泰科電子 (TEL) 2010 Q1 法說會逐字稿

Ladies and gentlemen,we'd like to thank you for standing by and welcome to the Tyco Electronics reports fiscal first quarter results teleconference call. (Operator Instructions) I would now like to turn the conference over to your vice president of Investor Relations, Mr. John Roselli. Please go ahead, sir.

Thanks, Steve. Good morning and thank you for joining our conference call to discuss Tyco Electronics's first quarter results for fiscal year 2010 and our outlook for the second 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. 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 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. Good morning, everyone. And if we can start with slide three, I will briefly talk about the first quarter, and what we're seeing in our markets right now and then I will turn it over to Terrence and he will go through our Q1 results in more detail. Our first quarter was a very good start to our fiscal year and it was actually our third quarter in a row of solid sales and profit improvement. Our sales and earnings significantly exceeded our guidance and we had another quarter of strong free cash flow. On the sales front, we grew 7% sequentially, $2.9 billion, and in our largest segment, Electronic Components, we grew 17%, with 14% organic growth.

A very positive note within the Electronic Components segment, consumer and industrial markets grew at double digit rates sequentially resulting from a combination of improve in demand in most of these markets as well as continued inventory replenishment in the supply chain. Our networks and specialty products businesses did remain somewhat sluggish in the quarter and we expected this. But they are still showing some signs of stabilizing demand. And our undersea business declined 25% sequentially as we expected. The sales growth in the quarter coupled with our aggressive cost reduction efforts and footprint action resulted in our gross margin improving to 29%, and this improved our adjusted operating margin to 11.5%.

This compares to 8.2% in the prior quarter, and just as a point of reference, in our fiscal year '08, when our sales rate was about $14 billion, our average gross margin then was 29%, so as you know, our big focus area for us over the last couple of years has been to improve the operating leverage in the Company, and I'm really pleased with the operating leverage that we're seeing as a result of streamlining, of footprints, improving productivity, and cleaning up the portfolio. The net effect was this enabled our electronic components segment to return to double digit margins in the quarter after generating operating loss of just two quarters ago, and I will say our management team in those businesses navigated some tough times, and kept their eye on the future and got us back in solid profitability pretty quickly.

As you know, and as we talked about over the last year, our primary focus coming out of this downturn was to achieve a 12% operating margin at a $12 billion annual sales level without sacrificing our strategic opportunities. Our team has done an outstanding job executing on this objective in the last year and we're right on track to achieve this 12 to 12 goal. And then finally with respect to cash we generated $256 million of free cash flow in the quarter, which is really outstanding performance. And Terrence will elaborate on it later in the call. Typically, Q1 is a low cash flow quarter for us. So getting out of the gate like this was another good sign of our strong execution.

Let me now talk a little bit about what we're seeing in the market. Our total company orders excluding undersea grew 15%. And our book to bill ratio was 1.09. This growth was led by our electronic components segment and is broad-based across the consumer and industrial markets we serve. We also experience growth in our specialty product segment reflecting improvement in our aerospace and defense and touch business. Orders in our network segment were up 1% sequentially, showing a little sign of improvement late in the quarter.

Our networks businesses do continue to be impacted by lower capital spending by our customers. These businesses turned down later than our components businesses, and are recovering in the same cycle. At least that's the way we see it right now. Finally in our undersea business, project activity remained robust. Although we did not book any significant projects in the quarter. However, we did have a previously-booked project move forward and we now expect full-year sales in the 7 to $800 million range, up from our prior view of 6 to $700 million. So based on everything we see today, we expect sales in Q2 to be flat to slightly higher than Q1.

We do expect end demand to continue to improve in our components businesses, but this will be somewhat offset by the end of the inventory replenishment portion of this cycle. We are optimistic that the improvement we're seeing in our industrial and infrastructure markets, excluding undersea, is going to lead to stronger sales in these markets in the second half.

Let me shift gears here a little bit. As I mentioned earlier, preserving our strategic opportunities and accelerating innovation in the company were very high priorities for us. Have been since we separated. And remained high priorities even when we were going through the very difficult last year due to the economic problems around the globe. And so while obviously there was a tremendous amount of focus on taking costs out, I'm just as proud of our team for keeping our focus on the future and on the strategic opportunities we have.

And I just wanted to highlight a few. We will start with automotive. As you know, our automotive business was hit the hardest in the downturn. The team managed through that, back to very solid profitability again, but even more importantly, in the first quarter in Europe, which is our largest automotive segment, we had our highest design win in total ever this quarter. So that team kept focus on the customer and I think the customers really appreciated having a strong supplier that not only had the financial wherewithal to get through that difficult time, but continued investing. And another very bright spot in our automotive business is in China where we've built a $300 million-plus business, and we expect to grow in excess of 15 to 20% this year.

We do have market leadership positions across that market with both the multinational OEMs who are there as well as the local China OEM's so we feel we are very well positioned in that market for the short term and the long haul. In our aerospace and defense business, we continue to win new designs with Boeing and Airbus. What is really exciting here is we're designing solutions for these customers that go well beyond our traditional connector and wiring cable competencies. We work with these customers early in the architecture. And they see that we have value to add there. Our content as we mentioned at the investor meeting in December, our content on this next generation aircraft will be as much as five to seven times higher than the current platform. So just like everybody else, we're very anxious for those to start rolling out later this year.

