泰科電子 (TEL) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Tyco Electronics' third quarter earnings conference call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

And I'd now like to turn the conference over to your host, Vice President, Investor Relations, Mr. John Roselli. Please go ahead.

Thanks, Rochelle. Good morning, and thank you for joining our conference call to discuss Tyco Electronics' third 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.

Thanks, John, and good morning. Overall, we are really pleased with the quarter we just completed. I think it reflects good progress in a number of areas for us. Our sales grew 19% and our organic sales growth was 11%. Our adjusted operating income increased 22% over the prior year, and our earnings per share increased 43%. You do have to make it apples-to-apples with last year, if you take out our unusually high tax rate in last year's third quarter, our EPS was up 31%, still a good strong showing.

We also had another strong cash flow quarter, as our free cash flow was $283 million. And, as announced this morning, our Board has approved a $750 million increase to our share repurchase. So we continue to have strong financial performance and are in very, very good financial condition.

All four of our segments had solid growth in the quarter, and three of the four had solid improvements in operating performance. We believe our performance continues to benefit from the diversity of our market mix and our global presence, which you know with about half of our business in industrial and infrastructure business, and half of our business in consumer, I think that's a good balance, especially in these times. And then about two-thirds of our revenue is outside the U.S.

We grew organically 17% in our businesses, which serve global industrial and infrastructure markets. These businesses and products account for about half of our revenue, as I just mentioned, and include undersea telecom, which continues to be very strong, up 81%, wireless systems, which was up 43% and continues to steadily build our base of business, our network segment which was up 6%, and as we'll talk in a minute had really mixed performance, and the industrial markets served by our electronic components segment, which were up 10%.

In addition, our automotive sales and international markets grew 12% in the quarter, very strong, with double-digit growth in both Europe and Asia, and Terrence will shed some more light on that in a few minutes.

Our performance in these markets offset continued weakness in most of our other consumer related markets, which includes appliances, computer, consumer electronics, and North America automotive. So those markets have been weak for awhile, and continue to be that way, and we expect them to continue to be that way for at least the next quarter.

Operating income growth and the improvement in our operating margin to 14.3% was driven by the strong organic growth which generated healthy margin flow through. This has been a key focus area for us, to make sure that when we hit that sweet spot of growth for us, which is 5% to 7%, that we get the margin flow through, and we've been seeing that the last couple of quarters, so I feel like we're making good progress on that.

We also had in the quarter a very favorable sales mix in undersea and wireless. Their margins were very nice, as well as the execution on the sales side in those businesses.

These positives more than offset continued commodity cost pressure, especially gold, which year-over-year was up about $15 million in the quarter, and a lower margin in our network segment. Although margins have stabilized in networks at about 12%, we did not see the improvement we were expecting in the quarter. This was due to a combination of slower than expected pace of network investment by certain carriers in Europe, as well as the ripple affect that had on our productivity in that operation.

Regarding our margins, at the 14% level, excluding restructuring costs, our margins are up about 150 basis points since our separation from Tyco International, a little over a year ago, and we're right in line with our plan to reach 15% plus margins by fiscal 2010.

I also feel we continue to make good progress raising the level of innovation in new product across the Company. I'm going to share just a few examples here. Over the past several months we have launched some significant new product platforms.

For example, we've just launched a comprehensive new connector system for the commercial vehicle market. This is a very attractive market for us. This product line offers very rugged -- superior performance in very rugged environments, as you can imagine, that experience extreme temperature, vibration, and moisture situation. This is -- this was a really key development for us over the last couple of years. It's now in early production, and can't get into specifics but we've been awarded the platform for three of the four largest truck makers. So this is going to pay dividends for us for several years to come.

We also introduced the new back plane connector system for the high end computing and telecom markets. Our TinMan product, as it's known, gives us a strong offering with 20 gigabyte per second performance for high-speed applications. This makes us much more competitive in this market. This is an area that's been important to us, that we've been lagging a little bit in this market. We now have a, we believe, a platform that can compete with anyone, and we're going to build off that.

