CommScope Holding Company Inc (COMM) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CommScope first quarter 2004 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded Tuesday, May 4th, 2004. I would now like to turn the conference over to Mr. Phil Armstrong, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us on this call. Frank Drendel, CommScope's Chairman and Chief Executive Officer, Brian Garrett, CommScope's President and Chief Operating Officer, and Jearld Leonhardt, CommScope's Chief Financial Officer, join me on the call.

During this conference call, we may make forward-looking statements regarding CommScope, our new Connectivity Solutions business and OFS BrightWaves market and financial position, plans and outlook that are based on current information currently available to management, management's beliefs and a number of assumptions concerning future events. Forward-looking statements are not a guaranty of performance and are subject to a number of uncertainties and other factors which could cause the actual results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see the press release we issued today and CommScope's filings with the Securities and Exchange Commission. In providing forward-looking statements, the company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events and otherwise. After Jearld Leonhardt reviews first-quarter results, Frank Drendel will make a few comments and then we'll open it up for questions. Jearld.

Thank you, Phil. Today CommScope reported results for the first quarter of 2004 that includes our acquisition of the Connectivity Solutions business of Avaya on January 31, 2004. The company reported sales of $235 million and a net loss of $16 million or 27 cents per share. This net loss includes acquisition-related transition and start-up costs as well as the impact of purchase accounting adjustments. Despite these charges, we are pleased with the ongoing progress of integrating this acquisition. We are also particularly pleased with the significant inventory reductions which contributed to our $22 million of cash flow from operations for the quarter.

For the first quarter, CommScope reported actual sales of $235 million and has reported sales in two segments for the first time. The Cable segment, which is CommScope's legacy business, and the Connectivity Solutions segment, which is our recent acquisition. In the press release we issued today we have included a sales summary that provides actual and performance sales by segment and major product category. First quarter actual sales include Connectivity Solutions sales for February and March only. On a pro forma basis, as if the Connectivity Solutions had been acquired on January 1, 2004, our sales would have been approximately $261 million. All of the year-over-year and sequential sales discussion that follows will be made on a pro forma basis.

Our Cable segment sales rose 5% year-over-year to $136 million and were up in all major product categories. Broadband sales were up year-over-year primarily due to strong international sales, somewhat offset by lower sales of fiber optic cable. While sales decreased to our largest domestic broadband customer, sales rose to essentially all other major domestic customers year-over-year. The sequential decline in total cable segment sales was primarily due to lower domestic broadband video sales. We continue to deliver good growth with legacy local area network sales and achieve double-digit growth both year-over-year and sequentially.

Wireless and other telecom sales rose 57% year-over-year. We believe that we continue to make steady progress communicating the sale-reach value proposition, to customers like Nextel, Sprint, Cingular and AT&T. We have also made progress internationally with new contracts in Europe and Asia. While we expect project business in the wireless area to be somewhat volatile, we remain optimistic about our long-term global opportunities. We also expect our wireless profitability to continue to improve as volume increases. Total external orders for the overall cable segment was $155 million, which results in a positive book to bill of approximately 1.1 times for the quarter.

Connectivity Solutions segment sales were essentially flat year-over-year. Integrated cabinet solutions sales grew significantly year-over-year and sequentially on a pro forma basis primarily due to telephone companies increasing deployment of DSL. However, reduced telephone central office spending and ongoing competitive pressures continued to affect ExchangeMax sales. Systimax sales, which accounts for about 75% of the Connectivity Solutions segment sales, were down year-over-year and sequentially primarily due to our efforts to reduce external channel inventories to a more appropriate level. However, sales from our distributor inventories, that is point of sales reporting, were up year-over-year and sequentially.

With regards to our strategy in the enterprise market, we recently made an important announcement. We introduced Uniprise Solutions, a second structured cabling solution for enterprise networks. Uniprise is an integrated solution built upon proven connectivity technology from Systimax and Commscope's high performance cable. We intend to address different market needs with our two enterprise solution brands. The industry-leading Systimax Solutions will continue to offer premium cutting-edge solutions to its global customers. The Uniprise brand will provide customers with competitive performance and value-oriented solutions based on established technology. These brands will be sold through separate sales forces and delivered to the marketplace through various sales distribution channels. Like the automotive industry, such as Lexus, Toyota, by example, CommScope intends to offer products to different customers depending on the distinct needs and required specifications of the customer. Our goal is provide customers with the industry's strongest portfolio of single source fiber optic and copper solutions. Total external orders for the overall Connectivity Solutions segment were $120 million, which results in a positive book to bill of approximately 1.2 times, with CommScope's consolidated book to bill was a -- was 1.2 times for the first quarter.