And another one of our important segments, data communications equipment, I would say it is probably fair to say that historically we have not been viewed as the technology leader in this segment. This has been a very, very high focus area for us the last two or three years. Naturally, given the proliferation of data and broadband and infrastructure that has to go in place to enable that and we've made a lot of progress with the introduction of our new high speed backplane product family in the last 12 months and have increased our design in win rate with most key server and storage equipment providers. You don't see it in our sales today but these wins definitely form the basis of what we expect to be higher market growth in future years. I think it is another example of the team being able to focus on the long term while also getting through the short term.

And then lastly, in our touch business, we announced recently we acquired a company called Sensitive Objects. They're an early stage software company with touch enabling technology principally geared for the consumer markets such as PC's mobile devices and consumer electronics. And, this team and the technology and the capability they bring is a really nice compliment to our existing $350 million touch systems business which is primarily focused on commercial and industrial markets. So the acquisition of SO significantly strengthens our overall touch technology portfolio. And as we all know, this is a market that is growing tremendously, almost explosively, I would say. We do think of this as an R&D investment, and we expect first revenue in the 2011-2012 time frame. These are just a few highlights of some significant progress, but again, thanks to the team for managing us through difficult times and coming out in good shape on the other side. Let me turn it over to Terrence.

Thanks, Tom. And good morning, everyone. Let me start by reviewing our sales performance by the segment, and by market, and then I will review earnings and cash flow. If you turn to slide four, this slide shows our overall revenue performance by segment, both on a year-over-year and sequential basis. Total company sales were $2.9 billion, and this was up 7% in the quarter, versus the prior year sales of $2.7 billion. Sequentially, sales were also up 7% as a result of the strong growth in the electronic components segment of 17%, which was partially offset by declines in the other three segments.

In our businesses serving the consumer markets, which is about half of our business, and is mostly concentrated in our components segment, sales increased 18% sequentially, driven by improved demand in inventory restocking. The industrial and infrastructure markets continued the trend from last quarter and were essentially flat on a sequential basis. We did start to see signs of stabilization and signs of improvement in our order rate in the industrial and infrastructure markets excluding our undersea telecom segment. Now let me get into more detail and cover segment performance by market.

Unless otherwise indicated, all changes that I will mention are on an organic basis. Let's turn to slide five. And before I start getting into the detail, I want to remind everyone that beginning this quarter, we reclassified sales to certain end marks in our components segment. We created new industry groupings and we now allocate distributor sales to end markets where possible. We did file an 8-K on December 8th that provided quarterly information for fiscal years 2008 and 2009 in these new market groupings. So now starting with the left side of slide five, sales in our electronics components segment increased 12% versus the prior year, with $1.9 billion. Strength in the consumer related markets were partially offset by declines in the industrial markets.

Sequentially, sales increased 14%, with broad-based increases across all end markets. So getting into the details in the markets, in the automotive market, our sales versus the prior year increased 30% and sequentially sales were up 17%. We estimate global automotive production group, approximately 8% sequentially, and this growth in production coupled with the continued restocking and supply chain, grew double digit sales increases in all regions with particular strength in North America and in Asia.

We do expect production to decline sequentially from quarter one into quarter two, but we expect our sales will be flat to slightly up due to further restocking and this is supported by our current backlog. In the data com market which includes sales to the communications equipment, server, and storage markets, our sales declined 14% year-over-year. However, sales were up 13% sequentially, and this increase was driven by increased spending on wireless and broadband infrastructure, as well as data storage equipment.

Turning to the industrial equipment market, sales were down 8% versus the prior year, but up 13% sequentially. Restocking by distributors and improved end demand drove the sequential increase. Order rates continued to improve, the trend we already discussed in the industrial area, and during the first quarter, we expect revenues to be slightly up in quarter two. In the appliance market, sales were up 15% versus the prior year, and up 11% sequentially, with sales increases in all regions. However, our sales in emerging markets were especially strong, and as you know, this is where we have a very strong position. In the computer market, our sales declined 5% versus the prior year. However, on a sequential basis, sales were up 5%, in line with end unit shipment data. And finally, in the consumer device markets, which includes sales to the mobile phone and consumer electronics markets, our sales were up 8% versus the prior year, and up 2% sequentially, driven by end market demand. We continue to strengthen our position in the mobile phone market with program wins in both our connector and antenna product offerings.

Let me turn to our network solutions segment now, which is on the right side of the slide. Sales declined 15% versus the prior year and 6% sequentially. Driven by continued capital spending reduction by our customers. Sales to the energy market were down 13%, versus the prior year, and down 4% sequentially, driven by lower spending, as well as inventory reductions at our utility customers. In the enterprise networks market, our sales declined 6% versus the prior year, and 4% sequentially, reflecting continued weak commercial construction markets. And our sales and service provider market declined 25% versus the prior year, and 8% sequentially, due to the trends that we've been talking about which is the slowdown in wire line capital investment, and we saw that in all regions in the quarter, especially in Europe. Overall, in our network segment we have a strong position and feel we are strengthening it but our sales are clearly being impacted by the capital spend levels of our customers. We expect that segment sales in quarter two will be essentially flat compared to quarter one and we do expect a sequential improvement in our sales to the telecom service providers but this will be offset by a decline in our energy markets due to seasonality.

