泰科電子 (TEL) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Tyco Electronics report strong first quarter results conference call. At this time all lines are in a listen only mode. Later there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. At this time then I would like to turn the conference over to the Vice President of Investor Relations, Mr. John Roselli. Please go ahead, sir.

Good morning, and thank you for joining our conference call to discuss Tyco Electronics first quarter results for fiscal year 2008 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 discussion 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 website at TycoElectronics.com. Now let me turn the call over to Tom for some opening comments and a review of our performance by end market.

Thanks, John, and good morning everyone. We are happy with the start we got in the first quarter of our fiscal year. Overall I think we had very good performances this quarter, and this performance really reflects very much the strength of the diverse markets we serve, the leadership positions we have in most of those markets and very importantly, our strong international base, which right now is about two-thirds of our revenue. And that is more than offset weakness in the US that we've been seeing for the last year, and we will talk more about that as I get into the details.

Let me now share a little bit about our business segment performance and our performance within the key markets in those segments, and then I will turn it over to Terrence who will take us through our P&L and cash flow in more detail. Our total sales grew 19% to $3.7 billion in the quarter with organic sales growth of 12%. This organic growth was driven by over 300% growth in our undersea business which continues to be very hot along with double-digit growth in Network Solutions segment. Our largest segment, Electronic Components, grew 5% organically in the quarter due to continued strength in our international markets where our sales grew 7%. This more than offset a 2% decline in the US. And as I said earlier, that is the situation we've been seeing for about the last three or four quarters.

Our adjusted operating margin of 13.6% increased 50 basis points over the prior year. This increase was driven by higher margins in our Network Solutions and undersea segment. As you know, this is one of our key goals to get our margins over 15% over the next three years and we made some good progress in the quarter, still a lot more work to do here but overall I am pleased with our progress.

Our adjusted earnings per share of $0.63 increased 26% over the prior year due to 23% growth in adjusted operating income led by our components networks and undersea segment. We also had another strong cash flow performance quarter. We generated $392 million of operating cash flow which is an increase of 84% over last year and our free cash flow is $267 million in the quarter. Most of this increase came from improvements in working capital and our higher income levels.

As we previously communicated, our plan is to return excess cash to our shareholders and during the quarter we took a major step as we repurchased over 7 million of our shares. We also finished the quarter very strong with over $900 million of cash on our balance sheet. And Terrence will talk a lot more in detail about that.

Importantly, we made good progress in two key strategic areas in the quarter. One in our manufacturing simplification area, we currently have over 20, about 20 actions in processes and we incurred about $21 million on restructuring activities. We continue to expect that we will spend about $130 million on the footprint restructuring this year. This is very, very important to our longer-term margin goals, and I feel we are tracking according to what we expected to be.

We also made good progress in our efforts to focus our portfolio. We closed the sale of our Power System business as we announced earlier, and we initiated the exit of three additional small productlines. We are also continuing to work on other transactions, which can't talk about any details at this time but we will certainly share them as the appropriate time comes up.

Now let me talk about our performance in several key end markets in the quarter. Starting with Electronic Components, our sales grew 10% in the quarter or 5% organically and by region the sales growth was 9% in Asia and 4% in Europe, again offsetting a slight decline in the Americas. We had a strong quarter in automotive, growing 17% overall and 8% organically, which was entirely driven by our business outside the US. And this is where we have our greatest strength. We had solid double-digit growth in Asia at 14% and in China we grew more than 30%. We also had a very strong quarter in Europe with 9% organic growth. In the US our sales were down 8% in the quarter, reflecting the continued weakness in this segment of the market that we've been experiencing for about the past two years. Our order rates for this business remain solid overall but we do expect slower growth in the second quarter, and this is consistent with the current global production forecast for automotive output.

In the computer market our sales declined 5% as a result of our continued effort to prune low margin products. Sales of these products were approximately $30 million in the year ago quarter. Excluding this pruning our sales are up 6%, driven by strength in the notebook computer market. In the communications equipment market we had a very good quarter with sales growth of 22% organically. In the infrastructure portion of the market which represents about 60% of our business in this market, sales grew 11% and again most of this growth was in Asia, which is offsetting continued softness in North America and Europe. Same trend we've seen for the last few quarters.

In the mobile phone market which is about 40% of this segment for this market segment sales, our sales grew 47%. And this was led by 66% growth for our interconnect products. We do believe we are gaining market share in this very important market as we expand our base of customers and broaden our product portfolio. And we expect another very strong year for this business.

In our industrial markets we grew 10% with very strong growth in the solar and oil and gas subsegments of this market. In appliances our sales declined 4% year-over-year with double-digit declines in the US and Europe partially offset by solid growth in Asia. This continues to be a challenging market, especially in the US as a result of the US housing situation. And we don't expect this to change for the balance of the year.

