泰科電子 (TEL) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome the Tyco Electronics Reports Strong Second Quarter Results, Increases Full-Year Outlook Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I will now turn the meeting over to our host, Mr. John Roselli, Vice President, Investor Relations. Please, go ahead.

Thanks, Laurie. Good morning and thank you for joining our conference call to discuss Tyco Electronics' second 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 statement that we have 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. On our website, we have also included an 8-K filing containing the historical financials adjusted for the reclassification of our RF Components and Subsystems business from the Wireless Systems segment into discontinued operations.

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 to everyone. As is our usual format, I will cover the key highlights of the quarter and then turn it over to Terrence who will walk you through the financial details. And then I'll wrap up with our outlook.

Overall, we were very pleased with our performance in the quarter. Our top line growth of 14% which was 7% organically reflects the diversity of our market mix and our balanced global presence and really similar dynamics as we had in Q1.

Our businesses that serve infrastructure and industrial markets which represent about 40% of our sales -- and that includes Undersea, Wireless, Networks, and the industrial market served by our Components segment -- grew 18% organically in the quarter. This more than offset the continued softness we are seeing in certain consumer markets in our Components segment, namely the US portion of our automotive business, appliances, computers, and consumer electronics. These markets were about flat in aggregate in the quarter.

We're also pleased with our operating income performance in the quarter. Our 7% organic sales growth delivered an adjusted operating income increase of 17% over the prior year and our adjusted operating margin increased slightly to 14%. Our margins were up significantly in our Undersea and Wireless segments, due to the volume growth we had in those businesses along with a more favorable sales mix in both businesses. Our sales mix was unfavorable in our Network Solutions segment, as our most profitable market, our Telecomm business, experienced a slight revenue decline.

We had another very good cash flow quarter, generating $349 million of free cash flow, a 47% increase over the prior year. We used this cash to repurchase over 10 million of our shares in the quarter.

We also had another quarter of good progress to become a more focused Company with the announcement that we were pursuing the divestiture of the RF Components and Subsystems business, formerly in the Wireless Systems segment.

Now I'm going to talk about our revenue performance in several key end-markets by segment. Starting with our Electronic Components segment, our sales grew 9% in the quarter or 1% organically and as expected, we had low organic growth in the quarter for some of the reasons I mentioned earlier and I'll touch on now.

Our sales to the automotive market grew 12% overall and 2% organically. On an organic basis, we grew 3% in Europe where we generate more than half of our automotive sales. As we had indicated on the last call, we had expected this business to decelerate after the very strong 9% growth we generated in Q1. In Asia, our sales grew 10% organically, led by very strong growth in China where we have a very nice position. In the US, our sales were down 17% in the quarter driven by significant production cuts by the US manufacturers. Overall, our global order rates for this business remain solid and we expect organic sales growth to return to the mid-single digit range in the third quarter.

In the computer market, our sales declined 6%. The decline was partially due to the continued exit of low margin product lines, especially in the desktop segment of the market. In addition, we are also being more selective with new projects in this area, due to the commoditized nature of this market. And this is consistent with the strategy we announced over a year ago.

In our communications market, our sales grew 14% organically. In the infrastructure portion of this market, which is about 60% of our revenue, sales grew 5%, led by growth in emerging markets. This offset declines in the US and EMEA, a continuation of the weakness we've seen in those markets for the past couple quarters.

In the mobile phone market, which is about 40% of our communications sales, revenue grew 43% in the interconnect products portion of this market as we continue to gain share in this very, very important market. We expect our sales to continue to be strong in this market for the remainder of the year.

In industrial markets, we grew 26% and 16% on an organic basis, reflecting increased demand in the solar, oil and gas, and industrial equipment segments of the market. Our sales to the aerospace and defense market grew 17% including currency or 11% organically. We continued to build backlog in this market and expect continued solid sales growth for the balance of the year.

In the appliance market, our sales declined 5% organically, primarily due to the continued negative impact from the US housing market. This is a continuation of the last several quarters and we do not expect this market to turn up for the balance of the year.

Finally, in the consumer electronics market, our sales declined 20% in the quarter. We do not yet have a significant presence in this market, and the platforms where we are strong had low volumes in the quarter.

Let me now talk about our Network Solutions segment where sales grew 14% on a reported basis and 5% organically. Our building networks business was up 14% organically as we continued to see increased infrastructure spending, particularly in China and India where we have leadership positions. In the energy market, our sales grew 5% in the quarter. Growth was solid in EMEA and Asia, and this was partially offset by a decline in North America, again, related to the housing slow down.

Finally, our sales to the communications service provider market were essentially flat, with growth in North America offset by lower than expected sales levels in Europe. As we mentioned on the last call, we were expecting a seasonally slower quarter in this market. But we were also more impacted by fiber -- slowdown in fiber rollouts by certain carriers in Europe. This was a bit of a disappointing quarter for us in this market. We do expect, however, to see this bounce back, begin to bounce back in the third quarter.

