CommScope Holding Company Inc (COMM) 2002 Q2 法說會逐字稿

Ladies and gentleman. Thank you for standing by. Welcome to the Allen Telecom Inc. second quarter results conference call. During the presentation all participants will be in a listen-only mode. After review you will be invited to participate in the question and answer session. At that time, if you have a question please press the 1 followed by the 4 on your telephone. As a remainder this conference is being recorded Thursday August 1, 2002. Your speakers for today are Robert Youdelman, Executive VP and CFO, and Robert Paul, President and CEO. I will now turn the conference over to Mr. Youdelman. Please go ahead sir.

Good morning everybody. Let me start the conference call with the traditional forward-looking statement. Statements made during this conference call, which are not historical in nature, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding the company's future performance and financial results are subject to a number of risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Factors that could cause the company's actual results to materially differ from forward-looking statements are listed in our press release and additional package contained in our Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC. At this point, let me turn the conference over to Bob Paul to get into some of the substance.

Well, the second quarter ended up in most respects surprisingly close to our expectations considering the uncertainties that we have in this industry right now. While revenues were up 2 percent our traditional businesses excluding geolocation, which usually will follow more closely industry wide trends were up 9 percent over the first quarter 2002 levels. The two major improvements in the quarter versus our expectations were number one, our cash generation of 24.5 million and what that does for our financial flexibility going forward and secondly the strong increase in backlog and the confidence that gives us at least for the near term. Sales for the second quarter were 91.9 million versus a 105.1 million in Q2 2001, which was the point in time when revenues were falling from first quarter through the fourth quarter of last year. The sales increased sequentially 2 percent from the 89.9 million in the first quarter of this year. This sales increase was in line with the updated guidance we provided in early June. All the product line sales are in our press release so we won't go over those in great detail, but which certainly does show up in terms of the growth in the non-geolocation businesses. The traditional sales in Q2 excluding geo were up 9 percent, geo at 7.7 million to several customers compared with 12.5 million in the first quarter of 2002 and of course none in the year ago second quarter. This sales decline in geolocation was fully anticipated in our earlier guidance and was discussed in our first quarter conference call. The Repeaters and In-Building Coverage sales increased 27 percent compared with prior year second quarter levels and was really the only one of our businesses that was [bucking] that trend in our industry and was up 17 percent from the first quarter to the strong sales in both Europe and the United States. Test and measurement products also were particularly strong in the second quarter. The base station subsystems and components have suffered the most from weak infrastructure build outs and were down 35 percent from prior year levels. They did increase 6 percent from the first quarter 2002 and hopefully we have seen the bottom of the [Indiscernible]. Base station and mobile antenna sales decreased 20 percent year over year but were up 12 percent from Q1 2002 and wireless engineering and consulting services were down 47 percent year over year and down a million dollars from Q1 2002. Now the Euro did strengthen versus the dollar during the second quarter and thus in 2002 compared with the prior year and prior quarter rates and sales would have been $1.9 million lower in the second quarter 2002 if the rates remain the same. The change in currency however had no impact on EPS. International sales were 49 percent of total sales in Q2 2002. Strong sales of geolocation products and the acquisition of Bartley accounted for most of the increase in US sales. International sales were still weak at the levels primarily due to the lower European OEM sales, although, they did increase 12 percent over Q1 2002. The backlog increased to a 118.2 million on June 30 from 95.7 million at 03/31/02. The backlog increase from the first quarter is primarily due to the strong orders for geolocation products. As well as improved order flow for Base Station Subsystems and Components and Base Station and Mobile Antennas products. In Q2 2002 we did incur structuring costs of $1 million at several of our businesses which are included on the SG&A line in our R&L. These are expected to generate 6 to 7.5 million of annual cost savings. In addition to actions taken in Q2 2002 over the previous six months we initiated other actions that will generate annual cost savings of $5 to $6 million. The gross profit percentage at 24 percent was up just slightly from the first quarter 2002 at 23.6 percent. And basically this was due to the improved margins on test and measurement products sale and were partially offset by lower Geolocation sales which also have above average gross profit margins. Decline in margins from Q2 2001 is due to the lower [Indiscernible] sales volume as well as increase price discounting particularly with our Base Station Subsystems and Component product lines. R&D costs remained flat with the first quarter down slightly from the second quarter of 2001. And the SG&A spending that we will have defaulted not amortizing goodwill beginning in January 1 of this year. We previously had goodwill charges of approximately $2 million for the quarter which had managed about 7 cents per share in the prior quarters for manageable total about 26 cents per year on annual basis. At this point of time we completed the initial valuation of our goodwill as required by the accounting rules as of January 1, 2002. And under this initial evaluation we determined that we may had a non-cash goodwill impairment charge of somewhat between $0 and $5 million that will be booked second half of 2002. We complete the goodwill evaluation. This charges does not affect the company's operation and has no impact on current or future cash flows.

Interest in the second quarter this year was 1.8 million as compared to 2.4 million in the first quarter. The global interests rate continued to the second quarter and of course we benefited from the procedure received when we close our preferred stock offering in late March. And as well as in the preferred input cash flows in the second quarter. The borrowings on our domestic revolver continued to come down for us and domestic rates at a borrowed rate has continued to come down. And the domestic rates for the second quarter of 2002 was down about 150 basis points as compared to the second quarter a year ago. Our affective cash rate continues 35 percent. It is little bit lower than the 2001 affective rate due to the fact that the goodwill sense, which was, not tax deductible no longer [Indiscernible] yeah.