CommScope incurred significant special charges during the first quarter. These pre-tax charges included the following: $13 million related to lower margins on certain inventory acquired from Avaya in the transaction and sold during the quarter. $4 million for acquisition-related in-process research and development. $7 million for acquisition-related transition and start-up costs,and $5 million for a loss on the early extinguishment of debt. Excluding these special charges, adjusted net income was $3.6 million, and adjusted earnings per share was 6 cents per share. Please refer to the supplementary schedule reconciliation of GAAP to adjusted results for a quantitative reconciliation in the press release issued earlier today.

The company's overall gross margin for the first quarter was 15.9%, which includes $13.3 million related to lower margins on certain inventory that was acquired from Avaya in the transaction and sold during the quarter. Excluding this impact, the company's adjusted gross margin for the first quarter was 21.6%. Gross margin was also affected by lower sales in manufacturing volume, unfavorable product mix, as well as higher material costs during the quarter. The previously announced price increases for the enterprise products had minimal impact in the first quarter; however, they are expected to have a more-significant impact in the second quarter. Additionally, as a result of rising material costs, CommScope recently announced a 5% price increase for essentially all broadband cable products, which will be effective beginning in late May.

During the first quarter, we also took aggressive steps to reduce internal and external channel inventories. We slowed production at certain facilities during the quarter in order to use existing inventories purchased in our recent acquisition. This production slowdown reduced overhead absorption and negatively affected cost of sales but did positively affect our cash flow.

Total SG&A for the quarter was $36 million or about 15% of sales. Non-acquisition related research and development expense was -- or for the quarter was $5 million or about 2% of sales. We intend to continue to fund a strong R&D effort and intend to build upon the strengths of our new acquisition. We are also pleased to report that CommScope's effective tax rate is now approximately 31%. Our tax rate declined primarily as a result of expanded international activities and lower tax-rate jurisdictions.

Our equity method investee, OFS BrightWave, had revenues of $21 million in the quarter, and a negative gross profit of $6 million with a -- with a net loss of $12 million for the first quarter of 2004. This compares to revenues of $28 million, a negative gross profit of $21 million and a net loss of $33 million for the year-ago quarter. CommScope recorded after-tax charges of -- of $0.8 million or $800,000 or 1 cents per share in the first quarter of 2004 for its share of losses of OFS BrightWave related to the company's minority investment in this venture. As we previously announced, Furukawa has combined certain cable production activities and restructured the OFS operations. As a result of these restructuring actions and because CommScope chose not to make further investments in OFS BrightWave, our equity ownership percentage was reduced to 9.4% effective the 1st of April 2004. This change in ownership does not currently affect the losses recognized for accounting purposes. The company shares of OFS BrightWave losses is based on CommScope's proportionate share of BrightWave's long-term debt, which was approximately 11% as of March 31, 2004. However, this restructuring activity does not affect CommScope's contractual right to sell its ownership interest in OFS BrightWave to Furukawa in 2006 for a cash payment equal to its original investment.

Now I'll turn to cash flow and balance-sheet items. Despite special charges, net cash provided by operating activities was approximately $22 million for the first quarter. Depreciation and amortization was approximately $14 million in the quarter, which included about $2 million of intangible amortization and amortization of deferred financing fees of about $2 million. While capital expenditures were $2 million in the quarter, we expect cap ex to be about $30 million for calendar year 2004. Our capital spending plan for the year includes spending associated with a proposed facility in Asia.

Also, during the quarter, CommScope issued in a private placement $250 million of 1% convertible subordinated debentures due 2024. That's 2024. The proceeds of this offering were used as follows: To retire all of the $172.5 million aggregate principal amount of our outstanding 4% convertible subordinated notes due 2006 through both repurchase and redemption and to repay $25 million of outstanding revolving credit loans under our senior secured credit facility and for other general corporate purposes. During the quarter, CommScope repurchased approximately $103 million of the 4% convertible notes and redeemed the remaining amount of $70 million on April 26th, 2004. At March 31, 2004, long-term debt, including the $70 million and other current maturities, was $402 million or about 46% of our book capital structure. CommScope ended the first quarter with $186 million in cash and cash equivalents.

