泰科電子 (TEL) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Tyco Electronics to report third quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. John Roselli. Please go ahead.

Thanks, Julie, and good morning. Thank you for joining our first official conference call to discuss Tyco Electronics' third quarter results for fiscal year 2007, and the press release issued earlier this morning. With me today is our Chief Executive Officer, Tom Lynch, and our Chief Financial Officer, Terrence Curtin.

During the course of this call we will be providing certain forward-looking information. We ask you to look at today's press release and read through the forward-looking cautionary statements that we've included there. In addition, we will use certain non-GAAP measures in our discussions this morning, and we ask you to read through the sections of our press release that address the use of these items. The press release and all related tables can be found on the Investor Relations portion of our web site at tycoelectronics.com.

I also want to point out that the results we are discussing today are carve-out financials. We believe the assumptions and allocations made in our financial statements are reasonable. However, they are not necessarily reflective of our performance had we been a stand-alone company during the periods presented. In addition, this quarter we began accounting for our Power Systems business as a discontinued operation, and all periods presented have been restated accordingly.

Now let me turn the call over to Tom for some opening comments and a review of our performance by end market. Tom?

Thanks, John, and good morning to everyone. It's great to be speaking to you today, this morning, for the first time as a stand-alone company. And, while the past 18 months has been a long process, we're really pleased that we finally got to the finish line. And I can tell you our whole team here is excited about the prospects for our company going forward.

As you can tell from our release, our third-quarter results were pretty complicated, due to our separation from Tyco International. The majority of this call we'll be taking you through the financials in detail, focusing mostly on our operational performance, without the impact of the separation-related items. But before we do that, let me highlight four key points that we'd like to leave you with today.

First, operationally our revenue growth, operating earnings and margins were all in line with our guidance. Additionally, free cash flow was $324 million in the quarter, which was up 30% compared to last year.

Second, our business continues to be about flat with last year, with the exception of Undersea Telecommunications. In our three largest segments our markets were mixed. Automotive, aerospace and defense, and industrial machinery markets continue to be solid, while our sales to the communications and computer markets were down year over year. This decline is due to market conditions and also a result of our focus on portfolio cleanup. For the most part, we see this continuing in the fourth quarter.

Three, on an adjusted operating margin basis we were flat sequentially, and have stabilized in the mid- 13% range. Year over year, we continue to run about 100 basis points below last year's levels, due to production cuts in the U.S. and a lower-margin sales mix.

Lastly, we did begin accelerating two of our key initiatives in Q3, portfolio cleanup and manufacturing simplification, and I'll go into this in more detail later on the call.

Let me now talk about our performance in each of our key markets, by segment. Within our Electronics Component segment, which is our largest segment, and in particular in our automotive market, our sales grew 4% year over year. And the trend continued with double-digit growth in Asia, continued growth in Europe, which was partially offset by an 8% decline in North America, pretty much the same trend we've seen. We are starting to see signs that our business in North America automotive appears to be nearing a bottom of the trend here, so we'll be watching that closely. And the other regions do remain pretty solid.

In the computer market, several quarters ago we made the decision to exit certain low-margin business, and this had the effect of reducing our sales by about $30 million, or ten percentage points in the third quarter. This had the ultimate effect of reducing our sales 8% from the prior year. We will continue to exit business in this market, and so this will impact us about at about the same level through the balance of the year, but with little earnings impact.

On a positive note, the underlying market appears to be firming up, as inventory in the channel gets closer to normal levels, and we have seen our book-to-bill turn positive over the last month or so.

Within our communications market, which consists of both infrastructure equipment and mobile phones, our total sales growth was 2% in the quarter. In the infrastructure piece of the market, which is the larger piece for us, our sales declined 6%. Most of this was related to soft demand related to the continuation of merger integration activity, and inventories still being worked on in the channel. On the positive note, orders did stabilize in the quarter, and were up, and we continued to see this strength in July. So we're getting a little more optimistic that this business is turning up.

Within the mobile phones piece of that market, we did have another strong quarter of growth, with 32% for our interconnect products. As you know, this has been a major focus area for us over the last several years, to get back into this market in a significant way, and we've made pretty steady progress over that time. And the strategy is pretty straightforward. It's to win one project at a time, and to broaden our customer base, and that's happening. And I was also pleased that our gross margins inched up in this market during the quarter. And we continue to see this kind of strength through the fourth quarter.

