泰科電子 (TEL) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Tyco Electronics reports third quarter results conference call. (Operator Instructions). I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. John Roselli. Please go ahead.

Thanks, Greg. Good morning, and thank you for joining our conference call to discuss Tyco Electronics' third quarter results for fiscal year 2009 and our outlook for the fourth quarter. With me is 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 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 and the accompanying slide presentation that address the use of these items. Press release and related tables, along with the slide presentation, 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, everyone. Q3 was a good solid quarter for the Company for several reasons. Sales increased 7% sequentially and exceeded our original guidance, primarily due to increased demand for our products which serve consumer markets, and especially in the automotive market. And while sales are well below last year's levels, it does appear that the inventory correction in the consumer markets is largely behind us. As a data point, automotive year-over-year was down 36% for us, but sequentially was up about a little over 25%. Total Company orders were up 14% sequentially, and the book to bill ratio was 1.4 excluding the Undersea Telecommunications business. The aggressive cost actions that we initiated early this year, coupled with our footprint reduction actions, have improved our operating leverage; and our strategic footprint restructuring actions continue to be on track, and at the pace we are at we will be less than 100 facilities by the end of the year. And as you know, improving margin flow through in the business has been a very, very critical objective for us and continues to be a critical objective, and we are making good progress.

If you take these productivity and cost actions in conjunction with the sales increase, this enabled us to increase our adjusted operating income by $55 million or about 76% sequentially, and this exceeded both our original and revised guidance. We also reduced inventory an additional 264 million in Q3, and to date we have reduced it about $0.5 billion. This was the primary driver behind our strong free cash flow in the quarter, which exceeded $300 million for the second quarter in a row. And we now expect free cash flow before restructuring to exceed $1 billion this fiscal year. This is a $200 million increase to our prior outlook. We strengthened our balance sheet in the quarter by reducing our debt levels by $336 million; and in July, we completed a tender offer which reduced our debt by an additional $152 million. As of today, we have reduced our debt by approximately $750 million this year, and our debt stands right around $2.4 billion today. And put it in a little perspective, if the business were to stay at this range, we would ideally like the debt to be in the 2 to $2.2 billion range. So we are closing in on what we think is the appropriate level of debt for this level of business. And as you all know, we completed the sale of our wireless system business for $665 million in cash.

And all in all, I think we have made excellent progress over the past two years focusing the portfolio around our core connectivity business. I really feel good about this portfolio and the growth opportunities we have, and how we are positioned. This morning, we also issued another press release announcing that our Board of Directors recommends for shareholder approval a dividend of $0.16 per share for each of our first two fiscal quarters of 2010, and this will be December and March. Shareholder approval of dividend payments is required as a result of our reincorporation to Switzerland. We decided to retain our dividend at this level despite the reduction in business levels over the past nine months because of our cash position, the strength of the balance sheet and the progress we have made in reducing costs and improving productivity. Now I'm going to turn the call over to Terrence, who is going to go through our Q3 performance in more detail.

Thanks, Tom, and good morning, everyone. I will start by reviewing our sales performance by segment and market, then I'll get into earnings, cash flow and liquidity. So if you could look at Slide four of the slide presentation, this shows our overall revenue performance by segment, both year-over-year and sequentially. Our total Company sales of $2.5 billion were down 34% in the quarter versus the prior year, of which the effective currency translation was approximately 400 basis points of the decline. Sales were up 7% sequentially, with three out of our four segments showing sequential growth. In our businesses that serve the consumer markets, which are about half of our sales, while we are still down year-over-year, we did see sales increase 20% sequentially; and as Tom mentioned, it appears the inventory adjustments in the supply chain are largely behind us. In the industrial markets that we serve, we continue to see weakness as sales were down 2% sequentially. These industrial markets are continuing to be affected by lower capital investment levels, and we expect this trend to continue in the near term.

Now let me get into segment performance by market. Please turn to Slide 5. In our Electronic Components segment versus the prior year, sales declined 42% overall and 37% organically, and we saw broad-based declines across all markets and regions on a year-on-year basis. In the consumer related end markets, which are about 70% of this segment's sales, we did see revenue growth 20% organically on a sequential basis. Getting into the specifics by the major markets we serve, in the automotive market, our sales versus the prior year did decline 36% organically; however, sequential sales were up 28% organically. We estimate global auto production increased 10 to 15% sequentially and we also benefited from supply chain restocking. Our sequential sales increase was driven entirely by our Asia and European region. For quarter four, in this market we expect sequential improvement in top line again of mid to high single digit growth on what we estimate to be flat sequential global production, and the growth will be driven by further restocking.