And then the last one I'll touch on is we recently launched an expanded range of products under our SOLARLOK brand for the solar energy market, which is experiencing very high growth. And in this area we're a leader in photovoltaic interconnection technology. The products we've introduced over the past three to six months are using applications from rooftops to desert energy farms, and they have to operate in very extreme external environments, where you can have temperatures going from minus 40 degrees C, to 100 -- or plus 105.

And one of the key things about these products is they need to last 25 years or more without failure. And this last product line is a really good example of how we are getting a little bit better and making progress that's leveraging our capabilities across the business. And we have a lot of experience in the energy systems market with products that have to operate in harsh environments, and marrying that with our connector technology to come up with this type of SOLARLOK product.

So good progress in these areas, and we'll share a little bit each quarter on these kind of developments.

During the quarter, we continued to get the Company more focused on our strategic businesses and products, as we announced an agreement on the divestiture of our RF components and subsystems business, which was formerly in our wireless segment, and this sale will be for about $425 million in cash. As we've done this, now, our wireless business is now completely focused on communication systems. In addition, this week we signed an agreement to sell our automotive sensors business for another $42 million in cash. Now, this was part of the wireless components business.

Both transactions are expected to close within the calendar year, and, as we stated last month at our Investor Day, we have approximately another $400 million worth of revenues that we're working through in product lines in our components and network segments that we expect to divest over the next year.

And, now, I'm going to turn the call over to Terrence, who is going to cover our segment and Company financial performance in more detail, and then I'll come back and cover Q4 and full year outlook.

Thanks, Tom. And good morning, everyone. Let me cover, first, the segment performance, and then get into Companywide items.

Starting with the electronic components segment, our sales grew 15% in the quarter or 6% on an organic basis. Our sales to the automotive market grew 18% overall and 7% organically. As Tom mentioned, we continue to benefit from emerging market vehicle growth, as well as content increases.

On an organic basis by region, in Europe where we generate more than half of our automotive revenue, our sales grew 10%. We did expect to see this sequential improvement coming out of Q2, and because we benefitted from production increases at certain manufacturers. We do expect this growth rate to slow down in quarter four.

In Asia, our sales grew 17%, led by continued strength in China, where growth was 25% in the quarter.

And in North America, which continues to be very challenging, our sales were down 18% in the quarter as U.S. manufacturers continue to reduce production levels.

Overall, our sales performance in the automotive market was very good in the quarter, despite a weakening environment in the U.S. Year-to-date, we've grown almost 6% organically in the face of a 14% decline in U.S. revenues.

Next, in our computer market, our sales declined 2% as we continue to rationalize our portfolio by exiting some low margin product line and being more selective with new projects.

In the communications market, our sales also grew double digit, which is 10% organically. And in the infrastructure piece of this market, sales grew 13% with solid growth in all regions, and we expect this growth to slow in quarter four.

In the mobile phone side of the com market, our sales of interconnect products grew 11%, and this brings our year-to-date sales growth to this market to 37%.

In industrial markets we grew 23% on an organic basis, reflecting continued robust demand in solar products, as well as industrial equipment segment of the market.

And, finally, our sales to the aerospace and defense market grew 7% organically. Demand remains stable, and we expect continued solid sales growth for the balance of the year in this market.

Adjusted operating income for the components segment increased 22% year-over-year, and the adjusted operating margin increased to 14.6%. As we've talked about previously, organic growth in the 5% to 7% range enables us to generate good operating leverage, which we saw this quarter despite increased metals cost, mainly gold, which had about a $15 million headwind.

Finally, similar to last quarter, while currency translation is creating increased operating income in the segment, it is causing a headwind to our operating margin percentage in this segment of more than 60 basis points in the quarter.

Turning to our network solutions segment, sales grew 15% on a reported basis, and 6% organically. Sales to the building network portion of the segment were up 15% organically due to increased data center and infrastructure spending. As we stated in the last call, we do expect organic growth in this market to slow down to single digit levels.

In the energy market of the segment, our sales grew 5% in the quarter, and we experienced growth in all regions, with strength in transmission products more than offsetting some housing related softness in distribution products.

And, finally, our sales to the communication service provider market were down slightly, with growth 11% in North America, offset by declines in Europe. As Tom mentioned, we continue to see lower network investment levels from our customers in Europe. And for the network segment, overall, we expect quarter four revenue levels to be slightly lower than this quarter, driven by a slow down in spending levels by the U.S. telecom carriers.