We also had another strong quarter in the aerospace and defense market with organic growth of 9% in the quarter. We continue to build backlog in this market and expect continued strong sales growth for the balance of the year.

I will now talk a little bit about our Network Solutions segment where sales grew 22% on a reported basis and 12% organically. In the communication service provider market sales were up 22% organically with growth in all regions especially in the US. This growth was driven by increased spending on broadband fiber deployment by certain large carriers. And as you know in this market our revenue is driven by carrier capital programs, and they tend to be a little bit uneven. And in the second quarter we do expect lower sales sequentially due solely to the timing of project revenues from certain European carriers. But overall we expect a strong year here, driven by continued fiber-optic rolloff as the demand for broadband is very strong.

In the building networks market of this business segment, growth was 10%. This business continues to be strong fueled by continued global demand as businesses upgrade their information technology to support broadband and more secure networks. The majority of this volume is driven outside the US, and pricing was relatively flat in the quarter. So this 10% was all volume related.

In our energy market sales grew 8% in the quarter, again driven by strength outside the US. As you know, utility companies continue to invest in energy infrastructure around the world, and we believe we are well positioned to benefit from that trend.

In our Undersea Telecommunications segment we had another outstanding quarter with 311% growth, driven by the construction of several large projects in Asia. Activity in this market remains very robust especially in emerging markets where broadband requirements continue to increase. We are well positioned there and we are winning more than our fair share of this business. And in the quarter we booked $750 million of new projects and we ended the quarter with a backlog of about $1 billion.

Finally, in our Wireless System segment sales were flat in the quarter with growth in wireless networks offset by declines in the commercial products and aerospace and defense businesses. Let me just say a few things about the state of New York project which is our big project in the Wireless System segment and in particular in the wireless networks business portion of that business. As you know, we were awarded this project a couple years ago. It is a very large project, and we are well into testing of the first two phases of that region of the state, the first two regions I should say. And right now we expect that we will start recording revenue in the second half of the year.

Now let me turn the call over to Terrence.

Thanks, Tom, and good morning everyone. Since Tom covered our revenue trends, I will go through the P&L, cash flow and a few other items. Starting with the P&L, our operating margin on a GAAP basis was 13%, which includes $21 million of restructuring costs. On an adjusted basis we were pleased to see our operating margin improve by 50 basis points to 13.6% in the quarter. We saw good operating leverage on higher sales levels in the Network Solutions and Undersea Telecommunication segments. This was partially offset by a slight margin decline in the Electronic Component segment reflecting a continuation of the low productivity levels we've been experiencing in our US automotive operations.

As you are aware, we were doing a plant consolidation in the US, and we worked through the final stages of that in the quarter. And we expect improved performance in our US automotive operations going forward.

Next, our net interest expense was $40 million in the quarter, a slight decrease versus last year, reflecting lower debt levels and a higher cash balance. Depending on the level of cash generation coupled with the timing of our share repurchase program our net interest expense should be in the range of 40 to $50 million per quarter.

Our other income was $592 million on a GAAP basis and $20 million on an adjusted basis during the quarter. Both of these figures relate to our tax sharing agreement with Tyco International and Covidian and were impacted by the adoption of a new accounting standard, which I will discuss in a minute.

Income tax expense in the quarter was $157 million, resulting in a GAAP effective tax rate of 15%. This slow rate reflects the nontaxable nature of the tax sharing income included in other income. Our tax rate on an adjusted pretax income was 34%, and this effective rate was reduced by about $15 million due to nonrecurring items in the quarter.

Now let me spend a few minutes on the adoption of FIN 48, the accounting for uncertainty in income taxes. This standard requires us to take a more conservative view of our potential tax liabilities for which the majority relates to the shared obligations with Tyco International and Covidian, under our tax sharing agreement. The adoption of this standard resulted in an increase to our contingent tax liabilities and deferred tax assets, and this resulted in a onetime increase to our net tax liabilities of $635 million.

We also recorded a onetime income item of $572 million in other income to reflect the shared portion of these liabilities for which we will be reimbursed from Tyco International and Covidian. The net impact of these items together to our shareholders equity was a decrease of $63 million. In addition to the onetime adjustments the adoption of FIN 48 will result in an ongoing impact to our income tax expense and effective tax rate, as well as other income.

The interest on the increased contingent tax liabilities which we reflect as a component of our income tax expense, will add approximately $80 million to our income tax expense and will increase our effective rate to 36 to 37% for the year compared to our previous guidance to you of 33 to 34%.

Our other income will also increase to $23 million per quarter versus our prior guidance to you of $10 million per quarter. Again, the impact to other income reflects the shared portion of the interest accrued through our tax line under the tax sharing agreement. The increase in our income tax expense of $80 million less the increase in other income results in a $0.05 decrease to our EPS versus our prior guidance.