Within the industrial machinery market, revenue grew 7% in the quarter, and this market has continued strong for the last couple years now. We did see strength in all regions of the world, although some deceleration of the order of growth rate in Europe, which we're keeping an eye on. We feel this is going to be an attractive market for some time, given the strong global economy and the continued push of electronics and wireless capability into the factory.

In our aerospace and defense markets, sales grew 13% in the quarter. And this was driven mostly by the commercial aerospace market, which is our stronger segment within that market. We expect continued strength in this business in the fourth quarter.

In appliances, sales were flat. We had continued strength in Asia, but a continued weakness in the U.S., which is largely related to the housing slowdown in the U.S. And we see this continuing in this way for the balance of our year.

And in the consumer electronics market, revenue declined as we expected. We have made good progress getting reestablished in this market over the last couple of years. As I mentioned on the last call, it is a market where we're being selective to go after the more attractive segments of the market. And, given that we're still-- have a relatively small amount of business there, it will be a little bit lumpy. But we still view this as a key growth market for us.

Let me now talk about our Network Solutions segment, where our overall revenue was flat organically in the quarter. In the building networks market, our sales grew 12%, continuing a strong trend, and this was strong across the world. The outlook continues to be solid in this market, as our customers continue to want to increase the speed and security of their networks. We also have been successful in this market in passing on pricing related to copper costs.

In the communication service provider market, sales declined 11% in the quarter, and this was a little more than we expected. Most of that was due to a strike at a large European customer this quarter, a customer that we were very strong at, as we've mentioned before, last year. The good news is the strike is now over, so we would expect growth to begin again with that customer.

Order rates, encouragingly, were solid, around 5% in the third quarter, so we expect the communication service provider market to grow in Q4. And the underlying strength in the market, we believe, is very positive, as fiber continues to get rolled out around the world. And we feel we're really well positioned, with a very broad product line, to serve that build-out.

In the power utilities market, our sales grew 3% in the quarter, which is a little slower than last-- than the second quarter. Overall for the year we're still in the high-single-digit growth rate, which is where we expect this market to grow over time. And we feel this is one of our more attractive markets, with all the activity to improve the power grid around the world.

In our Wireless Systems segment, organic revenue declined 3% in the quarter. Our commercial products business, which is the components portion of that business, was down 13%, and our aerospace and defense and wireless networks business was flat. We do expect, particularly the wireless networks business, to pick up in the fourth quarter and into next year. And, as you know, we have a very important project with the State of New York that we're right in the middle of, and on track to begin turning on the first region for the State's public safety project in early '08.

And, finally, in our Undersea Telecommunications segment we had another very strong quarter, growing 124%, as we continued to benefit from new network construction projects that we won, and the team is doing a very good job of executing against.

From a margin perspective, Terrence is going to bridge you from our reported results back to the guidance I provided on Tyco International's last earnings call. But the bottom line is that, on an adjusted operating margin basis, our margins have stabilized in the mid- 13% range, and we expect this to continue through the fourth quarter. Compared to last year, our margin continues to be down about a point, as it has been the last couple quarters, before restructuring, primarily due to our largest segments being flat year-on-year and, as a result, we have been cutting production.

We've also had slightly lower margin sales mix, which is the impact of our networks business being flat, which has pretty attractive margins in our undersea cable business, which has improving margins, but still lower than average, increasing at the rate it is.

Including restructuring, our margin was 12.7% in the quarter and, as we indicated at our investor meeting, we have a plan to get our margin, including restructuring, back to 15% plus, over the next three years. The anticipated divestiture of our Power Systems business, now in discontinued operations, is a significant step in that direction.

Before I turn it over to Terrence, let me say a few things about our strategy. At our investor meeting in June, we talked about a couple of key focus areas designed to simplify our business and improve our performance, especially our margins, which is our number one focus area. To reiterate, our plan is to divest, or exit, non-strategic, low-margin revenue of up to 15% of our total sales over the next 18-to-24 months.

During the last quarter we formally announced our plan to divest our Power Systems business and, as I mentioned, we accelerated our exit of low-margin computer business, which had the effect of reducing our sales about $30 million in the quarter. Exiting these businesses will bring greater focus to the Company, while also improving our profitability and operating leverage.