Adjusted operating margin for the network segment declined 360 basis points to 12.2%. Lower productivity levels in the segment and a lower margin sales mix caused by continued revenue declines in the European communication service provider market drove the decline. We are expecting similar margin levels in quarter four.

Turning to the undersea telecommunications segment, sales grew 81% in the quarter. Activity remains extremely strong and we again booked several large projects during the quarter, resulting in a backlog increase to $1.3 billion from $1.1 billion in the second quarter. We expect revenue in the range of $260 million to $270 million in the fourth quarter.

Margins in the segment improved year-over-year by 210 basis points to 14.4%. Increased volumes and a favorable project mix drove the increase. In the fourth quarter we expect to see a slight sequential decline in margins due to less favorable project mix.

And, finally, in our wireless systems segment our sales grew 43% organically. Higher radio sales related to rebanding efforts of a customer were the primary driver of the increase, and these sales have had a very positive affect on our operating margin, which increased to 17.3%.

Now, let me cover some other items on the income statement. Our net interest expense was $37 million in the quarter, which was down versus last year, reflecting lower net debt levels.

On taxes, our income tax expense was $182 million in the quarter, resulting in a GAAP effective tax rate of 36%. On an adjusted income basis, our effective tax rate was also 36%. We expect our tax rate to be about 35% for the fourth quarter.

Our cash taxes paid in the quarter were $106 million, and our cash tax rate on adjusted pretax income was 20%. And, as I've stated previously, we expect our cash tax rate to remain around 20%.

Our other income of $1 million was lower than our guidance, and this is entirely due to adjustments related to the tax sharing agreement. We also had a corresponding affect in our effective tax rate, however, tax planning initiatives that we put into place to make sure we get to our long-term planning goals offset that impact in the effective tax rate. For the fourth quarter, our estimate for other income is in the range of $10 million to $15 million.

Finally, our net income from continuing operations was $317 million and EPS was $0.66 per diluted share on a GAAP basis. Our adjusted EPS from continuing operations was $0.70 per share, an increase of 43% over the prior year. Our EPS growth of $0.21 per share on an adjusted basis year-over-year reflects a $0.09 improvement in the segment operations, a $0.06 benefit from the lower tax rate that tom mentioned, a $0.04 benefit from lower share count, and a $0.02 benefit from currency effects.

Moving now to cash flow, our cash from continuing operations was $444 million, which was essentially level with the prior year when you adjust for last year's advance tax payment to the IRS. While cash from operations was lower, we did have $163 million advance, which you need to add back for comparison purposes.

Our free cash flow was $283 million in the quarter, which was down year-over-year, primarily due to the timing of interest payments and a decrease in deferred revenue versus last year. As I talked about in the last earnings call, we received advanced payments in our project businesses last quarter, for which we earned the revenue this quarter.

Looking at primary working capital, we saw a four-day reduction year-over-year, although in absolute dollars it increased due to business levels. Our inventory days were 80 in the quarter, which was flat year-over-year, but down six days sequentially.

Gross capital spending was $167 million in the quarter, and we typically spend about 4% to 5% of sales on capital, which is where that rate is.

And, finally, to touch upon a few other items, we spent $260 million to repurchase 7.3 million shares in the quarter. With the increased authorization, Tom talked about, we have about $1 billion remaining on our share repurchase program.

And, also, subsequent to quarter end, we issued $400 million of notes in both public and private transactions, and this effectively completes the establishment of our long-term capital structure.

Now, let me pass the call back over to Tom.

Thanks, Terrence.

I'm now going to talk about the trends we're seeing in the business and our outlook for Q4 and for full year 2008. Just some mention, as we did last year, we'll provide guidance for the upcoming fiscal year, our fiscal year 2009, which starts October 1st, that's part of our next earnings call, so I will not be touching on '09 here.

For the fourth quarter we expect sales growth of 6% to 8%, with organic growth of 1% to 2%. We expect adjusted earnings per share of $0.65 to $0.67, which is another nice double-digit increase of 12% to 16% over the prior year. And we also expect another strong cash flow quarter, and this will mean that all four quarters of this year are first year since separation will generate double-digit earnings per share growth in spite of a very weak U.S. economy in the businesses we serve.