It is important to highlight that while these adjustments will affect our reported earnings, it is important to note that these are non-cash items. In the quarter our cash tax rate on an adjusted income basis was 17% and should remain below 20% for the full year. As I previously indicated, we are working on initiatives to reduce our tax rate by two to three points over the next several years but the base will be now higher due to the adoption of FIN 48.

Turning to net income, net income from continuing operations was $872 million in the quarter, and our EPS was $1.75 per diluted share on a GAAP basis. Our adjusted EPS from continuing operations was $0.63 per share, an increase of 26% [see press release] over the prior year and as Tom indicated, this was driven primarily by increased operating income in our businesses.

Moving now to cash flow, we had a very nice start to the year with cash from continuing operations of $392 million, an increase of $179 million compared to last year's first quarter. The improvement was driven by higher income levels and improved working capital performance. Our inventory levels on a year-over-year were down nine days, and we feel good with where our inventory levels are going into the remainder of the year.

Our net capital expenditures were $125 million in the quarter, which is down significantly versus last year. Recall that in last year's first quarter we spent $280 million to buy out a lease for ships related to our undersea telecom segment.

Next, as Tom mentioned during the quarter we repurchased 7.1 million shares for $259 million. Based on our current level of cash generation and current pace of repurchases, I expect that we will complete this program in the next few months. And finally, we completed the sale of the Power Systems business during the quarter for $102 million and recorded a $56 million pretax gain on the sale. And this gain is included in income from discontinued operations. And with that, I will turn the call back over to Tom.

Thanks, Terrence. I am now going to talk about our outlook for the balance of the year and the second quarter. In Q1 we had strong order rates with growth of 17% for the total company and 9% excluding our undersea telecom and wireless segments. The strength in orders was broadbased with the exception of our US components business which I mentioned earlier where orders were relatively flat compared to the prior year. Since the end of the quarter our order rates have continued to be solid, reflecting a similar pattern to the first quarter.

While it is clear that these are uncertain economic times other than the weaknesses we have been experiencing in the US for about a year now, the balance of our business continues to be solid. Based on these factors we are raising our full-year outlook for adjusted earnings per share to a range of $2.45 to $2.55 an increase of 12 to 17% over last year. This compares to our previous guidance of $2.40 to $2.50 per share. The increased results from our strong first quarter results and the continued momentum of our undersea telecom business, which is offsetting the $0.05 per share impact from the adoption of FIN 48 that Terrence discussed.

Our outlook for our other businesses in aggregate is really essentially unchanged from our prior guidance and our estimate of restructuring costs is still approximately $130 million or $0.17 per share for the full year. We expect full-year sales growth of 11 to 13%, and we now expect full-year organic sales growth of 7 to 9% compared to our previous view of 6 to 8%.

And just as a reminder, our guidance does not take into account any divestiture activity and assumes that raw material prices and foreign exchange rates hold at current levels. For the second quarter we expect sales growth of 10 to 12% over prior year sales of $3.3 billion with organic sales growth of 5 to 7% and double-digit operating income growth.

We expect adjusted earnings per share from continuing operations of $0.60 to $0.62, and this is essentially flat with the prior year, of a flat EPS is due entirely to a significantly lower tax rate last year, and this adversely affects the year-over-year comparison by approximately $0.07 per share. Restructuring costs are expected to be approximately $0.03 per share in the second quarter and including these costs earnings per share from continuing operations are expected to be $0.57 to $0.59 per share.

So before I open it up for Q&A let me just recap the call. We are pleased with the start to the year with organic growth of 12%, adjusted operating income up 23% and adjusted EPS up 26%. Our operating margins are up 50 basis points year-over-year to 13.6%. We had another good solid cash flow generation quarter. We got off to a good start in returning excess cash to shareholders. And we expect to complete our $750 million of our buyback program over the next few months.

We continue to make steady progress in our key strategic initiatives of focusing the portfolio and simplifying our manufacturing footprint. And of course there is a lot of work yet to do there. And we did increase our outlook for EPS based on the strong Q1 and the current order rates we are seeing. So all in all, pretty solid quarter. And with that, I will open up the line for questions. Operator, can you please open the line?

(OPERATOR INSTRUCTIONS) Steven Fox, Merrill Lynch.

Good morning. A couple questions. First of all, can you talk about the growth in the wireless business a little bit more on the handset side? Where are you, what kind of products are you having most success with, and then what type of customers by region?

Thanks, Steve. Our wireless business really has -- are you talking about the wireless business in our component segment?

Yes, I am sorry, in the Electronic Components, the handsets.

Sure. Well, I think as you know, historically we have not been a real big player in that segment. And about three or four years ago put a big push on, for obvious reasons, given the strength of that segment to become a significant player and I think the team has done a real good job of steadily improving our position. And broadening our connector productline and just really dedicating more engineering resources to the big customers. We can't get into customer by customer detail, but we are now in all the big customers. One of those big three we are still not a major player but we are in the door. But in the top five we have a strong position. So our products are now ending up in mobile phones in every region of the world. And we really feel good about the progress. And I'd say the most important key there again is we increased the engineering resources dedicated to that; it is a project by project basis. And so far we've been executing well.