In the computer market of the component segment, our sales declined 42% organically year-over-year, driven by end market declines as well as our continued selectivity on new programs, particularly in the commoditized portion of this market. On the sequential basis, sales were down slightly. In the communications market, our organic sales declined 28% year-over-year, and were up 4% sequentially. And as you know, we put both communication equipment and mobile phones in here. The year-over-year decline was driven by the communication equipment market primarily, where sales organically were down 34%. And except for China, the global market continues to be very soft. In the mobile phone portion of the communications market, our organic sales were down 16% versus prior year, but were up 35% sequentially. As expected, supply chain inventory stabilized, and our revenue decline in the quarter was in line with global OEM production declines.

In the industrial equipment markets, our organic sales growths were down 51% versus the prior year and down 14% sequentially. As we discussed on the last call, we expected declines in this market due to the reduced capital spending on factory automation and infrastructure globally. We have seen order rates stabilize, and we expect sales will be relatively flat in this market sequentially in the fourth quarter. And finally, in the distribution channel, our sales declined 39% organically versus the prior year due, to continued inventory reductions by distributors. Orders did begin to show some signs of improvement late in the quarter, and we expect Q4 sales to be similar to Q3 levels. Looking at the right side of the slide for our network solutions segment, versus the prior year, sales declined 26% overall and 17% organically, driven by capital spending reductions. Sequentially, sales were up 6% overall and 2% organically. We do expect segment sales in the fourth quarter to be flat with quarter three.

In the markets, sales to the energy market were down 15% organically versus the prior year. Utility customers, particularly in Europe, continue to defer spending on upgrades and maintenance. Sales were flat sequentially compared to the second quarter, and we did not see the usual seasonal pick up that begins in our third quarter and continues into the fourth quarter. We expect this trend to continue, and we expect quarter four revenues to be flat sequentially. Our sales to the service provider market declined 12% organically, driven by lower spending on upgrades and maintenance of existing networks in the US and Europe and the slow down of fiber investment in the US. In quarter 4, we do expect a sequential decline driven by lower fiber network investments in Europe.

And lastly, in the enterprise networks market, our sales declined 27% organically, reflecting weak US and European commercial construction markets and reduced IT spending. We do expect a modest sequential increase in the fourth quarter as a result of some program wins that we've had both in Europe and in the US. Let's turn to Slide six to cover the Specialty Products and Undersea Telecom segments. Sales in the Specialty Products segment declined 27% overall and 24% organically versus the prior year. Sequentially, sales down 2% overall and down 3% organically. For the fourth quarter, we expect the segment sales to be similar to quarter three. Sales in the aerospace, defense and marine market declined 20% organically versus the prior year, driven by both distributor inventory reductions and weaker demand in the commercial aerospace market due to aircraft cancellations and pushouts. In this market, we declined 6% sequentially; and while we have seen orders stabilize in the distributor channel of this market, we are seeing signs of weakness in the end markets. We expect quarter four to show further declines versus the third quarter.

In our Touch Systems business, sales were down 33% organically versus the prior year due to continued weak capital spending by retailers. Orders have strengthened in this business, and we expect a double digit increase sequentially. In the Medical Products area, sales decreased 13% organically versus the prior year, and we continue to be affected by capital spending cuts among health care providers. We expect this market to be down slightly on a sequential basis in the fourth quarter. And finally, in our Circuit Protection area, organic sales declined 34% versus the prior year, but were up 33% sequentially as sales to the consumer related end markets such as automotive and mobile phones showed improvement. Similar to consumer markets that we serve in our Electronic Components segment, we expect we will continue to see growth in our Circuit Protection business in Q4 sequentially.

Looking at the right side of the chart, in our Undersea Telecommunications segment, organic sales increased 15% versus the prior year and 3% sequentially, driven by our continued strong execution on projects in the Middle East, Africa and southeast Asia. In addition, as included in our revised guidance, we also benefited in the quarter in both revenue and earnings by approximately $20 million, due to the receipt of cash from a customer that we previously were concerned may not be collectible. This caused our operating margin during the quarter to be about 23% in this segment, which is higher than normal. We ended the quarter with a backlog of $811 million in this business, which was a decrease of $275 million from the end of last quarter. Bid activity on new projects remains solid, but the funding for these projects are uncertain. For quarter four, we expect our sales to decline sequentially to about $280 million, and we expect our margin to be in the mid to high teens.

Now let me go from sales and turn to the income statement, which starts on Slide seven. Our GAAP operating income for the quarter was $64 million, which includes restructuring and other costs of $63 million. These restructuring costs relate to both footprint and headcount reduction actions that we previously initiated, and no new plant closures were started in the third quarter. Adjusted operating income in the quarter was $127 million, with an adjusted operating margin of 5.1%, which is solid improvement from Q2 levels of 3.1%. Adjusted earnings per share for the quarter, was $0.17, which is up 21% from the second quarter. While operating income was up 76 sequentially -- 76% sequentially -- adjusted EPS was only up 21% due the income tax expense in the third quarter versus tax income last quarter.