Let's turn to slide six and I will cover specialty products and undersea telecom. And sales in our specialty products segment declined 7% overall versus the prior year and sequentially sales declined 3%. For the second quarter we expect segment sales to be similar to quarter one levels. Sales to the aerospace defense and marine market declined 16% versus the prior year and 5% sequentially, driven by continued weakness in the commercial aerospace market. Order rates have stabilized, and in quarter two, we expect a low single digit increase in revenue sequentially. In our touch systems business, sales were flat versus the prior year, and were down 3% sequentially. Sales to the retail market have improved. However, gaming and industrial markets remain weak.

In our circuit protection business, sales increased 14% versus the prior year, and were up 3% sequentially as sales to consumer-related end markets such as automotive, computer and mobile phones continue to improve. We do expect that next quarter we will get our normal sequential seasonal decline in our circuit protection business. And lastly in our medical products business, sales decreased 10% versus the prior year, and 3% sequentially. As we continue to be affected by reduced spending by medical equipment customers. If you look at the right side of the chart, in our undersea telecommunications segment, as expected sales declined 24% versus the prior year and 25% sequentially, to approximately $200 million. We ended the quarter with a backlog slightly below $800 million, and in quarter two, we expect revenues of approximately $225 million, due to the construction progress on a West African system, and we do expect our operating margin to be in the mid teens. Based upon progress on this project, we now expect sales for the full year to be in the range of 7 to $800 million.

Let me now turn the discussion to earnings which will start on slide seven. Our GAAP operating income for the quarter was $269 million, which includes restructuring and other charges of $63 million. The restructuring costs included $48 million of costs related to both footprint and head count reduction actions that we previously initiated, as well as the losses of $15 million related to the sale of the Dulmison product line that we completed in the first quarter. We continue to be on track on our footprint simplification. And during the quarter, we closed two sites in Europe and divested three sites with the Dulmison sale. Which brings our site count to 92, down from 97 just at year end. We expect that our charges will be smaller next quarter, at $20 million, due to the timing of additional site closures. And for the full year, we continue to expect that our restructuring charges will remain approximately $200 million.

Adjusted operating income was $332 million with adjusted operating margin of 11.5%. We are solidly profitable in all four segments and our component segment adjusted operating margin exceeded 10% for the first time since 2008. The fall-through on the sequential sales and improvement in margins demonstrates the company's improved operating leverage, and in quarter two, we expect adjusted operating margins to approach our 12% financial goal that we laid out in the first quarter of '09, at slightly less than the $12 billion annual sales run rate. Adjusted EPS for the quarter was $0.47, up 57% from the fourth quarter, reflecting the growth in our gross margin and operating income.

So let's move to slide eight. Our gross margin in the first quarter was 29%, which was an increase of 200 basis points versus the prior year. The 29% was the targeted margin we laid out, needed to achieve the 12% margin at the $12 billion sales level. The 200 basis points of improvement in the gross margin versus prior year was driven by our cost actions in 2009 and was partially offset by slightly unfavorable sales mix and the benefit of building inventory in last year's first quarter. Comparing gross margin to last quarter, our gross margin increased up from 26% to the 29%.

The sequential increase was driven by further cost benefits, and production levels that were in line with sales as we completed our inventory reduction efforts last quarter. We did expect about a 200 basis point improvement from stopping our inventory reduction efforts in quarter four, and we clearly saw that in our gross margin increase. Looking at the bottom half of the slide, on operating expenses, and this includes both our RD&E and SG&A, they were down $49 million on a year on year basis, or about 9%. Excluding the effects of currency, we reduced operating expenses by approximately $22 million through a combination of head count reduction, and spending controls. On a sequential basis, operating expenses were up approximately 8%, driven primarily by the increases in pension expense, and performance compensation, as well as increased investment and RD&E.

Now, let me turn to slide nine and cover items on the P&L below the operating margin line. Net interest expense was $35 million in the quarter, versus $36 million in the prior year. The benefit of lower debt levels was offset by lower levels of interest income. Other income which relates to our tax sharing agreement was $8 million, compared to $1 million of expense in the prior year. For quarter two, I expect this will be approximately $11 million of income. The GAAP effective tax rate was 29% in the quarter, and the tax rate on adjusted income was 28% which was in line with our guidance. In quarter two, we expect the tax rate on adjusted income to continue to be approximately 28%.

Now let me talk cash flow which starts on slide ten. Our free cash flow in quarter one was $256 million compared to a use of $79 million in the prior year period. And as Tom said, this is very good performance when you consider that quarter one is our lowest cash flow performance quarter. The increase we saw was due to higher income levels, lower capital expenditures, as well as lower cash taxes, as well as keeping our working capital management in check. On the cash tax, we do expect that our full-year cash tax rate will be in the low to mid teens, and this is lower than our typical 20% cash tax rate, as in 2010, we will benefit from net operating losses that we generated last year in certain jurisdictions outside the United States.

As I mentioned free cash flow also benefited from our solid working capital performance. Our day sales outstanding of $63 million(Sic-see press release) was down eight days versus the prior year, and improved three days sequentially. Our inventory days on hand, excluding contracts and progress were down 33 days year-over-year, and improved one day sequentially to 58 days. And remember in quarter one last year was our high point, we did build inventory, but I feel we did an excellent job throughout 2009 bringing it down, and we kept it in check here as the business has ramped up. As I've also mentioned at quarter four earnings call, we do expect inventory days will come back up into the 60s as we go through the year.