Now, let me talk a little bit about what we're seeing in our markets. Over the past two months we have seen our order rates soften a bit, particularly in the consumer related portion of our electronic segment, which includes automotive, and so our consumer business has been soft for awhile. That softness has increased a bit in the last couple months.

As a result of this, we expect a slight revenue decline in our consumer related revenues of about 1% to 2%. On the other hand, we expect solid high single-digit growth in our industrial and infrastructure businesses, and included in this high single-digit growth is a slow down, as Terrence mentioned, in our telecom networks business due to delayed fiber deployment. We're well positioned with all the customers that are rolling out fiber in Europe and the U.S., but we expect it to continue to be slow in Q4.

In addition, we've not included any revenue from the New York State Wireless Project in our fourth quarter guidance. As you know, we've been working on that project for awhile, and this is going to be a state-of-the-art public safety network when we turn it on. We are in the final stages of testing for the primary region build of this project, and it looks like the first revenue from the project will occur early next year. When you net all this together, it adds up to about 1% to 2% organic growth for the fourth quarter.

For the full year we now expect adjusted earnings per share of $2.63 to $2.65, which is an increase of 23% to 24% over last year, and this compares to our previous guidance range of $2.60 to $2.66 per share.

Our estimate of restructuring costs remains at approximately $130 million, which is about $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%. Our guidance does not take into account any additional divestiture activity and assumes that raw material prices and foreign exchange rates hold at their current levels.

It's been a little over a year since our separation from Tyco International, and, as I said earlier, I feel we've made very good progress improving the overall capability and performance of our Company. Let me just highlight a few things.

All four of our business segments are now generating double-digit operating margins, and three of the four are right around the 14% level in Q3. Network is lagging at 12. Our industrial and infrastructure businesses, which are about 50% of our revenue, have grown at double-digit rates this year. And in virtually all these markets we've strengthened our position over the past year.

We've improved the health of our portfolio through the divestiture or exit of approximately 1.1 billion of underperforming revenue, which has helped our margin and gives us more management focus on the most important opportunities we have.

As I mentioned earlier and very importantly, our operating margins have improved to the 14% range, a 150 basis point increase from where we were a year ago, and this is due to a combination of a more focused product portfolio, stronger sales growth, again, in our industrial and infrastructure businesses, progress in the early stages of our productivity improvement efforts and better pricing, and this has more than offset higher commodity costs.

And then, lastly, but of course very importantly, we continue to generate significant cash flow, which to date has enabled us to repurchase 28 million shares, worth about $1 billion, and now with the new authorization, we have another billion dollars remaining.

All of the above give me and our team a lot of confidence that we remain on track to achieve the key three-year financial goals, which we initially laid out in June of 2007 and reiterated last month at the Investor Conference, and they are 5% to 7% organic growth over the cycle, 15% plus operating margin in fiscal 2010, solid double-digit EPS growth, and cash flow about equal to net income.

So, overall, really pleased with the quarter. As I mentioned in the outlook, do see some softening. Going to keep our eye on that.

And, now, we'll open it up for questions.

(OPERATOR INSTRUCTIONS.)

The first question comes from the line of Matt Sheerin of Thomas Weisel Partners. Please go ahead.

Yes, thanks. Good morning. Since the question on the SG&A and gross margin trends, it looked like gross margin was down sequentially and SG&A on a dollar basis was down substantially, was that just due to mix or did anything else happen there?

Matt, it's Terrence. Two things. Yes, sequentially it's due to business mix, and also a little bit to how currency translation comes through, but it -- that's basically what's happened sequentially.

Okay. And then just following up on gross margin, I know at your Analyst Day you talked about passing along some price -- raw materials price increases to customers. How successful has that been, and what kind of contribution was that to either revenue or margin?

Hey, Matt. This is Tom. We're getting better at that. I think our processes, as I've mentioned before, we did a lot in the last couple of years to tighten up our process and make sure we're more nimble in the marketplace. And, as you know, the nature of most of our business is a lot of relatively small projects that we're pricing all the time.