Our net income in the quarter was a loss of 2 cents per share excluding those restructuring charges of 2 cents per share that Bob talked about a few minutes ago, which exceeded the first call consensus [Indiscernible] which were about 3 cents per share, [Indiscernible] loss for the quarter we had 2 cents loss versus 3 cent loss in the first call analysis. Excluding [Indiscernible] acquisition since our Strong first quarter of last year that in March at look at future sale -- sales expectations.

Let me go through some of the balance sheet factors. At June 30 we had cash balance of [Indiscernible] 22 million and total debt of 87 million. That compared to our March 31 balances at the end of the first quarter of this year of cash at $14 million in total dept of 103 million. The net improvement in our total debt levels in Q1 over Q2 levels of 152 million which due to a combination of one the $47 million net expenses we received from the preferred stock acquisition in March 2002 as well as the cash flow between generated in our business. Cash flow as measured by the increase in the cash in the reduction of total debt improved during the second quarter by 24.5 million. While balance sheet does not show all through the stronger Euro receivable to the inventories on constant exchange rate declined by $10 million from Q1 to Q2, if the Euro rate had remained constant. In addition we collected a large cash receivable in Europe. We continue our focus on cash flow and working capital, and are hopeful of modest improvements in the second half of this year as well. Turning to receivables at June 30, our [Indiscernible] receivables were $92.6 million as compared to $94.3 million at the end of the first quarter, that represent 92 days outstanding versus 96 days at the end of the -- first quarter -- cash generation [in those two] numbers of 1.8 million that was very comparable for the first quarter with CapEx of 1.9, depreciation and amortization was 3.9, and we had a $2 million on cash benefit. CapEx continues to be significantly reduced around the company in our second quarter as we respond to the generally weak business conditions. Depreciation and amortization were flat in the second quarter compared with the first quarter, however, [Indiscernible] of 2002 is lower than 2001 numbers principally again due to what we mentioned before [the fact] in 2002, we were not amortizing goodwill. At this point, let me turn to some of the individual business product lines and start with the Base Station and Subsystems and Components. The sales numbers [here] to the second quarter of this year were $35.7 million versus $33.7 in the first quarter of this year. The sales have continued to be weak to the fourth successive quarter as OEMs production levels are down across the board. Most of our original equipment manufacturers and their customers are extremely reluctant to commit any long-term outlook and our visibility continues to be quite short. The 2002 numbers include [Indiscernible] which we closed on the acquisition of [Indiscernible] which we closed on in late December of 2001. Looking in through this business with some of the underlying factors, the UMTS or 3G sales are still relatively weak, but we are beginning to see some gain in momentum. In the second quarter of this year, UMTS sales were about 27 percent higher than they were in the first quarter, but they still are not in the level that indicate a major roll out of 3G products and systems. During the first quarter of 2002, we transferred all of our production from our manufacturing plant in Sparks, Nevada to the acquisition plant at Bartley in Amesbury, Massachusetts, and during the second quarter by the end of April, the Sparks plant was completely closed down. In addition, we had another round of head count reductions for this business in the second quarter, and we expect to realize annual cost savings from the -- range of these actions about $8.5 to $10 million per year, and we started to see the realization of these savings in the second quarter. Due to the extremely weak sales levels in this product line, we have responded by lowering production levels, lowering our head count, and reducing our inventory levels from the peak levels - a little over a year ago at the end of the first quarter of 2001. In total, we reduced inventory by about $24.5 million [excluding] the inventory that came with the Bartley acquisition. Notably in the fourth quarter of 2002 -- and fourth quarter of 2001 and the first quarter of 2002 we had those inventory reductions. Again that inventory reduction would have been slightly larger from the using [Indiscernible] and exchange rates on the Euro, and we continue to look for more modest reductions during the balance of this year in the inventory levels. Backlog in this product line increased from about $25.5 million in March -- end of the March to about $35.5 million at the end of June due to some firming in the underlying market, however, the OEMs continued ahead to [Indiscernible] long-term purchasing commitments, and there continues to be a lack of full visibility for almost everybody in the wireless industry. Well after this [dipped] about the increased activity, in our changed plans and some our customers requesting us to ramp up production from current low levels over the next few months and I think on a general basis were cautiously after this [thinking] sales were increasing, quarter three over quarter two of this year but the improvement likely to be somewhat modest. [U&TH] sales should provide a boost to our sales as they continue to increase in the second half of this year over the first half 2002 run rates. Turning now to our Repeater and in building coverage product line, our sales in the second quarter was 26.3 million versus 22.5 million in the first quarter of this year. The continued strong sales in the second quarter resulted the shipments of [Indiscernible] repeaters in Italy and as mentioned early the strong tested measurement sales in the US market place. Quarter three sales, next quarter sales are said to be somewhat lower than the very strong shipment levels in Q2 due to a combination of some lower expectations on sales of test and measurement equipments due to large order having been shipped in Q2, as well as some delays in project sales in the US market place. One of our products that has been wound up by [Indiscernible] the product name that we use in this business is its [Indiscernible] system, which is successfully ruled out [Indiscernible] projects [for a new distributed and] repeater system. System is a multi operator micro [Indiscernible] distributed and [Indiscernible] system and it can be used for both 2G and 3G wireless communication systems, either indoor or in outdoor locations, but [Indiscernible] multi operators [Indiscernible] for this product line our backlog has come down at this point in time, it declined from 24.5 million at the end of the first quarter, to 18 million at the end of the second quarter, because of the long term nature of the project in this business, we have only now beginning to see a slow down in this business and it has lagged dramatically behind the slowdown in the other parts of the telecom business. Our repeater in building products continued quite strong until this point in time. But at this point, we [Indiscernible] to see with some larger projects having been completed, but were expecting a bit of a slow down as we go in to the third quarter. Test measurement business did get a [Indiscernible] in second quarter deliveries, but we still see in the domestic market place some [Indiscernible] customers placing orders even though the product continues to get very good reviews out in the market place, but the level of orders has just not increased dramatically. I will just turn the call back to Bob Paul at this point.