Looking ahead to the second quarter of 2004, we will have a full quarter of benefit of our recent acquisition. We expect total sales to be in the $280 million to $300 million range. While we expect higher material costs in the second quarter, we also expect to begin to see bigger impact from the price increases for our enterprise products. We also expect to see the positive impact of the broadband product price increases late in the second quarter. So we expect gross margin to be in the 22 to 23% range in the second quarter, excluding special charges.

We also expect SG&A expense to be around 16 to 17% of sales and R&D to be around 2% to 3% of sales. Depreciation and amortization expense is expected to be approximately $15 million for the second quarter. With regard to the ongoing integration of Connectivity Solutions, we expect to incur up to $10 million of special charges in the second quarter related to the remaining impact of purchase accounting adjustments for certain inventory and other acquisition-related transition and start-up costs. Thank you and now I'll turn it over to Frank Drendel for a few comments and then we'll open it up for questions.

Thank you, Jearld, and first I'd like to welcome the new members of the connectivity family officially. As all of you know on the call, we've had a very, very busy two months officially of having the family on board and three months of working to bring this family together collectivity. Jearld's team done an excellent job of bringing the finance group together with his team, the financing and $250 million offering that we had. Brian's team and Randy have done a great job in bringing the operations together.

I'd like to spend a few moments talking about what I see happening and what's happened in the last two months. I'm very pleased with the integration project and positive cash flow that we've had, the $22 million of operating cash flow, the $2 million of capital expenditures was excellent in the first three months that we've operated. We still expect to spend something in the order of $28 million for the year. We still have the Asian project we're working on. We have a lot of work to do. We're still looking at all the overhead issues. We are focusing on all the improvements that we can do in the profitability, all the cost improvements we can do in both of these businesses. We're still trying to leverage all the vendors that supply this vast enterprise.

Clearly there are all kinds of sales synergies with the vast [INAUDIBLE] work and the distributors we use. The Uniprise offering is now in the process of being offered -- offers us all kinds of new and expanded opportunities, we're building on the global sales channels. Again, very pleased with the cash flow from the operations. We believe the way to value these businesses in the early part of this -- this year is on the free cash flow and I -- I believe that the way that we'll finally see the value in this business is the strength in the Systimax top-end value proposition in the Fortune 500, Fortune 1,000 companies and then in the unit price offering in the channel that was traditionally CommScope only as a product offering, and then now as a system offering.

So I think that we're beginning to see both the change in CommScope as a product company into a system company, and I think this is a milestone for CommScope because it's the first time we've had footings of over a billion dollars. And now I will turn it over to the questions from the audience, and Brian's here and Jearld and I are here to help answer any of the questions.

Thank you. Ladies and gentlemen, if you'd like to register for a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. If you are using a speaker phone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Steven Fox from Merrill Lynch. Please proceed with your question, sir.

Hi, good afternoon. A couple questions. You alluded to a facility in Asia, could you just provide some details on what -- what exactly you're planning there first of all.

Steve, I'm Brian. The -- globally if you examine where our manufacturing capacity is, the one location that we currently do not have a strong presence is in the Asia-Pacific area. We do have with the acquisition a facility for local area networks in Brisbane, but as you know, a long ways from the -- the remainder of the markets in China. So strategically, we need capacity in that part of the world. It's high growth in all of our business segments and all part of a strategy to improve our service and logistics.

Any specific products you would start producing there, Brian?

I think at the outset, the very first pieces that will be coming off will be supportive of our broadband business. But it's not being excluded to that in the longer term.

Okay. And, then, secondly, on the inventory writedown, was it mainly related to networking cable or was it spread across all of the Avaya businesses acquired?

Steve, this is Jearld. It was mainly related to the Systimax product line. The $13 million adjustments that we're referring to.

Right. And then, lastly, can you just review where we stand in terms of cost savings to expect this year, um, given what looks like a more stable revenue environment, what are you targeting and how could it impact the operating margin as you go through the calendar year? Thank you.

I think we've done well installing the business systems that we have to date. I think our G&A targets that we gave you, SG&A targets are going to be well-demonstrated. You know, the outlook in terms of what we can do in terms of cogs, improvement and overhead structures and materials, uh, at this time, Steve, I'll say that we've got them on the wall. We've got them bracketed in terms of the scale of the opportunity. The timing of those projects and how much we can harvest, uh, we have not fully detailed and we really want to withhold that information until we've completed that work. But nothing has changed from our early outlook. It is a substantial opportunity for us, the entire team is organized and motivated to make it happen sooner than later.

Thank you very much.