Moving on to Slide eight, beginning in this quarter, we have reclassified research development and engineer expenses out of cost of sales, and are showing it as a separate line below gross margin to provide more clarity; and we have restated all periods presented for this reclassification change. If you look at the top of the slide, versus the prior year, gross margin declined 600 basis points from 29% to 23%. Volume declines due to the 34% decline in our sales reduced gross margin by 900 basis points. We also continued to reduce our inventory levels in the quarter, which reduced production by approximately 40% compared to the prior year. The impacts of lower production levels reduced gross margin by 300 basis points. Our cost reductions partially offset the negative effects of the volume and the production cuts. The savings from our implemented actions helped gross margins by 600 basis points.

Looking at our gross margin compared to the prior quarter, in the upper right hand corner, margins benefited from 200 basis points associated with volume increases, as well as 100 basis points of additional cost savings. Inventory reductions lowered gross margins by 300 basis points and offset the cost and volume benefits. Operating expenses, which are shown in the middle of the slide and include both RD&A and SG&A, were down $101 million year on year. Excluding the affects of the currency translation, we reduced operating expenses by approximately $70 million through a combination of headcount reductions and spending controls. As expected, operating expenses were flat versus the second quarter, and expect they will be a similar level in quarter four.

And finally, we continue to be on track for our overall target of removing approximately $300 million of annualized structural cost from our business. And this consists of $200 million in the manufacturing area, and $100 million of operating expenses, and we expect to exit the fiscal year at the full savings run rate. As I discussed on the last call, these actions position our Company for solid to upper single digit adjusted operating margins at current sales levels. With respect to our manufacturing footprint, the six closures are in process and they are on track with what we communicated last quarter, and we expect we will have less than 100 manufacturing sites by the end of this year. As you may remember, this is down from 133 facilities when we started the program back in 2007.

Moving to Slide nine, let me discuss the items on the P&L below the operating line. Net interest expense was $38 million, and this was flat versus the prior year. We to expect that this will come down to $34 million in the fourth quarter as a result of lower debt levels. As I discussed last quarter and as I provided in the guidance, the amount and mix of our income by countries where we have operations have changed considerably since we entered the fiscal year, and this has resulted in a lower than expected tax expense in the third quarter and has created volatility in our tax rate -- and this is evidenced by the 16% adjusted income tax rate we have in the third quarter. In the fourth quarter as earnings increase, the rate should not be as volatile, but will be lower than normal. We expect an adjusted tax rate in the fourth quarter of approximately 25%. Finally, other income -- which relates to our tax sharing agreement -- was $5 million in the quarter, up from $1 million in the prior year. For quarter four, I expect this will be approximately $11 million of income.

Now let me turn to free cash flow on Slide 10. As Tom stated, our free cash flow was $327 million in the quarter, up from $262 million in the prior year quarter. Lower income levels were more than offset by reduced inventory and capital spending. We continued to make progress in managing our working capital. Our day sales outstanding declined 3 days year-over-year and two days sequentially as we continued see improvement in receivables aging from our credit it and collection efforts. Our inventory days on hand, excluding construction in progress, were down 6 days year-over-year, and down 17 days sequentially to 67 days. On capital spending, we spent $61 million in the third quarter or a 63% reduction from prior year levels. On a year to date basis, capital expenditures down 39%, which is in line with the revenue declines.

For the full year, we do expect capital spending of about $350 million. Cash restructuring in the quarter was $80 million, and we continue to expect full year cash restructuring spending in the range of $300 million. And finally, based upon our strong traction over the past six months, as Tom indicated, we are increasing our 2009 free cash flow before restructuring outlook to $1 billion from our prior outlook of $800 million. Now let's move to Slide 11 to discuss liquidity and debt. Starting with cash, we began the quarter with $700 million of cash and ended the quarter with $1.26 billion. During the quarter, in addition to free cash flow, we received the proceeds from the wireless system sale of $665 million, which includes the working capital adjustment under the contract.

From a use of cash perspective, we paid off the balance of the credit facility, which was approximately $340 million; paid dividends of $74 million; and made cash payments related to pre-separation litigation of $50 million. The litigation payment, as you may recall, was related to the P&L charge of $135 million we took last quarter. We still have $85 million of cash payments related to these charges that we expect to pay out through 2010. Turning to debt, at quarter end our debt balance was $2.6 billion, down from $3.2 billion last year. As I stated earlier, we no longer have anything outstanding on our credit facility; and in the fourth quarter, our debt will go down by an additional $152 million due to the recently completed debt tender. After the tender, we will have about $2.4 billion of debt outstanding.

We feel very good about our liquidity position and and we will continue to retain additional carb in these uncertain times for flexibility and to make sure to support strategic options. Now let me turn the call back over to Tom.