The sales in Q2 of our base station in Mobile Antenna business at 18.6 million were up from the low point of 16.6 million in the first quarter, it was about 12 percent increase, not withstanding the sales increased the base station Antenna sales were still quite weak due to carriers delays particularly in North America and Latin America as compared to historical run rate. The Q2, 2002 sales were 20 percent lower than prior year, both international and domestic sales were parts of those reduction. Most of our top customers in 2001 have announced capital spending slow downs at least through the first half of 2002. Sales of product support for satellite radio in our Mobile Antenna business were very strong again in Q2, 2002. We anticipate the Q3, 2002 sales will improve slightly from Q2, 2002 levels, due to improvement in both domestic and international orders. However, we have also been notified by one of our largest US customers that certain base station deployments have been pushed out from 2002 to 2003. The market undoubtedly will continue to be difficult. Backlog for this product segment improved from 4.2 million at March 31, 2002 to 9.1 million at June 30, due to a mix of orders from both domestic and international sources. The Mobile Antenna opportunities most particularly in digital broadcast radio continued to be quite strong. Our Antenna special division has released its long haul [truck] Antenna and on glass vehicular Antennas designed for this market. They also have released their micro repeater Antenna kits designed to provide [XM] radio and its competitor serious satellite coverage inside retail establishments. XM radio and serious retailers require repeater solutions to advertise and demonstrate the [FCI ARS] service and support customer demonstrations in a variety of their receiver sets. Strong fields of both Antennas of micro repeaters in Q2, 2002 are expected to continue into the second half as subscriber rates continue to increase. The wireless consulting and engineering business is the one that's probably been impacted the most specifically in the most recent three to six months. Sales at $3.5 million were down dramatically from $6.7 million of a year ago and were actually down over a million from the first quarter 2002. Many domestic carriers have brought in-house, a large portion of their engineering consulting work in order to keep their existing engineering staff busy. In addition commitments to new software in major projects has been slow to come. Q3, 2002 sales are expected to increase slightly from the present levels, but nothing dramatic at this time. Now backlog is not significant for this product line as a result there is very little insight in to what is happening going forward. We are highly depended on the North American carriers where capital is been constrained in all - there is some modest base station deployment programs underway. There are no compared historical run rates and most carriers half the way then will cutback their capital spending plans. As a result of the deteriorating outlook since last fall in North America, we reduced personal [concerts] by 30 percent compared to prior year levels. -- Certainly the most exciting portion of the business is our geolocation products where we were really delighted with the results year-to-date. Just to give you the historical trend, the second quarter of 2001, of course we had no business in these product revenues in the second quarter 2002, which came in $7.7 million. We had shipments during the second quarter to five carriers [Indiscernible] AWS [Indiscernible] advantage including a startup in major deliveries on the AT&T Wireless contract. Q3, 2002, sales will be much higher than Q2 due to the ramp up of activity for more of the business within our backlog and in order to meet specific dates for carriers who are attempting to achieve in order to meet some of their FCC commitments. Sales in the third quarter and fourth quarters 2002 will be quite strong. The backlog at 06/30/O2 continues strong at 54.9 million increased from the 40.4 million on March 31, and there are actually $22 million of new orders that came in, in the second quarter. We received orders from five carriers so far and have additional inquiries from a number of other carriers. At [Indiscernible] part of what is happening in this business in addition to all executing role on our plan is some things that are happening at the FCC. We believe that the FCC is now establishing in deployment schedules for most carriers. The FCC has adopted consent [decrees] with AT&T Wireless in the same year for their TDMA networks which provide for certain minimum deployment of geolocation systems in 2002, 2003, and 2004. In the consent order, these two carriers committed to up to 8000 self-sites by June 2004 subject to their receiving request from local [Indiscernible]. Quarterly reports are due from the next major carriers including the [Indiscernible] request that they have and this next report actually received today, the 1st of August at the FCC. The FCC is scheduled not only the major carriers, but it is now scheduled to two and three carrier deployments starting in 2003. We also believe carriers are under increasing pressure from the FCC to implement a solution and start deploying geolocation capability for their GSM networks, since ELTD technology is encountering some delays. In terms of certain of the competitive solutions, the GPF capable handsets are beginning to be sold in limited quantities and then in few markets by CDMA carriers. However, the carriers' infrastructure to handle this GPF phones in most cases has not yet been activated. Thus far however we have seen no field trials to demonstrate a working hybrid ELTD solutions for the GSM phones as proposed by several GSM carriers. We are now beginning to receive GSM inquiries in considerable interest in our GSM option for our geolocation business.