For the Network segment, overall, we grew our backlog in the quarter and we continue to expect organic sales growth in the 6% to 8% range for the year.

We had another strong quarter in our Undersea Telecommunications business. Our sales grew 122% in the quarter. Activity continues to remain robust and we booked several large projects during the quarter, resulting in a backlog that remains over $1 billion. We'll begin work on these projects in the second half, resulting in higher sales levels than we had been expecting.

Finally, in our Wireless Systems segment which now consists of only our public safety business, our sales grew 24% organically, primarily reflecting higher radio sales related to the rebranding efforts of a major customer. We expect Q3 to be another good quarter for this segment.

With respect to the State of New York Wireless project, we concluded our testing on the first region with very good results and we have now turned over testing to the state. Once their testing is complete, we will begin to recognize revenue on the project and we expect this will occur in the fourth quarter.

Now let me turn it over to Terrence who will take you through the financials in more detail.

Thanks, Tom. Good morning, everyone, and thank you for joining us. Since Tom did go through the revenue trends, I'll go through the P&L, then cash flow and a few other items.

Our operating income in the quarter was $501 million on a GAAP basis which included a $36 million gain from the sale of real estate in our Electronic Components segment, $26 million of restructuring costs and a $23 million charge related to our portion of Tyco International's security litigation settlement with the state of New Jersey. Our GAAP operating margin was 13.7%.

On an adjusted basis, our operating income was $514 million, an increase of 17% over the prior year. The increase in operating income was driven by sales growth, improved productivity and pricing as well as the favorable impact of currency effects. These positive effects were partially offset by higher commodity costs. Our adjusted operating margin was 14%, an increase of 20 basis points over the prior year, led by Undersea and Wireless.

Turning to segment performance, in our Electronic Components segment, the adjusted operating income increased 8% year over year on organic sales growth of 1% and the adjusted operating margin declined slightly to 14.4%. Improvements in productivity and pricing essentially offset the margin impact of relatively flat volume and higher commodity costs. Overall, we were pleased with our margin performance in the quarter in light of these headwinds. Going into Q3, certainly raw material headwinds will persist and this is reflected in our guidance.

The adjusted operating margin in the Network Solutions segment, we had a decline of 140 basis points to 12% in the quarter. This was primarily due to the mix of sales between end-markets including a decline of almost 20% in the communications service provider market in Europe in our sales. That decline negatively impacted our productivity in our operations in this segment. We do expect our margins for the segment to improve to the 13% to 14% range in the third quarter.

In our other two segments, Undersea Telecommunications and Wireless Systems, both had a very nice year over year margin improvement. Those segments benefited from strong sales increases and a favorable sales mix.

In the Undersea segment, the favorable product mix drove our margin higher sequentially despite the lower revenue. In Wireless, which now excludes the RF Components and Subassembly business, we expect double-digit margins for the rest of this year. As we talked to you about before, these are both project oriented businesses. So, there will be sales and margin variation, depending upon the projects in force and the related timing of our execution on the projects.

Now to non-operating matters. On interest expense, it was $40 million in the quarter. This was down slightly versus last year reflecting lower net debt levels.

In taxes, our income tax expense was $171 million in the quarter resulting in a GAAP effective tax rate of 36%. On an adjusted income basis, our effective tax rate was 32.6% compared to our guidance of 36% to 37% and this added approximately $0.03 to our EPS relative to guidance. The lower tax rate reflects the catch-up effect of an improvement in our full-year tax rate based upon some of the planning that we've completed. We now expect our tax rate to be approximately 36% for the next two quarters.

On cash taxes, cash taxes paid in the quarter were $118 million, and our cash tax rate on adjusted income was 24%. This was slightly higher than our long-term expectations, due to the timing of certain tax payments. We still expect our cash tax rate to be around 20% for the full year.

In other income, this was $13 million and this was lower than our guidance; and this is entirely due to the correspondence adjustments to our tax expense as it relates to the tax sharing agreement that we have with Tyco International and Covidien. For the remainder of the year, we expect other income in the range of $15 million to $20 million per quarter.

Overall net income from continuing operations was $302 million and EPS was $0.62 per diluted share on a GAAP basis. Our adjusted EPS from continuing operations was $0.67 per share, an increase of 12% over the prior year. When you look at our adjusted EPS growth of $0.07 per share year over year, this reflects a $0.09 improvement in our operations, $0.02 from a lower share count, and also a $0.02 benefit from currency effects. These positive effects were offset partially by $0.06 headwind from a higher tax rate.

Turning to cash flow, our statement of cash flow was affected by the final transfer of the Tyco International class action settlement escrow off our balance sheet. While we funded our share of the settlement last year, it is treated on as a cash outflow in our operating cash flow with a corresponding inflow in our investing cash flow. It has no impact whatsoever on our overall financial position or capital structure.

When you adjust for this item, our cash from continuing operations was $479 million, an increase of 32% over the prior year quarter. Also, as Tom mentioned, the free cash flow was $349 million, an increase of 47%, primarily reflecting operating income level increases as well as some advanced payment from customers in our project businesses.

