泰科電子 (TEL) 2009 Q4 法說會逐字稿

Ladies and gentlemen standing by, welcome to the Tyco Electronics Reports Fiscal Fourth Quarter Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

(Operator Instructions.)

And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, John Roselli. Please go ahead.

Thanks, Ruth. Good morning. Thank you for joining our conference call to discuss Tyco Electronics' fourth quarter results for fiscal year 2009 and our outlook for the first quarter. 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 and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our web site, at tycoelectronics.com.

Now, let me turn the call over to Tom for some opening comments.

Thanks, John; and good morning everyone.

I guess you could definitely say 2009 was a challenging year. But I feel we really navigated through it very well. And we finished strong in Q4, with sales, earnings, and cash flow above guidance. I'd just like to take a second here to thank our 75,000 people across the world for really pulling together during these times and responding to the challenge.

I'll briefly recap some highlights of the year and Q4, and then I'll cover the overall market environment before I turn it over to Terrence, who'll go through our Q4 results in more detail. to recap Q4, sequentially, sales increased 8% overall and 15% in our Electronics Components segment. As expected, consumer markets, such as auto, computer, mobile phone, and appliances, showed solid increases. And this offset the expected decline in our Undersea Telecom segment.

Total company orders were up 25% sequentially, with strength across the majority of our end markets. Excluding Undersea, bookings were up 12% sequentially, and the book to bill ratio was 1.05. Adjusted operating income for the quarter was $221 million, an increase of 74% sequentially. And importantly, our adjusted operating margins improved again, 300 basis points, to 8.2%. We also had another quarter of strong cash flow, generating $600 million this quarter. This included a $200 million inventory reduction for the third quarter in a row.

As we entered in and went through the downturn, we had four overriding objectives. Resize the company to be able to deliver 12% operating margins at $12 billion of revenue. We felt this was striking the right balance of preserving the tremendous opportunities we feel we have while making sure the company stayed solid. We wanted to accelerate the restructuring program we started two years ago. Of course, keep the balance sheet strong. And stay focused on our strategic growth initiatives. I feel we made very good progress against all of these objectives.

Our cost reduction actions in response to the downturn, combined with strong execution of the strategic restructuring program we initiated right before separated, generated $300 million of annualized cost savings. And this has us on track to deliver 12% operating margins at the $12 billion revenue level, what we refer to as "12 at 12."

With respect to restructuring, we ended the year with 97 manufacturing facilities, versus 133 when we launched the program. And this is a little ahead of where we expected to be. We also made significant progress in focusing our portfolio around our core connectivity businesses by divesting the wireless systems and battery businesses during the year. And this substantially completes the plan we initiated two years ago.

We generated $1.2 billion in free cash flow during the year, driven by working capital turnover improvement and a substantial reduction in CAPEX spending. Clearly, when the business falls off, you do get the positive impact of working capital liquidation. But more than that, we improved our working capital turnover. And this free cash flow was a little more than three times adjusted net income in fiscal '09.

Divestitures also contributed approximately $700 million in cash, in addition to the free cash flow. So this strong cash generation enabled us to maintain our dividend, reduce our debt by $800 million, and end the year with a cash position of about $1.5 billion.

I think, just as important, despite all the disruption caused by the economy, the team also stayed focus on our growth strategy and made good progress strengthening our product offerings across most of our businesses. And over the last six months to a year, we've had some very key new platform wins in automotive with our alternative power connectivity systems, our high voltage energy product line that we recently introduced, some key new wins on the new airliners in the commercial airliners in aerospace and defense, and across our communications businesses.

Let me now shift to talk a little bit about what we're seeing in our end markets. Q4 was our second straight quarter of sequential revenue growth. And as I mentioned earlier, the bulk of this was in our consumer-related markets, due to rebuilding of inventory and some increase in demand. And we clearly felt the benefit of stimulus in the automotive industry in all regions of the world.

As we enter our new fiscal year -- we're in our first month of that -- actually, the second month -- visibility is still limited, but we're feeling a bit more confident about the improving trends in our key markets. And let me talk about a few of those key markets.

In automotive, global vehicle production grew for the second quarter in a row -- that's the September quarter -- to approximately 15 million vehicles. Total production in our full fiscal '09 was about 55 million vehicles. Our automotive sales are up 24% in the second half of the fiscal year compared to our first half, primarily due to the stimulus programs and the restoration of more normal production and inventory levels.

And as you'll recall, when the business went down, it went down very hard and very fast, and inventory was just take right out of the system. So we are seeing the rebuild of those inventory levels.

Encouragingly, our automotive orders in October have remained consistent with what we experienced in Q4. From an industry perspective, the latest outlook is that production levels will increase to about 60 million units in our fiscal 2010, which is an increase of approximately 10% over the 2009 levels. And if you saw, the October US sales results came out. Those annualized results are about in line with a global 60 million unit production level.

The increase from 55 to 60 will be -- the majority of that increase will be in Asia. And that -- we have a very strong position across all the Asian markets. And in general with respect to the automotive business, we continue to be very bullish, because no matter where you go -- and I was in India two weeks ago -- electronic content is increasing. Whether it's a small car or a luxury car, the electronic content is increasing around the world.

In our other consumer businesses, which include PCs, handsets, consumer electronics, and appliances, we're also seeing a pickup in demand for the second quarter in a row. Again, I think this is inventory being restored in the channel. But we are seeing some end demand pickup, especially in emerging markets.

In our infrastructure businesses, which are largely in our Network Solutions segment, and this includes our energy, enterprise, and telecom networks business, end demand remains sluggish as companies continue to hold back on their CAPEX spending, similar to what we've done. People are spending capital unless they have to. We do think things have bottomed out there, and -- but we don't expect to see any pickup until the second half of our fiscal 2010, which would be in the April-May time frame.