A quick update in terms of the true position litigation, we are continuing discovery and briefs in that, but certainly no change in our outlook for judgment that their claims are without merit and we begin to believe and continue to believe strongly in our counterpoints. Before we get into such specifics in terms of the outlook for Allen Telecom, I think a few comments on 3G are appropriate. In the past, a number of people in the wireless industry including ourselves have viewed 3G as the next major breakout opportunity for the wireless telecommunication industry. While we still believe in that, I believe that our concerns about the timing of that rollout and the speed have certainly changed as we have watched what happens. While our 3G sales entered best level yet in Q2, they are still nowhere near the levels that are needed for a major rollout. While the OEMs are continuing to predict sizable volume increases for 3G in the near term. Carrier responses seem considerably less exuberant. In part, that because of the cost we are putting in 3G and the lack of available capital that the carriers have in order to put in 3G. A second reason is there seems to be a lack of takeoff by consumers of GPRS. A second reason is that there seems to be a [lack] of take up by consumers of GPRS and [Indiscernible] in those areas where they have been instituted and as a result there is a belief on the part of the carriers that the demand for 3G is one that will develop more slowly than perhaps it was originally thought, and third is certainly some technology and handset questions in the short term that are causing people to be slow to make the investments in the infrastructure. Just recently [Telephonica] and major carrier in Spain with also major investments in systems in South America has announced that we are taking a major right off toward the joint ventures that they have in four major European markets, not Spain but other markets where they had received and bid for -- paid for a 3G license, typically with one or more additional European carriers [Indiscernible] investors. This announcement has been speculated on by a number of people, but I think the important thing to note is that Telephonica is continuing with slow roll out of it's 3G network in Spain and their [whole] concern seems to be not just on 3G and these other markets but rather a new carrier that has no underlying GSM business, is ever going to be able to establish enough of a [Indiscernible] customer base to be competitive. So that will be may be more a comment on not being room free to carrier rather we are going to specific comment on 3G. It will be interesting if they continue to move forward and we get more clarification of just what their concerns where in those markets, but as a result perhaps on our part, the less optimistic 3G roll out in the near term. We are expecting and planning for only slow growth in our businesses with continued margin pressure. Our focus internally continues to be then on cost containment and cash flow with really for support of Geolocation being the major bright spot in terms of short-term future. Having said that we are predicting a 10 to 15 percent sales increase in Q3 over Q2, primarily due to that strong Geolocation product sales. We estimate that we will increase in the Q3 in all of our businesses expect for repeated and in-building coverage products due to our existing backlog in July results. However they will be modest [Indiscernible] into geolocation and [Indiscernible] geolocation would be the prime driver to our growth in Q3. We anticipate that the sales will increase somewhat further in Q4 over Q3. Margins are expected to decline slightly from Q2 2002 levels primarily due to mixed changes. The lower sales of repeater products which have better than average margins and as well as lower sales of test and measurement products are set by -- and also with the higher sales of base station components and antennas which tend to have slightly lower margins of certain products by the higher relocation sales. [Indiscernible] cost should remain flat with Q2 2002 as we will continue to extend the support of new products such our distributed antenna and repeator concepts but we will continue to focus hard on certain other R&D projects. [FG&H] spending in Q3 should be flat with Q2 2002 levels. Cost savings were related to various restructuring efforts were [offset] and perhaps reduce slightly from other cost increase. Interested expense should be approximately $200,000 in Q3 than in Q2 to improve cash flow in the first half of 2002. As a result of all of the above we anticipate that earnings in Q3 2002 will be profitable and in the range of 1 to 3 cents per share. Preferred [Indiscernible] offering a course is slightly diluted to the extend of about 2 cents, but that is included in the 1 to 3 cents per share that we mentioned above and we believe Q4 we then show stronger earnings again than the 1 to 3 cents for Q3, and with that Kim I think we are ready to open it up for questions and answers.

Thank you ladies and gentlemen if you wish to register any questions for today's question and answer session, you will need to press the one and then followed by the 4 on your telephones. [Indiscernible] at your request. If your question has been answered and you wish to withdrawn your following request you may do so by pressing the 1. If your question has been answered and you wish to withdraw your polling request you may do so by pressing the 1 followed by the 3. If you are using a speakerphone please lift your handset before entering your request. One moment please, for the first question. Rich Falera with Needum and Company.

Thank you, good morning. First, good job on the cash flow this quarter. I was just trying to figure out where that was generated from I kind of worked through the stuff but I could see on the balance sheet and it looked like I got around 10 million, just wondering where the rest of that cash came from.

Okay. That 10 million that you came up with was basically the absolute reduction in receivable -- constant dollar basis. There was $7 million in tax refunds that we got in our European businesses. There is about $4 million that came from --.

Comments will be made to various points in the conference call where some the things are little harder to grasp and looking at the balance sheet numbers because of the conversion difference on the Euro operations coming into US dollars. So, that masks some of the real changes that took place in terms of generating cash.

Okay. That makes sense. In terms of your geo-location product line you have us a sense that this could be the up a lot on - I am assuming this is up above first quarter levels and may be even significantly above first quarter levels which were 12.5 million?

Yes. I think that we characterized the backlog at the end of the second quarter and while that number is not expected all to be shipped, certainly a very piece of it would expected to be shipped in the second half of the year.