Thanks, Terrence. Let me now turn to the fourth quarter, if you can flip to Slide 12. In Q4, our sales -- we expect our sales to be in the range of 2.53 to $2.63 billion, and this is up slightly versus Q3. We expect continued improvement in consumer markets and flat sales in industrial markets, and this will be partially offset by an approximate 10% decline in Undersea Telecommunications segment. As you know, we have been talking about that business slowing down for fiscal '08 and fiscal '09. It's been over $1 billion. We are starting to see a little bit of a slow down there now, as expected. We do expect our adjusted operating income to be in the $160 million to $200 million range. This significant improvement in sequential profitability is primarily due to continued benefits from our cost saving actions, our ongoing productivity improvement program and less negative impact on margins from production cuts to balance inventory.

Our adjusted operating income margin will be in the 6.3 to 7.5% range in the quarter, and that's up from about 5% in Q3 and about 3% in Q2, so we are making good progress there. Adjusted earnings per share from continuing operations will be in the $0.22 to $0.29 range, which is up from 17% in the third quarter. And as with prior years, we will provide further insights into 2010 in our next earnings call. If you move to Slide 13 now, I will just wrap up before we open it up for questions. Really importantly, we have resized the business to improve our operating leverage and have positioned the Company to deliver solid mid to high single digit adjusted operating margin at the $10 billion annual sales level and a 12% adjusted operating margin at $12 billion sales level. This is what we have been talking about for the last couple of quarters as we have gone through the resizing. This we thought is the right balance to strike to maintain a good solid performance, and even in these difficult times generate significant cash flow but increase our opportunities for growth in the future.

I feel like we are doing that pretty well. We continue to execute our strategic restructuring and, of course, maintaining our ability to grow; and this restructuring, coupled with our increased focus on core productivity, is really going to serve us well as growth comes back. As Terrence mentioned, the cash flow and balance sheet remain strong. And this really enables us to preserve our key strategic options, which are increasing our investment organic growth -- I think we feel there is more opportunity today than there were a year ago; bolt-on acquisitions, which can leverage our business platform; maintaining our investment grade rating; and of course, returning capital that we don't use for strategic purchases to shareholders through dividends and share repurchase. And with that, we will close off this part of the call and open up for questions.

(Operator Instructions). Your first question comes from the line of Matt Sheerin. Please go ahead.

Yes, thanks, and good morning. So I guess my question, Tom, has to do with the margin -- the incremental margin contribution going forward. Obviously, you are seeing a bit step function up in the September quarter on the inventory reduction and the costs kicking in. But as you go forward, once the restocking period is over, what should we think about the incremental margin contribution or variable margin going forward on incremental dollar growth? And you've stated in the past that your goal is to get to a 12% operating margin at a $12 billion run rate. Is that still on track, or is that 12 billion even lower now, given that you have seen a big jump up here?

Hi, Matt, and thanks for the question. No, it's still on track. I think we would be getting ahead of ourselves if we were getting ahead of that rate. I mean, we continue to work the opportunities to improve the margin, and the margin improvement this year has been largely from resizing in response to the downturn and benefits of the restructuring that's been ongoing for a couple of years. We still have more restructuring to do, so we have a little bit of a lift there. I think the biggest margin improvement we will get going forward is we'll have better flow through on the volume. That's been one of the -- that's been the highest priority, I would say, in the Company over the last couple of years. It got sidetracked by the decline in the economy, but fundamentally to improve the operating leverage. So that ties into that 12 to 12, and our ultimate -- not ultimate in a sense, but we have not taken our eye off of the goal of 15% margin. But we are tracking now to 12. And I'd say the other way to think about that is last year when we were at the 14 to $15 billion sales range, the actions that we have now taken over the last 18 months or so position us to have our margins a couple of hundred basis points higher than they would have been at that range, so we're making good progress.

Okay, and then as you do see volumes increase, what should we be looking at in terms of additional headcount? And as of today, what is your manufacturing capacity and headcount capacity able to produce in terms of revenue?

Well, capacity has several elements to it. I would say we have plenty of capacity in terms of bricks and mortar. The variable capacity in our business is tooling and people. So we believe that we could support 5 to 6% organic growth without much growth in the -- our manufacturing workforce. And that's really the marching orders we have through the Company, that we ought to be able to get that kind of productivity. Now, as we grow, we are going to have some -- definitely some costs feed back in. We've been in short-term work in parts of the world, things like that, and the business is picking up. So that's starting to change a bit. But I don't feel we have any capacity limiters, and I do feel we should get this acceleration in margin as the volume picks up because of that operating leverage I talked about.

Okay, thank you.

Thanks, Matt.

Your next question comes from the line of Amit Daryanani.