Having said that, we estimate that we're getting back about 50% of the gold increase that we've seen. There is a lag affect, if gold were [pop] $50 tomorrow we would not get our prices adjusted right away, but we're doing pretty well covering that, so at the volumes we have and at the productivity levels we have, as we did in Q3, we can improve the margin.

Okay. Great. And just, lastly, could you update us on the plan consolidation efforts, you know, what happened in the quarter and your plans for the next quarter?

Sure. We had a few that we initiated in the quarter, nothing really big. The quarter for us was more continuing to execute some of the big ones we started in the fourth quarter and the first half of this year. We're now going to be coming into a phase. We can't get into specifics, where we're going to see another ramp-up in the level of restructuring.

Okay. Thank you.

You're welcome.

Okay. Thank you. And the next question comes from the line of Amit Daryanani of RBC Capital Markets. Please go ahead.

Thanks a lot. Good morning, guys.

Good morning.

Good morning.

Just a question, I'm sure it's on everyone's mind, I suspect, as they're looking at the next quarter's guidance, we're seeing some material organic growth degradation. I know you touched on the auto business being a little bit stronger than you expected this quarter. You know, the appliance segment was actually up 7% organically, and I think the consumer business did better than what it did in the quarter before.

I guess I'm just wondering do you think you saw some pull ins in the June quarter, did you restocking or probably purchases ahead of some price increases, which is why September may be a little bit softer?

Amit, no, I don't think -- actually, we expect that a little bit when we announce price into the distribution channel, that was going to be effective in -- early in the fourth quarter, but we didn't really see that much pull in.

As far as auto, auto was very strong in Q3. I mean it was double digit in Europe, right around 10, it was over 15%, 17% in Asia. And we expect Asia to be more at 10 to 12 in Q4, and Europe to come down to 2 to 3. If you look at Q3 and Q4 together it's running at about the 6% level, which it's averaging for the year. Last year Europe Q4 was 5%.

So I think from where we saw it a quarter ago to where we sit now, the single biggest change is auto was stronger in Q3, a little weaker in Q4. overall, probably about the same. And the telecom business is weaker in Q4 and, of course, I mentioned we took the State of New York out. So no pronounced trends, but, hey, we're watching it closely, as you can imagine.

And, Amit, our clients business was only up about 1 or 2 points.

All right. And then I guess, again, I realize, Tom, you said you don't want to talk about the fiscal '09 trends at this point, but I guess maybe just talk about why the knee-jerk reaction of extrapolating the soft organic trends in the September quarter throughout fiscal '09 is probably not the right way to look at things?

Yes, I think it's not, it's only one data point, and it's also for automotive business it's when things seasonally naturally slow down a bit because of the model changeover. It's hard to call where the U.S. market admittedly is going to be, and it's worse than we thought it would -- we knew it was going to be tough a year ago, but we didn't think it was going to be this tough.

On the other hand, Eastern Europe and China, exports from western Europe to eastern Europe and China have been stronger than I think anybody expected. So I wouldn't -- I think it's too early to tell. This is an important quarter for us to -- for our fourth quarter to understand how that sets us up going into '09.

All right. And just, finally, I'm going to hop off after this, the wireless system sales, they were strong because of the customer rebranding. Do we expect that sales contribution to continue in fiscal Q4? Was it a one-quarter blip, and how should we think about margins next quarter in that segment?

I think when you look at next quarter, I think wireless sequentially will look very similar sequentially. Q4 typically is very strong for our wireless segment, historically, and, as Tom said, Q4 won't have any impact for the State of New York, which was in our prior guidance.

And margins, I'm sorry, trends, should stay around the levels then?

It'll be similar in quarter four, and similar to quarter three.

Fair enough. Thanks a lot, guys.

It's Tom. Just to add a point to that. Our business there is stronger than it was a year ago, our base of business is stronger and, of course, the single most important thing for us is to get phase one of New York approved.

Got it.

Okay. Thank you. And the next question comes from the line of AjayKejriwal of Goldman Sachs. Please go ahead.

Good morning, gentlemen.

Good morning.

Hi, Ajay.