Okay. That is fair. And on - in your sort of new products areas I guess you commented on the 3G side of things. I was wondering if you could give us a little comment on the microwave radion business, how that is trending, and also I guess you are expecting to ship some power amplifier products in the second half and I guess technically we are in the second half now. Just wondering if you can give us a view on where those products stand.

Well it is in middle or no change in the microwave radio business from the run rates of the first quarter which was lower than last year's run rate and we are still shipping basically to one major OEM not to any other customers. And in the case of power amplifiers there have been no shipments that have achieved anything beyond I would call a prototype or initial qualification levels. And a lot of that will depend as we said before in the second half the release of some of the new models and the role out of some of the UMTS third generation equipment.

Great. And in terms of just one final question on your interest you expect to pay on the convert in the next quarter, is that expected to be sort of the 970 K level, $970,000?

Yes.

That is my final question , thanks gentlemen.

The next question comes from [David Tang] with [McDonald Investments]. Please go ahead.

Yeah, Good morning gentlemen.

Good morning David.

You talked about the 3G activity in Europe, you talked about telephonic -- in the US there is the [Indiscernible] roll out by [Verizon] and [Indiscernible] is doing also high-speed roll out. Can you talk about how you play into that, you know, how that affects base station deployment, and also you talked about the margins in the various businesses. Can you talk about the margin differentials between your domestic business versus your international business, maybe I am splitting between Asia and Europe also?

Okay, let me handle the first part, and then I will let Bob do the margin parts. In terms of the Verizon and the [Indiscernible] roll outs, at their initial conversion, they are not really dramatically impacting any of our businesses because the changes are basically software and some transmitter, but in terms of combiners and filters and antennas, there is not a necessity to make that particular change out. It was certainly a major boost to our test and measurement business because the test and measurement equipment necessary for this two-and-a-half or 3G whatever you want to call this new hybrid, does require more sophisticated test equipment than the prior generation, so that certainly did help that piece of our business. The area where it will impact our business is if they continue to add subscribers and they are starting to use a lot more minutes because of the data packages that are being made available, then infrastructure is going to have to expand and we will be part of that expansion, but the specific technology that goes into make it you know [Indiscernible] does not impact our product other than in the area that I mentioned. It clearly was showing at least Verizon I guess was probably the most successful carrier in exceeding expectations in terms of subscriber growth. I don't know whether that's a specific factor of their new technology or not, that's hard to say.

In terms of the question on margins which really was domestic versus international, I don't think [Indiscernible] themselves the markets command different margins, but let me make some additional comments on that. First of all, in sale of our OEM products, we negotiate product qualification and supply from a number of different markets so we may be supplying [exacting] product coming out of our European production facilities as well as for example our China production facilities. Now in many cases margins would be helped in a Chinese plant just because of lower cost and those lower cost would be somewhat due to lower cost of labor although labor is not a major component of our cost of goods sold as well as some of the lower cost of materials that we find for example in China market place, however, it should be noted that the OEMs are very well aware of these differences and in many cases part of those cost savings must be shared back to the OEMs that were selling product tool. We continue to look at international markets in terms of margins more in terms of [Indiscernible] excluding the Bartley acquisition since our strong first quarter last year that's March 31, 2001. We reduced our total headcount by 447 people and then [Indiscernible] 255 temporary positions and reduced 355 dedicated outsource labors. We told [Indiscernible] represented about 29 percent reduction in control of the headcount and we continue as a company should in your current industry situation to take a hard look at spending reductions in a difficult environment as we look at future sales expectations. Let me turn to some of the balance sheet factors, at June 30, we had a cash balance of over $22 million and a total debt of $87 million. That compared to our March 31 balance at the end of the first quarter of this year of cash of $40 million and total debt of $103 million. The dramatic improvement in our total debt levels in Q1 over the Q4 levels of a 152 million was due to a combination of one, the $47 million [Indiscernible] expenses and received from the preferred stock, which was issued in March 2002, as well as the cash flow which we generated in our businesses. Cash flow as measured by the increased in the cash in the reduction of the total debt, it proved during the second quarter by 24.5 million, while the balance sheet is not short of all the [Indiscernible] in respect of the Euro receivables and inventories on a currency exchange rate declined by $10 million from Q1 to Q2 if the Euro rate had remained constant. In addition we collected a large tax receivable in Europe. We continue our focus on cash flow and working capital and are hopeful of modest improvement in the second half of this year as well. Turning to receivables, at June 30, our [Indiscernible] and inventory receivables were $92.6 million as compared to 94.3 million at the end of the first quarter, that represents 92 days outstanding versus 96 days at the end of the first quarter. We still see some of the OEMs updating slowly and some are in the process of [Indiscernible] negotiate for [Indiscernible] charges. Receivables wouldn't have declined an additional $6 million if the Euro exchange rates had remained constant and what they need is with the strengthening of the Euro, the amount of Dollar value of the receivables increases as we increase the value of the Euro. At this point in time, just as a side note to try and anticipate a question that might be asked we are [Indiscernible] of receivables from some of the companies which are identified in general telecom industry is having some significant problems like [Indiscernible] process. So we do not have exposure to there as when would we anticipate we would not [Indiscernible]. Turning to our inventory levels, at June 30, we had 182 million versus a balance of 113 million at March 31 at the end of the first quarter. The inventory turns declined a little bit at 2.27 versus 2.14 at the end of the first quarter. While the inventory increased 4.8 [Indiscernible] we were producing product and sourcing our material because of the ability to control cost not only in that local market, but worldwide, so when our antenna business as an example we are now sourcing some of the components for antennas out of the Chinese market place, both for local China production as well as for domestic production. The -- probably the way we look at our business is to measure our margins is more by [Indiscernible] today marginally profitable at this point in time [Indiscernible] last year and there's just not a lot of impact on the net income, that's net we have the sales and the [Indiscernible] changing, but does not have much impact on the net income profit change in the Euro.