Looking at our working capital, our receivables and payables were 69 days and 54 days respectively. Our inventory levels increased modestly to 86 days as we built inventory for the expected sequential sales increase in quarter three. On a year on year comparison, we are up slightly. Most of that is driven by investment in the state of New York which is reflected in our inventory balance on our balance sheet.

Now, a few other items I want to highlight. During the quarter we repurchased 10.3 million shares and where that leaves us at the end of the quarter, we had approximately $650 million remaining on the current authorization.

And also, as we mentioned in the press release, we're now reporting the results of our RF Components and Subsystems business as a discontinued operation. The results of this business were included in our previous guidance for the quarter and the full year. In the second quarter, the business generated $114 million of revenue and $4 million of operating income which was about $0.005 per share after tax. For the full year, we had expected this business to contribute approximately $0.04 per share.

With that, let me turn it back over to Tom.

Thanks, Terrence. I'll cover our outlook now for the third quarter and the balance of the year. As you saw in our press release, we are raising our full-year outlook for adjusted EPS to a range of $2.60 to $2.66 per share which is an increase of 21% to 24% over last year. This compares to our previous guidance of $2.45 to $2.55 per share.

Our estimate of restructuring costs remains at approximately $130 million or $0.17 per share for the full year. We expect full-year sales growth of approximately 14% to 16% and we continue to expect full-year organic sales growth in the range of 7% to 9%.

And just as a reminder, our guidance does not take into account any additional divesture activity and it does assume that raw material prices and foreign exchange rates hold at the current levels.

The increase in the guidance is based on our order rates which remain solid, especially in the businesses serving the global infrastructure, industrial and automotive markets. And as a result, our second half backlog is firmed up. This is more than offsetting continued softness in most of our consumer related markets. Again, a continuation of the trend we've seen for the last several quarters. We also continue to get a net benefit from the strength of foreign currencies.

For the third quarter, we expect sales growth of 15% to 17% over prior year sales of $3.3 billion with organic growth of 7% to 9% and double-digit operating income growth. We expected adjusted earnings per share from continuing operations of $0.66 to $0.68, an increase of 35% to 39%. The year over year comparison does benefit from a lower tax rate and higher other income compared with the prior year quarter. These items favorably impact the comparison by $0.07 per share. Restructuring costs are expected to be in the range of $0.03 per share in the third quarter; and including these costs, EPS from continuing operations are expected to be $0.63 to $0.65 per share.

Now just let me recap our call for today before we go into Q&A. The diversity of our business and global presence is paying off with organic growth of 7%, adjusted operating income up 17%, and adjusted earnings per share up 12%. Operating margins are up slightly year over year to 14% and we continue to track to our long-term goal of 15%. As you recall, a year ago, our margin including businesses that we've since divested or announced we're going to divest was about 12.7%. So, we're making good, steady progress in this area.

Our strong cash flow generation was used to repurchase over 10 million shares. We made another significant step forward in focusing our business with the planned divestiture of the Wireless Components and Subsystems business. And all four segments in the Company now have double-digit operating margins.

And if you add in the power business and the product lines we've exited, primarily in computer but also some in a few other market segments, we've divested or announced the divesture of about $1.2 billion of low margin non-strategic revenue to date.

And finally we're increasing our EPS outlook to a 21% to 24% growth over the prior year, again, based on the strong Q2 earnings and backlog increases in all of our segments along with some FX lift. So, with that, we feel pretty good about the quarter. We're making progress on our longer-term objectives. And now we'll open it up for questions.

(OPERATOR INSTRUCTIONS) Our first question, from the line of Matt Sheerin, Thomas Weisel Partners. Please, go ahead.

Thank you and good morning. Just a question on the margins going forward. It looks like you definitely had some favorable product mix within both components and your other divisions that helped boost the gross margin. Going forward, given the mix in the June quarter, are you expecting that to be sustainable or will that be down a bit?

Hello, Matt. Yes. We do expect the margin to run in the 14% range, plus or minus 20 basis points depending on mix, commodity pricing, currency. But we feel like we've got the business up to that 14% range and we should stay in there for the next couple quarters.

And if you break down gross margin versus SG&A, is it similar to last quarter? It looked like SG&A was up a good bit in the March quarter. Was that partly currency related or some extra expenses in some of your other divisions?

Matt, it's Terrence. Let me get the SG&A. SG&A's always going to bounce around a little bit. It was a little bit higher this quarter. If you look year to date it's right on 12%. I think that is the right long-term rate to think about. There's lots of moving parts in there based upon where sales are but I think you will always see our SG&A right around 12%. And then, to Tom's point, we will be around the 14% [new] line and that basically moves up to the gross margin line.

Okay. And then my follow-up, also regarding margins and pricing. You talked about materials still being a bit of a headwind, that you're offsetting that, obviously, through cost cutting and other things. But going forward, have you looked at selective price increases, particularly on your Components side? Have you talked to customers about that yet?