Okay, great. And secondly on the undersea telecom business you mention that you built more backlog, have more projects. Can you sort of help us out on what the implications for full-year revenues are now for that business? And what it means for margins? Off of the margins you just put up?

When you look at the year certainly we had about $300 million revenue in the first quarter. We did have the big transpacific product that we will be wrapping up; where we see undersea I think the best way to think about it is in the second quarter around $250 million of revenue. And right now in the out years probably about 150 million out quarters, $150 million per quarter in the out. So that is adding the increase to our topline growth, increase on our topline growth on guidance. You did see, we did see operating income pick up in that segment this quarter. I think with these levels I would still expect them to be in the low double digits for the year.

Thank you.

Will Stein, Credit Suisse.

Thank you. I would just like to make sure I understand your comments with regard to the weak US economy. It sounds like you have been seeing weakness in this region for some quarters, not just in the current quarter. And I'm wondering if you can comment as to how you expect that -- how you expect the US economy to factor in going forward and how it is incorporated in your current guidance.

Yes, a couple comments. First of all, the weakness is really in the components business. The networks business and our other infrastructure businesses, wireless, are pretty robust right now, or solid I should say in the US. In components where we've been seeing it for the last year is our US automotive business fell. We've been doing very well in Europe and Asia and that is where our strength is and that is where about 80% of our business is. But US automotive has actually for us been down in revenue almost 8 quarters I think straight now. So it has been soft for a while. We don't expect that to improve in '08.

We don't expect that to get significantly worse either. It has been down quite a bit. And the other piece that has been down for about a year now is the appliance or the white goods space, which is really directly correlated to the housing market. So those are the two big markets that have overall kept us in the negative growth mode in the US. In industrial we've been solid double-digit, which is primarily US and Europe. And in aerospace which is primarily US we have been strong.

So it sounds like you are not contemplating an erosion in areas outside of automotive or white goods in your guidance. Is that right? And I am --

That is fair to say because when we look at the dynamics which are driving wireless public safety, for example, strong, strong order book in the first quarter, that is primarily US business. So we expect that to get a little stronger in the second half. And then we continue to expect industrial to hold up and aerospace and defense, we are sold out at capacity.

Okay, great. Just one other question. I'm wondering if you can update us on capacity rationalization that happened in the quarter. I think you said earlier we are at 120 sites and maybe a quarter or two ago I thought we were at 130. Can you just bring me up to speed as to what has happened in the last quarter and what the current plan is, when you currently expect the capacity rationalization to be essentially completed.

First off, as we laid out this was a long-term plan that we have it going out to 2010 is what we communicated. So there is still, I think as Tom's comment said, still a lot of work to be done. We do have, as Tom mentioned, 20 individual actions that are in progress currently. We ended last year '07 with 121 manufacturing sites. So we did make some progress. We have touched already about 14 facilities that are either closed or are in the process of being closed from when we started the program. And that is split pretty evenly between the US and Europe and Middle East and Africa. So we are still early into it. I would say this quarter was really a continuation of what we started last quarter and the year before. And in that regard there was no new one action done in this quarter that we just did is a continuation of what we've been working on.

Great. Thanks very much.

Carter Shoop, Deutsche Bank.

Congratulations on a pretty good quarter there. One area that you guys have focused on in regards to gaining market share had been the handset market, and that is pretty evident in this quarter. Another market that you had talked about trying to reinvigorate has been the consumer electronics market; not as much success there. Could we talk a little bit about what needs to be done to drive sales there and how important that is for Tyco Electronics in the components division?

I would say consumer electronics is clearly an important focus area for us. I think if I had to rate in priority I would rate mobile phones a higher priority, but it doesn't mean that we are not paying as much attention to consumer electronics. As we discussed before I think within consumer electronics there is a mix of attractive product to go after and not so attractive. We've been selective. Where we've been successful is in gaming, is in big screen TVs, digital cameras. I would say our performance has been bumpy as those markets have ebbed and flowed; we've ebbed and flowed with them. We are still relatively small, so our revenue can move around quite a bit because of that. When I take a couple year view of it and look over the past couple years we believe we are growing slightly ahead of market rates. So we are making progress, and it is an important market for us.

Great. That's helpful. As a follow-up, two questions on the cash flow. Could you provide us with a targeted range for cash flow for fiscal year '08? And also, could we talk about the longer-term trend in cash taxes? I know we're looking for a 200 to 300 basis point reduction in the GAAP tax rate by 2010. Will that be decreasing at all for the cash tax rate?