Al right. Thank you.

The next question comes from [Larry Harris] with H.C. Winfray. Please go ahead.

Yes, good morning and congratulations on the cash flow and the backlog increases.

Thanks

There was one item in the press release perhaps you could clarify and that relates to the impairment of goodwill charge where it is indicated that there might be in the second half of the year between 0 and 5 million, but this also a number sided of 32.7 million related to Decibel products. What's the difference between those two numbers?

The 32.7 million is the total goodwill, that's on the Decibel books

with that business

And in the phase I that with the initial call it a rough calculation that we do - are required to do, it would indicate that there is some minor impairment and the range we gave is from 0 to 5 million which in essence says that most all that goodwill is still justified under the different rules which you would use, but there could be or may be $0 to $5 million of impairment.

Right, and I know Decibel has been with you for a number of years when was it acquired?

In 1892.

Okay, thank you very much.

The next question comes from [Collin McArdle] if there is --

Good morning gentleman and congratulations I wanted that if you could provide a little additional revenue breakdown by geography and also what percentage of revenues in the quarter would arrive from 3G sales?

All of the 3G sales would have -- I am not sure what you want to put in there

Four percent.

we have got - it's got to be 5 percent at most

and that would include?

-- some test and measurement business -- may be between 5 and 10 percent when you look at the test and measurement business you look at the base station business and some others look perhaps we cannot identify as 3G.

Okay, for the international just fall around that what percentage do you see it exiting this year and may be next year?

The percentage I think that if you look at the various factors that we described with [Indiscernible] business getting little softer in the third quarter, our Geolocation business which is all domestic strengthening I think we can probably see a [Indiscernible] towards the domestic percentage you get. What will change that is when the OEM's businesses, the base station components start to increase because that is very largely driven out of our European plants and Chinese plants. So those are the various factors -- I think we can in the short to the medium term with the strength of [Indiscernible] everything else will see a strengthening in the US percentage of business. Individual market - I mean we went through the list that we have of individual markets that are out there. It is interesting to note that the China market we noted with [Indiscernible] pretty consistent quarter-to-quarter for the last couple of years. US we talked about the swings with the increases coming at Geolocation a big part of our repeated business had been in Europe and we expect that to soften a bit as some of those projects come to completion, but nothing that was really a dramatic change in terms of where the sales are growing in the market places.

Okay, strategy for the [Indiscernible] acquisition was cross selling opportunities I wondered if you could provide some color on how that is progressing and whether it is meeting your expectation?

Thank you I would not see the major strategy with cross selling as much as it was one of cost reduction of integrating it into one factory and taking the business that we had in North America. Remember that Allen already was doing business basically with [Mortel] in Canada and as well as with Motorola and Lucent here in the US. Bartley was primarily at Lucent so we picked up that portion of the Lucent business and primary opportunity was to put all of that in the one plant and reduce the cost significantly.

Oh I am sorry, I thought your attempt for Lucent product was going to be offered to other OEMs.

I am not sure there is a technology, let's not - let's differentiate between product and manufacturing process. There was a unique manufacturing process at Bartley, which allowed lower cost reductions, which we were hoping to integrate into more products. At this point, the level of business is such that it is not the worthwhile to even look at trying to build that in to other product. But there was not a product at Bartley that was unique and we at least [Indiscernible] of the product segments.

Okay. Thank you and lastly were there are any 10 percent customers?

There was one 10 percent customer just a little over 10 percent and it jumps around from quarter to quarter, so we will only talk about it on an annual basis, but there was just one this quarter and on a year-to-date basis there were no 10 percent customers just because of the swings quarter to quarter.

Okay. Thank you.

The next question comes from David [Indiscernible] please go ahead.

Good morning.

Good Morning David.

Could you help me with SG&A. If you had a million dollar restructuring charge that was included in SG&A for Q2 why would it be sequentially flat in Q3 particularly with the cost savings that you are anticipating?

It is sequential to the 13.8, which is after the million [result].

Okay, so it is not sequential of the [14.8].

No. It is not sequential to the ongoing run rate.

Okay, then the savings that you -- as result of the various actions, most of those would show up in the margin?

A little bit would show up in SG&A, the bigger portion would be in margin, unfortunately it may not show up if price competition continues as it has which is why we have been said there might have to be a minor reduction in gross process margins. Because it is competitive and part of the way we are dealing with that price pressures by reducing overhead costs.

Okay that makes sense. And then can you talk a little bit more about the geolocation business focusing on the nature of the new enquiries that are coming in, how they are building, how you measure opportunity in that particular area internally?