On the capital spending side, we spent $76 million in quarter one, down from prior year levels of $115 million. For the full year, we expect our capital expenditures to be approximately 4% of our sales, which is at the low end of our typical spending as we've improved our capital productivity. On the restructuring side, from a cash perspective, we spent $67 million in the quarter. And for the full year, we continue to expect cash restructuring spending of approximately $300 million. And overall, we expect that our 2010 free cash flow, including the cash restructuring spend, and the benefit of the lower cash tax rate, will still be in our free cash flow approximating net income.

Let's move to slide 11, which covers our debt and liquidity position. At the beginning of the quarter, we started with $1.5 billion in cash, and we ended the quarter with $1.7 billion in cash. Uses of cash during the quarter included a return of capital to shareholders of $92 million, which included dividends of $74 million, and share repurchases of $18 million. In regard to the dividend. As part of our upcoming annual meeting in March, we will be asking shareholders to improve four quarterly dividends of $0.16 per share, starting with the third fiscal quarter of 2010, and ending in the second quarter fiscal quarter of 2011. Our plan is to continue to review our dividend payout rate in connection with our annual meetings. As we stated during investor day, we will continue to hold excess capital for flexibility and to maintain our ability to fund strategic acquisitions.

During the first quarter, we repurchased $18 million of our shares, and with the strength of our cash flow, and current cash levels we plan to increase our share repurchases in the second quarter. Also, from a proceeds or a generation of cash, during the quarter, we completed the sale of the Dulmison product line which was part of our network solutions segment for $12 million. This business had annual sales of about $50 million with operating margins in the low single digits. And finally, as Tom mentioned, regarding the acquisition related to our touch system business that closed last week, this will be a capital use in the second quarter, of approximately $62 million. So let me turn the call back over to Tom.

Thanks, Terrence. I'm going to talk about the second quarter outlook now. You can turn to slide 12. In Q2, we expect our sales to be in the range of $2.85 billion to $2.95 billion. Organically, our sales are expected to be flat to slightly up, versus Q1. Again, we do feel good about end demand, but the inventory replenishment piece that is driving our revenue is going to slow down in the back half of this quarter. We expect adjusted operating income to be in the $335 million to $370 million range compared to $332 million in Q1. The continued improvement in sequential profitability is primarily due to improved leverage from productivity gains in the electronic components segment. And this should result in a gross margin in the 30% range, up from 29% in Q1. And our adjusted EPS from continuing operations are expected to be $0.49 to $0.54, which is a range of sequential increase of 4% to 15%.

So in summary, really pleased with the start to the year. Off to a good start. The second quarter is shaping up. I would say most of our end markets are improving. Although as we mentioned several times, we do expect the inventory replenishment portion of our demand to slow down this quarter towards the end of this quarter. Our delivery is improving but it still has more to go there for sure. And we're improving on that every day. I think we feel best about what we've done with the operating leverage in the company, which was just a top priority when we separated the company almost three years ago.

Cash flow continues to be strong, and in particular, the working capital management of the company has improved significantly over the last several years. And we're -- last but certainly not least, we're really excited about having the Sense of Object teams, as part of the Tyco Electronics team. We are very, very bullish on our touch business. This team we're bringing in has tremendous talent and capabilities, and we think the compliment of those two is going to enable us to continue to grow that business significantly. So with that, let's open it up for questions. Operator?

(Operator Instructions) Our first question comes from the line of Amit Daryanani of RBC Capital Markets. Please go ahead.

Good morning, guys. And congratulations on the quarter. You guys have done a fairly exceptional job I think of getting back to this 12% margin target on (inaudible) revenues based on the guide. I'm just curious as we move forward, I think the big question everyone is going to struggle with, do you guys still have room to sustain these outsized margin expansion going forward or will margin expansion be more driven by sales growth and hence leverage could return back to the mid 20% contribution margin rates.

Could you just maybe talk about how the model works beyond the 2012 target and do we have any restructure realization savings left to be realized on the COGS or OpEx line for fiscal '10?

Thanks, Amit, for the comment and yes I think the way you summarized it is actually the way we see it. We have had obviously significant lift in the last couple of quarters, a combination of the inventory reductions behind us, the restructuring kicking in, and the resizing. Going forward it is going to be a more normal margin flow through of 25 to 30%. Productivity improvement is certainly a very high priority in the company.

There is a little bit of restructuring left to benefit the next year, year and a half, and Terrence can comment on that in a minute, but I would think of it as we're going to get back to normal margin flow-through and as we said, a month and a half ago, when we were in New York, investor day, and we now see a 15% operating margin in target in the 14 to $15 billion sales range. So- that is at a much lower level than we had laid out two or three years ago because of all of the progress we've made on the portfolio restructuring and general cost changes.

From the restructuring perspective, Amit, when you look at it, like we said, coming out of the last year, we had about $15 million of savings that still needed to click in and that clicked in the first quarter. There are some other effects going out through the year but it is pretty negligible. It is not big. So it does come down to volume. So I think you're thinking about it right.

Alright And my second question was, I think last quarter, and other analysts, we talked about auto production being up about 10% in fiscal '10, but there was some caution on what China would do with the incentive programs on the auto side. Now that China actually extended the incentive programs, can you just talk about how are we thinking about auto production in 2010 and what does it mean for Tyco's auto business specifically?