Thank you.

Thank you, Steve.

Our next question comes from the line of Darryl Armstrong from Smith and Barney. Please proceed.

Hi, this is Nigel calling in for Darryl. Just a couple quick questions. Regarding activity rates. Activity rates from Adelphia, have you seen any changes there?

Adelphia continues to work through the process as you know. Obviously the surprise in the Adelphia situation is, one, it looks like there's a substantially greater activity in them being acquired sooner than I had initially anticipated. They still are running at about the same order input rate that they were before, uh, it's not increased and not decreased. Uh, the bankruptcy judges are continuing to let them operate in an effective way to keep them at an operationally correct rate, that they are not losing subscribers, they are not doing any substantial upgrading work but they're running the business in a course that would protect the business. But there has been a substantial increase in the activities. As you know the potential early acquisition or possibly two or three companies teaming up to acquire them. So I would expect that process to accelerate.

Regarding the Uniprise, what is the revenue opportunity there and how quickly do you expect to start recognizing that revenue from that new product.

Well, the -- we went public with it within the past 30 days.

Right.

And it's yet to be demonstrated. You know, that segment for us in North America last year was -- was approximately $95 million. And that's with the absence of Connectivity. If this business -- if the transition was maturer, the business was maturer, you know, there's a ratio of probably another 60% of that factor that would be represented in Connectivity. So at the current -- you know, if you wanted to model last year's scale within an appropriate amount of Connectivity, you know, the opportunity would be something in the neighborhood of $150 million without -- without growth, if you will, in terms of accounts.

And it's safe to assume this is the gross margins here are above the corporate average?

They are.

They are.

And I'll say the early response to the product from both our sales organization channel and end-users that have seen it has been extraordinary in all cases and we'll get a better look at our results this time next Q.

If I might point out again. This is yet to be proven. But if you think about it from the logical point of view, we have the best opportunity to see both sides of the river. You're on the left side of the river and serving the Fortune 1,000 companies and you see two or three of these opportunities that you're not going to win, you know that you can pass that lead/follow situation on to the other side of the river and possibly your Uniprise customer base can receive that order.

Or conversely.

Or conversely.

Good, thank you.

Yes, sir.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. Our next question comes from the line of Alan Bezoza from FBR. Please proceed with your question.

Hi, guys.

Hi, Alan.

Hi, Alan.

First maybe for Frank now that you walk around the NCTA floor in New Orleans, what is the feel that you're getting from just the domestic cable operators, you know, is it livier, is it more exciting, are things starting to happen as they roll out all these new services and how that will impact CommScope. Number two

Allen, you and I were both treated to the experience of a lifetime on the boat. If there has ever been a piece of technology that we both were treated to, I have never seen a piece of technology move faster in one year than IP telephony.. I mean, last year it was a pipe dream and this year you have Portland, Oregon and the Time Warner system going from a gee wouldn't it be nice to try and offer it to see what happens to 15% of the cable customers are taking IP telephony in one year. So I don't know what your reaction has been to your view on IP telephony, but it looks like it could be a big runaway opportunity for the cable industry as high-speed data. Second, I think that for the first time, it is absolutely clear that high-definition is a bandwidth hog and it is real. So between the IP telephony and high definition, this is the first time I have seen an absolute interest in making sure the bandwidth capacity needs of the industry are met. I don't know that there will ever necessarily be a complete rebuild of the plant, but there is absolute need to make sure the plant has all the capacity and is -- and necessitates that there is security in that bandwidth. And that's my take. And my take is that there's real excitement in these new-revenue opportunities.

That's great.

But you're here to show and you've got a lot of experience in seeing these things.

Yeah, no, I 100% agree with you. On top of that it looks like Time Warner might be going up to one gigahertz now in their plant.

I agree. And I think that people will push fiber deeper and that the -- I think that the industry will probably have to consider pushing up the speed, uh, of their two-way connectivity for all kinds of reasons. It stops the telephone thread from higher speed DSL, but I think for the first time the cable industry feels like that it has to take this next leap. And I think -- I think for the first time in three years, the cable industry's feeling its strength in telecommunications, real pure telecommunications, interconnectivity.

That's great and I agree. And then on the international side. You know, someone asked earlier about the Asian facility being -- being built I guess out in -- I think it's China you said.