On the restructuring front, on the last call we announced the acceleration of our manufacturing footprint simplification. Between 2007 and 2010 we will spend up to $500 million on this initiative, including about $100 million in 2007. During the third quarter we incurred $28 million of restructuring charges, which included the initiation of two more plant closures in North America and several product migrations from high-cost locations to low-cost regions. We expect to further increase our investment in this area in 2008, and will have more detail on that in the fourth quarter. These moves should increase our low-cost production to more than 50% of our total production.

Now I'm going to turn it over to Terrence, and he can take you through our financials in detail.

Thanks, Tom, and good morning to everyone. As Tom mentioned, I'll bridge our results on a carve-out basis back to the guidance we provided, and then I'll review some other financial items.

Starting with the results compared to guidance, our guidance for the third quarter was organic revenue growth of 2% to 4%, plus currency effects, and an operating margin of 13% to 13.5% as a segment of Tyco International. The margin guidance we provided excluded restructuring, standalone corporate costs, separation costs and other unusual items, such as the class action settlement. Our guidance did include the results of our Power Systems business, which is now reported as a discontinued operation. So let me walk you back to the guidance.

On the top line, our reported revenue growth was 6.4% overall, with organic revenue growth of 3.3%. Including our Power Systems business, which had a year-on-year sales decline, our organic growth was 2.5%, which was within our guidance range of 2% to 4%.

On the margin side, as we mentioned in the press release, our adjusted operating income, before the class action settlement, restructuring and separation-related costs, was $461 million, with an adjusted operating margin of 13.5%. From this income, to get back to our guidance, we have to add back our standalone corporate expenses, but subtract the operating loss from our Power Systems business. In doing this, these two items offset each other, and our margin comparable to guidance was 13.5%, which was at the high end of the range that we provided.

Now let me turn to profitability by segment. In the Electronic Component segment, our adjusted operating margin was down 110 basis points compared to last year. This decline was due to the lower production levels to adapt to market conditions, as well as our efforts to reduce inventory. We also experienced a modestly lower sales mix during the quarter in the segment.

Looking at Network Solutions and Wireless Systems, our profit in both of these segments and operating margins were down year over year, mostly due to restructuring and separation-related costs that were incurred or allocated to these segments. On an adjusted-operating-margin basis, the margins in both of these segments were modestly lower than the prior year, mostly due to the softer top line performance Tom reviewed with you.

Finally, in our Undersea Telecommunications segment, the adjusted operating margin exceeded 12% compared to 6% in last year's third quarter, primarily reflecting the benefit of the significantly higher sales volume that we're getting in that business.

Now let me cover the other financial matters I want to highlight. First, cash flow. Our cash flow from operations was $299 million during the quarter, which included $163 million advance payment related to the shared tax liabilities with Tyco International. Our free cash flow was strong during the quarter at $324 million, which is up $75 million compared to last year.

Looking at the major drivers of our cash flow performance, in receivables our performance during the quarter remained consistent with where we've been at, around 68 days outstanding. In inventory, we reduced our inventory days by two days sequentially, to 78 days. While this has been a focus area for us, as evidenced by our production cuts-- and we're pleased with the improvement we've made-- we still need to make further progress to get back to the prior year levels, which were in the mid-70 day range.

And then, finally, our capital expenditures were $140 million on a gross basis in the quarter, which is slightly down from last year. This is approximately 4% of sales, and as I previously discussed, our long-term capital expenditures should be in the 4% to 5% range of sales.

The second item to highlight is that we recorded a net charge of $891 million for our portion of the Tyco International class action settlement. This settlement resolves the majority of the class action litigation that we share with Tyco International. In connection with the settlement, we funded $921 million into escrow, and our debt level of $3.7 billion reflects our portion of the settlement. I do want to highlight that the difference between the income statement charge of $891 million and the funded amount of $921 million reflects expected insurance proceeds that we will receive.

Next, our income tax expense was $146 million in the quarter. The tax rate during the quarter was affected by non-deductible charges, as well as our separation from Tyco International. On an adjusted basis, our effective tax rate was 41%, which is not representative of our ongoing tax rate, due to certain negative effects of the separation. As I previously mentioned, we initially expect our tax rate to be at the high end of the 31% to 34% range, and we have tax planning efforts underway to reduce that rate by two to three points over the next several years. Adjusting the tax rate in the quarter to the 34% that we expect to be at beginning in '08 would have increased our earnings per share by $0.06.