In our Undersea business, project activity remains pretty vibrant as telecom operators continue to add bandwidth and redundancy, particularly in emerging markets. However, the size of the projects, as we expected, is declining a bit. And we do expect the business is going to be down from the billion dollar sales levels of the past two years. Still a very healthy business, but the past two years have been banner years, and the business is going to come off that level a bit.

Finally, in our other two key markets, industrial equipment, we're seeing some signs of recovery. That went down hard last quarter and the quarter before. Lagged consumer a little bit. It has bottomed out and is picking up sequentially a bit. And in our aerospace and defense business, sales continue to be a little soft, as air travel is down and airline production, private and commercial, is down.

But overall, although business is still down from the 2008 levels, we are seeing improvement and much more consistency in order patterns. Clearly, order levels in our Q1 and Q2 of our current new fiscal year is going to provide a much clearer indicator of where we are in the recovery. So those are going to be two critical points. But no question, from our perspective, things feel better than six months ago and even three months ago.

With that, I'll turn it over to Terrence, and he'll take us through Q4 in more detail.

Thanks, Tom; and good morning, everyone.

I'll start with slide four in the slide presentation. And I'll start by reviewing our sales performance by segment and market. Then I'll review our earnings, cash flow, and liquidity. On this slide, this shows our overall revenue performance by segment, both year-over-year and sequentially.

Total company sales of $2.7 billion were down 25% in the quarter versus the prior year. Sequentially, sales were up 8%, with three of our four segments show growth. The effects of currency translation added 300 basis points to the sequential growth. In our businesses that serve the consumer markets, which is about half of our corporation, sales increased 17% sequentially. Industrial and infrastructure markets, as Tom mentioned, continue to show sluggishness, but they do appear to have stabilized, as sales were flat sequentially.

Let's turn to slide five, and I'll cover the segment performance by market. And unless I indicate otherwise, all discussions I'll talk about will be organic. If you look at the left-hand side of the slide, sales in our Electronic Components segment declined 24% versus the prior year, with declines across all markets and regions. Sequentially, however, we did see sales increase 12%, driven by the strength in consumer-related markets that Tom talked about.

To go into the major markets in the segment, in the automotive market our sales versus the prior year declined 15%; however, sequentially, sales were up 14% We estimate global auto production was up approximately 8% sequentially, which this benefitted from the global incentive programs.

We also saw additional sales in this market from the continued restocking and the supply chain. Sales sequentially increased in all regions, with particular strength in North America and in Asia. For quarter one, we expect mid to high single digit revenue growth sequentially, reflecting further increases in production, as well as the positive effects of currency translation.

In the computer market, our sales declined 37% versus the prior year. And on a sequential basis, sales were up 10%, which was essentially in line with end unit shipment data. In the communications market, our sales declined 30% year-over-year, and we're down 1% sequentially.

In the communication equipment market, revenues were down 38% versus the prior year, and 7% sequentially. In the mobile phone area of the communications market, we saw a decline of 16% versus the prior year, but growth of 10% sequentially, essentially in line with the global OEM production levels.

In the industrial equipment market, sales were down 41% versus the prior year, but up 19% sequentially. During the fourth quarter, order rates began to improve, and we expect a slight sales improvement sequentially into the first quarter.

And finally, in the distribution channel, our sales declined 29% versus the prior year, but were up 12% sequentially. The order rates have improved in the channel, consistent with the trends in other markets, and we expect mid single digit growth sequentially for quarter one.

Turning to our Network Solutions segment on the right side of the slide, sales declined 18% versus the prior year, driven by continued capital spending reduction by our customers. Sequentially, sales were essentially flat. Now, while there has been a lot of news about stimulus programs in the market that's served by our network segment, we have not seen any significant effect in our sales. We do expect segment sales for the first quarter to be down slightly compared to our fourth quarter.

In the energy market, our sales were down 15% versus the prior year, driven by lower spending and inventory reductions at utility customers. But we did see sales up 3% sequentially. We expect, in quarter one, revenues to be similar to quarter four levels.

Our sales to the service provider market declined 22% versus the prior year and 13% sequentially due to a slowdown in wire line capital investment in all regions, especially in Europe. In quarter one, we expect a mid single digit decline sequentially in this market.

And in our enterprise networks market, our sales declined 20%, reflecting weak commercial construction markets. Revenues were up 6% sequentially as a result of program wins, and we expect our quarter one sales to this market to be flat sequentially.

Turning to slide six, to cover Specialty Products and Undersea Telecom. Sales in our Specialty Products segment, which is shown on the left side, declined 22% overall versus the prior year. Sequentially, sales were up 4%. And for the first quarter, we expect segment sales to be similar to the quarter four levels.

Sales to the aerospace defense and marine market declined 23% versus the prior year, driven by continued weakness in the commercial aerospace market, as Tom talked about. Revenues declined 4% on a sequential basis. And while commercial aerospace remains challenging, we have seen sales to the distribution channel of this market, which is about 30% of our business, stabilize during the fourth quarter.

In our touch systems business, sales were down 25% versus the prior year due to capital spending declines in the retail market. However, as expected, business strengthened sequentially, with revenues up 11%, driven by growth in the retail and industrial markets.

Turning to our medical products business, sales decreased 16% versus the prior year as we continue to be affected by reduced spending by medical equipment customers. Revenues were down 2% sequentially. And lastly, in our circuit protection area, sales declined 19% versus prior year, but were up 24% sequentially, as sales to the consumer-related end markets such as automotive and mobile phones continued to improve, consistent with the trends we're seeing in the consumer markets in the Components segment.