Thanks, congratulations on a good quarter, you guys. I had a question. If I look at the auto business for the June and September quarter, you guys are obviously benefiting from some supply chain restocking helping you guys out. But do you sense that post-September most of this restocking benefit will be behind us, and from there on, auto sales for Tyco should reflect end demand? And is any there concern that much of the strength you see in the first half -- in June and September, really, is due to scrappage laws in Europe that are probably pulling in demand from the back half to the first half?

I think your first point is a very fair point. That's what we feel that by September we are going to be pretty much through inventory balancing in the supply chain. We do see, to your point, some lift around the world. I think it's for different reasons. There is a little bit of benefit from stimulus -- it's hard to get exact figures around that. But I think that's definitely -- we are not concerned about it. We are happy about it. But I think in terms of how we manage the business, we are not anticipating the kind of sequential increases we saw in Q2 to Q3. I think we anticipate kind of a more normal growth coming back. And as we talk to all of our customers -- in fact, there was just a note today that Denso, who is a big suplier to the OEM, is now going back to full work week. So I think there's a lot of signs out there, but not enough to feel like demand is really getting back at a fully robust rate. But it's better than it was, for sure.

Got it. And then just I guess a question on your dividend policy. There's been some discussion there, and I realize that you guys are committing for two more quarters of dividend payouts. But assuming demand continues to hold the way it is, is there a desire or commitment to maintain the current dividend yield? And is there any thoughts on possibly restarting the buyback program we have?

When you look at that, Amit, one thing is when we look at it -- and you used the word "dividend yield", we look at it from cash generation, and where is our balance sheet and our cash generation. So when we look at it, it's out of our earnings and our cash generation to do it. So from a yield perspective, while that's something we would look at, that is not the way we said it. So I want to make sure on the dividend side --

Yes, it's more of a payout ratio is the way we think about it, to Terrence's point.

Yes, and you know what? Maybe I just misspoke. I mean, I'm try to get on the a sense on the $0.64 annual dividend payout we have. Is there a -- if demand remains the way it is, is there a commitment to maintain that beyond the two quarters we're talking about?

Yes, the intention is to maintain at $0.16 a quarter. And one of the little complexities of Switzerland as opposed to Bermuda Company or most companies where the Board approves Switzerland -- the Board approves dividends, rather -- shareholders approve it. So it makes the cumbersome. That's why we're doing two quarters, but we're also not doing a full year, and our next annual meeting will be in February, March time frame next year. Our intention would be to get back on a -- sort of an annual cycle. But yes, our intention is to keep the dividend. If business got worse or didn't get any better, or we were going to be in a lull period, of course we would reevaluate it. But that's not how we feel right now, and that's why we have continued it through this year.

Yes, and then just the question on the -- possibly looking to restart the buyback program?

I would say eventually probably, subject to the Board approval, but not in the short-term. I think we want to maintain our flexibility in the short-term, both -- I mentioned earlier when I talked about the debt level, we made great progress bringing it down. If the business doesn't improve, we have a little bit to go on the debt, so we need to keep that flexibility. We also want to keep flexibility for these quote/unquote bolt-on acquisitions that fit in to the strategic sweet spots that we would like to fill out. But having said, that I think from our track record that we are not going to let cash build up, and we're certainly not going to let it burn a hole in our pockets. So if cash builds up, if we don't have better options, we would reinstitute the buyback program that we have in a sense on the shelf now. We have 600 million left on the program that was approved by the Board last year.

Got it. Thanks a lot, guys.

You're welcome, thank you.

Your next question comes from the line of Shawn Harrison. Please go ahead.

Good morning, everyone.

Morning.

I have a few questions on just incremental savings rolling on. Should we expect the entire inventory drag then, 300 bps or about $75 million, to essentially roll off as we move here into the September quarter? Is that what the guidance implies?

Shawn, if you look at it, there will be a little bit carrying in, but the vast majority, it is real likely that we've made better progress these past two quarters and we will get pick up in quarter four from it, but it will be essentially behind us.

Okay, so there -- it could be a $60 million plus?

Yes.

Second on the restructuring savings, I know you had previously talked about $150 million of savings incremental in 2010. Is that the number we should be using the model, or is that something a little bit lower now?

When we look at that from a footprint perspective, from a run a rate off of quarter four, there is -- just taking quarter four as a run rate, Shawn -- there is from some the factory items that we are wrapping up, the (inaudible). There is about 60 million incremental off of the quarter four run rate.

Okay, so 60 million annual off the quarter four run rate?

Yes.

Okay.

150, Shawn, was really the full benefit on an annualized basis of the original program.

Okay, okay. And then how much incremental are we seeing fourth quarter from third quarter?

About 100 basis points.

Okay.