I think from when we talked to you last time, the estimates by the industry are a little bit higher. In the $62 million -- or 62 million, $64 million range. That's where we moved from. So obviously, we should benefit from that. Again, we're watching it closely. But clearly, it was stronger in December than we thought. And I think the industry as a whole is stronger in January than the industry was projecting it would be. So right now, the experts are calling $64 million for the year.

Perfect. Thanks a lot, guys.

Thank you.

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

Yes, thanks. And good morning. Just to ask another question, regarding auto, it looks like you're seeing a little bit more inventory refresh in the March quarter. Do you get any sense of what inventories look like at your customers there? Are they -- do you think they're going to end up being at normal levels when this refresh is done? Below normal or even better than that?

Well, we pick up some data, but I would say our view of it is that as this normalizes, and production and our sales get more in line with production as the inventories get balanced out and the whole supply chain, you're going to see at or slightly lower than where they ran in the past. Talking to most of our customers, a year, a year and a half ago, they said hey, we probably had too much inventory. So I think it is going to end up a little lower. But that is hard to call right now. Because when things get tight, everybody pushes hard to make sure they get more than enough inventory.

And I guess --

I think everybody is going to get a little smarter, I guess is the way I would answer it.

And I guess my point, Tom, is we've seen this from a lot of other suppliers, where business is very strong, and we're even seeing sort of overheated order environment, and for Tyco, are you planning, or are you bracing for any sort of volatility that might come, whether it is the June quarter or the September quarter, where you see orders decline, because there is an inventory adjustment, or some supply chain adjustment the other way, and how are you planning your business around that?

We're planning for quarters to decline in automotive, starting the end of this quarter, and to be down in Q3 and Q4. Our estimate is that in the last couple of quarters, we have benefited from about $100 million, 75 to $100 million of replenishment in the pipeline over and above kind of what you would normally expect. So it is definitely -- our revenue is hotter than in demand right now and we're factoring that into our planning for second half.

And Matt, just to add to what Tom said, we talked about the 64 million vehicles. We do expect that production, quarter one production levels were about 16.5 million vehicles, in our quarter one. That also we're planning will come down to about a 15.5 million vehicle on average through the rest of the year, quarter two through our quarter four. So that is how we're looking at the year.

Okay. That's helpful. And then just on the Toyota news with the recall, and it looks like they're halting production on certain models, does that impact your business at all short term?

Short term, it has a minimal impact. That is all included in our guidance. For the quarter. So it is not a big impact when you look at it.

Okay. Thanks.

Thank you.

Our next question will come from the line of [Steven Fox of CLSA.] Please go ahead.

Hi, good morning. Tom, you mentioned that you are seeing -- having some confidence in the second half of the calendar year I think in your prepared remarks. Away from auto, are you seeing certain signs that are pointing to sustainable demand or improving demand in certain markets that could you highlight further beyond say this quarter?

I think for the last couple of quarters sequentially,we've seen first the recovery and then the pickup in what we call the industrial and infrastructure businesses within our components segment. So that is selling to the capital equipment makers, and telecom infrastructure, we've seen a pickup in appliances, particularly in emerging markets, there has been a fair amount of stimulus in China, for example, on appliances.

Our networks business hasn't turned yet. As Terrence mentioned. That is still down sequentially. A little bit of that is seasonality. But we are, in talking to customers, we are starting to see signs that we expect that to start going in a positive direction in the second half. The same with aerospace, our aerospace and marine business, again that was down about 5% sequentially, and we think later second half, that will start to pick up. And hopefully the dream liner will begin to build. And so product will have to get laid in for that pipeline.

So the way I think of this, sort of the big picture, and not getting specific on guidance, obviously, because visibility is pretty limited, but auto as I said on the prior question is going to come down, we would expect, based on everything we see. Not dramatically. It is still doing a lot better than we would have throughout three or six months ago. And the industrial infrastructure network, especially product side of the business, is going to come out of the trough so to speak.

Great. That's helpful. And then just Terrence, on the cash flow side, would we expect in the next few quarters to see similar say free cash flow to net income ratios? Is there anything we should be thinking about plus or minus beyond what you guys just did in terms of free cash flow trends?

No, I think just where we are, and with the guidance that we gave, quarter one to quarter two, I think you are going to continue to see pretty solid cash flow. We may have some other restructuring cash, it could be lumpy, but I think you are not going to get big spikes up or big spikes down.

Okay. Great. Thank you.

Thank you.

Our next question will come from the line of William Stein of Credit Suisse. Please go ahead.

Thanks. A couple of quick questions. First, I apologize if you have already gone through this on the restructuring. I think in the past, we've discussed the small amount of incremental savings from the footprint reduction flowing through in March. Can you tell me whether that is still -- is that contemplated in guidance? Is there anything further that we should expect let's say on a sequential basis into June or beyond for restructuring?

Will, it's Terrence. It is about an incremental $10 million from quarter one into quarter two and that is included in our guidance.

Is that quarter over quarter savings?

That is from quarter one to quarter two. It is sequential.

Okay. And anything beyond that? At this point?

Negligible.

Negligible. Okay. Then I was hope can you could, for a second discuss the touch screen acquisition. Remind us where your positioned now and what does the acquisition bring you in the future?