First off, what we've said is over the long-term I would expect that our free cash flow will approximate net income. So when you look at it over a very long-term cycle that is the guidance where I think your head should look at. In regard to cash tax rate versus GAAP tax rate I would not assume that the GAAP tax rate coming down will continue. You get the same on the cash tax rate due to us or NOL position that we are utilizing. So where I think we will be is sub 20%. You saw a 17 in the first quarter but we will be in that for quite some time with our NOL position and the tax planning we are doing.

Great. Thank you.

Matt Sheerin, Thomas Weisel.

I am hoping you can talk specifically about demand trends you're seeing in Europe aside from the automotive business. We are starting to hear from some of your distributors which tend to focus on industrial markets that Europe is off to a little bit of a softer start in the March quarter, which is normally up sequentially pretty strong. So could you tell us what you are seeing there?

Europe has been strong for us for the past year and was another solid quarter in Q1, and particularly automotive was very strong in Europe. We expect that to slow down a little bit over the balance of the year. We don't expect it to fall off the end of the earth, but our outlook does have baked into it a little bit of a slowdown in most of the markets there.

Okay, and then with the buyback -- and I know you've made some good progress there -- if you were to complete that in the next few months given your plans for free cash flow would you expect to do an additional buyback?

Yes, we would.

Okay. Thanks very much.

Yuri Krapivin, Lehman Brothers.

Good morning. Tom, so with orders being up 17% organically and 9% if you exclude two volatile segments you are guiding to organic sales growth of 5 to 7% only. So I think there is a little bit of disconnect year. Are you guys being conservative?

Yes, Yuri. I'd think about it this way. Coming off a good quarter, good order growth, that is going to carry us through in the second quarter. And we feel confident about that. And we do feel our outlook is balanced for the year. Admittedly, there is just a lot less visibility, of course, for the last six months of the year compared to Q2. So there are some signs out there that things could get softer but it is not yet reflected in our order rate. So if you were to peel back and look by our segments and kind of really I think the bellwether indicator of the economy for us is EC. We see growth slightly down in EC second half versus first half, so we do see that coming off a bit and a part of that is because automotive has been really very strong in the first quarter. And we expect that to come down a little bit. So that is our view is, it is a pretty balanced outlook for the year, and we feel comfortable with it.

I would just add a little bit of the disconnect between the order rates in Q1 and the growth rate we are looking at in Q2 relates to some of the orders we took in are for some of the out quarters. In certain longer cycle markets like A&D, solar, oil and gas, some of those markets we are getting orders that extend out into the second half.

Okay, great. And then with respect to your inventories you mentioned that you feel good about the inventories for the balance of the year and that inventories were down on a year-over-year basis by sequentially, I think your inventory position increased by about $250 million. So you could you please address this sequential increase in inventories?

I think you are a little bit high on your increase figure sequentially. I think it is up $100 million or so without FX. There is FX in there. When you look at it sequentially we always have a build in our first quarter, and that build is just we always get it down to fourth quarter at the end of the year and we do have a build going through the holiday season in quarter one. If you look last year we had a much more significant build last year, and it took us a long part of last year to burn that off. We did have an overbuild last year first quarter. I would not say we are in an over build situation. I feel very good about where we are for the rest of the year in inventories, and I don't think there's pressure on the business to get it down. So I do think it is in connection. My comment on year on year if you look at nine days, the nine days overall being down in inventory is where we would expect to be. And longer-term, like I said, we will be in the mid '70s on average over time.

Jim Suva, Citigroup.

Thank you, and congratulations. Can you talk a little bit about what type of visibility you have? We all read the newspapers. We all see the news about concerns about recessionary type things. What type of visibility do you have, and maybe if you can give it to us via the different segments? Is it a month visibility? Is it quarter visibility? And when things slow like in past cycles how fast does it slow and have we seen any of your customers starting to kind of temper down some of their ordering?

Thanks, Jim. I would say, answer your last question first, no, we have not seen any change in the order patterns, particularly in what I call our industrial or infrastructure businesses. And that, if you look at that that is about 40% of our business. Things like wireless public safety, undersea telecom, pretty long order cycles. You get the backlog, for example, we mentioned the big order bookings in undersea and in wireless in the first quarter. That is [where] can be for a full year's worth of activity, in some cases even more. In our Network Solutions business because it is project oriented it tends to be longer-term. Components generally is the shortest without question, and I think if you look over the past years where there has been slowdowns it can come quicker in the components businesses, for sure, particularly in the consumer related businesses. So we watch that very closely, but we really haven't seen any significant change in pattern.

US automotive continues to be lousy for us. And I think for a lot of people. The appliance business the same way. Consumers, the consumer electronics businesses have slowed down a little bit. Mobile phones continues to be really solid and we are actually, we have some capacity constraints in fact there, which is not so great for our customers in working through it. But it is a better problem to have. So on balance we have not seen that, and I was with a bunch of customers last week. And we are all asking each other the same questions. Because you look at the newspapers and hear the news and you sort of feel one thing and then you look at the order book and say well, I see something else. So I will tell you we are all staying closely connected to make sure if there were a change there we would pick it up quickly so we can adjust. But haven't seen any push, cancellations or anything like that.