We're always doing that Matt. And as you know, in the Components business, most pricing is really on a project by project basis. But I think we've made pretty good progress in the last year or so in how we implement pricing, our overall pricing controls, and our price erosion is down from where it's been. So, yes, we are constantly working the pricing angle and I think making steady progress.

Okay. Thank you.

You're welcome.

And our next question, from the line of Amit Daryanani, RBC Capital Markets. Please, go ahead.

Thanks. Good morning, guys.

Good morning, Amit.

I guess I heard the comments on the Component margins and how they went down about 20 basis points sequentially at least, year over year, I'm sorry. But if I look at it sequentially they were up actually about 50 basis points on relatively flat sales. Could you just talk about the puts and takes? I know you had a better mix, but how's there 50 basis points? Or is -- from the restructuring benefit that we may be seeing over here?

One of the big things there, as you recall, we had been struggling in our North America automotive business where sales have been down and remain down there. But as we went through some restructuring there, we did have some issues. That began to stabilize and improve in Q2. So, that definitely helped the margins. A little bit favorable mix. Pricing a little bit better. So those are the three main things that account for the improvement.

All right. And then just on the Undersea Telco business, I know you guys said you expect better sales in the back half than you initially expected. That I think was around a $150 million run rate. It feels like every time I pick up a newspaper, you guys seem to be winning a new order in that segment. Could you just maybe quantify what you expect in the back half and also what sort of margins could this business run at?

Amit, it's Terrence. I'll take that. When you look at Undersea, and Tom mentioned it, we booked new projects, like you mentioned, that the backlog at the end of quarter one was $1 billion and we've maintained that at the end of March. So, you're right. The $150 million that we talked about per quarter in Q3 and Q4, I would recommend you keep it more around $250 million in Q3 and more like a $225 million in Q4.

One your margin question, the second quarter was almost 15%. That was a very high margin benefited by favorable mix. I would expect you should have more of a 13% to 14% operating margin mindset around that business than where we had it in Q2. So, that'll be a little bit of a headwind as we go through the rest of the year.

All right. And just my final question and then I'm going to hop off after that. In the industrial segment, there seems like really good organic trends over there. I'm not sure if you break it out this way, but if you do, it would be helpful. How much of that business is sort of late cycle end-market driven, be it energy, oil and natural gas, or power, versus all these cycle segments?

Our industrial has got a significant mix to it. So, there's a piece of oil and gas for sure. Alternative energy has been very hot. Alternative lighting, which is still a small business but it's very, very high growth. And then as factories move to Ethernet-based communications and controls, that piece. So, there's a number there. And also buried within our industrial is our medical business which is experiencing nice growth. So it's pretty broad-based.

But it doesn't sound like there's a lot of residential, light commercial kind of exposure in there.

No.

All right. Perfect.

Actually the piece that is residential-related is flat to down.

Fair enough. Thanks a lot and congratulations on the quarter.

Our next question, from the line of Jim Suva with Citigroup. Please, go ahead.

Great. Thanks very much. Can you talk a little bit about -- I think you'd mentioned Wireless expects double-digits going forward. When we talk about double-digits are you talking 12% to 16% type thing, or as we start to see more of the equipment and the product rollout that the Wireless starts to really increase there?

I think right now, Jim, similar to Undersea, Wireless is going to have some flows based upon how projects are moving. I would right now put it in the low double-digits, where we are from a scale. It is a small business. As it grows, I think you could see that move up. But my comments really were for the rest of the year, expect it in the low double-digits.

And then on the Undersea, very nice improvement there. But you mentioned that the backlog has remained stable and in essence you've won more business and added into the bucket there. I guess we would -- I guess it would be fair to say that that Undersea Telecomm business should see potentially even margin enhancement beyond the 15%. Is that fair? Are we talking approaching 18% to 20%? I just want to keep expectation realistic here.

Jim, as I mentioned to Amit, the 15% we saw really was a factor of some product mix we had in the quarter between contracts. I still think and how we think about it is still a 13% to 14% at these business levels.

Okay. And as a quick follow-up, there's been some talks about some fiber optic pushouts or delays in Europe or something. Can you talk or give us a little bit of light on that?

Sure. That was the primary reason for our second quarter Telecomm portion of our Networks business being under the performance we expected. That business, for the last year, I would say has been pretty lumpy. The underlying characteristics are still very attractive and all the Telecoms we're dealing with over there have pretty robust fiber plans because of competitive requirements.

But the rate of deployment tends to be fits and starts. Nobody stops. But sometimes it accelerates, then it slows down as they refine each of their own strategies. So, mid- to long-term, we really like our position there but it can be a little bit lumpy like it was this quarter for us in the short-term.

But are these just temporary pushouts or these like cancellations or do they come back in?

No. We're not seeing cancellations. It's more temporary.

Okay. Great. And if my math is right, my last point of clarification here, are you about half-way through your divestiture plan? It seems like it's progressing in my mind maybe a little bit faster than what you thought for about a three year run rate?