Now, looking at the right side of the chart, in our Undersea Telecom segment, sales declined 11% versus the prior year and 16% sequentially, to $268 million. We did book a project in the Middle East called Gulf Bridge for approximately $300 million in the quarter. We expect to begin work on this project in the second quarter, and this project will continue into fiscal 2011. This project solidifies our expectation for full-year sales in the $600 million to $700 million range.

Bid activity has improved recently. And if we're able to win additional projects over the next six months, it could provide upside to this range, depending on the timing of the project. We ended the quarter with a backlog of $920 million, which was an increase of about $100 million from the end of quarter three. And for quarter one, we expect sales of approximately $200 million, with margin in the mid-teens.

Now, let me discuss earnings, which starts on slide seven. our GAAP operating income for the quarter was $176 million, which includes restructuring and other costs of $45 million. These costs included $33 million of costs primarily related to both footprint and headcount reduction actions that we previously initiated.

In addition, we signed an agreement to sell a small business in our Network Solutions segment and incurred a $12 million impairment charge in the quarter related to this divestiture. This business had annual sales of about $50 million, with operating margins in the low to mid single digits. We expect this divestiture to close by the end of the calendar year.

Adjusted operating income was $221 million, with an adjusted operating margin of 8.2%. This is the second consecutive quarter of solid improvement, as our adjusted operating margins have grown from 3% in our second quarter to 5% in the third quarter, to the current 8% level. We are solidly profitable in all four of our segments. And the fall-through on the sequential sales increase continues to show the benefit of our actions.

Adjusted EPS for the quarter was $0.30 a share, which is up 76% from the third quarter, reflecting the growth in the operating income. In addition to the restructuring and the impairment charges I just mentioned, adjusting items also included a $0.04 gain on the early retirement of debt related to our debt tender completed at the beginning of the quarter.

This is reflected in our P&L as a $22 million in other income, and a $3 million expense in interest expense. The gain reflects both a discount from the tender price versus the par value of the bond and the unamortized gains on the debt retired. We also had $0.09 of tax items, which reflects the effect of various tax matters in the quarter, including a tax settlement under our tax-sharing agreement. I will provide further details on this later.

Let's move to slide eight. Looking at the top side of this slide, our gross margin declined 200 basis points versus the prior year, from 28% to 26%. Volume declines related to the 25% year-on-year decline in our sales reduced our gross margin by 400 basis points. We also continued to reduce our inventory levels in the quarter. The impact of lower production levels to achieve the inventory reductions reduced gross margin by an additional 200 basis points. Our cost reduction actions were able to partially offset these negative effects of both volume and production, and added 400 basis points to our gross margin.

Comparing our gross margin to last quarter, it increased from 23% to 26%. Higher volumes in the Electronic Components segment were partially offset by the expected volume declines and lower margin sales mix in the Undersea Telecom segment. As a result, the net volume effect was 100 basis points of improvement.

While we did reduce inventories in the quarter, the negative effect on the P&L was positive versus last quarter by 100 basis points. And finally, cost reductions added 100 basis points sequentially to our gross margin.

Looking at the middle of the slide, operating expenses, which include both RD&E and SG&A, were down $82 million year-over-year, or about 15%. Excluding the effects of currency translation, we reduced our operating expenses by approximately $70 million, through a combination of headcount reductions and spending controls.

Operating expenses were up 2% versus the third quarter, driven primarily by the sequential increase in sales. As sales continue to increase, there will be a modest increase in our operating expenses. And finally, as Tom mentioned, our structural cost actions of $300 million to achieve 12% adjusted operating income on the $12 billion of sales are on track.

Now, turn to slide nine and let me discuss items on the P&L below the operating line. Net interest expense was $36 million, versus $39 million in the prior year. As I mentioned earlier, included in interest expense was $3 million of expense related to the early retirement of debt. Excluding this expense, net interest expense would have been $33 million, down $6 million versus the prior year, as a result of lower debt levels.

Other expense was $55 million, which included two adjusting items. The first is an $86 million expense primarily related to the settlement of a pre-separation tax liability. And the second is the $22 million gain on the early retirement of debt I discussed earlier. When you exclude these items, adjusted other income was $9 million. And for quarter one, I expect this will be approximately $11 million of income.

The GAAP effective tax rate was 1% in the quarter, and the tax rate on adjusted income was 28%, which was slightly higher than we guided. Going into next year, we expect a tax rate on adjusted income of approximately 28%, reflecting the continued progress since separation on levering our structure.

The GAAP rate was impacted by various tax items, including the settlement of a pre-separation tax liability. This settlement affected both the GAAP other income and the income tax expense lines. The settlement is not a full settlement of our pre-separation tax liabilities, but, rather, a settlement on one matter. The settlement has not changed our view on the eventual size of our portion of the shared tax liabilities.

As we previously communicated, as individual items get settled under the tax sharing agreement, it will create volatility, both positive and negative, on our income statement.

Now, let me turn to free cash flow, which starts on slide ten. Our free cash flow in quarter four was $608 million, up from $437 million in the prior year quarter. Lower income levels were more than offset by the reductions in working capital and capital spending. Our day sales outstanding of 66 days were essentially flat, both versus the prior year and sequentially.

Our inventory days on hand, which excludes construction and progress, were down 13 days year-over-year and 8 days sequentially, to 59 days. As volumes begin to return, we do expect inventory days to move back into the 60s, which is a substantial improvement over the 72 days where we ended 2008.

We spent $58 million on capital in quarter four, which is down from prior year levels of $165 million. For the full year, our capital expenditures were approximately 3% of sales, as our capital spending focused on tooling for new programs. In fiscal 2010, we expect capital spending to return to the low end of our historical spending level of 4% to 5% of sales.

Cash restructuring in the quarter was $60 million, and full-year cash restructuring spending was $260 million. For fiscal 2010, we expect cash restructuring spending of approximately $300 million.