Now turning to our capital structure, two weeks ago we entered the market to issue long-term debt to term out a portion of our $2.9 billion bridge facility. While there were many interested investors, during the marketing period we observed a severe deterioration in market conditions and therefore decided to withdraw the offering. I want to remind you that our bridge loan does not mature until April 2008, which gave us the flexibility to postpone this offering. I do want to be clear that our capital structure plans have not changed, and we still plan to have approximately $3.5 billion of total debt going forward.

And finally, as Tom mentioned, our Power Systems business is now being treated as discontinued operation as we market the business for sale. We recorded an after-tax impairment charge in the quarter of $435 million in a discontinued operation line.

Now let me turn the call back over to Tom.

Thanks, Terrence. I'm going to talk about our outlook for the fourth quarter now. As I mentioned, our orders were essentially flat in Q3 and our book-to-bill ratio was 0.98. But if you adjust out the typically volatile order patterns that we have in the Wireless and Undersea segments, orders were flat, with a book-to-bill ratio of 1.02. So our core Components and Networks business had a book-to-bill of 1.02.

Based on these order rates and my earlier comments on our markets, we expect organic revenue growth of 3% to 5% year over year, plus an additional two to three points from foreign exchange over last year's revenue of $3.2 billion, which excludes Power Systems. Again, the strength in our Undersea Telecommunications segment should account for most of our top-line growth, with the rest of our business running pretty close to flat. So this is pretty much the same scenario we talked about last quarter.

As I also mentioned, we expect our operating margin, before restructuring and separation costs, will be similar to Q3, in the mid- 13% range. And we do expect to spend $40 million to $50 million on restructuring activities, which is an increase from the third quarter. Our restructuring investment will tend to move around a little bit each quarter, depending on what locations we're focusing on in that quarter. And we'll always break that out for you.

So let me just quickly recap again where we are before we open it up for questions here. Our quarter was in line with our guidance, and we continue to generate solid cash flow. With the exception of Undersea Telecom the business continues to be flat, but we are seeing some signs of improvement in markets that have been down this year, although I'd say it's a little bit too early to call it a trend. But it is a positive sign.

Our adjusted operating margins were flat sequentially, and have stabilized in the mid- 13% range. And year over year we continue to run about that 100 basis points below last year's levels, due to production cuts and sales mix.

And lastly, and importantly, we made solid progress accelerating two of our key initiatives, the portfolio cleanup and manufacturing simplification.

So with that, we'll open it up for questions and if-- operator, could you please open the lines?

Certainly, thank you. (OPERATOR INSTRUCTIONS). And we'll go to the line of Thomas Dinges with J.P. Morgan. Please go ahead.

Hi. Good morning, guys. Wanted just a point of clarification, Tom, and then a quick question for you. On the computing business you said that roughly in the Components area it was about $30 million, was the revenue that was-- that you guys consciously have exited because of low profitability, and you expected that to continue through the rest of this fiscal year. Was that your comment there?

Yes, Tom.

Okay.

We're going to be-- they'll probably be a little bit that bleeds over into Q1, and the annual rate-- the best way to think about it is we're getting out of about $100 million worth of business in that market.

Okay, that helps. And then just a quick question for you-- one of your comments I found interesting, because automotive is obviously a significant business for you guys. And you felt that, in the North American area at least, it was a little bit closer to a bottom. What are you seeing, particularly in either your order rates, the mix of business, or what are you hearing from the major customers there that's really giving you the conviction that you think that you're a little bit closer to a bottom there, because it is obviously a pretty consumer-spending sensitive area.

Well, conviction is probably too strong a term, Tom. I would say an indication that we're bottoming, and it's just what we're seeing in our order rates over the last four-to-six weeks. I mean that has been coming down for awhile. The other point to remember is in U.S. automotive it's not just the U.S. auto makers, but that includes some of our-- you know, the transplant business we have that's a pretty significant part of our business. So we're not going to the bank on that yet, by any stretch of the imagination, but it's been coming down for a while. I mean at some point production levels bottom out and inventory levels get to where they should be.

Okay, thanks.

To add to that, Tom-- this is John Roselli-- last year's fourth quarter is where we really started to see the production numbers come down in a big way. So we're sort of getting to the anniversary of some of the bigger drops in production.

Okay, that helps. Thank you.

Thanks, Tom.

Thank you. We'll go to the line of Steven Fox of Merrill Lynch. Please go ahead.