With the announcement of the most recent one, that would put us about two-thirds. And the two big important ones were power and this RF business. So, we're -- we focused on those big ones and additionally, as I mentioned, have been exiting some product lines. So, we're two-thirds and 70% there. I'd say we're slightly ahead of plan, Jim.

Thank you and congratulations.

Thank you.

Thanks, Jim.

We go next to the line of Steven Fox with Merrill Lynch. Please, go ahead.

Hi. Good morning. First question -- on the auto business you talked about some of the puts and takes and you also talked about reaccelerating of year over year growth. But can you talk sequentially, how much seasonality factors into that for the June quarter, and where it's at, and also how the comparisons look versus a year ago?

I think from Q2 to Q3, sequentially and versus year over year, Jim, or Steve, it's not so much a seasonality. We had -- business was really strong in Q1, particularly at the end of Q1. We expected a little bit of a slowdown in Q2 and now our orders have been solid through Q2 and we expect that to go back to the 5% to 6% range in Q3. And for the year, we expect to run in that range. So, very, very strong growth in China in particular.

I feel like we're gaining share. And we're strong in the Japan market. And with some new products we've launched in the last year, we're growing faster than the market there. We're strong in Korea although that market's been a little slow. You know the US story. And Europe's been pretty solid and we continue to -- we think Europe will be a little slower in the second half for automotive than the first half but still going to be solid; and third quarter will be better than second quarter.

Great. And just to make sure I'm clear, the catch-up you did in the Carolinas, I guess last quarter you said you were a little bit behind in where you planned to be. So, is the restructuring all done in the Carolinas for those three plants having been consolidated?

It's largely done. We're still not running at the productivity level that we would expect to. Now part of that is because the market is down so much. But part of it is because we're just not where we should be. But we are doing a little bit better than we did in first quarter which was better than we did the fourth quarter of last year. So, we're making progress.

And then last question on restructuring, can you give us an update on plans for Europe? Is there anything that we should be focusing on for the second half of the calendar year in terms of accomplishments over there?

No. We can't. As you know, we can't get specific because of the requirements of all these things. But if you -- we're still estimating that we're going to spend about $130 million for the year. We've spent roughly $50 million in the first half of the year and the fourth quarter will be more significant than the third quarter.

I guess what I was getting at, Tom, is there any, in your full-year guidance now, does that have some improvements in Europe from restructuring?

No. Not significant.

Okay. All right. Thank you.

You're welcome. Thank you.

We'll go next to the line of Shawn Harrison with Longbow Research. Please, go ahead.

Good morning. Looking at the Undersea Telecomm business, I guess if you could provide some additional visibility into potential order trends beyond the $1 billion backlog. Is this the peak we're looking at right now? And maybe what are you seeing into the back half of '09 and what should margins look like at that point in time?

Shawn, it's Terrence. When you look at the back half of '08, I said the $250 million and $225 million. Certainly order and activity remains robust. We are benefiting from the China project called TPE. So, this year, when you take where we've been plus the next two quarters, we would be in excess of about $1 billion of revenue this year. I would say that does benefit from that China project. We still see good order activity. But right now, I don't think we would expect it to be $1 billion of revenue next year with where we see right now.

Just a couple points to add to that, Shawn. Clearly, if you go back to where we expected this business six months ago, it's stronger than we thought. Really, three or four drivers to there.

Redundancy for systems, particularly in Asia which really didn't have redundancy. And if you recall, there was an earthquake a couple years ago off Taiwan that had some damage.

Just more bandwidth in Asia because of internet usage.

And business that's always been kind of on again, off again in Africa, in the Middle East, particularly Africa. A couple of systems have started to happen. They've got funding, they've made deposits. So, there's clearly more activity.

It's hard to gauge visibility beyond '09 right now. That's one of the things we're working hard at. A couple of these projects definitely kind of popped up unexpectedly. The good news is we're pretty well positioned with the combination of our technology and our ship infrastructure.

But I'd say it's pretty hard. We don't expect '09 to be as good as '08. We do expect it to be solid. And beyond there it's hard to gain visibility right now.

If revenues were to decline to maybe a $175 million run rate in the business, what should we expect operating margins to look like?

Low to mid double-digits. But probably more like a 12% to 13% versus where it is today. Since we have scaled the business after the telecomm bubble for this type of business activity, I would tend to think we'll be in that 12% to 13% range if you rat your $700 million number annually that you quote.

Okay. So, not much degradation?

No.

Follow-up question just on the share repurchase activity. Maybe I missed this, but what are you expecting to do during the third quarter? Do you expect to finish the plan by the end of the year? And what's the likelihood of seeing another share repurchase authorization of a similar size once this is completed?

As we've said, Shawn, we're going to exercise share repurchases out of excess capital and that's what we've been doing. So, how we exercise the plan really will be a function of our cash generation and whether we have another strategic use for the cash.

So, we have been exercising under the program as we had very strong cash flow and we came out of last year with excess capital. Where we are now, it's really how we generate cash and how cash comes in will be how fast we look at the program unless something else comes up.