Just wanted to maybe touch a little bit on the New York State Project. I know you disclosed part of the prior guidance, but is not now full year. So maybe if you could talk about what's delaying that project and when do you expect revenues? And, also, just because you pulled that out of the guidance, how much did that hurt your guidance on the top line and on EPS?

Sure. New York, and I was up there just a few days ago, assessing our progress. Two big pieces, I think, in terms of going through the testing on this kind of a project.

The first one is that we -- a key part of this is delivering significantly improved coverage for the folks who use it, the State Police and all the other State Agencies, and we passed that test about six to eight weeks ago. So the coverage really is the best coverage of any system of its type in the world.

Now we're into the nitty-gritty testing of the radio, so people driving around and using these devices in every imaginable way to make sure they do what they say they should do. So the typical process on this is you test, you find a few bugs here and there, you fix the bugs, you retest, and that's where we are. And I mean we're into the last probably 30 days of this, and it's, you know, a stressful time for everybody involved.

But having, you know, since it's coming down so close to the wire at the end of the quarter, we just felt it's prudent to take it out of the quarter. We could get acceptance in early September but have a punch list, and maybe that wouldn't enable us to recognize revenue, so I just thought the prudent thing to do is take it out. So we would expect to recognize the first phase revenue early next year.

And, Ajay, from your question on numbers, it's about $40 million of revenue and a little bit more than a penny.

Okay. So if that was in your new guidance it would have been, the top end would have been similar to your older guidance?

Correct.

Right. Okay. Moving to Europe, also, I know you had talked about slow down sequentially, 2% to 3%, but maybe some more color on what's -- is it a production slow down you're seeing, is it general economy? And I know you don't want to talk about '09, but any general thoughts on what do you expect going forward in Europe?

Well, I think it's coming off a really robust quarter, so I think there's a little bit of that. So we didn't expect the growth rate to be like it was in Q3, even when we sat here a quarter ago, we expected Q3 to be much stronger than Q2, and Q4 to slow down again.

I think the thing we're watching closely is the demand for vehicles in western Europe. About half of what's produced in Germany, which is the big exporter there, goes other places, and exports to the U.S. declined several quarters ago and just really got redirected to eastern Europe, Russia, China, et cetera. So that market continues to be pretty robust.

I think the question that we're watching very carefully, and it's really too early to tell, is is there a slippage in demand in western Europe. So we're -- that's what we're factoring into our Q4. We've got about a 2% to 3% growth rate, as I mentioned, versus 10% in Q3, versus last year's 5% in Europe. Year-over-year both at about 6% in Europe, so '07 grew 6% in Europe, '08 is going to grow about 6% in Europe.

Got it. And maybe, finally, if you could update us on progress on restructuring in Europe? Any new initiatives in the quarter?

No new initiatives in the quarter in Europe. Working on a lot of things in the planning stage but, of course, until we formally announce them through the appropriate channels we can't say anything. But you know we have a lot of work to do here yet.

Got it. Thanks.

Thank you.

Okay. Thank you. And the next question comes from the line of Jim Suva of Citigroup. Please go ahead.

Great. Thanks very much. Tom, can you just clarify a little bit, you talked about the European auto market, some of the recent trends from there for both western and Europe are actually showing a little bit of a deceleration, can you, again, talk about what you're seeing there in Europe and your expectations for European auto?

We're seeing that, too, Jim. It's not as pronounced as our 10% growth in Q3 and 2% to 3% growth in Q4, you know, because Q3 was unusually high. But that's why we've taken -- that's one of the reasons why we adjusted the Q4 outlook down, because we do feel it's a little slower.

It's hard to tell is this the beginning of a trend, is it just an adjustment, but it's definitely a little bit slower. We don't sense any massive things going on in Europe, like anywhere near you see going on in the U.S. It's more of a fine-tuning down of the production at several of the OEMs.

Right. And can you just clarify what you tuned it down from or, say, from the reported quarter to now what you expect the quarter to be?

Probably about a percent.

Okay. And then a second follow-up question, can you and maybe this is a question for your whole team, but when you talk about that other income line that you guys were expecting I believe $10 million to $15 million, I had thought that there was an offset of lower tax, if that line comes in lower, that those two should typically wash themselves out.