For the full year fiscal 2009, our free cash flow was $1.2 billion, inclusive of the restructuring spending I just mentioned. This compares to $1.3 billion in 2008, which included $76 million of restructuring spending. Our 2009 performance demonstrates the strong cash generation of our business model, and we're very pleased with how our team performed this year.

As we look to the future, we continue to expect that our free cash flow will approximate net income in a normal growth environment. Our adjusted cash tax rate should remain around 20% for the foreseeable future; and the favorable difference versus the expected adjusted effective tax rate of 28% should offset the working capital increases as volume is returned.

Let me know cover debt and liquidity, which is on slide 11. We began the quarter with about $1.3 billion of cash, and ended the quarter with $1.5 billion. Uses of cash during the quarter included debt reduction from the tender of $141 million, dividends of $73 million, voluntary pension contributions of $61 million, and cash payments related to pre-separation litigation matters of $52 million. The litigation payment was related to a P&L charge we took earlier in the year, and the voluntary pension contribution we made of $61 million was in addition to our normal contributions of $84 million that we made during 2009.

The $61 million that we made was the level of contributions that made economic sense in light of the asset declines we saw in 2009 in some of our plans. For fiscal 2010, we expect our contribution will be at the normal level, which is below $100 million, as our plans remain well-funded.

While the pension funded status declines will not significantly affect our pension contributions for 2010, it will impact our pension expense. We estimate that our pension expense will go up by about $50 million in 2010, and will be about $160 million for the full year.

And at quarter end our debt balance was $2.4 billion, down from $3.2 billion last year. Our balance sheet is solid. And in the short term, we will continue to maintain a higher level of cash to preserve flexibility. And finally, we maintained our quarterly dividend of $0.16 per share, and our shareholders have already approved payments for the first two quarters of fiscal 2010 at $0.16 per share.

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

Thanks, Terrence. We'll now go to slide 12. I'll just quickly sum up our outlook. For our first quarter of fiscal '10, our sales will be in the range of $2.7 billion to $2.8 billion. Organically, this is flat sales compared to Q4, with continued strength in the Electronic Components segment, which we expect to be up 3% to 5% sequentially, being offset by 25% sequential decline in Undersea.

We expect adjusted operating income to be in the $250 million to $280 million range, which is an increase of 13% to 27% sequentially. The continued improvement in sequential profitability is primarily due to the improved leverage on the volume increases in the Electronic Components segment, again, partially offset by the sales decline in Undersea.

And this should result in gross margins in the 27% to 28% range, which is up from 26^% in Q4. Our adjusted earnings per share from continuing operations are expected to be $0.35 to $0.39, a sequential increase of 17% to 30%.

So just wrapping it up, tough economic year. We feel, a year a good operating performance and also a year where we strengthened the Company' s strategic position. I don't want to have to go through another '09 again, but I think I, again, thank our team for really doing a great job pulling together and getting through it.

So with that, let me -- let's open it up for questions.

Thank you.

(Operator Instructions.)

And the first question comes from the line of Shawn Harrison with Longbow Research. Please go ahead.

Hey, good morning, Tom and Terrence. Congratulations on the quarter

Thank you, Shawn.

The first question I have just is in regards to just kind of the ongoing and incremental benefit from both restructuring as well as the decline in inventory reductions. Would the inventory reductions, maybe, add another 100 basis points to the operating margin sequentially?

And then on the restructuring, versus the end of fiscal '09, how much on the dollar basis is left in terms of benefits in 2010, given large amount of cash costs still to come?

Thanks, Shawn. Let me answer part of that, and then I'll turn it over to Terrence.

Our gross margin up to 26% in Q4, clearly, we -- that was largely benefitted from the cost actions and the restructuring. And then the outlook for Q1 getting to 28%, continued benefit from the cost actions, but also seeing our production come in line with our sales for the first time in quite a while. So then we're sort of in a balance environment.

As far as the restructuring program goes, I'd tell you to look at it in two ways. From a -- starting the program and going through it, we're probably almost 70% through. Paying for the program, we're about halfway through. If you think of this year, our charges from '09 to '10 will actually go down, but our cash will actually -- our cash out will actually increase as we get through a large part of the program.

Terrence, you want to elaborate on --

Yes. I mean, when you look at Tom's first part to answer it, on the margin, Shawn, when you go sequentially, what we really have going on here is about half of the benefits further -- inventory, we assume production will be balanced with volume in quarter one, so that's about half of the improvement in the operating margin.

And then the other half is cost actions. When we go sequentially from quarter four to quarter one, there is about $15 million of savings that you can, basically, annualize to $60 million from an exit rate coming out of quarter four from a restructuring perspective.

Okay. And then beyond the first quarter, is there anything above that $60 million annualized that we should model?

That is what you should conclude in right now. The things that are happening, anything new we start will come later in the year and trail into '11.

Okay. And then second, just on a follow-up, usage of cash flow. I know there's been some talk on prior calls about acquisition opportunity. Maybe, Tom, you could speak to what you're seeing in the marketplace in terms of acquisition opportunity and kind of where you're trying to pinpoint some bolt-on acquisitions.

Sure, Shawn. I think, as you -- obviously, the last couple of years, we've been in the divestiture mode to get the Company a lot more focused and tight around our connectivity business. We have developed a pretty robust acquisition pipeline, I would say. So we think, in certain markets, particularly areas like energy, aerospace in a sense, medical, there's opportunity there.

I'd say there is -- the markets are starting to come back to life a little bit there in terms of our cash. We need about $500 million to run the Company. We'd like to keep a couple hundred million -- I'm sure Terrence will talk to this, as well -- if we need to reduce the debt further. Right now, we don't need to do that.