Right. I think, Alan, you also saw -- you mentioned with some of the -- you know, you were fortunate to be there with Paul Allen and I on his modest facility. You know, he points out for the first time you have everything going for the rest of the world. You have in Europe and in the rest of the world you have the dollar/euro situation, you have the platform for the first time recognizing that you have telecommunications leading its capacity against DBS. You know, satellite owns video and the rest of the world but now there's a telecommunications platform, we saw moxie demonstrated. You know, there's enough money to be made without video so you're seeing the beginning of these platforms being deployed around the world that says an HFC platform can be deployed without video in the traditional sense of video, that it can be a compressed compacted two-way type of video. Everything I saw here says that there's going to be a whole new revolution in telecommunications on HFC networks.

And where is the strength internationally?

All over. It is generally all over. I think a lot of it's driven by the cost of money. People are feeling now that they can get in there and make these networks -- you have lower cost of equipment, Alan, you've seen the price of some of these boxes drop by two thirds, you know, the hardware. And you are seeing a dollar value position on equipment, and a dollar position on the euro -- you are seeing all of it pushing down getting less and less expensive and for the first time you're seeing that last-mile connectivity being available to these operators. So it's -- it's a whole combination of things.

And my last question's on -- maybe for Jearld. You know, when you look at the inventory to revenue kind of ratios that you've been running at relative in your lend business relative to Systimax and your Avaya businesses and certainly you're seeing some benefits. How much more inventory can you reduce in that product line.

I will defer that to Brian. Alan.

Alan, we made I think you can tell from the numbers we made substantial progress in the first quarter and in fact, more than we ever anticipated. And -- but, you know, that being said, uh, we're kind of recalibrating our targets for year-end and, uh, if I look at the turns performance, we're still about half of what CommScope Corporate averages. And -- and our enterprise business exceeds the corporate average. So if we look at Systimax, I would say there is still substantial improvement in terms performance.

Great. Thanks guys, appreciate it.

Thank you, Alan.

Our next question comes from the line of Troy Perry with Oppenheimer, please proceed with your question.

Hi, Troy, are you there?

Oh, hi, yeah, can you hear me?

Yes, yes.

Oh, great, thanks. Yeah, I'm going to follow up on that last point. The $10 million in charges expected in Q2, how much of that do you think will be inventory related?

Troy, we expect about 2.5 to $3 million of that to complete the -- the adjustments there and the amortization really of those fair-value adjustments from the opening balance sheet.

Okay. So maybe that answered my next question, but just to clarify. Of the Avaya inventory, you think -- how much more do you think we'll have to finally be written down when it's all said and done?

Well, we -- we faded in the opening balance sheet process, which was back to January 31. All of our inventory's at fair value. This adjustment process that we're seeing here is really the difference between the acquisition costs of inventory and its ongoing manufacturing cost that gives rise to the $13 million. In other words, our manufacturing replacement costs for inventory that we've been selling is lower than the value -- it was valued in the opening balance sheet. And as that flushes out, that inventory flushes out, we have costs that is in excess of our normal operating level.

Uh-huh.

And that's what the $13 million represents and we've still got 2 to 3 more million more of that.

Okay. And that'll do it. And is that all related to Systimax as well?

Yes, it is.

Okay. Thank you so much.

Yes, sir.

Our next question comes from the line of Chris Blackman from Imperial Capital, please proceed.

Yes, thank you. Jearld, the production slowdown, can you quantify how much that negatively impacted cost of goods sold.

Chris, we don't have an operating history with the ACS business, of course, we've only owned it since the 1st of February here. So it is something that we can't substantially quantify. We -- as Brian pointed out and we pointed out in the other material, we were making an effort to reduce our inventory, we were successful in that. The factory overhead was not being absorbed through that process and there was an impact of that, but -- but it -- I can't be more specific than that at this time.

Okay. And thank you. And then on the broadband, um, what percentage of your cost of goods sold is raw material?

It's roughly -- yeah, two thirds. I was going to say 65, 70%, somewhere in that territory.

Okay. Thank you.

Thank you, Chris.

Our next question comes from the line of Cob Sadler with Bank of America. Please proceed with your question.

Okay. Thanks, guys. I have a quick question on your networking business. It looks like it was really strong and, you know, it could be a seasonally weak quarter. Is it -- you know, are you -- could you give us a split between fiber in LAN applications and copper and then could you talk briefly about what you see in -- in Cap 6 deployments and IP telephony.

Tough questions. We typically don't do a breakout, Todd, between fiber and copper.

Okay.