Well I guess I would measure the short-term opportunity is really going to be backlog what we have now which we would expect to shift between now and sometime and perhaps in the first quarter of next year. There are some pretty specific dates that carrier want to meet. Other orders that we announced in the third quarter, at some opportunity have being shifted in the fourth quarter that are more likely - the bigger parts of them are more likely to be may be in the first quarter. But just as you know some of the [Indiscernible] customers have an implementation date that starts in April or I am sorry March 1st of next year, so that any enquiries that were involved with now for [Indiscernible] customer which began as a smaller carriers, but not smallest carriers. We would have to start their implementation in the first quarter for sure and maybe some in the fourth quarter. In terms of opportunities [best move] were the short-term focuses. The bigger focus really has to be GSM and whether ELTD which all the GSM carriers had basically gotten the [labors] so far to put in ELTD, whether ELTD becomes a real opportunity for the location with the network based solutions like we offer. We know we can take care of GSM, we often believe it is a very good approach. But at present all we have are people inquiring about it. No one has done a major field trial with a carrier on GSM network-based solutions because they are all hoping for EOTD. But clearly the recent announcements and letters submitted by Nokia, Ericsson to the FCC on behalf of certain carriers are saying they were not sure they can get to the accuracy requirements required or using EOTD and the company called Cambridge positioning that has strived for lot of the software and algorithms had basically a couple of months ago stated they were not sure whether they are going to be able to get those accuracy requirements. So we believe there is some pending pressure to find a solution that can allow for a more rapid introduction of GSM answers. If one also turns to look at the [consent decrees] at both Singular, and AT&T wireless signed with the FCC, those have some specific [sell] counts that must be included over the next couple of years and I guess the last piece in packing geo demand is going to be we call [PSAF] request public safety answering points or the dispatch services from police, fire and ambulance. Because a lot of what the FCC requirements are based on is those requests coming in and PSAF ready to handle the data comes from a geolocation system like ours and we are just going to be I think today and in the next couple of weeks we will start seeing the accumulation, and compilation of these PSAF requests and there may be an additional incremental driver if there are as many as some people suspect are being made, but those numbers have never been made public yet.

And just a quick followup on the GSM front, have you demonstrated, you said there have been no field trials, presumably you have demonstrated in the laboratory or in some other environment that geolocation service works on the GSM system?

Yes. There have been no field trails with carriers. We have GSM network setup in the Western Virginia area, which is what we call our private network, which is to put up five or six cell sites where we have the GSM. We actually demonstrated that to one of the public agencies [MEEA] who came out with an announcement about some four or five months ago of their view of that and the fact that the works which we have done with some encouragement to lobby harder for work to be done and moving GSM forward. The PSAFs are beginning to get concerned because of the fact that they are able to deal with certain E911 calls in their area once they become compatible and once somebody has a network upon operating, but they can't deal with all of the different area interfaces and that's getting them frustrated.

Okay. Thank you very much. Let somebody else join the queue.

Okay.

The next question comes from [Rendem Messeus], from Morgan Stanley, please go ahead.

Hi folks.

Hi, Rendem.

On the share account in next quarter with the positive earnings and we should take the fully diluted shares to be about just under 37 million?

If you are adding in the [Indiscernible], but remember our basic at these levels for the most part the most diluted is with the dividend coming out rather than the 37 million.

Okay. So could I have that in right now [Indiscernible] for December, the question is that September quarter, December quarter according what you folks are thinking right now?

Only one earnings get involved in order to do the calculation both ways. You do it by taking out the dividend and dividing by the 30 million number and then you also do add the dividend back to net income and use the 37 million and then we always use the lower earnings number.

Okay.

And then at these earnings levels, the more diluted is with the dividend.

Okay, I got it. Secondly, a nice work on the balance sheet. How do you augment cash again, what is more likely from an inventory or receivable reductions and if you could also when you talk about the balance sheet address maturity of the long-term debt.

Yes, in terms of what will you to expect over the next couple of quarters, I think the third quarter you could actually see some increase in the receivable inventory primarily from the geolocation business off set by some improvements in the other businesses in terms of further reduction. But I think that you could actually see it move slightly in call it the negative direction [if you] one of the reasons I would delighted with the cash balance is because of the fact that we can certainly handle that without any difficulty. And then by the fourth quarter its possible because the Geolocation is a nice profitable business with a reasonably rapid [payment] cycle and that could that then turn back positive again in the fourth quarter depending on how the shipments occurred during the third and fourth quarter in terms of monthly cycle. In terms of the long-term debt basically there is about $11 million due in November of this year and that same kind of level at November of each of the next few years going out. A $62 million of insurance company debt is due over [Indiscernible] about six period of time.

Okay thank you and finally on the repeater side of the market do you have any [Indiscernible] for mobile wireless providers or these mostly facility specific solutions [Indiscernible] can you give us a sense of the [split] from that right now?

Actually what we find is the drivers are the mobile wireless providers. I mean if you are using that term as being the wireless [carriers] which two are predominantly the [Indiscernible] even though some of [Indiscernible] is going into facilities very often one or more of the carriers have taken the lead in helping get someone in to design the network because the facility managers often don't know what they need. So the carriers tends to be the most important person in that respect.

And of course the carriers are the ones who are going to look at any given facility and measure the incremental business versus the cost if they are going to engage [it or putting it] in the incremental system there.