And it's mainly in the gross margin, as I stated. Operating expenses, we have been able to get that down; but on the cost side Q3 to Q4, it's about 100 basis points.

Okay. And then I know last call we talked somewhat about copper not really being a head benefit to you anymore. With copper at 260, probably having worked through most of your raw material inventory now, should we not expect any incremental benefit from raw material prices in the back half of the calendar year?

As you indicated, we did fix positions late in '08 that we worked off, and they will be worked off through basically the end of this fiscal year. We are averaging, if you take the year between those fixed positions and where we do do some market purchases, we are at a 260, 270 level. So right now, the benefit rolling over is -- will be fairly minimal. And we are starting to look at fixing end positions into 2010.

Okay. And then one last question. Given the commentary on copper, what are you seeing in the broader interconnect pricing environment? And maybe if you could talk about pricing in the other businesses as well.

Sure. I would -- in the core interconnect business, lots of desire for price reductions from customers -- not anything that's really new, but no real change in price erosion, because I think what's balancing that is there has been a lot of stress on a number of the suppliers to the OEM in various industries in the -- during the last nine months, so a lot of effort is making sure I have suppliers that can get me through this period of time. And certainly I'd say we fit into -- that's one of our strong suits; as well as keep investing in development. So we don't -- haven't experienced any real change in price erosion.

I mean, Shawn, it's still about 1.5%, just to give you numbers; and that really has not moved. So it varies by market. But it really has been very consistent now, basically this year and last year. So it really has not moved, to Tom's point.

Okay, and that was 1.5 annual?

Correct.

Okay. Thank you very much.

You're welcome.

Thanks, Shawn.

Thanks.

Your next question comes from the line of Steven Fox. Please go ahead.

Hi, good morning. Couple of questions. Getting back to the auto, can you isolate on the trends in auto demand in Asia, how much of that was restocking versus real growth? And then also if you could talk on auto about what the mix of the content looks like per vehicle? If there is anything you've been able to dissect on that, that would be helpful.

Sure, well, let me talk mix a little bit. I think there is a slight change in mix I would say, and we kind of estimate it at a couple dollar impact on content. Right now there is a little bit higher proportion of smaller cars with less features being sold. We do believe that that's something that will work its way through -- and it happened in the past, during maybe circumstances that weren't this crazy as the last nine months. So slight so far there, Steve, I would say. In terms of Asia -- I mean, definitely China -- that had a month or two of declining auto sales stimulated quickly through a number of ways -- changed taxes on certain priced cars -- and that business is really very robust again, and it's very -- we were strong there in Tyco Electronics. Getting a little bit better in Japan, I would say, both in the local market as well as the exports. That feels more inventory correction related; and I was in Korea a couple of weeks ago. I would say a little bit of both -- a little more inventory still. I would say in general in all the consumer markets, the sequential benefit is definitely in the two-thirds to three-quarters inventory, but there is some improvement in end demand.

Got it. And then the Network Solutions business looked like it had a little bit more leverage quarter over quarter than I would have expected. Is there any -- can you talk about maybe any kind of improvement -- how you got the improvement, if there is any one-offs and what we should be looking for on network margins going forward?

Steve, this is Terrence. Couple things. Both in Specialty Products and Network Solutions, you saw nice sequential increases. They both had benefits of our cost actions -- our cost actions were across all our businesses except UP -- not just Electronic Components -- and they also did bring down inventory. So they both did get the benefit of some of the inventory burn turning, as well as the cost actions. The incremental that you do see in a Network Solutions has to do with a little bit of a favorable mix, because the service provider market grew a little bit faster. So there is a little mix, but there isn't any other one-offs.

Oka, and then lastly, if you were going to look at a tax rate for next fiscal year, any suggestions on what to use?

Yes, a tax rate when you look at it -- certainly our tax rate, like I said, has been very volatile. As the business has swung through these income levels, it certainly impacts pre-tax income. When we started the year, we told you about 30%. We have continued to work on planning, and we'll give you full guidance in the next call; but right now, I think using in a 28 to 30% range pending our formal guidance and insights for next year, I think, is a reasonable assumption.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Jim Suza. Please go ahead.

Great, thanks. It's Jim Suva from Citi. Congratulations.

Thank you.

When you guys talked about the destocking of inventory is pretty much over, I just want to be clear. For the September quarter, are you envisioning a restocking or just stability?

Go ahead, Tom.

I would say more stability, Jim. There is a little bit of restocking going on, but inventories were so much higher than the level of business as the market collapsed so quickly, particularly in automotive, I don't think we've seen -- certainly everybody got a little tighter than they would normally be on inventory. But I can think of just how we are managing our own inventory; we are not going to into restocking mode. Our reductions are starting to flatten out, and I think that's the way we see it with most of our customers.