And, uh, and really don't want to go there. I will tell you that we have a -- a re-emphasis on the fiber program. I think over the last three years traditionally -- particularly in the -- in the case of traditional ACS, uh, they lost some position in the -- in the fiber space and we're spending at a renewed pace in R&D and sales and marketing to -- to re-emphasize our fiber position. So it's -- as it relates to -- to IP telephony and Cap 6. The voice bandwidth is going to be very, very small and, uh -- so I would characterize it as a -- maybe just another brick on the whole package that's got to be carried by the -- by the infrastructure. It certainly doesn't have the influence of the load that the large data applications would have. As IP -- at least in our perspective, as IP voice deploys, its major impact will really be on those who are the providers of traditional analog voice wiring, which would be cap 3 and associated connectivity. And that's a space that neither Systimax or CommScope participated to -- in any degree.

Okay. Got it. And, you know, you had a pretty strong book to bill there, looked like 1.1 and I bet you don't want to break it out among product category, but could you tell us if it's higher in the local area networking group versus some of the other sectors, or -- or do you want to go there?

Help me out. I mean, what was book to bill in our enterprise space versus --

That's right, that's my question.

Okay. The -- you know, the biggest one to discuss would be broadband and broadband was 1.2, I believe.

Okay.

Yeah. Excuse me, 1.1, I'm being corrected here. And, uh, the segments for enterprise were 1.2, and the corporate total was -- rounds to 1.2 as well.

Thanks very much.

You're welcome.

Our next question comes from the line of Bill Marriott from Arnold and Blakeberger. Please proceed with your question.

Thanks, good afternoon.

Hi, Bill.

I have a couple here. I guess the first is on your -- your cash restructuring spending in the quarter and, uh, what you were thinking about for the year subsequent to actually closing the deal.

Sure, Bill. Um, as far as we -- we had talked about spending as much as $25 million, I believe, previously and, uh, one-time transition and related costs, we are obviously revising that estimate down, spending about $7 million in the first quarter for that and -- and expect to spend under $10 million in the second quarter for that. So -- so we -- we expect the cash aspect of that to be 5 to $10 million better than -- than our original estimate.

Okay. Thank you. My second question was with respect to your guidance for SG&A as a percent of sales. Um, I was a little surprised that it's a little bit up, given, you know, sales -- stronger sales sequentially.

All right.

Could you talk about that.

If we look at the first quarter, Bill, we only had two months of ACS business, the ACS has a higher selling expense primarily than -- than CommScope overall does with its -- with its marketing approach and -- and so the -- the impact on the mix for the quarter was muted somewhat in the 15% or so that we reported in the first quarter, so, you know, we just think that number is likely to be a little higher percentage going forward. You know, it depends on a number of factors, like our ultimate sales volume.

Understood, thank you. And my last question was just with respect to the orders that Connectivity. I think you gave a number that probably represented the -- the orders that you received as owners of Connectivity. Could you give us a sense of what perhaps the pro forma orders were for the quarter so we could have a sort of a quarterly book to bill --

Bill, it's Phil Armstrong. About $165 million.

Okay. Thanks very much.

All right. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. Our next question comes from the line of David Degleo from Boston Co., please proceed with your question.

Hi gentlemen, two questions. Just on the last one so you're kind of apples/apples book to bill was 1.1 and 1.2 respectively for the business units, is that correct.

That's right.

And then how much is your inventory down, you know, round numbers since the beginning of the year, if I kind of pro forma the balance sheets?

Uh, it was -- including the amortization of some of these fair value adjustments we were talking about, it's about $30 million.

Okay. You said that, okay.

Yeah.

Yeah. And we -- and without the -- without the accounting adjustments, it was something in the neighborhood of $17 million.

Have you given free cash flow guidance for this year?

Uh, no, we haven't, David.

But I can assume -- I mean, you've got low cap ex, the depreciation will be around $60 million or so, depreciation and amortization for the year.

We've said that D&A reflected both the acquisition and the new appraisals and write-off rates as we did as part of the ACS acquisition in adding it to our legacy business should be about $15 million on a quarterly basis. So, you know, that would annualize to about 60 on a run-rate basis.

Okay. Thank you.

All right.

Yes, sir.

There are no further questions at this time, I will now turn the call back over to you.

If there are no other questions, we want to thank you for joining us and we're continued to be excited about this opportunity. Again, bear in mind we've only had it under our operational control for two months, we've got another quarter to continue to work on these opportunities. We are very, very excited about what we see in the future for these businesses and we'll keep you informed. Thank you for joining us.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation and I ask that you please disconnect your lines.