But we're carrying about $800 million. I'd call it strategic flexibility, which gives us the opportunity to look at acquisitions, if the right ones are there. And if not, we talk to the Board every quarter about how much should we hold and how much should we return. So our thinking hasn't really changed.

Okay. Thanks. Thanks for answer the questions; and once again, congratulations.

Thank you.

Thanks, Shawn.

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

Yes. Thanks; and good morning, everyone.

So I just wanted to just ask about what you're seeing in terms of the demand picture. Obviously, the quarter was better than seasonal. Your guidance on the electronics side looks better than seasonal. And I know it's difficult for everyone to figure out the difference between to-demand and restocking.

But do you have a sense that this whole restocking phase of the recovery cycle here is behind us, or is there still a little bit of that left?

I think there's still a little bit of it left. But certainly, that has been closed quite a bit in the -- in Q3, but especially in Q4. So just based on our order rate and the expedites by our customers of us, I think that a lot of our customers are still feeling that their inventory levels are too low.

I think, if you go around the world, emerging markets, it's -- there was stimulus, but there's also real demand. And I think it's just a little more uncertain, although it feels better in the US and Europe.

And I know, obviously, visibility is still pretty tough. But would you expect, given that the restocking phase is ending here and we don't really know what demand's going to look like, that you could return to more seasonal levels in the March quarter, or is it too early to tell what March is going to look like?

I think it's -- Matt, it's still a little too early to tell. I mean, like I said, we feel better than we did three and six months ago, but we also know the way some of these -- the way these things tend to go. Now that people are coming back, everybody's trying to protect a little bit against the upside. And we're making sure we don't overreact to that.

Okay. And just lastly, just in terms of your capacity and ability to meet customer orders. I know we've been hearing across the supply chain of some lead time stretching, some distributors scrambling for parts. Are you seeing that in any of your business?

Yes. We're scrambling a little bit, too. I would -- it's really more material-related. As hard as things went down in the components segments in -- for a lot of companies, everybody pushed inventory out. And it just takes a little bit longer to get that back. But the good news is, sequentially, in Electronic Components, we're in 14%-15% sequential growth the last two quarters.

So we're coming up pretty fast. But clearly, in some cases, not as fast as our customers want us to. But it's not a -- we don't have any fundamental capacity issues, bricks and mortar or people. And the way we're flexing on the people side is being careful, using overtime, things like that. Slowly adding folks back into the mix until we feel a little more solid. But we're -- it's more chasing material.

But you're not concerned with any double-ordering --

We're watching it carefully.

-- possibly happen?

I would say we're really watching that carefully. It's hard to discern that, at times. So I suspect there's a little bit of that going on. But we've reflected that in our Q1 outlook.

Okay. Thanks very much.

You're welcome.

Thanks, Matt.

And the next question comes from the line of Amitabh Passi with UBS. Please go ahead.

Hi. Thank you.

My first question has to do with, if I look at your guidance, it looks like you're now approaching sort of $11 billion on an annualized run rate for revenues, and about 10% operating margins. And just to get to your 12-12 model, it still looks like the implied incremental operating margins are north of 30%. If I back out the restructuring benefits, I don't know, $60 million-$70 million, it looks like you're still looking at incremental margins of sort of mid-20s.

Is that the right way to think about your model on a more normalized basis, once we sort of return to sort of normalized revenues and get a lot of the restructuring benefits behind?

I think you're looking at it right on, on the top. I mean, the only thing I would say is we are getting some benefit of currency translation right now. That is creating -- as Tom talked about when he did guidance for the quarter, we're getting about 500 basis points of growth Q4 to Q1. That's the only weird part of the calculation right now, because you don't really get real fall-through on that. You just get translation.

But the way you're thinking about the model is correct. And like we talked about in the call, the 12 at 12, we're fully lined up with where we're exiting the year.

Okay. Great. And then my second question had to do with your Undersea Telecom. If -- let's just assume that that business at some point trends further down to sort of a $500 million annual run rate. Can you still do double digit operating margins in that segment?

Yes. It would be on the top, as we talked about before. When you look at that, it would probably be in the 10% to 11%, with how we built the business and structured the business. So from that viewpoint, we can definitely be in double digits at the low end of that -- at that $500 million level.

Okay. And then just my final question, I guess, for either of you. When you talk of your 12-12 model, even if I adjust your peak revenues, which are approaching -- or I guess you did about $14.4 billion. And if I adjust for Undersea Telecom, instead of assuming a segment north of $1 billion, let's assume it's $500 million.

It still implies that your revenues will be down about, probably, 14%-15% from where you were at the peak levels. Whereas if I look at some of your periods, by 2011 they'll sort of be back to their peak levels of 2007, 2008.

Would love to get your comments in terms of why you think there's still this large discrepancy between, actually, what's implied by consensus estimates, your target model versus your peers'. And is there a chance that your 12-12 could prove conservative?

Yes. I guess, I can't comment on my peers. If you just look at automotive as an example, though, in 2008 there were 72 million cars produced, 2010 60 million. And most of the folks who do the forecasting don't think you get back to 72 million until, probably, 2013. So I don't think most people are viewing that business absolute business levels are going to be back by 2011 to where they were in 2008. I haven't heard anybody say that.

I think the most important thing, though, is we're positioned to manage well, I think, whatever the volume levels are. We've reduced our excess capacity. But yet, we still have plenty of capacity to grow past where we were in 2008, as you said, in the $14.3 billions. And if you look at the margin leverage, we're close to 150-200 basis points better than where were as a result of the actions we've taken.

Great. Thank you, and congratulations on a good quarter.

Thank you.

Thanks, Amitabh.

Thank you. The next question comes from the line of Jim Suva with Citi. Please go ahead.

Thank you; and congratulations, gentlemen.