This is obviously a program we review on a regular basis with our board as we did the last board meeting. They approved the $0.5 billion increase. So I think we need to get through Q3 and see how things are shaping up and see what other options we have and we'll go from there, which is pretty much the way we've been approaching it.

I guess that poses a follow-up in terms of acquisition activity. With the divestures winding down, where are you at right now in building up maybe the potential pipeline for acquisitions?

We are beginning to build up a pipeline. Our priorities still are, number one, tighten up the operational performance of the Company. And while we're pleased with the progress we have made over the last year, I don't think you'd find anybody in our Company who believes we're anywhere near hitting on all cylinders there. So that's still number one priority.

And in conjunction with that, continue to make sure we focus the business and are really driving the products and businesses that make sense for us. So we have put more attention towards building a pipeline in select industries with select products; but I don't think you'd expect to see anything from us in the near-term, the next quarter or so.

Thank you.

Thank you.

And we'll go next to the line of William Stein with Credit Suisse. Please, go ahead.

Great. Thanks. You spoke a little bit about capacity restructuring in the Carolinas and you addressed a question in Europe. Can you remind us where we are in that process overall, what the plan was as of the spin and where we are today in terms of the number of facilities?

Sure. Thanks, Will. About a year ago we estimated that based on everything we wanted to do at the time, we saw this being in the range of a $500 billion bill to do this restructuring with about a three year payback.

The plan really kicked in, in the fourth quarter of last year, when we did $40 million to $50 million. So we are about $100 million to $120 million into it. Pretty much about where we have expected. There's been, in that period of time, about 21 actions that we've announced. Some are large. Some are small. Some are medium.

And then as I mentioned earlier, we -- this will be an ongoing thing for the next couple years. So, still a fair amount of work to do, for sure.

The one thing, Will, I would add to that, when we announce an action, it does take, for a sizable action, about a year to execute on it. So, there will be some delay in savings from execution announcement, and getting through it. So, that is one thing I want to make sure you understand.

But 21 actions but not 21 plant closures, in other words?

Correct. Those could be migrations of product lines with -- a facility would still be in place.

Okay. Great. Next, I'm wondering if you can remind us of the distribution strategy in Components. I think there's been an adjustment there during the last quarter. Any comment you can make on plans for distribution there?

Sure. About 15% of our total business goes through distribution and that is really in our Components and our Networks business.

Yes, we did, we went through an assessment of our effectiveness in that channel for about three months with our various business leaders. And then recently, we have announced a new position in the Company of Vice President of Global Distribution who reports into Joan Wainwright, our Senior Vice President of Marketing.

Our goal there is to become more effective through that channel. I would say we do a decent job. We have a long history there. We're well represented. But there's clearly opportunity, to put it into the operational execution category, for us to do better through that channel and through our e-channel. So, that's what we recently announced to our distribution channel partners.

I appreciate it. One more quick follow-up if I can. Can you remind us of how raw materials might be impacting the Network Solutions business? I think there's a lot of copper that flows through there. Correct me if I'm wrong. But I'd love to know what the margin impact might've been in the quarter and how you think about that, how you manage it.

Network Solutions, we serve three markets, as you're aware; communications service provider, the energy and power utility, as well as building networks.

Really, where metals impacts that -- the markets the most is really in our building networks where we actually sell cabling. In that market we actually have the ability to pass on copper prices. So, while it does impact us, we're able to pass that through. So, it really doesn't have any impact on overall operating income.

Great. Thanks very much.

We go next to the line of Ajay Kejriwal with Goldman Sachs. Please, go ahead.

Good morning, gentlemen.

Good morning.

Maybe just a quick follow-up on the automotive business in North America. 17% decline in revenues. Wondering if you could parse out what was volume versus pricing and also maybe if you could relate that the underlying production cuts that you're seeing in North America. To me it looked like a little more than production cuts. I'm wondering if there was any inventory drawdown or any issues with the restructuring or consolidation that you'd mentioned.

Sure. Thanks, Ajay. The vast majority of our issue is volume, although I will say that is a market where we are being more selective outside of the connector product line. We love the connector product line and we're being more selective outside of that. So, we did decline with the North America suppliers a little more than they cut production, which I believe is in the 11%, 12% range.

So, the decline, more than the production cuts, was because of non-core product lines. Is that the right way to think about it?

That's the right way to think about it.

And just to add to what Tom said, the other thing there is the mix of customers. The big three production was down more than overall production in North America. That number was more like minus 15%. Most of our business in the US is related to the big three and our mix of business within the big three also had some impact on that decline as well.

Got it. So, in terms of your expectations for the second half, I know you mentioned overall for the business you expect mid-single digit. But if you could help us with what are you expectations for North America auto?

I would say running similar to the rate we're at. We're certainly not baking in or expecting any recovery in the second half.

Ajay, if you look at production for the year it is going to be down including all manufacturers, not just big three. It's going to be down 5% for the year in the latest JDPower. And you know, that's our expectation based upon where our business is with that production.

I think the comps get easier as you get further into the year.

Right.

So without things improving, the percentage decline may not be quite as large.

