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CommScope Inc. Q2 2009 Earnings Call Transcript

July 29, 2009 | about: CTV

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CommScope Inc. (CTV)

Q2 2009 Earnings Call

29 July, 2009; 5:00 pm ET

Executives

Frank Drendel - Chairman & Chief Executive Officer

Brian Garrett - President & Chief Operating Officer

Jearld Leonhardt - Executive Vice President & Chief Financial Officer

Randy Crenshaw - Executive Vice President & General Manager - Enterprise

Phil Armstrong - Investor Relations

Analysts

Mike Walkley - Piper Jaffray

George Notter - Jefferies

Steve O’Brien - JP Morgan

Shawn Harrison - Longbow Research

Jeff Beach - Stifel Nicolaus

Ken Muth - Robert Baird

Steve Ferranti - Stephens Inc.

Blair King - Avondale Partners

Amitabh Passi - UBS

Amir Rozwadowski - Barclays Capital

Simon Leopold - Morgan Keegan

Presentation

Operator

Good afternoon and welcome to the CommScope second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) As a reminder ladies and gentlemen, this conference is being recorded today Wednesday, July 29, 2009.

Thank you. I would now like to turn the call over to Phil Armstrong. Sir, you may begin your conference.

Phil Armstrong

Thank you. Good afternoon and thank you for joining us on this call. Joining me today is Frank Drendel, CommScope’s Chairman and Chief Executive Officer; Brian Garrett, CommScope’s President and Chief Operating Officer; Jearld Leonhardt, CommScope’s Executive Vice President and Chief Financial Officer; and Randy Crenshaw, Executive Vice President and General Manager, Enterprise.

Please note that during this conference call, we may make forward-looking statements regarding our position, plans and outlook that are based on information currently available to management. Managements believes and a number of assumption concerning future events.

Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected.

For a more detailed description of factors that can cause such a difference, please see the press release we issued today and CommScope’s filings with the Securities and Exchange Commission. In providing forward-looking statements the company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise.

Also note that all dollar figures and percentages are approximations and that the detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today that is posted on our website. After we review second quarter results and our outlook, we’ll open the lines up for questions. Also, during the Q-and-A period, we ask you to limit your questions to one topic and then if we have follow up questions you can step back in the queue.

With that, I’ll turn it over to Jearld.

Jearld Leonhardt

Thank you, Phil. Before we get into the details, I plan to take a few minutes to talk about what we’re seeing in the global marketplace. Despite the recession, the global fundamentals for wireless services remain solid. Global wireless subscriptions grew to more than $4 billion in the second quarter according to industry estimates and traffic growth on mobile networks continues to accelerate.

Consumer demand for new wireless services and broadband capabilities continue to drive the need for new infrastructure around the globe. In this environment, we believe that we have strengthened our global market position, particularly for the development of solutions for use in net generation networks.

However, there is still a great deal of economic uncertainty in the world, which is affecting global telecommunications spending. While we have experienced pockets of strength, overall wireless customer spending levels were lower than we expected during the second quarter, particularly by OEMs and especially in international markets that were affected by the more difficult credit environment or unfavorable currency fluctuations.

However, we are pleased with our ability to deliver solid operating margins and generate strong cash flow in this difficult environment. We appreciate our employees efforts and sacrifice and we continue to balance short term priorities of driving down costs with our longer term priorities of enhancing our global market position and developing solutions for next generation networks.

As we discussed our second quarter 2009 results, our primary focus will be on the sequential performance, because we believe this will provide you a better sense of the current status of our business. For the second quarter of 2009, we reported sales of $784 million, and net income of $15 million or $0.18 per diluted share.

Reported net income includes after tax charges of $15 million for amortization of purchased intangibles, $15 million for charges related to debt conversions and prepayments, $10 million in litigation charges and $6 million in restructuring. Excluding these special items, adjusted second quarter 2009 earnings were $61 million or $0.67 per diluted share.

Now, sales declined 28% year-over-year, to $784 million primarily due to the on going effect of the global recession, decreased spending by telecommunication providers and ongoing weakness in commercial and residential construction, and the impact of OEMs and distributors sharply reducing their inventory. The year-over-year sales were also negatively affected by changes in foreign currency exchange rates of $22 million. Sales were down in all segments and in all geographic regions.

However, sales rose 6% or $41 million sequentially in the second quarter, due to improved enterprise and Wireless Network Solutions or WNS segment sales and the positive sequential impact of foreign currency exchange rates of $8 million. The expected sequential sales growth was tampered by lower than expected wireless sales, the global OEMs and the delays in spending by certain North American wireless operators.

Antenna, Cable and Cabinets Group or ACCG segment sales declined 1% sequentially to $322 million as much stronger North American wireline cabinet sales were largely offset by lower global wireless sales of cable and microwave products. Western Europe remained weak and wireless sales declined moderately in the Asia-Pac region mainly due to irregular carrier spending and lower prices on some products.

While we expect lower second half sales for wireless infrastructure in China due to the timing of operator deployments. We remain bullish on longer term wireless opportunities there. We expect the benefit from 2G and 3G projects that will begin in the second half of the year.