On your outlook for the next quarter, is that pretty much based upon a annual automotive production unit of 60 million? Or is it still kind of on the increasing part of the curve for that?

If you look at quarter one, Jim, quarter one auto production in the 60 million Tom talked about is about 16 million units. So if you look at it, there is probably about a million more units in quarter one than just 60 million divided by 4, which would be 15 million. So there is still a little bit of production bump here in quarter one, which is about up 6% from quarter four. So there is a little bump there. But at 16 million, it's not too much.

And to reach your 12-12 goal, is that -- you think you can get there at 60 million? Or could you actually get there with a little bit less than global auto units at 60 million?

You would need more than 60 million, Jim.

And what would that level be?

Excuse me?

What would that level be for more than 60 --

Probably be closer to 63 million-64 million.

Yes.

Okay. Great. And then just a quick --

(Multiple voices.)

Yes. A quick clarification. On the tax rate, I thought I heard 28%, but then I thought I heard 20%. Which one of those should we use for going forward?

20%, Jim, is the cash tax rate.

Okay. Got you.

And the 28% is the adjusted tax rate. As you know, when we separated, our tax rate was in the mid-30%'s. And we continued to work on planning. And I know the tax rate has been very volatile this year, just due to how our earnings have been volatile this year. But 28%, in the environment we see right now, is what you should use for 2010.

And my last question. You've worked down inventory pretty aggressively the past three or four quarters. Are you at a point now where we should start to see inventory increase or stabilize, or what's your inventory outlook?

I would -- you should expect to see inventory increase a little bit. And our days are going to increase a little, as well. So absolute dollars will go up, because the revenue is going up a little bit. But we need to put a little more into the channel, into our production here.

Great. Thank you; and congratulations, gentlemen.

Thanks, Jim.

Okay. Thank you. Next, we'll go to the line of Craig Hettenbach with Goldman Sachs. Please go ahead.

Yes. Thank you.

In the automotive space, can you talk about things you're doing from a competitive standpoint through this downturn, whether it's a design -- if I think about automotive and the pressures there's been, there's companies that are deemphasizing that market. So just really looking for ways that you'd be able to capitalize on that and, in particular, maybe, potential resources you're putting towards that, as that market ultimately will recover.

Good, Craig. Thanks. Well, automotive's critical to us, as you know. We have a very strong position there. And it's taken a long time to build up that position, because of the demands of the customers, and appropriately so. We protected engineering in that organization, despite the significant downturn. At one point, our business was down 55% in revenue globally, just three quarters ago.

And we are very, very -- as focused as ever, from an engineering, sales, and marketing point of view, we haven't changed our attitude. And I think we've actually, from a strategic point of view, strengthened our position through the last year in terms of some key platform wins and, definitely, evolving our alternative power connectivity system in all parts of the world.

So I like our position. We've always been strong there. And I actually feel we're a little stronger than we were a year ago. And from a structure -- a cost structure point of view, that's where a lot of this heavy lifting on the restructuring has been, which is to reduce our excess capacity.

We -- our automotive team is a very -- has a good track record of productivity improvement. And -- but we weren't taking the unnecessary fixed capacity offline fast enough. We've made a lot of progress on that in the last 18 months. So I think strengthened our position to grow, strengthened the portfolio of products, and reduced our fixed cost structure, so -- and the profitability of the automotive business has come back quickly. It's not to where it was two years ago, when the business was a lot higher. But the team got it back on track much faster than one might have expected with that kind of downturn.

Okay. And if I could follow up. You mentioned orders X Undersea Telecom up 12%. Can you just give some color about linearity through the quarter and then into this current quarter on the order rate level, and then also just what you're seeing in the pricing environment as we make our way through the trough of the downturn here.

Let me -- the pricing's actually pretty straightforward. Let me answer that. Pricing has not changed. I mean, certainly, the consumer electronics are always the most aggressive. But our price erosion is still sub-2% and really has not moved. And so that hasn't changed.

Craig, on your order question, really, what we saw from an order perspective -- and our quarter four results show that, we saw sort of, as we exited quarter three, orders were stabilizing, as we talked about on the last call.

We saw a little bit of a step-up in September. And that order level has continued into October. So October order trends are very consisted with September and slightly up from where we were in the July and august, earlier in the quarter.

So from that viewpoint, Tom talked about the consistency of orders. And certainly, that consistency has been in our Components segment, as well as the Networks and Specialty Products segments.

Thank you.

Okay. Thank you. And next, we will go to the line of Wamsi Mohan with Bank of America. Please go ahead.

Thank you.

Can you, perhaps, talk a little more about the automotive business by region? Specifically, is the content for car beginning to recover somewhat? And given that the vast majority of growth that you're projecting in fiscal '10's coming from Asia, how worried are you about a negative mix shift from a content for auto perspective?

Sure, Wamsi. Thanks. I guess, a couple things. I think, if you -- content for car, you really have to look at it at a granular level. And what I mean by that is I don't think in any car, any category of vehicle, content is not going down. It's going up everywhere. Even in -- the small cars are adding more features like anti-lock brakes in some parts of the world where that hasn't been prominent, or electronic stability controls, certainly entertainment, more air bags.

We see that trend everywhere, even in areas of the emerging markets. And as I mentioned, I was just in India. In talking with a couple of our big automotive customers there, they've actually been surprised a little bit with the resiliency of the midsize cars. And folks are still demanding more features.

And no question, I think you're going to see, probably, a little bit of a higher growth rate in smaller cars because the emerging markets is where the higher growth rates are. But on a vehicle basis, look for content to continue to grow. A slight impact on the averaging of mix, so the average content per vehicle, but not significant, a couple dollars per vehicle, maybe. And in the grand scheme of things, that's kind of $100 million-$120 million revenue.