Hi. Good morning. First, on the financials, I was wondering if you could just talk about the tax rate for Q4, whether it's going to be unusually high again. And then on the SG&A line, is the dollar level or the -- whether we look at dollars, percent, is that a sustainable type of number now going forward?

Steve, it's Terrence Curtin. On your question, first on the tax rate-- the tax rate this quarter definitely had unusual effects in it because it is carve-out basis. We will probably have a little bit of that in the fourth quarter. I think the best way to think about it is the 34% I guided to really will be where we're at in '08, and then we're going to work that down. So I do not expect it to be in the 42%. I would expect it to be closer to the 34%.

On your second part of your question, on SG&A, in the SG&A you can see year on year our SG&A was up about 10% in the press release, but there was some separation-related items that are adjusted out, about $25 million in the G&A. On that adjusted basis, Steve, we do believe that G&A rate is an appropriate rate.

Great. And then, Tom, just from the computer market-- just looking at the organic growth, you seem to be implying that's still troublesome. But we've seen some lift in things like notebooks and PC's, so I'm wondering where you see the weakness specifically in computers, and your expectations a little more for the turnaround there?

Sure. Well first, take about almost 10% out of our run rate there and, if you normalize for that, we're probably in low-single digit rate growth. So we're not really negative, because we've selected out of some of the business.

I'd say the other piece is that the channel, the (technical difficulty) channel is continuing to work through inventory, and what we're starting to see is, really for the first time in the last six or seven weeks, the book-to-bill turn positive. It had been negative, of course influenced by our moving out of some of the-- but even if you adjust out of that, our book-to-bill was slightly negative for almost six months. We think that's bottomed out and it's starting to pick up, which is reflecting what we're seeing in the end manufacturers selling more units. So it's a bit of a mixed bag, but we're getting a little more confident there.

But do you think that's more driven by high-end systems, rather than notebooks or something like that?

Well I think just recently-- what I've seen is notebooks, and what our folks are seeing is it's starting to pick up again. I think the higher-end systems have been stronger a little bit longer than that.

Great. Thank you.

Thank you.

Thank you. We'll go to the line of Yuri Krapivin with Lehman Brothers. Please go ahead.

Good morning. I was hoping you could discuss the raw material situation. I believe that during the first six months of fiscal '07 you were able to recapture about 60% of the raw material increases, compared to 40% the year before. So, how is this ratio trending now?

Copper's settled in in the high $3.50's to low $3.60's right now, Yuri. So, other than the sort of the big drop in the second quarter, and then it bounced right back up, it's kind of settled in I'd say around that $3.40 to $3.60 mark over the last nine months. It's a lot higher than we'd like it, but it's somewhat stable. At the rate it's at, for the year that would end up being up about $0.45 a pound year-over-year. We buy 200 million pounds, so at a gross level we're spending $90 million to $100 million more for copper, but I do-- I think we've recovered more than it-- in the 60% to 65% range.

We've made pretty good progress on the pricing side. Again, it's not that much progress in the automotive side, but in the rest of our businesses-- in our cable-related businesses we're passing it on real-time. In the other businesses we've been moving a lot quicker than we did in the past, so it's a lot less of an issue. It's still an absolutely high level, of course, but, relative to where it's been, it's less of an issue.

Great. And then, in the mobile phone market, can you indicate what your current sales run rate is is?

We're a little over $50 million a quarter in interconnect there, so it's still only a couple percent of our business, but it's moving up. And for the last several years we've primarily participated-- we haven't participated with the top players. It was more the number three player on, where we've been building back into that industry. And over the next year it'll be important for us, and we're getting more confident, that we're going to break into the top two players there. So we're subtly bullish, I guess, about our position in that market.

Right. And then, Tom, you commented that you are in the process of simplifying your manufacturing footprint and reducing the number of manufacturing sites. Can you review how many sites do you currently have, and how many sites do you expect to have once this restructuring program is over?

Yuri, I can tell you we have right around 130 sites, and it will be down materially from that. But I don't really want to get into all that yet, since of course we haven't announced a number of these yet, so it wouldn't be appropriate for us to get too specific. But it's going to be a significant change.

Yes. Thank you.

Thanks, Yuri.

Thank you. We'll move on to the line of Jim Suva of Citigroup. Please go ahead.