Great, that's what I thought. And then on the automotive side, you guys have done a lot to right size your business, cut down costs and things like that. For the September quarter, what type of annualized global automotive run rate are you running the business for, for the September quarter?

If you look at it right now, Jim, when you look at it, global production in fourth quarter is going to be about 13.5 million units is our estimate. We do see that having the potential to inch up to about 60 million units for next year, as we've told you, just as the consumer and production get back in line, which is pretty flat production quarter on quarter from Q3 to Q4. So our production estimate is about 13.5. Our capacity is above that, but that's right now how we are seeing it, and we do expect to grow about 6% to 7% sequentially.

Great, so then if we go from 13.5 more towards an annual run rate of 60 million, you would likely see more benefit from the positive level flow through?

Exactly. If you look at it, Tom talked about components business getting to profitability; and around these business levels, we think it's a mid-single digit profitability. But then you get the volume leverage that we believe will be very significant that Tom talked about.

Great. And my last question is -- and not for guidance, but you guys have done a lot of divesting of businesses throughout the last several quarters. Can you help us understand the normal seasonality of your Company in aggregate now, kind of as the quarter has progressed through the fiscal or calendar year?

I have to say, what's normal after what we've been through this year, Jim? A lot of seasonality has been thrown out the door. Our wireless business -- really from a seasonality, the wireless business that we sold, the only thing that was unique about that is it always had a big September quarter. If you look at the rest of the business without that, and assuming a rate return to where we did historically, typically our third quarter will be our strongest. We do get impacted in the other quarters by holidays and seasonality; but still, quarter four and quarter one may be 5% off of that. Quarter three, which is our June quarter, would be our strongest in a normal time.

Great. And last point, along that line, you mentioned stepping away from some of the computer businesses, the commodities side. Is there still more to go on that, or is that pretty much behind us? I think most of it is behind us, Jim.

As you know, we have been working on that for a couple of years to get out of the real low value add. I mean, we still have -- our products still span the range, I would say, of complexity; and there is still pretty wide margin range across the portfolio, and it's not our goal to get out of every quote/unquote low-end product. What we wanted to get out of was products that we didn't really add any engineering or manufacturing to it, because we can't distinguish ourselves that way and would rather have those resources on other projects -- as you know, it's project intensive. So I guess the simple answer is yes, most of that is behind us.

Thank you, and congratulations again.

Thank you.

Your next question comes from the line of William Stein. Please go ahead.

Thanks. I'm wondering if you could give us a brief update on the M&A strategy going ahead? You talked about potentially doing something to fill in some holes in the portfolio. Any comments on how that might progress going forward?

Sure. As you know, the last couple of years the focus has really been to get the portfolio much tighter, and I feel like we have done that around our core connectivity business that serves devices and automotive and networking. So now that we have that -- in the same time, we have looked at acquisitions and have been building a pipeline that's a derivative of our strategy, and our sales pipeline is pretty robust right now. We are scanning and looking at a number of things, but it's focused in a couple of areas -- and as we have said before, areas that would compliment us. We like energy for sure, we like medical. We have good positions there. We would like to build on those positions. I'd say generally speaking, it's rounding out markets where we don't have a full product line, and that's how we think about it. And then when I think about what percentage of our business, it feels like a 2 to 3% of our revenue -- and obviously maybe one year it will be one, maybe one year it will be five -- would make sense when we look at where we want to go strategically and what's out there. We haven't done any yet. We've been active in a few. We've passed on a few, because either it turned out as we got into them they weren't the fit that we thought, or weren't willing to pay the premium. But I think it's definitely an important part of our strategy going forward.

Any chance that you'd do something bigger than that, and maybe even a public company? Or is that officially out of the cards, or still potential?

I would never say never. I would say is there a chance? Yes. Is it at the top of our prior list? No. Because we -- I mean, if you go across the markets we're in and the technology we have -- and again, we are more than just a connector Company -- we like what we have; and the biggest opportunity to create value is to leverage what we have and augment it. So I really feel like M&A, in the mid-term for us, is more of an augmentation strategy, not necessarily a big deal, transform the Company strategy. But I'd never say never, because things come up and you get smarter as you go. But that's how we are thinking about it right now.

Thanks. And then an update on the distribution strategy, please?

Sure. We're -- as you know, about a year, year and a half ago, we felt like we needed to be strategic and, frankly, much more effective through that channel, so we've been on a pretty intense program to do that. We're making good progress. We have reduced the number of the distributors over the last three months that we serve. It's not reduced -- we still serve them with our products, but I think some of those -- most of those customers and partners will be better off as we simplify our channel, and therefore we can focus our efforts on the bigger distributors and do a better job. So I feel good about that. You can't really see it in the numbers yet because obviously the business has been down and the channel has been correcting inventories, and that's -- Terrence talked to that a little bit. We think that's largely behind us. But I definitely feel like our relationship with strategic partners in that channel around the world are better than they were a year ago.