So don't see anything really negative there. It's just -- the real question is what's the growth rate going to be in the US and Europe. I mean, I think it's back on track in Asia, and the fundamentals are pretty straightforward there, and as we're all wrestling with in the west, what is the real state of the economy.

Okay. Thank you. That's helpful.

And on the raw materials side, both with sort of gold and copper still at pretty high elevated levels, can you update up on your current hedge levels for those raws?

Yes, Wamsi. As you know, as we went through this, we were overly hedged. And we actually finished burning off all our positions here in the fourth quarter related to copper. So you actually look at 2009, our net copper cost was around $2.70-$2.80 a pound. And right now, with where we're fixed through the -- basically, the first six months of 2010, we're at a similar level. So copper is really a non-factor right now with where it's at and our fixed positions.

When you look at gold, gold certainly is a little bit of a headwind, not major. We are hedged out for the first six months around $900 to $1,000 an ounce. So we have a little bit of benefit versus market. But year-on-year, it's a slight headwind, but not much.

So right now, raw materials are included at the rates I just talked about when we look out. And it's not a big positive or negative.

Thanks, Terrence. And then last one from me.

Specifically, your guidance had anticipated a charge of $75 million in the quarter, and you guys recognized $45 million from a restructuring charge standpoint. And your guidance is now calling for $60 million in charge in fiscal 1Q, which is actually up sequentially. Can you talk about what's driving those dynamics, please.

It's just timing, Wamsi. Some of these charges that we're taking are related to actions that we've already initiated, as well as, maybe, an action we wanted to do here in quarter four that will leak into quarter one. So it's just timing between the quarters.

Okay. Thank you very much.

Thank you.

Okay. Thank you. And next, we will go to the line of William Stein with Credit Suisse. Please go ahead.

Thanks.

Just a little bit more on the restructuring. I think your comments earlier suggested that we get the last of the benefits in the December quarter at, I think you said, $15 million sequentially or $60 million annualized. I had thought that these were going to extend out and continue to benefit the P&L above all the other benefits from higher revenue and better absorption costs from inventory stabilizing. I thought we were going to get that into March. Has that changed now? Have the benefits -- more of the benefits been realized or more of them coming into December from March?

No. They -- we benefitted quicker than we expected, from a cost action perspective. So we've been able to complete things from that viewpoint. And from that viewpoint, we did get some things done quicker. Some of the closures we did in the automotive area Tom talked about, we completed earlier than we expected from that prior guidance when we talked a few quarters ago.

Okay. Great. And then also, can you update us on your efforts in distribution? I think, historically, the Company has been, perhaps, over-franchised. I think you've been taking some actions in that regard. If you can talk about that, it'd be helpful.

Sure. That's -- as you know, that's been a key focus for us over the past year-plus, to build more strategic relationships and a strategic channel than we have in the past. That's moving along nicely. We're still in the first phase of doing that. So I expect that it'll take another -- it'll continue to happen over the next three to six months. But it's well underway. And we're feeling very excited about where this is -- how this is going to help us.

Wondering, also, if you can, perhaps, quantify a bit about what this scrambling for deliveries you discussed earlier would have been in the quarter in terms of, perhaps, what inventory -- what revenue could have been if you could deliver to your customers' demand. And then also whether that's meaningfully affecting lead times and ASPEs for the Company overall.

I would say, if we were at our normal sort of delivery rate, we would have had $20 million to $30 million more of revenue in Q4. But that's a big "if." Because as you know, when things go down this hard and then come back, it just takes time to prime the pump. And we are working hard to do it. Because at the end of the day, the most important thing is to keep the customers happy. And so I think we're making progress, but we're still not caught up as much as we'd like to be.

And on lead times in ASPEs, this -- I would assume lead times are, certainly, extending. That's what your bookings would suggest; right? Bookings were up a lot better than -- a lot more than what you're guiding revenues to go up. And so I assume that means backlogs extending, lead times extending. Is that right?

And then also any -- is it supporting ASPEs here? Is there any talk of raising prices in this environment?

There's no kind of across-the-board talk. We're always evaluating where our pricing is. But pricing really more moves in conjunction, when it does, with commodity cost increases. And as you know, they're not that easy to get, either.

So no. There's no sort of across-the-board pricing because of a supply-demand imbalance. In terms of lead times, I would say, if you wanted to average it, we're probably a week to two weeks outside, on average. In a lot of areas, we're okay. In some areas, we're worse than that. But on an average, we're probably a week to ten days, I would say, longer than normal.

Okay. Great. That's helpful. Thank you.

Thanks, Will.

Thanks, Will.

Okay. Thank you. And next, we will go to the line of Steven Fox with CLSA. Please go ahead.

Thanks. Good morning. Just two quick questions.

One, just to -- trying to understand the plans for the footprint going forward. And maybe, this is a better question for the analysts' meeting. But just getting a sense for where you stand versus, potentially, other restructurings down the road and -- or just naturally weaning some plants out.

And then secondly, hasn't been much conversation around just sort of selling into corporate equipment, the datacom market. It sounds like you're fairly conservative on those markets, at least to the spring. Can you just talk about what you're seeing, specifically, maybe, in the box with servers versus, maybe, outside the box with cables, etc.?

Sure. Let me talk to datacom. I think the market's starting to come back. I would say, historically, in the box, we haven't been that strong. We put a higher priority on that strategic -- as a strategic focus area about three years ago. And the product line that we started to introduce about six, nine months ago, a range of high-speed products, still, I think, very, very competitive, probably more so than we've ever been.

And in terms of strategic position, I think we're getting better. But we're still feeling the effects of our not being a major player there. I mean, it's -- an important player, but not one of the top couple. And so we've made progress, but we're still not where we want to be there.