Great. Thank you very much. Can you help us understand a little bit about triangulating around, or connecting the dots, of your outlook of sales versus the outlook for margins. And, more specifically, what I mean is if we've got organic sales going up 3% to 5%, and then a kicker of additional foreign exchange rates taking it to 5% to 8%, how come we're looking at operating margins of only 13.0% to 13.5%? And at the high end that would be at best in line with this quarter. How come we're not getting any leverage there?

Two things-- when we look at the fourth quarter, what we see is the fourth quarter looking very similar to the third quarter. So that is where we see things when you think about the guidance we provided, both from a top-line and a bottom-line perspective. And it's where we've been calling it since basically the second quarter. Just sequentially on some of the margin, just-- we still have a large amount of growth in our Undersea Telecom business, so we still are seeing that effect. And the other thing-- we do get a slight negative effect as we go into the automotive slower seasonal pattern in Q4. So our automotive business will be slightly down in Q4 versus Q3. But balancing those, I think you're going to see Q4 be very similar to the Q3 levels.

Okay. And as a quick follow-up, so are you then implying that your automotive has above-corporate-average profitability?

Yes, slightly above.

Slightly.

Okay. Okay, and then as my follow-up, your outlook as far as where you sit today-- we're already into August. Europe always goes on vacation for the month of August. Can you sense right now-- is that vacation and slowdown in line with normal seasonality? A bit better? A bit softer? Where do you see the Europe slowdown right now?

We feel it's in line with normal seasonality, Jim. I mentioned the one area where the order growth rate has slowed down that we're watching closely, is in our industrial business in Europe. But beyond that, our outlook reflects normal seasonality. We don't expect anything significantly different.

Okay, great. Thank you very much everyone.

Thank you.

Thank you. We'll move on the line of Ajay Kejriwal with Goldman Sachs. Please go ahead.

Thank you. Good morning, gentlemen. I wonder if you could comment on the production decline in North America and how it compared with second quarter? And, if possible, if you could quantify the margin impact of the underabsorption of overheads?

Sure. Relative to the second quarter production is down about the same level, in the 15% range. We have made more progress in cutting costs in reaction to that, because the production decline really started in the second quarter. And the impact on our year-over-year margin is in the 30 to 40 basis points range.

It sounded like things improved a little in the fourth quarter. Could you elaborate a little bit on the decline and on the margin impact? What do you expect in the fourth quarter?

Well as I said, we really expect margins to remain about flat. I don't-- we're not counting or expecting a significant pick-up from production in Q4. And we are still working to drive inventory down, as Terrence had mentioned.

So you expect production to be down again double digits in the fourth quarter?

Year on year.

Year on year. Okay. But sequentially, would that--

I don't think it will be down significantly sequentially, other than the refinements, because the auto makers change over the model year and things like that. But that's-- that happens every year, so sequentially that would be the only difference in year on year, about the same.

Okay, great. And just on your Wireless business, on the commercial side revenue's down 13%. Maybe if you could talk a little more on the trends you're seeing there, and also comment on how that business fits longer term in your overall portfolio.

Well I can address the first one and I really can't address the second one on any of our businesses yet, until we make decisions on any of these businesses. And as we said this quarter, we talked about Power and the computer product lines. But in terms of the revenue being down in our commercial business, that's our-- primarily our semiconductor portion of that business, which is a $200 million to $300 million business. It is communications-related. What we have seen a little bit of is, as the handset business in general globally-- and I don't mean just ours, but in generally-- slowed down in the quarter, folks became more aggressive to get some of this component business that we have in the handset business. So you can look at it as we lost a little bit of share in the quarter. And we're kind of a small player in that space. So that was the big driver of our being down in Q3.

And just lastly, maybe if you could comment on the technology issues and that side of the business. Is-- do you feel comfortable with the technology you are in, and where do you see the future?

We're pretty narrow in the semiconductor space and we're really a very, very niche player there. And our technology is competitive. I think in the aerospace and defense portion of the wireless business, and the sub-systems base, in the pieces where we play-- signal intelligence, radar systems-- we consider ourselves a technology leader.

And in the wireless systems piece of that, which is the public safety piece, I think we have a very, very strong technology portfolio. We are a relatively distant number two player in that market, but as we've said before, I think the winning of New York sort of solidified our position as a company that has serious and cutting- edge technology that plays into inneroperability, utilizing IP. So I think we have a very, very strong technology team in the aerospace side and in the systems side.

Great. Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). And we'll go to the line of Carter Shoop of Deutsche Bank. Please go ahead.