Got it. Maybe -- just a question on the guidance. If you could help me with the numbers here, $0.13 increase midpoint versus where you were previously. So how much of that is from a lower tax rate now? You said you're looking at 36% in the second half. First half was obviously much lower. So if I do my math correctly, the lower tax rate is about $0.08. Is that about correct or (multiple speakers) different number?

No. That's a little heavy. Let me give you a little bit of a walk here and then Terrence can talk about the taxes.

So, about 6% of the improvement is what we did in Q2. Then you have to back out the business that we discontinued which had $0.04 in our full year. And then we pick up about a little bit of improvement across our other businesses, about $0.05, $0.02 to $0.03 for Undersea Telecomm, $0.03 to $0.04 for foreign exchange. That will give you a rough idea. We did get benefit in Q2 for tax and I'll let Terrence talk to that.

Ajay, the tax benefit we have for the year really relates to what we saw in quarter two as we were guiding to a 36% to 37% for the year; we're at the low end. But that was really $0.03 here in the quarter.

Maybe in your $0.08 you're not including the other income impact as that is also coming down, which, when I talk tax, includes also the other income reduction that we're seeing as well, which will be a negative.

Okay. So, the net effect of tax and other income is the $0.03 to $0.04?

$0.03. Yes.

For the full year?

Yes.

Great. Thank you.

You're welcome.

We go next to the line of Carter Shoop with Deutsche Bank. Please, go ahead.

Good morning, guys.

Good morning.

I wanted to first clarify something on the computing division within Components. Were we continuing to walk away from businesses there or is that comment more regarded on the year over year impact?

That's primarily year over year. I think we're -- I don't see any more significant pruning there. We kind of think of our computing business in three big blocks -- laptops, desktops, and server storage. We like the server storage space. We like most of the laptop space. The desktop has really become a commodity and we've been retrenching from there, and our share is down significantly in that space.

Moving over to the handset market, can you discuss where you're gaining share, not necessarily by customer or by region, but rather by product, type of connector, just to clarify?

Well, I'll just say the share gain is mostly in the connector space and we've introduced some new products around battery connectors which have been pretty successful. So, that's helped us.

We've grown our customer base. As you know, for a long time, we kind of reenergized in that business with the Japanese handset makers; then we moved to the Korean handset makers; and then we moved to the European handset makers. So there's still opportunity for us there to grow. We're pretty bullish about our prospects to continue our momentum in this category.

When I think about the handset market, I think of it becoming increasingly commoditized like the computing market. And I know there's a lot of different connectors that go into a handset, and some of the antennas and hinge connectors are a little bit less commoditized than others.

But what is your view longer-term for that market and in regards to growth? And why is it so important for your guys to be a larger player in this market?

Sure. Well, it's 1.1 billion units a year so it's a very big market. I would say it's very different from the computer market and I expect it'll largely stay that way because, increasingly, the way the handset makers compete is through design and design means differences in the way the phones look.

Of course, the other thing that's helpful is as you jam more features into the footprint of a particular handset design, you need the connectors to be able to work within that footprint. So there still is an awful lot of customization. In fact, I think as much as there's ever been, if not more, customization in those markets.

And as you start working through higher data rates, you need more sophisticated antennas. You'll probably see an evolution to fiber optic connectivity in there with higher data rates. So, there's a lot of innovation, obviously, by our customers and that means we need to stay with it. So that's why we're bullish.

Moving up a little bit, can you discuss your longer-term outlook for organic growth within the Components division? Maybe over the next kind of three to five years? How do you think about that?

I still think it's in the 5% to 7%, 6% to 8% range. As we sort of laid out our three year goals last year, we talk about a 5% to 7% growth range and I -- that feels like a balanced rate of growth given our size in the market, given the market's historical growth rates and given where we see increase in electronics in certain categories.

For example, as you put hybrid systems into cars, you have a significant increase in connectors; at the same time we've been backing off on the commodity side. So, I think 5% to 7% feels like the right growth rate for our business and I think there's, as we continue to improve operationally, there's a good deal of operating leverage that will come with that.

Great. Two more quick questions, if I may. In regards to the State of New York contract and in regard -- and the testing at the state level, can you help us better understand if there's any risk associated with that testing or if it's more a matter of dotting the i's and crossing the t's?

Well, I'd say with any big system there's always risk. Until you get that final signoff, you don't have it.

Having said that, I've been really pleased with our test results. The test results we get on call quality, which is really, really important, of course, in that industry, have been the best we've ever seen. And the state was very, very demanding.

And it was really setting a new standard, not only for interoperability and for the ability for calls to be maintained when a fireman or a policeman's going five stories down in a building, which historically has been a problem in that industry, the bar was being raised and the coverage rate was being raised. And we just completed three or four months of very, very expensive testing in the first two regions and did very well.

The second phase of that is we turn it over to the customer, and they go through two phases of testing, and right now that testing is showing consistent results with our testing. So, we're -- we feel good. Of course, we've been working on this system for a couple years. So we're anxious to get the first one up and running. The customers we deal with, I think are really getting excited about bringing the first region on.