India continues to adopt wireless at a staggering pace, however as we mentioned last quarter, there are some challenges that will constrain our growth. These include the effect of lower incumbent operator spending due mainly to seven new nationwide operators and the timing of upcoming 3G license awards, as well as increasing competition and the negative impact of the lower rupee.

India will remain the key market for us and we intend to continue focusing on those opportunities where we can utilize our technology and competitive advantage to serve our customers and provide acceptable returns. Shifting toward North American wireline business, we were pleased with the strong sequential improvement in sales of our environmentally secure cabinets.

AT&T continues to experience success with its wireline U-Verse strategy. We’ve also begun shipping environmentally secure cabinets for the wireless market and are in the process of completing some key fuel cell trials in several global markets. We continue to be excited about the long term opportunities of our industry leading cabinet portfolio.

WNS segment sales rose 13% sequentially to $180 million. WNS sale rose sequentially in all major product areas and benefited from the network consolidation initiatives of a large U.S. based wireless operator, as well as the timing of deployments of certain products in Asia. The WNS segment continues to benefit from increased deployment and use of mobile location base services.

We recently announced innovative new technology and lots GeoLENS, our next generation of solutions that enable location capable networks. GeoLENs helps communication carrier support and stay ahead of customer demand for location based applications and enhances their ability to address regulatory requirements, such as E-91 emergency services and commercial opportunities, such as 411 information services and other new Smartphone location based applications.

The proliferation of new frequencies and the increased efficiency of our power amplifier technology have accelerated interest in our industry leading integrated amplifier products, such as remote radio heads. These integrated power amplifiers provide high power, high efficiency all in one solutions that enable flexible deployment options, as well as make it easier for wireless carriers to change frequencies as they transition towards 4G technologies such as LTE.

Demand is also improved for our high powered multi-carrier power amplifiers or MCPAs as network consolidations continue in North America, which drives cell site sharing and as demand for wireless data increases.

Turning to our Enterprise segment, sales rose 14% sequential to $164 million in the seasonally stronger second quarter. Sales rose in essentially all regions except the EMEA region, due primarily to on going weakness in Western Europe.

Sales rose despite lower sequential channel inventories that we believe bottom late in the second quarter. Distributor channel inventories are at historically low levels. We continue to see increasing demand for our cutting edge SYSTIMAX gigaspeed extent solutions for data centers, as well as SYSTIMAX, iPatch intelligent, software, and control systems.

The iPatch intelligent patch panels themselves with software and control systems is increasingly demonstrating its value to IT professionals, who want to improve control and enhance intelligence in their physical infrastructure. We have also seen some stabilization in corporate IT spending and in government healthcare and education markets.

Despite the current economy, enterprises is continue to consume increasing bandwidth and are upgrading their land infrastructure and data centers to handle expanding bandwidth requirements for data intensive applications, such as collaborative software, TelePresence, requirements of IP based intelligence buildings, as well as in-building wireless applications.

As a result, we continue to experience a positive shift in mix toward our high end gigaspeed extend solutions and strong portfolio fiber solutions. Broadband segment sales rose 4% sequentially, to $118 million due primarily to normal, North American seasonal trends.

We were pleased with the US Department of Agriculture’s Rural Development Telecommunications Program that it has accepted CommScope’s BrightPath fiber-to-the-home solution, enabling service providers seeking funding from the Rural Utilities Service or RUS group to propose the use of BrightPath products in applications they submit for RUS grants and loans.

The RUS also accepted our flat drop fiber cable designs, which support fiber-to-the-home solutions, including the company’s BrightPath solution. BrightPath provides the benefits of a fiber-to-the-home network without requiring changes to back office, head end/central office or customer premises equipment.

We expect our broadband business to benefit from the U.S. Government broadband stimulus beginning in 2010. On a consolidated basis, U.S. sales increased 17% sequentially to $419 million, while non-U.S. sales decreased 5% sequentially to $365 million.

Total customer orders booked in the second quarter of 2009 were $742 million and our book-to-bill ratio was 0.95 times for the quarter. Gross margin for the second quarter 2009 rose more than 600 basis points sequentially to 29%. Adjusted gross margin for the quarter would have been 32% excluding a non-cash $18 million litigation charge and $4 million for the amortization of purchased intangibles.

Gross margin rose sequentially, primarily due to higher manufacturing volumes, lower material costs, and ongoing costs reduction. SG&A expense for the second quarter 2009 was $99 million, down $38 million or 28% year-over-year due primarily to the ongoing cost reduction programs, as well as the suspension of our incentive based cash bonus programs, lower sales commissions, and recoveries of bad debt expense.

SG&A expense in the first quarter of 2009 was $101 million. We were pleased to deliver a very solid operating margin in the second quarter of 2009, despite the tough business environment. Adjusted operating income excluding amortization of purchased intangibles and other special items nearly tripled sequentially to $125 million or 16% of sales. All segments adjusted operating margins returned to double digit levels in the quarter.

Now let me take a moment to highlight the progress in broadband and WNS adjusted results, as they posted strong sequential and year-over-year performance. Broadband team executed their cost reduction and plant consolidation plans effectively in the past year.