And it came in at $1 million but your tax wasn't benefitted from that, and it seemed like you kind of left $0.02 of EPS on the table this quarter, but now looking out to next quarter it seems like, a, you're not recouping all of that, you're just going back to this steady state, or I thought that the other income line and the tax line had some type of washing or contra levers there?

Yes, Jim, this is Terrence. As I stated on the prepared comments, you are correct how you think about it, that came down. Also, we had a favorable impact in the tax rate, but due to tax planning initiatives that we're working on we actually also took a hit in the quarter by a similar amount in the effective tax rate, that sort of masked that effect that you would expect to see. But that was a onetime effect of that other income being down this quarter, just due to some adjustments related to the sharing agreement.

And those adjustments are they permanent, ongoing, or it looks like it's coming back?

Onetime, so that's why you see that rebounding back in the fourth quarter, they were onetime adjustments. And then the planning we did gets us down to a lower rate here in quarter four, as we mentioned being down to 35% versus the 36% we mentioned previously.

Okay. And $10 million to $15 million forward-looking is a good rate, I'd say even beyond the next quarter? Like a consistent run rate, or is it (inaudible)?

I think that right now is the way you should think about it, yes.

Great. Thank you very much, gentlemen.

You're welcome.

Thank you. And the next question comes from the line of Shawn Harrison of Longbow Research. Please go ahead.

Good morning. Just a clarification, the $50 million increase in gold, was that sequentially or year-over-year?

Year-over-year.

Year-over-year.

Year-over-year. And then, secondly, if you could just highlight what your hedging strategies are right now for commodities?

Shawn, it hasn't changed from what we've mentioned before. On copper we have been fixing out -- commitments out. I would say right now we're only fixed out into the next quarter, which our blended rate right now is probably about a 350 to a 360. We currently do not hedge any gold.

Okay. And then just looking at the undersea telecom business, maybe I missed this, but did you state what the backlog was exiting the quarter?

Yes, that's $1.3 billion, Shawn.

Okay. And that's up sequentially?

That is up from $1.1 billion. We landed three new projects. Some of those do go out into '010. I would say from where we see undersea for next year, it's still in that $700 million to $800 million range with where we sit today, but certainly activity remains good there.

Okay. Just the wireless systems, given the better mix here that's expected for the fourth quarter, from some of the handsets, does that continue into 2009, or should we see kind of a slip back in terms of the profitability?

That's going to slide back a little bit, Sean. There's a lot of rebanding this year where operators are trading out because of the frequency changes out there, so it's a little hard to accurately predict the rate at which that happens, and so we were, you know, it was at a better rate this year than we expected, but we would expect that to decline a little bit next year.

Okay. And it seems like the incremental margins on that rebranding are 50% plus?

Yes, they're -- it's attractive.

Okay. And then, finally, any share repurchase activity here, quoted today, and I don't think you stated that?

Yes, we've done about $100 million since the end of the quarter, so we have done a billion dollars under the whole program to date, and with the authorization increasing up to $2 billion we still have a billion to go.

Okay. Thank you very much.

Thanks, Shawn.

You're welcome.

Okay. Thank you. And the next question comes from the line of [Maher Kapor] of Credit Suisse. Please go ahead.

Hi, guys. Just had a kind of like a housekeeping question on the outlook, the adjusted EPS is that $2.63 to $2.65 for the year, and I have $2.00 for the first three quarters of the year, is that just rounding or something, because--?

Share count, it's share count.

Okay.

The share count average for the quarter versus for the full year.

Got you.

That's how the math works.

Okay. Thanks.

Thank you.

Okay. Thank you. (OPERATOR INSTRUCTIONS.)

And there are no further questions. Please continue.

Okay. Well, thank you for joining us. The Investor Relations Team will be around all day to answer any follow-up questions, and we look forward to talking to you at future events. Take care.

Okay. Thank you. And, ladies and gentlemen, this conference will be made available for replay after 10:30 a.m. today until Wednesday, August 6th at Midnight. You may access AT&T Executive Playback Service at any time by dialing 1-800-475-6701, entering access code 942723. International participants dial 1-320-365-3844. Again the access code is 942723. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.