Great, thank you.

Thank you.

Your next question comes from the line of Amitabh Passi. Please go ahead.

Hi, thanks. Just a couple of questions, the first one being for you, Terrence. On the balance sheet, once you've redeemed the 150 million plus or so of debt, would you be largely done with most of the balance sheet restructuring, or do you think you will probably continue to pay down debt further?

Tom mentioned that where we are today, we are probably at the high end of the range if we stay at the revenue where we are. And as you saw in the tender, we went out with a 350 tender, we had 150 submitted. So there could be a couple of hundred million more that we do depending upon business levels. So there could be a little bit more that we do -- that's why Tom talked about the flexibility of holding more cash in these uncertain times. But we are close to being done.

Okay, and then how do you foresee working capital movements in the fourth quarter?

Working capital in the fourth quarter on the revenue we have, we do view we will take a little bit more out of inventory; but other than that, we expect working capital to be fairly flat quarter on quarter.

Got you. And then, Tom, just for you, a couple of sort of strategic questions. I guess the first one was just, any thoughts on the recent acquisition of [SCI] America by Hubbell? I mean, does that -- from your perspective -- indicate anything on one of your competitors, or -- ? Just curious to see what your thoughts were

We obviously were aware of what was going on there, but other than that, really don't have too much to add. As I said, we are active. Active -- you could call us active and selective.

Got you. And then just one final question on your Network Solutions, just trying to understand, is there still -- what is the value add for you to remain invested in some of the businesses like building networks and the comp service provider, where there are certainly much larger competitors in that space? I mean, is that an area you remain fairly committed to? And how do you see the synergies playing out with the rest of your sort of interconnect and component business?

I think the networks business is one of the things that makes us more -- and we like this a lot -- than sort of a device interconnect company. Of course, that's our core business, but it's -- if you look at our core technologies -- and out of our networks business, we really lead with our kind of material science expertise, and our connector business we would lead with our mechanical and contact physics expertise. But they come together, and they definitely come together in the enterprise business. We are one of the top three players in the world in our enterprise or net connect business -- that's a 400 to $500 million business, very attractive business for us, a business that we have a lot of momentum in. Those technologies come together in our energy business, which is in the neighborhood of $1 billion in normal times -- it's a lot lower this year -- and we are strong around the world in the energy business, and we really love the prospects for that business.

And in the telecom portion of the business, what we sometimes call our outside plant business, which is copper and fiber interconnect in the outside plant, and we sell to companies -- the big carriers around the world. That's been a very good business for us. It's been down and lumpy the last couple of years, and it tends to fluctuate with the stock and the acceleration and the deceleration in fiber deployment. But with we like all three of those businesses, and the technologies are very linked. So we like being this very broad-based connectivity business that those network businesses are roughly 2 billion in sales, with historically very attractive margins -- and in the future, we believe, very attractive margins -- and have been very solid during this last year.

Got you. And I apologize, just -- I do have one final one. On the aerospace and defense, you talked about some weakness in the end market. I suspect some of that was driven by commercial aerospace weakness, and likely (inaudible) continued to destock. Just curious what you're seeing on the defense side of that business?

Relatively flat. That's holding up better than the commercial aerospace business. This is another business that we like a lot. We have invested in over the last few years, we broke it out as its own stand alone business unit a few years ago; and I think we mentioned on the call last time that we have significantly increased our content on all the new platforms in commercial aerospace from the two big providers there, and we've also increased our content in the defense side on a lot of the new military vehicles. Now that's not showing up in sales yet. That will show up as these platforms begin to shift. But we like that business. As you know, that's attractive business. It's long cycle. It's hard to be displaced from that business, and it require as lot of technology. A lot of our advanced material technology starts there and then moves into other parts of our business.

Okay, thank you.

You're welcome.

Greg, we have time for one more question.

Okay, that question comes from the line of Amit Daryanani. Please go ahead.

Thanks. I had a quick follow up, guys. On the computer segment, sales were down a little bit sequentially. Could you just quantify how much of that was due to these programs that we exited?

How much of the decline?

Yes. Because I mean, in general, right, I mean, most of the computer PC supply chain has done fairly positive. We've seen some good sequential growth. So I'm just trying to understand the delta. How much of this is because of business that you walked away from?

Exiting the business, Amit -- the lion's share of that is from exiting the business.

All right.

We are doing pretty well on our core platforms in that business, but all the potpourri of other things we had, we either -- we raised prices basically the last couple of years, and most of that -- because of that -- has gone away, which was our intention if we couldn't keep the price.

Okay.

Thanks, everyone. All right, well, thank you very much for the time; and Keith Kolstrom and myself will be around all day for any follow-up questions you may have. Thanks for joining us.

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