Broadband’s record quarterly operating performance also reflects the unusual combination of higher year-over-year sales prices, lower raw material costs, the benefit of suspension of the incentive based cash bonus programs and higher recoveries of bad debt expense. We do expect some sales price decline and higher margin cost in the second half of the year and as a result, expect operating margin due to decline from the second quarter level.

The WNS team effectively restructured its product portfolio, as divested unprofitable businesses and improved operations over the last year. We have also seen increasing adoption of our technologies for power amplifiers and location based solutions.

Interest expense was $43 million in the second quarter and includes non-cash charges of $11 million related to the interest make-whole payment for the conversion of convertible debt and $5 million related to the write-off of the deferred financing piece, in-connection with accelerated debt payments made in the second quarter. Excluding these items, interest expense in the quarter was $26.5 million.

The company’s effective income tax rate for the quarter was 51% and reflects nondeductible charges related to the conversion of convertible debentures and to a lesser extent, the effects of foreign income repatriation. No, despite the global slowdown, we continue executing our plan to repatriate foreign earnings during 2009.

The incremental calendar year impact on taxes is expected to be roughly $18 million, which is having a significant impact on tax rates. Now, since our projected 2009 pre-tax income is slower than we anticipated earlier this year, the repatriation cost is having a larger effect on the overall tax rate than we previously expected.

Now, assuming there are no major changes to U.S. tax law and excluding the impact of special items, we do expect tax rates to decline in 2010 to the mid-30s likely, due primarily to repatriation costs having a lesser impact.

Now, I will turn to cash flow, the balance sheets and liquidity measures. It’s been a very busy quarter for us and with regards to our capital structure. I will review some of the key actions we took in the quarter to strengthen our balance sheet and enhance liquidity through capital markets transactions.

Our primary goals were to lower debt and enhance financial flexibility and reduce uncertainty, regarding the company’s ability to remain in compliance with the financial covenants in the credit facilities. So, during the second quarter, we completed the public offering of $288 million of 3.25% senior subordinated convertible notes, due 2015.

Concurrent with the convertible note offerings, we also issued 10.5 million shares of common stock and public offerings at a price of $22 per share. Now, we used $400 million of these proceeds to repay a portion of the senior secured term loans in conjunction with an amendment to the credit facilities.

Credit facility amendment postpones by a year, the increase in the minimum interest coverage ratio and the decrease in the maximum leverage ratio among other changes. These changes to the covenant levels will now take affect beginning with the quarter ending September 30, 2010 instead of quarter ending September 30, 2009. The subsequent change to each ratio is also postponed by a year to September 30, 2011.

We also announced the conversion of all $100 million of the outstanding 3.5% convertible senior subordinated debentures due 2024 in CommScope common stock. In connection with the conversions, holders received an interest make-whole payment in shares of common stock and we recorded a non- cash charge of $11 million.

Now, as a result of the conversions, we issued 10.3 million shares of CommScope common stock. Now, we believe that we have accomplished our key goals of adjusting our capital structure. We are also pleased that’s rating agencies recognized our progress by affirming our corporate debt ratings, while updating their outlook to stable from negative and rising the rafting on the senior secured term loans.

Now, turning to other second quarter results, we are pleased to report record cash flow from operations. Cash flow nearly tripled year-over-year and rose 62% sequentially to a quarterly record of $138 million. We achieved this record primarily due to increasing operating margins, cost management and ongoing focus on reducing inventories and managing our working capital.

Capital spending in the second quarter was $10 million. We’re also pleased with the pace of debt reduction and have reduced debt by nearly $500 million year-to-date. Now, at June 30, 2009 total debt outstanding was $1.5 billion or about 52% of book capital structure. Net debt; that is total debt outstanding, less cash and cash equivalents was about $1.1 billion at the end of the quarter.

So looking ahead to the second half of the year, we are now planning on economic recovery or a significant benefit from the U.S. Government stimulus plans. While we believe that the spending environment is stabilizing, we do not anticipate meaningful improvement until next year. So in this environment we believe it is best to remain cautious, a position we think many of our customers are taking.

Now for the third quarter of 2009, we expect revenues and adjusted operating income to be consistent with second quarter levels. Specifically, we expect revenue to remain generally stable sequentially around the $750 million to $800 million level.

Adjusted operating income is expected in the range of $105 million to $125 million, excluding the amortization of purchased intangibles and special items. Interest expense of $26 million is expected including amortization of deferred financing piece. The tax rate is expected at 38% to 40% on an adjusted pretax income and about 106 million fully diluted shares are expected to be outstanding in the third period.

So overall, in this short term, we remain cautious, but optimistic. We are seeing some signs of stabilization in certain markets that could be a foundation for an eventual recovery. Global wireless subscriber and mobile data traffic growth do remain robust. The ongoing consumer demand for new wireless services and broadband capabilities continue to drive the need for new infrastructure around the globe.

We believe that we are positioned CommScope well in all of our served markets, particularly for advanced next generation technologies. We expect ongoing ways of spending for 2G, 3G and 4G services global, for higher speeds in data center and the desktop and for broadband services to the home could continue to expand.