Good morning. A couple quick questions here-- on the buyback plan, can you give us an update if there was any shares bought back, and what your plans are for the next one or two quarters?

Hi, Carter. No, there hasn't been any shares bought back yet. And our plan has been to really get something in place in our early fiscal '08, which starts October l, so we're just fresh out of the gate here. Top priority is to get our capital structure locked down, which we're moving along with. Terrence mentioned a little bit of a delay, but, given our cash flow and credit rating, I don't think we're going to have any trouble there. And then the next thing we'll jump on with the Board is our ideas for a buyback plan.

Okay, great. And then, a clarification for Terrence-- it sounded like you said that the tax rate for next quarter will be between kind of that 34% and where we were this quarter. Is that accurate? And then it also sounded like you were suggesting that for the full year of fiscal '08 we'll be at the upper end of that 31% to 34% range. I was thinking that maybe we'd be able to work that a little bit lower throughout fiscal '08. So, is that accurate, that we'll be at the high end of that 31% to 34% range through the entire fiscal year '08?

Let me take your first point on Q4. On Q4 I will expect us to be closer to the 34%, so I wouldn't take a mid-point. I would expect we'll be closer to the 34% than the 42%. The 42% does have some one-time effects in it, as these are carve-out financial statements.

Looking at next year, Carter, out of the gate we will be at 34%, as we separate from Tyco. We do have planning under way, and we want to get some of the planning in its place as soon as possible. So, I do think our goal is to drift that down a little bit throughout the year, but out of the chute you need to start with the 34%.

Great. That's helpful. A couple more quick ones here-- in regards to divesting other assets, should we think about this being kind of a quarter-by-quarter phenomena, where the most recent quarter we divested the Power division into the discontinued operations? Should we expect to see another asset be placed into that bucket each-- in the next few quarters, or is it going to be more of a one-time event, where maybe in a couple quarters we'll see several different assets put into that bucket?

Yes, I wouldn't think about it as a quarterly-to-quarter thing, Carter. As things go, you work through them. You get ready. Then you start marketing them, and then at some point when you get real momentum that it's going to happen in a reasonable timeframe, that's when we would announce it.

The other thing I would add to what Tom said, Carter is not everything will be a discontinued operation. Similar to our computer business, we may exit some things. Where Tom mentioned the $30 million we did this quarter, so it will be a mix between-- there may be some businesses that are in discontinued operations as we proceed, and there may be some that will stay in the historical results.

Okay, so the kind of walking away from some of that computing business is part of that up-to-15%-of-sales figure that we talked about?

Correct.

Correct.

Okay. Great. And then, when you talked about how the incremental corporate expenses is offset by the divestiture of the Power division to-- for an apples-to-apples basis looking at guidance-- I don't understand why that corporate expense was incremental. Was that not factored into guidance originally?

Yes, our guidance we gave, Carter, was as a segment of Tyco International, so on our reporting we did not have incremental corporate expenses in that guidance. So that was incremental as you move from our carve-out basis financial statements, and looking back to the segment results.

Okay, great. Thanks. And then a last question on handsets-- pretty strong growth right there on a year-over-year basis, off a relatively small base, but definitely a lot better than your peers. You mentioned that you expect to take some share, maybe, with the top one and two vendors going forward, maybe looking at the fiscal 3Q. Did you see share gains there with some of the larger vendors, or is that more your--

Oh it's more within our base of customers.

Okay.

I don't think that's going to change for a couple quarters.

Okay. Great. Thanks a lot.

I'll move on to the line of Michael (Ellman) with Mayo Investment Advisers. Please go ahead.

Good morning. This question may be premature, but have you noticed the appetite for businesses that you intend to divest being reduced because of changes in the credit markets and perhaps reduced propensity for private equity to look at things?

No, we haven't. Not to this point.

Is it just-- is that simply because it's too early?

I'm not sure. I mean we don't have huge businesses that we're talking about here, so I think that's probably as much of it as anything.

Okay. Thank you.

You're welcome.

Thank you. We have no further questions.

Okay, great. Well thank you for joining the call today. Keith Kolstrom or myself will be available all day for questions. If you have any follow-ups, feel free to give us a call. We look forward to talking to you on the next conference call.

Thank you. We will be available for replay after noon today, through midnight, August 15, 2007. (OPERATOR DIRECTIONS). That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.