I think, from the cables side, that's a strong suit for us. In our enterprise business, we've had two or three really good years. I mean, that business has been off a little bit, but in the server area, it's still pretty strong. So we connect in the enterprise. We're in the network. So we have a pretty robust position there, which I think has actually gotten stronger over the last couple years.

And Tom, how do you feel about the market right now in that area? Just -- if you can just go back over that, a little bit more detail.

The enterprise, right now, is still -- it's flat. It's been down. It's flattened out in the last couple months. That's one of those that I mentioned that I -- I don't think we're going to see an upturn from the current levels for another quarter or so. And that's the outside the box piece.

I think it's coming back a little bit faster in the inside the box piece, which we'd call datacom or communications infrastructure. So we expect to see that, the inside the box, for us, be up sequentially next quarter.

And then Steve, on your restructuring or footprint comment, a couple things. I mean, you said it very well. Early in December when we have our investor day, we will get into it in more detail. Where we're at right now, though, is 97 facilities. We have five that are in process that will take the bulk of 2010 to complete. And that gets us into the low 90s. I could see us being in the high 80s or low 90s when we're done completing most of it here in '10, maybe a little trickle into '11.

But like we always said, this was a three-year program. We have accelerated it, increased it. So from that viewpoint, we'll give you a more full update in early December. But there's five currently in process.

Great. That's very helpful. Thank you.

Thanks, Steve.

We'll take two more questions, please.

Okay. Thank you. Next, we will go to the line of Amit Daryanani with RBC Capital Markets. Please go ahead.

Thanks.

Tom, you were talking about, I think, auto production being possibly up about 10% in 2010 and it's going to be fairly Asia-centric. Could you, maybe, help us provide -- or, maybe, provide a framework on what you think your auto business would do if production's up 10% next year and it's Asia-centric?

Generally, I would say we'd track to that, maybe a little higher than that. We're strong in Asia. I mean, Europe -- our largest market share is in Europe. Our second largest market share is in Asia. And that share has been increasing over the last several years.

So again, if you'd take that 5 million units, it probably splits about 3 million Asia, a million Europe, a million US. So it's not all Asia, but, clearly, the larger proportion of the increase is Asia.

I think the key thing to your question, Amit, is we average around $60 of content per vehicle. Certainly, maybe, we get hit, to Tom's point, a couple bucks due to mix. But then you have to take that against the 60 million vehicles, if that comes true. So I think that's the way to frame it property as you're modeling.

Fair enough.

And then can you just talk about, is there any thoughts as we start the new fiscal year about revisiting the share buyback option? And if you don't go that route, could you just say -- will you talk about what the bigger priorities are for all the cash you generate going forward?

Well, we still have about $600 million open on the share buyback authorization from the Board that we carried over. And of course, we suspended that due to circumstances. We really want to get another month under our belt, two good solid quarters of sequential improvement and demand picking up in our big Electronic Components segment.

I think that, kind of, the proof will be in the pudding on the recovery in the balance of this quarter and early next quarter, which we're optimistic about. But I think it's still too early to go back into the program. And as I said, it's something we -- it's a very important topic with our Board.

I think you can tell from our first year, we don't sit on the cash. So we're not going to just sit on it. But I do think we're better positioned -- I mean, we're more ready than we were a year ago and have been more focused on how do we strengthen the company strategically through inorganic moves.

The first 18 months were very, very focused on the divestiture side. The last six to nine months have been much more focused on the pipeline in the areas that I mentioned, like energy and medical and aerospace and defense. Not exclusively those, but certainly those are -- and our enterprise business -- those are important markets where we have nice, good, solid market position, and we'd like to strengthen our position.

Got it.

And then just finally, I think you talked about 500 basis points of benefit on the revenue line from (inaudible). Is there any impact on the EPS line?

It's very minor, because of how it falls through. It'd be less than a penny.

Right. Fair enough. Thanks a lot, guys. And congratulations on the quarter.

Thank you.

Okay. Thank you. The last question will come from Brian White with Ticonderoga. Please go ahead.

Okay. Thanks.

Just on the materials side, you're scrambling to get materials. What, specifically, is difficult to procure?

It's across. As you know, we start with base materials that come through, whether it's metals, resins, and anything. So any time in those base metals, lead times on those can be up to a month. So it's pretty much across the board, Brian.

Okay. And then when we think about the December quarter, you have a great outlook in the auto market. I think, typically, it's somewhat seasonal. Your peers had a great September quarter, just like you did. But then they're going to succumb to seasonality in the December quarter.

Why do you think you're outperforming in the December quarter versus your peers?

I mean, I can only -- I won't say it relative to the peers. Just what we're saying -- seeing is the backlog is pretty robust in the automotive business right now. And we're a month into it. So there's still the -- I think there's still a little bit left of the inventory rebuild, and auto's almost 30% of our business.

That went down. Three quarters ago, it was really tough. It went down so much harder than any other market, almost twice as far -- twice as big a fall as any of our other markets. So I think we're just seeing the return to a little more normal level, albeit below where we were in 2008.

And Brian, I would just be careful on seasonality right now. Certainly, we have, over time, (inaudible) straightforward seasonal pattern in our businesses. As we're coming out of this, I would caution viewing seasonality until we get to sort of stabilization, like Tom talked about, as we look at the next couple of quarters.

Okay. And when we think about the China market within Asia, do you feel like you're the number one player in the connector market within China?

Oh, yes.

Okay. Great. Thank you.

Thank you.

Okay. And no further questions. Please go ahead.

Okay. Well, thanks, everyone, for joining us this morning. The IR team will be around all day for any follow-up questions you may have. And everyone have a good day.

Thank you.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 10:30 a.m. eastern time today until November 11th, 2009, at midnight.

(Operator Instructions.)

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.