When the economy rebounds, we intent to be even stronger, operationally, competitively, financially, so that we can grow revenues at both market rates and continue to drive revenues at above market rates and continue to drive long term shareholder value.

Now I will turn it over to Frank Drendel for his comments.

Frank Drendel

Thank you, Jearld. Thank you very much. First, I would like to thank all the CommScope employees for their excellent execution during a very difficult period. We improved sales margin and working capital. I would also like to congratulations the finance, accounting and legal teams for the capital market transactions and amendments.

We are proud of our second quarter accomplishments. Capital market transactions have lowered the debt, enhanced liquidity and improved our ratios. We have reduced debt by more than $1 billion since the acquisition of Andrew and already this year added an additional $500 million reduction. We have improved operating margins to nearly 16%, and we generated record cash flow from operation of $138 million.

We continue to deal with the world economic issues. We still believe in the wireless and bandwidth growth. India is adding 13 million new subscribers a month. China is committed to deploying 3G networks and SmartPhone usage is accelerating around the world.

We see a number of long term growth opportunities in building wireless GeoLocation applications, wireless cabinets for power backup, and equipment protection and ongoing data center expansion. The HDTV transition is taking place and we’re beginning to see the first use of IPTV. We have the best team and the best execution in the marketplace, and we continue to believe in the power of the bandwidth expansion.

With that operator, we’ll turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Walkley with Piper Jaffray. Please go ahead with your question.

Mike Walkley - Piper Jaffray

Great, thank you. I just wanted to ask a question on the margins on the ACCG business. You talked about potential consolidation helping your business to open the opportunity for new customers and maybe to scale their to improve margins, but on the flip side we’ve seen some pricing pressure hitting margins and some of the OEMs like Nokia, Siemens and Ericsson. So could you talk me about the pricing environment and then also some opportunities to gain share with new customers?

Brian Garrett

Mike, Brian Garrett here. I’ll say year-to-date, I think we’re very pleased with the pricing environment. We have seen very, very modest reductions in pricing, certainly in the quarter and on a year-to-date basis. I’d say very modest on a year-over-year basis. So we’re pleased certainly in North America in the western world.

Asia is always going to remain a very competitive space for us and particularly as it would relate to base station antennas and more specifically within ACCG, within the cable space. I think we have technologies that longer term are going to address that competitive environment in Asia. Specifically, what I’m speaking to is our deployment for a smooth wall aluminum solution for the tower space in Asia.

Mike Walkley - Piper Jaffray

Okay, great. Thank you. Do you see any opportunities with the carrier consolidation? Is there opening opportunities for maybe some new OEM relationships for you?

Frank Drendel

Mike, the OEMs already are very strong relationships for us. Some of the consolidating OEMs that you mentioned are OEMs that we have both large and very close relationships with. The result, particularly some of the activities in North America, I think we largely view that as zero sum gain, where business that may have been on a direct basis, longer term may be moving over to the OEMs that we have well established relationships with.

Frank Drendel

Mike thanks. Operator, we’ll take the next question.

Operator

Your next question comes from George Notter with Jefferies; please go ahead with your question.

George Notter – Jefferies

Thanks very much. I wanted to ask about gross margins. Obviously a big step up sequentially in gross margins, even though the top line I think was worse than folks were expecting. Can you help us kind of pars that improvement out? Was a lot of that driven by commodities? Was it driven by the cost reductions associated with manufacturing integration on the Andrew deal?

Maybe there are other factors in there, but if you could just kind of scale some of those things for us in terms of the impact, that would be great. Then as a follow on, I guess I’m wondering how much more benefit do you get from those things going on out into the model to the rest of the year? Thanks.

Brian Garrett

Hi George, Brian Garrett again. Yes, I’m not quite sure unless Jearld has specific quantification. I think I will respond to that qualitatively, because I don’t have any specific detail for you.

My assumption and insight would tell you that the real big contributors to margin was one, clearly retaining pricing in the market. These give back can be substantial and I’ll tell you, the sales and marketing teams globally continue to do an exceptional job and I’ll say some times at the cost of volume.

With that being said, I mean the big contributors on a COGS basis in the quarter really has to be attributed to increased volume. That’s going to affect our absorption. We reduced headcount substantially in the quarter, some 500 people are better. So on higher volumes, lower headcount, productivity was improving.

Historically, we’ve talked at length about the successes that we’ve had in delivering our synergy numbers in the quarter. We delivered approximately $32 million of synergy. So cost reduction in aggregate, whether it’s through productivity and traditional vehicles or through our defined synergies with Andrew, are delivering big, big numbers and driving this gross margin.

Jearld Leonhardt

George, you mentioned a lot of these, but really just the whole supply chain area is where we have been getting probably the largest piece of cost reduction, which would include some benefit of commodities, in addition to things that Brian talked about, but volume obviously has been key.

It was much more productive factories this past quarter than the first quarter. That was very helpful and he mentioned the headcounts and different factors there that helped the margins. So I would lead that with cost reduction and the supply chain is probably the biggest single item.