We have been in the touch business for several years, and its genesis was really out of the [RayChem] company that was acquired ten years ago and the material science that goes into enabling touch. So very natural place for the company to have gone and we like the business for the obvious reasons. Our focus, our success, we have pretty nice position in many market, the leadership position in the commercial and industrial.

So if you go into a photo kiosk, retail, hospitals, more often than not, it is our touch screen. It is not always branded our touch screens, because we sometimes brand them for our customers, but -- so that has been a good solid part of our business.

The other thing about touch is, there is a number of different technologies, depending on the application, so the same technology that you would use on an iphone, which is not a technology we have, you wouldn't use in an industrial setting, because it is not robust enough. What this sense of objects does is it brings acoustic pulse recognition capability. Now, it is a different type of touch enabling technology. It is relatively new. We have been developing it in our business as well, again for commercial applications, SO has been developing it for consumer and mobile applications, and between them, we add a tremendous amount of -- increase our just shear technical horsepower around the capability.

What is very promising about it is that its lower power. You don't really need a template. So if you think of a touch screen today, there is a screen over the actual monitor that you touch. And what that also enables is that you can use any kind of stylus for this kind of touch. So you could use your finger or use a stylus, the old PDA kind of thing. It is, as we said in the opening comments, we're still a year 0 two years away from any significant product. This is R&D investment for us. We have a very nice position in the touch business. We wanted to strengthen it. And this is something we had been looking at for a while. We have worked with this group for a while. So we are very excited to have them part of the team now.

Great. And just a follow-up on that. Can you talk to us a little bit about the acquisition pipeline as it stands today?

Yes, sure. I mean the acquisition pipeline is getting more robust. We've been working on it for 18 months. I think we've, as you know, we've been -- this is our first one. We've been thoughtful about it. Because we had to get through the divestiture pipeline first. And get in better fighting trim, so to speak, to be ready to do M&A, but we've been working a number of opportunities for a while. As you also know, it takes a while. And you have to be very active to get down to a couple. So we've come a long way in the last year on the pipeline.

Great. Thank you.

Thank you.

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

The operating margins and network solutions, quite a big decrease sequentially quarter over quarter. Even though sales were only down marginally. I'm just wondering what my mite have contributed to that.

It is Terrence. When you look at it, one thing that would be pressured, if you go back to my revenue comments, is that in our service provider market, as the [Telcos] have really cut back capital and have cut back specifically on wire line, that has really hurt our margin in the network solutions segment overall. Just from a mix perspective. So when you look at it, that business is down 25% year-over-year, as well as almost down 10% sequentially. So that is putting a burden on the gross margin and operating margin in that segment. We do think that we have hit sort of a bottom point in that business. We did see some uptick in orders late in the quarter. So really, it all comes down to really a market mix is what we're dealing with right now.

Okay. And then just related specifically within the communications service provider sub segment of network solutions. We hear increasingly operators talking about decreasing investment in wire line and sort of focusing more on wireless, I'm just curious strategically, any intention of expanding your solution set within that segment to sort of address maybe the wireless service provider community.

Well, I wouldn't get that specific, but I would say generally, if you think about where our primary focus on M&A and partnerships is, it is definitely in specialty products and networks. So we really like the networks business, between our undersea telecom, although that is not in the network segment, but if you think of all of our telecom business, our component side of it, our enterprise business, and the service provider business, we're a top one or two or three player depending on the region in all of those. So we like the space. Clearly, with broadband, continuing to proliferate, and outpace everybody's expectations in terms of all of the data that is flying over the network, we think in the long haul, it is an attractive space, and it is a space we would like to get stronger in. So it is an important one to us. I think in the short term, this switch, disproportionate switch, I would say, or reemphasis, or increased emphasis because of the smart phone impact on capacity and wireless, which is great stuff for anybody who is in the networks business, is slowing down our wire line business. There is going to be significant opportunity though as the structure continues to change to more fiber connecting the base stations. So it not -- I mean we're still very attractive about the fiber piece of it but overall we like the business and some of our things in our pipeline are definitely focused on that business.

Great and just one final question. Tom, I think you talked about your China automotive business, I guess approaching a $300 million annual run rate. I'm just wondering should we expect any meaningful regional shift this year within your automotive segment? It looks like Asia is about 25, 26%? And then related to that, I think in the past you talked about a 58 to $60 roughly per vehicle content. Does that sort of materially change as we progress through the rest of the year?

In terms of the region, the $300 million was last year's revenue in China. I think we're going to be closer to $400 million this year. And so that obviously, that market is robust, we've been there a long time and we provide a wider range of capability than we typically do in a mature market, especially to the local OEM's because they're earlier on the learning curve, so it is very attractive for us. I think you will continue to see Asia driven by China and India, become a bigger part of our overall automotive business. I don't think you're going to see massive changes year-over-year, but a gradual steady, that becomes a bigger part of our business. As far as content goes, we really haven't seen anything significant yet. When we think about content, we think about increasing our content per model. So as I think about it, really the content in every model, whether it is a low end, two cylinder car, or an eight cylinder, 12 cylinder car in Europe, the content is going up for all of the reasons you know about. The averaging impact, hey, more small cars this year than last, there is a little bit of that, but we've always estimated that as a dollar or two dollars, and it is definitely in that range. So no significant shift.

Okay. Thank you.

You're welcome.

Our next question comes from the line Jim Suva of Citi. Please go ahead.