Okay, and just a little color as far as if something like that were to happen, would it happen like within a couple months type period, couple quarters, couple weeks? How fast in the past cycles have you seen it?

It is usually about a quarter. And really what has been going I think a good example is US automotive, when you see the increased amounts of plant closings or furloughs and stuff like that. And the ripple effect for us is usually in the quarter range maybe a little bit less than a quarter there. In other areas we do have one indicator we have is about 15% of our business is through distribution. And that has been slow in the US. That is where our biggest distribution business is, and we have a good idea of what is in the channel. And we certainly know our sell-in and sell-through, so that is another indicator we look at.

If inventories were to spike there, that would be a sign for us to put on the brakes. We've actually been expecting that to bounce back a little more than it has and it is still relatively flat for us but we haven't seen it any material increase in our inventory in the channel. So all the different indicators we look at, we are not getting any feedback. But I would say typically think about a month, I mean a quarter, sorry, about a quarter would be the lead time we would have.

And a quick clarification question. On Undersea Telecom it was 314 of revenues this quarter and if I heard correctly, you are guiding to about or expecting about 250 next quarter followed by 150 thereafter. If that is correct and did those also include that 750 million new program booked? And when a new program like that gets booked what type of lifeline or longevity does that have?

A couple things. Yes, you are right on how you thought about the quarters, you articulated the quarters. That 750 is not one order. It is multiple orders. And from that viewpoint it was based upon demand capacity that we can actually install the system and some of those orders will actually trickle into '09. So not all those orders were for this year. Some of those orders go into next year.

Sp maybe typically think of it like a three to five quarter contract?

I think that's depending upon our ability and capacity could be anywhere out four to six quarters depending upon our -- (multiple speakers).

That is typically the average from the time we sign a contract until you work out the logistics. And you actually finish the contract -- of course depending on the size of it. For example, that big transpacific express contract was about an 18 monther. What is happening now is activity is, there is more activity than there was a year ago. So there is the lead time is pushing out a little bit because there is capacity limit in the industry.

Great. Thank you, and congratulations.

Ajay Kejriwal, Goldman Sachs.

Just a detailed question on currency. Wondering if you have the EPS impact of currency in the quarter?

On that we did have as you saw in the top line that benefited us seven points above organic growth. And that was all currency. That was about four, that was above our four points we expected. And it did contribute to about $0.01 above our guidance overall. FX helped EPS by $0.03 year-over-year.

And what do you have built into your full-year guidance?

In our guidance we have four points on the top line going through. And that would [fall] through at our normal operating margin trend for the year.

Okay, so maybe something like $0.12? I mean is annualizing the first quarter of [goodwill we are] thinking of?

It would be less due to the euro got stronger towards the second half of the year, so it would be less than that number.

Okay, great. And assuming stable raw material prices, wondering if you have any specific numbers that you could share.

Where we are at right now copper has been around $3.20. We have fixed most of the second quarter around the $3.20, $3.30 rate and a chunk of the third quarter at the same rate. So copper for the year, year on year for the total year is pretty similar. So that is really not a headwind year-on-year. Certainly between the quarters, for example in '07 copper went down to 2.70 in the second quarter, then went up higher. So in the second quarter there will be a little bit of a compare issue there.

The real factor this year is gold. Gold has gone from $650 a troy ounce up to almost $900, and that is a headwind in our -- it is included in our guidance for the year. So gold right now is probably a headwind before consideration of price of about $10 million a quarter.

So $10 million year on year?

Yes.

Great. Shifting to wireless, maybe if you could help us understand the progression of revenues as you implement the New York State project; so how should we think in terms of the ramp up by quarter later this year?

On the revenue on the state of New York it will depend upon the acceptance, but that would be primarily in Q3 and Q4. It will depend on the timing of when acceptance occurs. So it will be later in the year in that regard, Ajay.

Thanks.

Shawn Harrison, Longbow Research.

A few quick questions. Just a follow-up on raw materials. On the other side of that equation what are you seeing in terms of ASPs in the Electronic Components business right now?

ASPs, price erosion is really running about where it was last year. Overall average 2 to 3% range, so not a big change. Haven't seen I mean, in that business for all of us in that business, every deal is a different negotiation. But generally haven't seen a significant change in erosion.

Second question just getting back to the cash flow, how much stock have you repurchased so far in the quarter?

In quarter one it was $259 million.

And through I guess January in quarter two?

We would be up to about $400 million.

Okay and do you have an updated full-year CapEx number?

We still believe CapEx will be in the long-term range that we've given out before which is in the 4 to 5% of sales rate for the year.

Okay, and one final question just on operating expenses. How should we expect them to track through the year? Pretty stable on the dollar basis or maybe declining given the growth and kind of restructuring as the year moves along?