George Notter – Jefferies

Yes, and then prospectively, for example on merger synergies, are you still at $115 million combined company target for year end, is that on track? What do you think about these things looking forward?

Jearld Leonhardt

Yes, our year-to-date run rate is ahead of the midpoint and our internal projections say that we will meet or exceed our public commitments, George.

George Notter – Jefferies

Got it, and then any benefit from commodities into the second half?

Jearld Leonhardt

Modest. In the quarter of the second half.

George Notter – Jefferies

Into the second half?

Jearld Leonhardt

Commodity is always a tough call.

Phil Armstrong

Alright, thanks George. Let’s go to our next question, please.

Operator

Your next question comes from Steve O’Brien with JP Morgan; please go ahead with your question.

Steve O’Brien - JP Morgan

Hi, thanks for taking my question. I would like to get a little better understanding of volume growth and price, as it affected the revenue result this quarter versus your expectation leading into the next quarter and on the same topic. How did revenue or did revenue impact the ability? I guess just how did you manage to exceed your operating margin goal in a clearly tough revenue environment?

Jearld Leonhardt

Yes, Steve. I think it’s a good question. We were somewhat disappointed obviously in the volume growth that we had in the period, but as Brian mentioned there were some price give backs, but they weren’t as much as expectation, so we did okay on the pricing standpoint.

I think we’ve got greater benefit of cost reduction activity across the Board in every area than we expected. It was a strong focus for the period and therefore we were able to achieve higher numbers than we had expected in cost reduction. So those combinations of factors let to the higher operating margin than we expect.

Frank Drendel

Steve, it’s Frank. I think the important thing for our investors to recognize, we’re generating these types of margins on these sales levels. You’re getting a strength coming to this market on improved performance and orders around the world. This thing will be in really great shape.

The operational team have got it leaned out of where we can produce very substantial margins at very low volumes. No one in the world can do this kind of distribution, and serve the customer base as we’re serving it, given this environment. We won’t see any of our competitors producing this type of operational margin.

Jearld Leonhardt

The other big variable, Frank is, I mean there was a large mix change in terms of the segments. On a pro forma basis, our WNS business delivered 16 points of operating margins. This is a $700 million plus part of our business that struggled to reach profitability the year before.

Eddie and his team have continue to make increase in progress, both commerciality and operating performance, and a lot of things came together in the quarter for WNS. Essentially, every part in the business was profitable. So you take basically a breakeven business and put 16 points of operating margin on it and it has the major impact on the corporate for both.

We could say much the same about broadband. For broadband for the last several quarters has been in single digits of operating and for them to be in the mid 20s in the quarter was a big turnaround for both of these businesses. So these things as I say, have a major impact on the sum of the performance.

Jearld Leonhardt

Steve thanks. Operator, we’ll take our next question.

Operator

Your next question comes from Shawn Harrison of Longbow Research. Please go ahead with your question.

Shawn Harrison - Longbow Research

Good evening. I wanted to touch on the revenue short fall at ACCG, this quarter, as well as kind of you looking into the back half of the year. I was hoping you could discuss the linearity of orders you witnessed during the quarter. If you saw order rates decelerate as you went into the summer and then as you look at $750 million to $800 million guidance for the third quarter. I guess what would be the puts and takes to the positive or negative to fall somewhere, either above or below the midpoint of that guidance?

Frank Drendel

Well, in the wireless space in particular, it is quite a mix Shawn and it’s likely to continue to be puts and takes as we move forward. Some of Jearld’s comments, there is going to continue to be variability across all of these businesses the next several quarters.

We continue to have a very strong business in Asia, and I’ll say that for all of our business segments. We had strength in our enterprise business in the quarter in Asia, and it remains a big part of CommScope, but in aggregate it was a softer period for us in wireless in Asia.

The flip is that in North America, we saw an up-tick in wireless business, and very large up-ticks by AT&T sequentially and Verizon, but that was offset by substantial downturns in T-Mobile. So, you look across all of our business segments and geographies. Really the strength of our position is that we got a diversity in our leadership and in total provides us a lot of stability.

Shawn Harrison - Longbow Research

Okay and as we look out into the third quarter, is it safe to say then maybe a continuation of the second quarter trends is the best way to expect?

Jearld Leonhardt

I think that’s what the forecast says, and there’ll be on balance, a mix of up and down for all of the segments next quarter.

Frank Drendel

Thanks Shawn. Operator, we will take our next question.

Operator

Your next question comes from Jeff Beach with Stifel Nicolaus; please go ahead with your question.

Jeff Beach - Stifel Nicolaus

Good afternoon and great quarter.

Brian Garrett

Thank you, Jeff.

Jeff Beach - Stifel Nicolaus

Since I’m not going to get more than one question it sounds like, it better be a good one. I’m looking at these outstanding margins and I guess the question is, was there any inventory gains off of the reductions here in some of the businesses in the quarter and then looking at a couple of the segments; specifically like a broadband at 24% it doesn’t seem that’s unusual pricing versus cost, but talk about some of the puts and takes on the margins, specifically at broadband and WNS going from here to the end of the year where these are just outstanding margins that have never been achieved before?