Thank you, and congratulations gentlemen. I have two questions. The first question is on the acquisition that you did. It appears this is kind of a pre-revenue company or early stage company. Is that the type of M&A strategy you're pursuing? Or are you looking at more companies that are in production for your M&A pipeline? And then my second question is, earlier in your prepared comments, you made the comment that you were progressing on your restructuring according to plan, and on track. When I look at your guidance, for next quarter, it is below a $12 billion run rate, and your operating margins are above 12%. So it appears that you're not actually on track. It appears you're faster or accelerating, because that would then also conclude that you're not getting any additional future benefits from restructuring. So those are my two questions.

Sure. I would say on the M&A strategy, it really depends on the opportunity, or the gap we're trying to fill. So in -- we're going to do both. And you typically expect the smaller one, like the one we did with Sensitive Objects, or, if we do others, smaller on the technology side, it will really be to make sure we're building out our technology capability in a particular product line. There is a lot of technology changing fast. And us being a significant player, in every market, you can't do it all yourself. So we're really have built out and continue to build out a nice network of companies, we look at, universities we partner with, to make sure we're on the leading edge, at a minimum of understanding what is going on but preferably participating in some of them. We've done small ones. This is a relatively big one of this type which is why we're talking about it. I would say generally speaking, if you talk about what we're going to spend on these kind of things, the majority of what we're going to spend, and invest, will be on companies that have revenue. I would expect that. So if you look back a year or two from now, and you say hey, we spent X, I would expect the vast majority of that X is going to be on companies that are revenue generating companies from the get-go. But this one is one we've been dealing with this company for a while, we really like their team, and their capability, and it is just a great fit with us. So this is a pre-revenue but I wouldn't put it in the start-up category. They've been around for several years and have excellent partnerships and excellent technologies. And then on the margin rate, I will make a comment and turn it over to Terrence to elaborate on it. Let's say,, if we hit this 12% where, as we expect in Q2 at less than $12 billion revenue I think the important thing is we're -- we're on track right now. The thing is, we're tracking right to where we want it to be. In any particular quarter it could be [12-3 versus 11-7], at the $3 billion revenue range, it could be, depending on the mix of distribution, the mix of end markets, what is going on with that fact, but we're really pleased with the fact that we've got the operating leverage to this point, which gives us a high degree of confidence that for the next wave, , with volume gets back to more normal levels we're going to have the next step function improvement. Terrence, you want to

Yes, Tom has it right, Jim. Cross-action what we went through last year, getting the cost base in check was one element. Certainly was improving our productivity and the operating leverage in the core operation. And what we saw during the quarter was with the volume improvement we had, mainly in the components segment, we were able to convert very nicely on it, not just due to the cost actions, but through improved operating leverage. So the cost action, when we look at it, what we laid out last year, that is completely on track, what I covered back on investor day, from a footprint, is on track, and that hasn't changed. And really, what we got is when the volume came through, we executed very well in converting that volume and we got very nice fall-through. So the benefits that are still to come are like I said, small sequentially, from quarter one to quarter two, about $10 million, but we're also getting efficiencies in our plants as the volume ramps and that's what you're getting is the guidance and around the $2.9 billion to $3 billion level as Tom said we would like expect to be around 12%.

Great, thank you and congratulations, gentlemen.

The next question comes from the line of Shawn Harrison of longbow research. Please go ahead.

Good morning. Getting back to the automotive question, I want to be clear that as you get into the back half of the fiscal year, automotive may be a little bit of head wind of growth is. That what you were trying to suggest with the statements?

Yes, you could look at it that way. I mean because any time you're in an inventory replenishment cycle, as you know, the buyers, like us, they are going to sell at a -- we are going to grow at a higher rate than actual end product. If you go back to the last year, production was down in '09, 22%, we were down 31%. And in some quarters, it was much more pronounced than that. This year, in the first quarter, production was up double digits and we're up 10% more than that. So you see the catch-up happening. I think that is actually lasted a little longer than we expected. We would have expected it to end a couple months earlier, but it is still happening, which is a good sign of where our OEM customers think end demand is. But yet the short answer, Shawn, is yes, that all things being equal the way we see them now, automotive revenue, for us, will be a little lower the second half than the first half.

Okay. Then as we get into maybe what is within the electronic components business, a more normalized environment, what is typical seasonality that we should now expect, given some of the changes in mix, on a typical say third and fourth quarter?

Typical, we haven't been there for a few years. But if you look at it typically, components, components typically has, in normal times so you go back to an '07 period or before, that typically where we get impacted is quarter one and quarter four are our weaker quarter, impacted by shut-downs in the first quarter, by OEM's, around automotive, around the holidays, and also in the fourth quarter due primarily to our European automotive side there, and you get the European holiday. So typically both of those quarters are about 5% lower in a normal environment than our second and third quarters. So you really have that the middle quarters are your stronger quarters in components, and then the first and fourth quarter are a little bit lower.

Okay. And then on network solutions, maybe if you could just speak of within the three individual segments, what are you seeing on a calendar year basis in terms of capital budgets? Will there be growth? If there is, it sound likes it is going to be back half weighted but maybe you can elaborate on what customers are telling you about their capital budgets for 2010.

What they are saying is they are expecting to start ringing out in the summer, I would say, late spring, early summer, which would be our second half. We're seeing some signs of that, but this is also typically the weakest time for those businesses, particularly service providers and energy, because all of the work is outside. And our strongest areas are the US and Europe, and increasing strength in Asia, but most of the world, where our business is, is pretty cold right now. So it is a typical slowdown.