Okay I have one more question. I was a bit confused by the comments on the [BTS] Subsystem business where you earlier in the commentary mentioned that certain base station [declines] were pushed out and then when you are giving your guidance you commented that you should have sequential increases in all businesses except for repeaters. So initially when I was thinking about that I was thinking you know perhaps the BTS would go back to December of [Indiscernible] levels. You didn't seem to indicate that when you gave your [Indiscernible].

Yeah, now when you talk about base station and antenna deployment and some of that is not new base stations, but it changed out of antennas in the couple of carriers have some major change [Indiscernible] programs antenna and that's where the push fact was. It was not on the base station deployment antenna deployment.

Thank you very much I appreciate it.

I would really like to see [Indiscernible] some of the levels that go back over a year. It has been that OEM's servicing part of the business with base station components and subsystems. So it is all relevant to what you are measuring it against whether it be increasing or declining. It is certainly still is very [Indiscernible] with compared to a year plus ago or year-and-a-half ago, but there is sequential growth expected from the second and the third quarter there. Next question.

If there are any additional questions please press the one followed by the four at this time. [David Tang] with [MacDonald Investments] please go ahead.

Just a followup question on the [true] position on litigations. You said that you are in discovery so I take it that there has no motion practice and no movements for [Indiscernible] judgment or any of those motions?

There has been no motions to some rejudgment [Indiscernible] at this point in time. It is a little early in the proceedings.

Give me sense of the-I guessed they filed their initial [lawsuit] back in December and then they augmented with some [Indiscernible] additional counts. Is there any indication of the strength or weakness of your case because they had to you know have to do twice and not do it all at once or.

[Indiscernible] if you read the press release, which I am sure you have but it looks like they are strengthening their claims and I can tell you that based on our discussions with council and then we don't feel that the changes in the midst of case at all.

All right thank you.

The next question comes from David [Indiscernible] with [Indiscernible] please go ahead.

Yeah, just another followup on the Geolocation. You have implemented - that AT&T has implemented a couple of sites. Now can you give us some sense of how those have operated and have they been if you will [Indiscernible] an opportunity to showcase the technology and have others I guess migrated to that?

I think it would be fair to say that with AT&T that -- it is too early because in AT&T the shipments really just started in June, there probably there is no single market area that is totally up and operating there. I think the show case is that has been reference in some published material in some of the National news were really the first three of original Verizon markets, which we put in last year and the first quarter of this year and those are working extremely well and in fact the [piece-out] people in those areas are very outspoken about some of the things that have happened in terms of only the rise and then saved or they have been able to get very early solutions to problems because they have been able to locate 911 callers and they are also pretty outspoken about wanting to get their piece-out covered by the other carriers in their area as well. So those are more of the showcases. Now at this point in time, the Verizon has no desire to showcase them because there approach for all of the rest of their markets is to go with GPS in a handset. They are not network based in terms of their other markets. So they have no desire to showcase, the [piece-apps] have.

Has it been -- do you sense any change in Verizon's position, and going through the handset-only solution?

No. None at all. Not at this point and I guess it is probably fair in being a bit [Indiscernible] to say that, you know from very [Indiscernible] stages of the evolution of the Geolocation alternative solutions, there is no reason to believe that the GPS system is not going to be an adequate and a solution and begin the requirements.

Right.

There are some questions on some of other technologies and some of them have fallen by the wayside are completely and some of them were being questioned at this point in time, but that one is not that has ever been thought to have a failure.

I guess it is a question of where and how soon they can get it?

How soon it rolls out and how soon it is complete. But the network solution one of the real strong benefits that we have been pushing from day one, with the network solution once you deploy it will cover all of the carriers customers. The [Indiscernible] aged with their handsets, but not convert their handset over, it covers [Indiscernible] in coming in etc. With a handset solution it's only going to work for those handsets which are equipped, which is at very very small percentage in any of the markets today. It is not going to cover the legacy handsets it is not going to cover the analog handsets and it may not cover the [Indiscernible] unless they are well equipped. So, it is a much slower or more tedious [Indiscernible] on a handset solution and getting to that point with having opened it in total coverage, may never be achieved. All the FCC regulations eventually require that they carry users -- its best efforts at the backend in 2004 or 2005 to convert as many of the people over, but if someone doesn't want to turn in their handsets for a new handset, it is not going to happen, it is not going to work.

A last question on this, could you, it gives us any change in the FCC stance that because of those circumstances. You just elicited that they may be more inclined to push for, if you will a system solution?

Probably, not from the perspective, the GPS site and handset solutions because that they have accepted the timetable that are out there, unless there is some hue and cry coming from the [Indiscernible] and from the piece-apps about it not happening quick enough or far enough or fast enough or if not going to cover some of those missing pieces there, that's not where we see it, we do see it somewhat on the GSN solution, which haven't got the specific timetable, which looks like it's not met yet, that is where the thrust is more open that why we talked about the opportunity for GSN network solutions.

Thanks, very much.

Gentlemen, I am showing no additional questions, please continue to presentation or closing your mikes.

Okay, [Indiscernible] thank everyone for joining us, we just wanted to let you know that we know there would be many twists along the ways of wire [Indiscernible] communication industry, finds its road to recovery. We continue to believe our financial flexibility are leading market positions in our chosen markets and our critical mass, we will insure that we will continue to be one of the significant participants in our industry. We thank you all for joining us today and look forward of the talking to the [Indiscernible] near future.

Ladies and gentlemen, that does conclude your conference for today. You may all disconnect and thank you for participating.