Brian Garrett

Okay, Jeff. I think we talked about; in the broadband area, they certainly did have remarkable and a very strong second quarter and a lot of good execution there, but I think we said that would not be our expectations in that area moving forward. I think the second quarter is one where we did catch a lot of wind at our back if you would in the broadband segment particularly, and our team executed well there.

In the WNS area, volume will be key to that business as it is. It has some of the strongest gross margins in the business, some of its product lines do and so volume is always keen there and as we said, there is a movement or more like waves as some of the programs that move in are very strong for a quarter or two and then they tend to back off and we would expect some in and out activity in WNS in the second half of the year. So third quarter probably, not to the level that second quarter was.

Jearld Leonhardt

Yes, one thing I was going to say Jeff, we got Randy here in the Enterprise space. They did nearly 19 points, 18 or 19 points in the quarter. Randy you want to give us some insight on what’s happening there?

Randy Crenshaw

The biggest drivers of course, we have pushed all along the solutions element of our business and too often people talk products and we get confused with a lot of other commodity players. In reality we are doing solutions, both in the optical, in the intelligence and in the copper space and we think utilizing that capability, even though we are in a very, very difficult time from a demand and volume standpoint, customers are demanding smarter solutions and with that we can save our customers a lot of money and thus drive better margin as well.

Brian Garrett

One other thing I would mention is that we did, while in total not a material number, we did benefit from some recoveries of bad debt. We wouldn’t expect that to be a repeatable sort of situation, largely in broadband. So we wouldn’t expect to repeat that, obviously in future quarters.

Jeff Beach - Stifel Nicolaus

Phil, just as a follow-up to this, can you give us a flavor for the book-to-bill, any segments above one and any segments maybe below the 0.95 average?

Phil Armstrong

The wireless groups were slightly below and the broadband and enterprise were a little above.

Jeff Beach - Stifel Nicolaus

Okay.

Jearld Leonhardt

Thanks Jeff.

Phil Armstrong

Operator, we’ll go to the next question.

Operator

Your next question comes from Ken Muth with Robert Baird. Please go ahead with your question.

Ken Muth - Robert Baird

Thanks. On the Q2 operating margin, the 15.9% and the kind of guidance of 14% to 16% range if you will on operating margin, is it fair to assume that you feel comfortable that you can maintain that level and that’s kind of something we should think about for kind of 2010 on kind of the worse case as Frank was talking about before? If volumes get better, that you’d again see upside to the operating margin for a little bit further out?

Brian Garrett

Well Ken, even when we were in the depths of the first quarter, we’ve been pretty vocal about our expectation, that we saw a little reason why we should not be in the mid teens and those numbers sustainable. So I wouldn’t reject your proposition, that for the second half we should remain in the mid teens.

Jearld Leonhardt

I think looking at the mix of businesses, the mix might shift a little bit between segments, but our largest segment, ACCG, was lighter in terms of operating margin and has potential to improve that while we may give back some in some of the other segments.

Frank Drendel

Ken, it’s Frank. The other thing is we have not seen any solid dollars come in from any of those stimulus programs. So you could see a situation where the fourth quarter is stronger than it has been traditionally for this company.

There’s no question that there’s all kinds of activities going on in Randy’s space, especially in government and healthcare, but as far as dollars getting out of Washington, D.C and into the system, I can’t imagine you’ll see that until the earliest of the fourth quarter next year.

Ken Muth - Robert Baird

Okay. Then a quick follow-up on China, it seemed like that maybe changed a little more rapidly than you’re thinking of it as we kind of talked back in May, that you felt pretty good about Q3 in China. Is that just more as you think of a one quarter correction of the inventory or do you think that’s some of the change maybe from Huawei and ZTE, gaining share or some of the other vendors over there has something to do with this falloff as well?

Brian Garrett

Well, we’re going to participate, at least on the OEM side with Huawei and ZTE in terms of some of our subsystems. So our expectations are on the OEM side, we’re going to do fine.

Second quarter, China was down for us and not big numbers, and not substantial changes into the third quarter. There are RFPs that are out for the tail end of the year. There is some uncertainty about the fourth quarter and our current outlook, yet it will be down from the third, but we don’t see substantial downturns in our China business from these current levels.

Phil Armstrong

Great, Ken. Thanks very much. Operator, we’ll take the next question.

Operator

Your next question comes from Steve Ferranti with Stephens Incorporated. Please go ahead with your question.

Steve Ferranti - Stephens Inc.

Thank you, Steve Ferranti with Stephens. Nice job on the operating front there guys, tough quarter on the top line, but good job on the OpEx line. I just wanted to ask you, just looking across your geographies, Latin America and EMEA, obviously looking like the bigger territories in terms of decline. Can you give us some sense for, in term of your segments, maybe which segments are more exposed in those geographies?

Then I guess this is a follow-up; in your discussions with customers in those particular territories, any sense for what sort of the key constraints are in terms of their willingness to place orders, whether it’s economic uncertainty, whether its credit, Forex challenges, any sort of color along those lines as well?