I think it is a little hard to call right now. You say-- you go back to six or nine months ago, and they were telling us it was going to slow down and that turned out to be the way it was, and now they're telling us, it is going to start picking up, so we're hopeful of, that and we're seeing just little signs of it, but got to watch it closely.

And by picking up, I mean that is low to maybe mid single digits year-over-year growth. Something like that. Not double digits? It is just maybe a way to kind of gauge our expectations?

Well, year-over-year, what you could have is when you compare our year-over-year, certainly those businesses came down later. In '09 versus -- so their first quarters were typically strong. What I think, what Tom said, Shawn, you will get a seasonal pickup in the summer months naturally, coming into our third and fourth quarter in these businesses. What I would say is do we get sort of a multiplier effect as spending kicks back in from a comparable perspective but I think you will see year on year growth in those businesses in the summer months, that is just due to natural seasonality versus how they came down last year, but the real question that I think when we look at the orders, is, is there sort of a spending catch-up that happens in those late quarters.

Okay. Thanks. That's it for me. Congratulations on the quarter.

Thank you very much.

Our next question will come from the line of Brian White of Ticonderoga. Please go ahead.

Wondering if you could talk a little bit about the pricing environment and how you're handing rising commodity costs.

Sure. Pricing hasn't really changed too much. We look at our overall pricing erosion, it is still running south of 2%. I think what we're a little bit better at is we have been -- than we have been in the past is where we have the opportunity to react to commodity costs. We're doing that. But as you know, this is a business of literally thousands of price quotes a week. But generally speaking, haven't seen any major shift in pricing at all.

And then Brian, just add to that, just to frame the commodity environment that we're in right now, with the fixed program we've done and last year we burned off the hedges so we didn't get a big windfall last year due to metals. Right now we're probably experiencing maybe a $5 million per quarter head wind in quarter one and quarter two, due to metals and it is really more on gold than copper and that probably increases up to a $10 million later half of the year, gold stays around $1100, whereas today copper around $330.

So some of our risk management techniques are also protecting us.

That's great. And when we look at your seven different markets in the electronic components business, which one do you think will show the greatest strength in the March quarter sequentially, and the greatest strength over the next year?

Do you mean pure just growth numbers?

Growth numbers yes.

Not necessarily --

Year-over-year.

Just sequentially in the March quarter versus the December quarter, and then if we also look out over the next 12 months.

Well, I think the compares, I mean if you compare it to the low -- auto has already got a couple of months of improvement under it. I would say industrial, because it started later. But that is a lot smaller business than auto for us. Although we're a leading player there.

As well as datacom.

Yes, that really started to show momentum this quarter.

When you think about it, the trend that Tom talked about already, one of the things that was nice about what we saw in our first quarter was the industrial markets, when we talk sequentially, our orders being up 15%, in the first quarter sequentially, it was pretty much 15% in the consumer markets, and the industrial markets that we serve, and that covers EC, specialty products and networks so we're starting to see order momentum and at this phase I think it will be among those industrial type infrastructure markets later in the year.

And how about just activity, customers coming out with new products, where is the most activity in the different markets that you serve in the electronics components?

I think the most activity is always in the consumer and the mobile space in terms of -- just because of the life cycle of the product. So they're shorter. But clearly, there is a tremendous amount of development going on in the automotive space, in hybrid vehicles, where we have a really excellent product line, and more and more entertainment in the cars, and changing, looking at more efficient infrastructures in the cars, and a lot of activity around, weight reduction and size reduction, everything including our components, and even though they might be a small part of the equation, and in a jet or a car, still a lot of demand by our customers. So the technology envelope continues to be pushed. I don't think we saw much slowdown in that during the downturn, which I think plays to a company like our strength because we kept up the investment. We didn't back off at all.

Okay. Thank you.

Steve, we have time for one more question.

Okay. Our last question will come from the line of Wamsi Mohan of Bank of America. Please go ahead.

Thanks a lot. Terrence, can you quantify the components of increased OpEx quarter over quarter, particularly the pension expense and performance comp? And should we expect an increase sequentially from here heading into fiscal second quarter?

If you look sequentially, and you strip out currency, we were up about $35 million from quarter four to quarter one. Engineering was up about $5 million. The pension expense was about $5 million. And the remainder was incentive compensation.

Going sequentially out through the quarters, we do see and the things we touched on in investor day, engineering continuing to increase, as we do some of the investments we covered on investor day. But I think the way to think about it is right now when we look at the year we will probably be around a 13% SG&A rate this year. And R&D&E will be around 5% of sales. If we stay around our top line that we are at right now.

Okay. Great. That's helpful. Thank you. And then on share repurchases, you bought back a little bit here in this quarter. How should we think about it through the course of the fiscal year?

We have $600 million outstanding on our authorization still, so we will continue to look at it. What are the strategic opportunities? We do see that increasing off of first quarter levels and we will assess it as we see market conditions and as we see our cash generation. So I think you can see it increasing as we go through the year.

Thanks a lot.

Thank you.

Let me wrap up. Thanks for taking the time to join us. I think we had a few questions we couldn't get to, I apologize and we want to be respectful of everyone's time. The IR team will be around all day to answer any follow-up questions.

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