I don't think you should assume that it would decrease in dollars. I think what you saw in the first quarter we got a little bit of benefit of leverage from a SG&A rate perspective due to the strong growth in undersea. But from a dollar perspective our actions that we said on the footprint really does not influence SG&A. So I think from a dollar perspective you would assume moderate growth in that but you wouldn't assume a decline.

Thank you very much.

Brian White, Jefferies.

Just looking at the automotive market within the Electronic Components business, US is obviously slow and you said Europe is even seeing some signs of slowing. Will growth decelerate in 2008 versus 2007 for the auto Electronic Components business?

Compared to Q1 we were at 8, 9% in Q1, so we would expect to run 5 to 6% for the year.

That compares to about 6 last year so not meaningfully different.

Okay.

And that is production is expected to be down about 200 basis points year on year from about a 4.7 to about a 2.5 year on year, Brian.

Okay, and when we look at the March quarter, how should we think about the four different segments in terms of sequential growth? What markets, what segments will actually go up, and what will go down?

Sequentially if you look at it EC will grow. Networks will decline. We typically get a little seasonality coming into the winter months in networks. Wireless will be up a little bit and Undersea Telecom will be down, as I mentioned, on their quarterly. So I think when you look at the second quarter when you take all that, the second quarter P&L other than taxes, should look fairly similar to quarter one.

Okay and just a question for Terrence. The inventory number that was given out for the September quarter and the one given out today for the September quarter changed a little bit. I think that was one of the reasons for confusion of the sequential inventory dollar change. What is that attributed to?

There was a reclass made out of prepaids up into inventory, there were some reclassifications we had done for consistency. It doesn't change the balance sheet at all. It was just a reclass between some lines.

Okay, great. Thank you.

Aaron Husock, Morgan Stanley.

Thanks for taking my questions. I was wondering if you could talk a little bit about the restructuring savings you're seeing on the cost line so far in the restructuring program? And when you expect that savings to kick in a little bit more meaningfully.

From the actions we took last year there is a little bit of savings but of course we're going to ramp up our investment this year so when you net the investment against the savings it is really a slight negative this year. We really won't start to see a net benefit of any magnitude until 2010, because we're going to spend in the 130 to 150 for the next two or three years. And as we've been saying all along, the benefit of that is really back end loaded. It was a net negative last year, it will be a smaller net negative this year. It starts probably a little bit of a wash overall between investment and savings in '09 and then we get the pickup in 2010.

Yes, and Aaron, from what we started everything that we started last year pretty much happened in the second half. So really in quarter one there was very minimal savings before the consideration of charges.

Okay, but as far as you saying it will be a smaller negative in fiscal '08, does that mean in the actual savings could be somewhere in that say $100 million range, or will it not be that high?

They will not be that high. Where we are going is last year we had about $100 million of charges. We've guided to about $130 million this year. So when we are talking year-over-year compare you got to take the comparison, not just the $130 million. So no, we would not have $100 million of savings this year with what we kicked off last year. Remember we did say it was going to be about three-year payback per project. So on $100 million that would be about $30 million of savings when fully implemented.

Okay, great. Thank you.

Amit Daryanani, RBC Capital Markets.

Thanks. Just a question on the components margins. It looks like they were down about 20 basis points sequentially year-over-year despite having good organic trend. Can you just talk about why we aren't seeing incremental leverage in that part of the business?

That was probably without question the one blemish on our results this quarter, and that is very much absolutely related to our North American automotive business. Part of that is volume, but part of it is as you know we started to do a fairly significant restructuring there about nine months ago. It has taken us a little longer, and we have not executed as well as we typically have in that group, and our North American auto business has done a great job over the last three years of keeping our margins attractive in the business as it's declined. But we've had a rough quarter in Q1. We should be through that by the end of Q2, but that caused our margin decline. Otherwise we would have been up in components. That was the one rough spot for us in the quarter.

So if I look at the business ex North America auto driven restructuring issues, would it be fair to think you probably would've had 20, 25% incremental EBIT margins in that segment?

I'd say 10 to 20 basis points.

(multiple speakers) probably would have been 10 to 20 basis points expanded versus where we came in at.

Approximately 20 basis points now? (multiple speakers) headwind then? I think you guys mentioned about three product line divestitures you guys did in this quarter, could you quantify the dollar impact of that?

When you look at it, it is in the component segment. But they are small productlines, annualized revenue of that is about $20 million.

All right. And just kind of going back to one of the only questions on the potential for a downturn of what you guys are seeing; it doesn't look like you're seeing it in your orderbook to show right now, but if you look at your bidding activity for new businesses, is that part of the segment may be slowing down? Are you seeing less amount of bids that are going through the system over here, and how is that working?

No, we are not seeing that yet.