Jearld Leonhardt

Steve, I’ll let Randy kickoff comments relating to our enterprise business, and then I’ll follow up on wireless and broadband.

Yes, speaking regionally, certainly some of the destocking levels that we saw in distribution were most severe in the EMEA region and actually we are out-looking for the rest of the year to see some improvement in that because the levels simply are not sustainable.

Latin America certainly has struggled, but we are seeing renewed strength in that region as well, and we have strong expectations for the APAC region. We think North America is going to be pretty much business as usual and certainly North America was hit first and it matriculated around the world and we are seeing pockets of strength in those areas.

Certainly not out of the woods yet, but we think there’s some masking because of the destalking, but they supply globally in channel that have been cut dramatically, which even if the market storm materially improved, we think that some stabilization is going to occur in those particular areas, at least in the Enterprise space.

Brian Garrett

Let me go into wireless here Steve. Within ACCG, we said North America sequentially was strong for us in the quarter. Expectations are in aggregate that activity will continue through the remainder of the year. Within EMEA, it was a soft period sequentially, relative to the first quarter and there’s little visibility to improvements in EMEA for the remainder of the year as it relates to ACCG.

When we talk about WNS, the WNS business was strong in all segments sequentially in the quarter, having growth in the North America and EMEA, which was a real stand out among our business segments, as well as CALA.

Now, I would say as it relates to WNS, we’ll have a mix of results throughout the remainder of the year. I think in some of our segments we’re going to see softening with some of the European OEMs and our China, our Asia-Pac segment will likely remain strong for the second half of the year.

Frank Drendel

Great. Thanks. Operator, we will take the next question.

Operator

Your next question comes from Blair King with Avondale Partners; please go ahead with your question.

Blair King - Avondale Partners

Thanks for taking the question. Just a couple of quick ones, sort of follow ups to previous questions that have been asked, but just sort of looking through the balance of the year and into 2010 on the operating margin side, obviously a lot of the top line is attributed to volume and clearly there’s a lot of upside when demand returns.

Where is the break on the volume, where potentially we would slide back down into numbers that might have been seen around the first quarter or sort of a down tick on operating margins? Then also as a follow up, just on the gross margins side, if you could just give a little bit more input on how the gross margin might be sustainable through the back half of this year and then I’ll leave it at that. Any kind of input would be great. Thanks.

Brian Garrett

That’s a long list. I will see if I can pick up a few of them; Jearld, if you want to chime in here. I don’t know if Q1 is a good comparison. If your proposition is what does it take to get back to what we had in Q1; because remember Q1 was more, it was much more than a loss of market demand. It was much about inventory destocking, as it was about reductions in demand and globally these channel inventories have compressed substantially and I don’t think we’re going to see that again, from these levels.

The other whipsaw that was in the first quarter remember was we came into the period as a result of those volumes with overpriced commodities and so, it was the worst storm. Our margins, the confidence in margins going forward really has to do with what we have been able to achieve in productivity and our outlook for continued improvements in cost reduction and productivity improvements.

The other aspect as you think about the models for the business going forward is that the business largely across all elements of it continues to position itself on new technologies. We look at what’s happening in WNS in its both volume and margin growth.

It wasn’t about same old business. It was about attracting new accounts with their NLC technologies, the announcement that they’re making in the GeoLENs technologies, the things that Randy is dong with10G, which our broadband group is doing in BrightPath is really about repositioning this company in the second half of this year and for 2010. So I will just say there’s a lot of focus right now on not just talking about the cost reduction performance, but repositioning this business for growth.

Frank Drendel

It’s Frank. I think when you look at the construct that we have of our facilities around the world, the way we have consolidated the facilities and our ability to produce almost to order the short lead time cycle we have and taking care of this massive customer base we have. I don’t see a competitor out there disposition to do that. So, when it turns, we’ll have it, and we’ll be there.

Jearld Leonhardt

Blair, I think we predicted a significant improvement in margins for the second quarter when we did, and because we knew the first quarter was unusually low as Brian pointed out. First quarter was really a major transitional period, seeing the factors going on in the world, the destocking activity, restructuring activity that we were doing in our company. First six months of this year for instance, we’ve lowered our inventories more than $120 million.

So, don’t really expect to see those kind of reductions moving ahead. So what that means is that things are flowing through normally again, which means that we’re getting the benefit of the lower cost on the raw material procurements and our component buys and those kind of things where we essentially had to wait on those a quarter or so, as we cleared out inventory.

So our restructuring activities are largely in place now, and so we have that behind us as well. So we think the fundamentals of improved margin are in place. Top line side will be monitoring pricing, and as we said there will probably be some additional give backs in that area, but we have some potential offsets there as well. So we think we can sustain very healthy margins through the balance of the year.

Phil Armstrong

Great, thanks Blair. Operator, we will take the next question, please.

Operator

Your next question comes from Amitabh Passi with UBS. Please go ahead.

Amitabh Passi - UBS

Thank you. Hey guys, I had two questions for you. The first one you talked about some benefit from network consolidation and WNS in the second quarter. Is that something you think continues into the third quarter? Could you just perhaps elaborate, what exactly that activity was that benefited you in the second quarter?

