, frankly, having a bit of trouble understanding the significant decline in profitability in Q3.

You're guiding essentially for about a 1.5% sequential decline in sales, but a 10% hit to EPS. Can you sort of walk us through the decrementals? What's causing this? Do I have my numbers right? Thank you.

Yes, so let's walk you from Q2 to Q3 and then let's also remind you the Q3 to Q4. So from Q2 to Q3, we're expecting the EBITDA to be essentially unchanged. However, we are expecting the tax rate in the third quarter to be higher than it was in the second quarter, and we're expecting just a tad more interest expense in the third quarter than the second. So the reduction in profitability implied in our Q3 guidance as compared to Q2 is all below the EBITDA line.

If you look at Q3 to Q4, we have a step-up in profitability as a result of the cost reduction programs associated with Grass Valley. We also have seasonality with Tripwire, and we have a little bit of seasonality with Grass Valley.

And so that's what's driving the profitability improvement from Q3 to Q4, and I think if you put those together, I think we can help you really kind of model that and hopefully make it clear to you on how we came up with those numbers.

That's really helpful. Maybe if I can ask, given sort of the dislocations we are seeing, could you give us some directional view on segment revenue expectations that the Company has for the coming quarter?

So if you look at the full-year guidance -- let me start with the full year -- we have really no change in expectations with either Tripwire or Enterprise. In fact, if Enterprise were to miss, I think they would miss probably on the high side. They've got good momentum. They've got good volume growth. Execution is good.

On the Broadcast side, the issues are isolated to Grass Valley. We still think that we're going to have very strong growth in broadband or PVC. We still feel very good about our commercial AV and our broadcast cable business. And, therefore, the reduction in revenue in the Broadcast platform is isolated to Grass Valley. So roughly speaking, we think the Grass Valley business on a full-year basis is going to be down somewhere around 15%.

The other reduction is in the Industrial platforms in combination, and that's a result of us having a different view on our project business, which represents approximately 50% of the total of the two platforms. So we believe that business is going to be down on a full-year basis approximately 3%.

If you have noticed, there's been quite a few other industrial companies that have come out in the last two weeks that have been expressing similar issues or concerns with regard to strong US dollar affecting exports, oil and gas being weak and also leaking into other areas of the economy. So we feel like that project business is going to be down on a full-year basis. We began seeing a reduction in our project funnel within our industrial platforms starting in May. That's when it first started declining, and we also saw a slight reduction in our win rate as some of our traditional cable competitors who have more exposure to oil and gas began being more aggressive in certain projects as they were trying to deal with some of their own factory utilization issues. Graph

Our machine builder business is roughly 25% of total. We believe that business is going to be down maybe 1% on a full-year basis. US machine builders struggling a little bit because of the strong dollar. The German machine builder is probably helping. We are doing a little bit better, has a weak euro, although everybody dealing with a weaker China.

And then our MRO business, we think that will continue to be healthy. It was healthy in the quarter. It was up 6% in the quarter. Very strong growth. I think that will continue.

So in summary, roughly $40 million to $50 million out on Broadcast all Grass Valley, $40 million to $50 million in the Industrial platforms. Probably three-quarters of the Industrial being due to Industrial Connectivity and probably a quarter will be in Industrial IT.

That's very helpful. Thank you. A couple of other quick ones, if I can. First, bigger picture, you've been very acquisitive in the past. You tend to like to get towards your target leverage before you go lever up yet another deal. Should we expect -- I think, Henk, you said that you think that by the end of the year, you're looking to get to more like 3.3 to 3.4 turns of leverage. Did I get that right, and does that mean another acquisition is much less likely this year?

So, what Henk said, you're correct. He said that our current plan would be to exit the year with leverage somewhere around 3.3 to 3.4. I think it's still possible, though, we can do an acquisition this year. Although I think the kinds of acquisitions we would do this year would be smaller and bolt-on in nature and, therefore, tend to be higher ROIC types of opportunities like, for example, what we did with Coast last year or like what we did with ProSoft, those smaller kind of opportunities but higher ROIC, more quickly accretive. I think that's possible yet for us to do in 2015.

That's helpful. If I can squeeze one more in on Broadcast again. You didn't mention the transition to IP that I think this architecture change. My checks have been saying that this is part of the delay in purchase plans. Do I have that right, or am I misinformed? And to what degree, if I'm right, is this impacting demand today, and is it more of a permanent thing or a brief issue? Thank you.

So I think you're right, and you're right. I didn't mention it, and I probably should have. I do think that our customer's desire to convert from proprietary to IP is part of the delay. To be frank, I think it's probably less of an issue than some of the other things that I mentioned, but there's no question we have customers that have said we like your -- we do like your IP solution. We'd like to use your IP solution, and we would like to see it get further along in its development before we make that investment. But I do think that if our customers were committed to investing in infrastructure in studio upgrades, they probably would do it even if they weren't converting to IT.

So I think it's real. I think that it's minor, though, by comparison to some of these other issues, and I have a high degree of confidence that the IP solution that we are developing is unique and one that will be well received by our customers. We've heard that feedback already from our customers.

Steven Fox, Cross Research.

First of all, in terms of the Industrial markets, you provided a lot of good information on what's going on. Some companies have talked about weakness is more of an inventory cycle. Others have talked about it similar to how you have in terms of just weaker demand. Can you give us any kind of sense for where you think the bottom is in this relative to what you're seeing in your own orders? I understand the updated guidance, but why couldn't some of these trends bleed into next year as well? And then I've got a follow-up.

Yes, Steve, so I think that we should expect that our MRO business will remain reasonably strong. That's typically what happens in periods like this where people are a little bit more cautious about CapEx, and so I would expect that our MRO business will remain strong as it was in the second quarter.