In some of our businesses you are bidding a year, two, three years out. Take automotive, for example. We are working on proposals for 2010, 2011 and even out as far as 2012. Even in something like mobile phone, which the typical view is hey that is really a short cycle business and certainly orders can change short-term depending on fluctuations and end demand. But the bidding we are doing is out a year or two; because from the very beginning of trying to get a product designed into the architecture to when you end up shipping it, it is usually well over a year. So we have not seen any material change in activity.

All right. And finally, can you talk about what debt to cap ratios are you guys comfortable with in terms of bandwidth? I guess what I am really trying to get a sense of is can you sustain a $750 million buyback every six to nine months that we have done this time around?

When you look at it, as I have stated right now with the size of our business and consideration of we do have some shared liabilities, what we feel the debt balance we can hold is about $3.5 billion. And withholding liquidity position around $500 million cash. So net debt around $3 billion with where we are now.

All right. Thanks a lot, guys.

Michael Ellmann, Mayo Capital Partners.

You've indicated in the press release and on the call that you've spent $259 million to repurchase stock in the quarter. And yet in the cash-flow statement the number that is given for repurchase of common shares is $232 million. Could you please explain the discrepancy?

The discrepancy would be there were trades made towards the end of the quarter that did not settle until the following quarter, so actually cash went out was 232. But we actually bought 259. So it is just a timing item (multiple speakers) settled into the quarter too.

That's helpful. And you made some comments about this new accounting standard. Do I understand properly that the $592 million of tax sharing income is going to remain non-cash forever?

There is two pieces of the tax sharing income, a 572 and also 20 million that related to ongoing activities. So there are two pieces.

Okay.

When you look at it, will it be non-cash forever, it will depend upon when all the shared liabilities related to our tax sharing agreement are done. The net net at the end, while definitely FIN 48 has created confusion when you look at it and it is a complex standard, when we separated from Tyco we thought our total exposure net of the shared amounts was going to be about 6 to $700 million. Over time as we settle out our tax audits and issues we still believe that that is the amount and the adoption of the standard doesn't change anything. So while the ongoing run rate, my comments relate to the ongoing run rate, overall the tax exposures related that we had when we separated have not changed with FIN 48 to be a net 6 to $700 million that we've stated before.

Okay, thanks.

Brian Jacoby, Goldman Sachs.

Just a question on your capital structure, your cash-flow statement is showing that you paid back some debt, and I am just curious what you repaid. I am assuming you repaid some of the rest of your bridge and then maybe some of the revolver; if you could just tell me what the debt looked like at the end of the quarter.

The end of the quarter you are right, we still are operating on a small piece under the bridge. There is one piece of our capital structure that we still have to complete. We have about $500 million remaining under the bridge facility. So that is still outstanding. And that payment that we did make was under the bridge. If you look at our overall debt where we were around 3/2,$2.1 billion relates to the offerings we did in the fall. We had $500 million under the bridge, and then we have CP for the remainder, basically.

I thought you had 550 on the bridge last quarter, so you didn't really pay much down? Where is --.

We paid a little bit down on the bridge. The rest would have been in the commercial paper just depending between the bridge and the commercial paper.

Okay, thanks.

Steven Fox, Merrill Lynch.

My question has been answered. Thanks.

Carter Shoop, Deutsche Bank.

Just a couple quick follow-ups here. Could you talk if there is any impact at all on a sequential basis from divesting any of the pipelines in the computing division? And I know you guys quantified it on a year-over-year basis. Was there any impact sequentially?

Not much, Carter. We have been doing it now for about a year or so; most of the compare is over. It is probably going to be 5 to 10 million.

Two quick follow-ups. In regards to an incremental buyback, it sounds like you guys would look to initiate a new buyback sometime this fiscal year. Is there any buyback already incorporated into current guidance for the full year?

We would have in our guidance the use of cash either for interest or for share repurchases, Carter. So from a cash generation, yes, we would include cash generation in our guidance.

Thanks. And now that we've got a lot of the refinancing behind this divestiture, the Power Systems, are we going to start to look more closely at acquisitions? Should investors start to think about seeing acquisitions in the fiscal year '08, or is that going to more kind of an '09, 2010 event?

In some targeted markets we are starting to build a pipeline, for sure. If we can do a couple of targeted acquisitions or one in a couple of these key areas this year, we would do it. It is really going to depend on are the properties the right fit for us and are they interested. But we are starting to rev that up.

Great. Thanks.

Will Stein, Credit Suisse.

Just a quick follow-up. The guidance for the full year of $2.45 to $2.55, am I right in assuming that that backs out the restructuring charges that you are going to incur in the year?

Correct.

Okay, and one other quick one. The $102 million payment for The Power Systems division, was that received in the December quarter, or is that going to be received in March?

That was received in this quarter. You can see it on the cash-flow, Will.

Okay, great. Thank you.

At that time then we have no further questions in Q.

Great. Thank you for joining us this morning, and the IR team will be around for questions, and we look forward to talking to you.

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