But there is still timing risk although I think it's low right now. I really do. I think with everything we've progressed to in the last three to four months, our risk is down. But until we get that final signoff and turn it on and send the bill and get paid, we will still be a little bit anxious.

That's helpful. In regards to the Wireless division and being able to sell that to other states, are we getting to the point now where you can use this as a selling or marketing point to other jurisdictions? Or do we need to wait until the system's up and going before we can really leverage the work you guys have done here in the State of New York?

Two things. Yes, we have been definitely using it and in the sense that, one, it's a marquee customer and we bring people in to see that -- as well as, by the way, the State of Pennsylvania which we completed over the last couple years.

And the other thing is, the system itself which is pretty robust and has -- it really has the state of the art features for the early responders. It's being pretty well received out there. The last couple quarters of orders in this business have been two of the best we've had ever.

And I think we're on the verge of taking the business to another level because of New York but also that's going to benefit us in other areas. We have to obviously deliver that into results, but I feel the best about this business for sure since the two years I've been here.

Great. Thanks a lot and congratulations on a good quarter.

Thank you.

Thank you, Carter.

And we go next to the line of Yuri Krapivin with Lehman Brothers. Please, go ahead.

Good morning.

Good morning, Yuri.

I wanted to ask you another question about your raw material exposure. So I believe you effectively hedged your copper exposure, probably at around $3.50 per pound through the end of June via some of the contracts with your suppliers. Obviously, currently the copper is above $3.50. So, what are your plans in that regard? Are you planning to roll over those contracts through the end of the calendar '08?

Yuri, it's Terrence. We have been actively fixing with our suppliers and we at this point have in excess of 50% of our requirements fixed through the end of our fiscal year right now. We'll continue to evaluate where copper is when we look at going into next year, but our guidance includes the copper rate where it's at right now, at $3.90, plus what we fixed.

Just to add to what Terrence said, Yuri, it's John. Gold is not an area where we're doing any hedging so we are up year over year significantly on the price of gold. And that is something that's been absorbed in our numbers. So, when we talk about headwinds, it's really more of a gold discussion now than it is copper.

Okay. Well, that said, are you planning to hedge gold?

We have not yet. We'll continue to evaluate that, Yuri.

Okay. And then, my other question has to do with this Other category within your Electronic Components segment. So, that Other piece I think comprises about 25% of the total segment. And the growth rate there has been fairly lackluster for the last several quarters and it looks like that Other category sort of consistently underperforms the overall segment growth rate. So, could you comment, please, on what you have in that Other category and what's happening there?

Sure. That's primarily our sales through distribution, Yuri. And that business has been relatively flat overall for the last year. I think largely reflecting market conditions and inventory in the channel. But I mean clearly we see that as an opportunity, as I mentioned earlier, for us to improve. That's what's primarily in that big -- in that 25% number.

Okay. Thank you. And finally, you took a charge in the quarter for the litigation settlement with the State of New Jersey. Any other potential settlements that you see on the horizon that could trigger charges?

Hi, Yuri. It's Terrence. When you look at the charge in the quarter, as you're aware, (inaudible) we're responsible for two shared things as a result of (inaudible) shareholder lawsuits from the old Tyco as well as taxes. What we did last year was (inaudible) big class action settlement of $3 billion was finalized here in February. That is out. There were some opt-outs in that that were about (inaudible). State of New Jersey is part of that which continues to (inaudible) that item.

But there are a handful of other cases that were not (inaudible). Over time we could see some charges but right now we're going to defend our position on those. But (inaudible) that there could be some other small charges.

Okay. Great. Thank you.

Thank you.

And our final question will be from the line of Amit Daryanani with RBC Capital Markets. Please, go ahead.

Thanks. Guys, just a couple of follow-ups. Could you talk about what sort of lead times are you getting from your customers on the Component side, but really the connector side especially? One of your peers actually talked about visibility shrinking to two weeks or so on their call. So could you just talk about that?

Our typical lead time, I think when you average it, it's about a month. That really hasn't changed too much. Of course, it depends by end-market. But we haven't seen any significant change there.

All right. And then, I may have missed this, but I know you guys -- you bought 10 million shares up on the end of March quarter. Could you just talk about how much you have bought so far in the June quarter?

When you look at the June quarter, since -- really where we're at, we've exhausted the first authorization; the 750 basically is where we're at right about now.

About 100 million incremental in June? All right. And then just finally, I think there was a press release out a few days ago on the $4 million settlement you have with the State of New York. Just to clarify, that has nothing to do with the State of New York project that you guys are underway right there, correct?

That's correct. We've been supporting, serving the State of New York in public safety for a long, long time and that was something we settled related to prior business.

Perfect. Thanks.

You're welcome. Thanks, Amit.

Okay. We have no further questions?

Speakers, back to you. We have no questions.

Okay. Great. Well, thanks, everyone, for joining the call. Keith Kolstrom and myself will be around for the rest of the day with any other questions.

Thank you.

Bye-bye.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.