I think our project business is going to remain challenged as long as the oil and gas environment is the way it is. I didn't mention it, but our business in Brazil, for example, is down 50% because that's quite a bit of oil and gas exposure. And I don't know how long this oil and gas situation is going to last. I've read some credible comments from folks that it may take 24 months for us to reach equilibrium again between supply and demand, but there's obviously a lot of factors, including the recent agreement with Iran, that might throw a wrench in all that. So I don't know for sure.

And then on the machine builder side, I think it has a lot to do with China. So clearly the weak euro is a really good thing for our customers who build machinery in Germany. However, if there is not anybody buying that machinery, it doesn't really translate into a lot of economic gain.

So I think there's a good chance that some of the weakness that we are experiencing in both project, as well as machine builders, could lead into 2016. We are obviously watching that very carefully, but it wouldn't surprise me if we see that bleed into 2016.

On the other side, it wouldn't surprise me if the strength that we see in Enterprise and Tripwire doesn't continue into 2016 as well.

That's helpful. And then secondly, just getting back on the Broadcast business, so it seems like HBO has moved over the top has been proven to be a momentous event since the months it was launched. It seems to be driving some of the pressures that you described. Any chance you can sort of put it into perspective how many of your customers are sort of delayed because of over the top in the US? Put in the international side to talk about sort of the secular pressures and whether that also continues into the next year or whether this move is more broad than maybe we understand. Thanks.

I think in the short run, we have almost all of our customers that are directing a considerable amount of their capital budget towards their own over-the-top solutions. And I think that's somewhat temporary and episodic as they do that buildout.

I think the bigger long-term issue for our customers is making sense of some of the advertising spend that they're trying to wrestle with. I think in the end, however, two-thirds of our Grass Valley revenue is used for content creation. And so that's live sports, live news and live studio production. And regardless as to whether you consume that content over the top or in traditional linear programming, that I think will be the prime differentiator for people winning share or not and then ultimately being able to collect fees.

We just saw Netflix, for example, say that they are going to have to increase prices as they have to renegotiate the prices they pay for content, and they are, of course, investing in their own content. But I believe that all the people investing in content is going to continue to be a positive trend for the Grass Valley business, and therefore, I think much of what we're seeing right now is not permanent. It's temporary. And, therefore, we characterize it as a pause or a deferral rather than a permanent production.

But you haven't seen any positive offsets from that yet given the over-the-top spending either, is that correct?

Yes, so I would say to this point the amount of benefit that we would see from over the top is minimal. The investments that they're making for over the top is setting up the infrastructure to manage the consumption of that content.

So we get occasionally involved with some of the file configuration and so forth, but our business is predominantly exposed to content creation, and that's where they are reducing their CapEx right now so that they can pay for the over the top.

Understood. Thank you very much.

Gary Farber, CL King.

Just a couple of questions. It sounded like on the call you said the international markets would be down 18% year over year, in North America down 8%, and if that's correct, can you kind of say how you thought about those markets before this quarter?

So that's just for Grass Valley.

That's just Grass Valley. And can you give us a sense of (multiple speakers) --

Just Grass Valley.

So the Grass Valley business we expect on a full-year basis to be down 18% outside of the United States and down 8% in the United States.

And what would you have expected before?

So I would say one quarter ago we would have expected the emerging market business to be down probably somewhere between 5% to 10%. We now view it more like down 15%.

I would say that a quarter ago, we would've thought the European business was going to be flat, and now we think it's going to be down more like 15%. And I would say a quarter ago we would've expected the North America business to be up slightly, and now we feel it's going to be down 8%.

Okay. And just whether in Grass Valley just sort of broadly in broadcast to date before this quarter, what kind of visibility -- because it sounds like you have a backlog -- so what kind of visibility do you typically have? Is it a couple of months or is it less?

So this business has backlog that can go out pretty far, and it varies by how much you -- how it kind of layers into the quarter, Gary. So, going into the second quarter, we had a higher book and turn assumption. So that would be more orders that we would ship in the quarter than typical but not out of norm. It was a little bit more aggressive but not out of norm, and we had a project funnel to support that.

We did have a book to bill at 1.15, and part of the reason why we weren't able to ship more in Q2 is the orders came in very late. So we got the orders in the quarter, but we weren't able to turn them in the quarter, and that's one of the reasons why we are entering Q3 with more backlog than we entered Q2.

Okay. That's very helpful. And just one question on China. Even if it sort of qualitative in nature, can you talk about your industrial end markets, how tied are they to Chinese demand, do you think?

So I'd say on a direct basis, our industrial businesses, our Industrial Connectivity business has about $60 million year in Asia. Most of that's going to be China. Our Industrial IT has another $60 million a year. Most of that's going to be to China. So that's $120 million direct into China, and then you have got machine builders in Europe and the United States, and those machine builders today represent may be $200 million of our total. So I don't know, let's estimate that half of that $200 million is somehow being affected by China. You're probably looking at somewhere around $300 million or so, both direct and indirect, that might be exposed to China.

Right. Okay. Thank you.

You see what I'm doing there, Gary, right? So I'm doing my best to try to get you the right answer, but there's going to be some estimates in there in terms of what I did.

Yes, no, I appreciate you getting so quantitative because a lot of people would have just given the qualitative picture, but I appreciate it. Thank you.

Matt Tractenberg, there are no further questions. Please continue.

Thank you, Don. That's going to do it for us today. We appreciate everyone joining today's call. If you have questions, please reach out to the IR team here at Belden. Our email address is investor.relations@belden.com. Have a great day, everyone.

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