Brian Garrett

On the side that escapes me.

Jearld Leonhardt

Among our products, our Geo area was healthy, although our product segments in the WNS segment, I understand your question. That were healthy sales trends in the quarter, up nicely sequentially and again in that environment, because we do have better margins in some of those product areas, it responds to volume very nicely, most of it driver by power amps and other technology, driven by the demand on traffic, on the network.

Brian Garrett

I was slow on the uptake here, I’m sorry. The specific there is a technology that you know well and that’s the value proposition for MCPAs. It’s a technology, where Andrew has led for many years. The value proposition has not been largely adopted by the carriers, but as a result of consolidation, the value gets much larger.

So, if you were to look at the performance of our power amplifier business, it was a substantial improvement in the quarter, an important piece of that was approval and acceptance and sales of our MCPA to North American carriers.

Amitabh Passi - UBS

Got you and then Frank, maybe for you, how are you thinking about the potential opportunity for CommScope from the broadband stimulus program? I think you said, you don’t have any major expectations for ‘09, but possibly in 2010. Just curious to see how you’re thinking about the potential side of the opportunity here?

Frank Drendel

We see multiple customers in the small rural communities that are applying for those stimulus monies, looking at some of our fiber to the home technologies. I would not expect any of the major MSOs to accept the terms and conditions. So, it will be the rural type of operators, but we’ve seen a lots of applications for it. So, I would expect some sales in that area at the end of this year and certainly next year.

Brian Garrett

I’d add to that, these are unquantified. I think for everyone it should be unquantified at this period, but even the tier two and tier three wireline carriers, and these are the guys that are the traditional voice guys in rural markets, their ability to deploy broadband is going to be expanded by this stimulus. We will participate likely in our cabinet business if ADSL or VDSL is more broadly deployed in some of these rural markets by the tier two and tier three carriers

Frank Drendel

The other aspect that will probably take us some time to define, but federal interest in accelerating document management within the health care market is going to drive spending in data segments for health care and so we only read that as a positive going forward. There’s not one operation in CommScope that isn’t covered by some stimulus program.

Wireless and public safety, all of the Government programs, medical care, health care, management, taxes all of these things will have some stimulus impact.

Phil Armstrong

Thanks. Operator, we have about two more questions, please.

Operator

Your next question comes from Amir Rozwadowski with Barclays Capital; please go ahead with your question.

Amir Rozwadowski - Barclays Capital

Thank you very much and good afternoon gentlemen.

Brian Garrett

Good afternoon, Amir.

Amir Rozwadowski - Barclays Capital

If we look at sort of linear progression through the course of the year, I realize that your guidance doesn’t factor in any recovery at this point, but if we look at linear progression, obviously the step down in Q1 and we’ve seen some steady improvement here, and if we look at the higher end of your guidance, that would imply sort of some steady growth off of Q2 levels. How should we think about the progression through the course of the year?

I know Frank you had mentioned that fourth quarter could be and perhaps I misunderstood, stronger than it has been traditionally if we get some of that broadband stimulus into the back half of this year. I just want to just trying sort of understand your thought process around that.

Frank Drendel

I do believe that. I believe the fourth quarter will be one of the stronger fourth quarters sequential to what we have seen in history and I look at what Randy is looking at and some of the programs you are talking about Randy and some of the other programs. So Randy, why don’t you mention what you are looking at into the future.

Randy Crenshaw

Well, certainly just looking at days supply and channel in our indirect model. Distribution, traditionally drives a slightly weaker fourth quarter as they right-size their inventories.

There could be a situation to be determined where they don’t take quite as large a dip adjustment for year end inventories, which can mute things, as well as a little more optimistic outlook, since they are stocked so low that there may be less tendency to prepare for a very soft first quarter, which is kind of traditional.

So some of that seasonality that we’ve experienced in the past may be muted depending upon the pace in which we go into third quarter.

Frank Drendel

I would point out that all of the major carriers, cable and Telco, all are saying they are going to spend more in the second half than they did the first half and that is traditionally not the way it works.

So, you can imagine in the fourth quarter as these Telcos and cable operators get close to the end of the year they’re going to try and spend everything they have on their capital budget. So, I firmly believe that it could be a stronger than normal fourth quarter.

Amir Rozwadowski - Barclays Capital

Could we find ourselves in a position where sort of revenue actually grows on a sequential basis in the fourth quarter, Frank?

Frank Drendel

I don’t know, that we’ve lived six to eight weeks backlog for five years, and I won’t promise any investors that is going to happen. I think you can take comfort with. As we’re performing at 75% of sales level of last year with better margins, just show any recovery in 2010 the way this thing is trimmed up and we’ll hit full speed from the sail boat.

Jearld Leonhardt

I would say it’s fair to say probably the cyclical trends in the economy are probably overpowering the seasonal trends while they’re still there. I think they’re definitely muted, both on the way up and likely on the way down.

Phil Armstrong

Thank you very much. Operator, we’ll take our last question, please.

Operator

Your last question comes from Simon Leopold with Morgan Keegan. Please go ahead with your question.