CommScope Q3 2009 Earnings Call Transcript

CommScope, Inc. (CTV)

Q3 2009 Earnings Call

October 27, 2009 8:30 am ET

Executives

Phil Armstrong - Vice President of Investor Relations and Corporate Communications

Jerald L. Leonhardt - Chief Financial Officer, Executive Vice President

Frank M. Drendel - Chairman of the Board, Chief Executive Officer

Brian D. Garrett - President, Chief Operating Officer

Eddie Edwards (ph) - Executive Vice President and General Manager of Wireless Network Solutions

Analysts

Amir Rozwadowski - Barclays Capital

Ken Muth - Robert Baird

Steve O’Brien - JP Morgan

Jeff Beach - Stifel Nicolaus

George Notter - Jefferies

Amitabh Passi - UBS

Mike Walkley - Piper Jaffray

Steve Verosi (ph) - Stephens Inc.

Shawn Harrison - Longbow Research

Simon Leopold - Morgan Keegan

Blair King - Avondale Partners

Anthony Kerr (ph) - Keybanc

Presentation

Operator

Good morning and welcome to the CommScope third 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's Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, October 27^th, 2009. Thank you. I would now like to turn today's conference over to Phil Armstrong, Senior Vice President of Corporate Finance. Mr. Armstrong, you may now begin.

Phil Armstrong

Good morning and thank you for joining us on the call. Joining me today on the call is Frank Drendel, CommScope's Chairman and CEO, Brian Garrett, CommScope's President and Chief Operating Officer, Jerald Leonhardt, CommScope's Executive Vice President and Chief Financial Officer, Eddie Edwards (ph), Executive Vice President and General Manager of Wireless Network Solutions, and Bill Gooden who's Senior Vice President, Controller and Principle Accounting Officer.

Please note that during this conference call we may make forward looking statements regarding our financial position, plans, and outlook that are based on information currently available to management and management’s beliefs on a number of assumptions 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 could cause such a difference, please see the press release we issued today, the 10-Q we filed this morning, as well as other filings of the Security 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, please note that the dollar figures and percentages are approximations and that detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today and it is posted on the website. After we review third quarter results and our outlook, we'll open the lines up for questions, and please note that during the question and answer period, please limit your questions to one topic and if you have follow-up questions please step back into the queue. With that I'll turn it over to Jerald Leonhardt. Jerald?

Jerald Leonhardt

Thanks, Phil, and good morning. Before we get into the deals, I plan to briefly talk about what we're seeing in the global marketplace. As we indicated last quarter, we did not expect a rapid recovery in business in the third quarter. While the fundamentals for the global wireless services remain solid, economic uncertainty continues to impact communication infrastructure spending and exacerbate the short-term volatility related to service provider project spending.

However, we did expect the business environment to become more stable which is what we saw. One of the key reasons that our sales have stabilized is that business enterprises and service provider customers, both wireless and wireline, continue to use increasing amounts of bandwidth. Ongoing wireless subscriber growth in emerging growth and advanced mobile devices and wireless applications have created rapid growth in mobile broadband usage and traffic, which creates an ongoing need to invest in communications' infrastructure.

This dynamic business environment creates many challenges and we appreciate our employees' efforts and sacrifices as we continue to balance short-term priorities of driving down cost with our longer-term priorities of enhancing our global market position and developing solutions for next generation networks.

As we discuss our third quarter results, our primary focus will be on the sequential performance because we believe this will provide a better sense of the current status of our business. For the third quarter of 2009 we reported sales of $750 million and net income of $46 million or $0.45 per diluted share.

Reported net income includes after tax charges of $15 million for the amortization of purchased intangibles and $2 million in restructuring costs. Excluding these special items, suggested third quarter 2009 earnings were $63 million or $0.61 per diluted share. Sale declined 29% year over year to $750 million primarily due to the declines in volume across all segments and geographic regions as the global recession negatively effected capital spending by telecommunication providers and created a slowdown in commercial and residential construction.

Now as anticipated, enterprise and broadband sales increased in the typically seasonally strong third quarter, however, overall sales declined 4% sequentially, primarily due to a slowdown in project oriented wireless network solution sales which we will discuss in a moment.

The net impact of changes in foreign currency was not a major factor in the overall sales in the quarter. It negatively affected year over year sales by about 1% while it positively affected sales by about 1% on the sequential basis. Total customer orders booked in the third quarter of 2009 were $719 million and our book to bill ratio was 0.96 times for the quarter.

Antenna, Cable, and Cabinet Group, or ACCG segment sales declined 2% sequentially to $316 million as lower base station antenna sales in the Asia Pacific and North American regions offset increases in the sales of cable and microwave products.

Overall global pricing in ACCG remained essentially stable sequentially. Regarding base station antennas, sales were negatives affected in the third quarter by uneven carrier project spending. However, in the fourth quarter we expect sales to improve and benefit from the positive mix or more sophisticated multiband antennas.

We have recently introduced SmartBeam, our next generation base station antenna technology. SmartBeam antenna systems can increase efficiency of existing sites and improve network quality by optimizing the antenna beam based on the predictable customer traffic loads.

We are also particularly please to have made progress during the quarter in communicating the value proposition of our HELIAX 2.0 FXL solution for wireless based stations. This aluminum cable provides a lightweight cost savings design for operators. Global trials initiated with carriers and OEM in 2008 and earl 2009 have begun to materialize into approvals and orders which we believe will continue to drive the demand for XL products.

Wireless Network Solutions or WNS segment sales declined 33% sequentially to $120 million due primarily to lower sales in China for the select 3G projects as well as short-term volatility associated with large-wireless projects in the North American, Europe, Middle East, and Africa regions. Further, demonstrating the sequential volatility, we expect significant improvement in WNS sales in the fourth quarter and remain excited about our longer-term opportunities. As we look ahead, we expect to benefit from increased appointment and use of the mobile location based services in North America.

We recently announced innovative new technology and launched GeoLENs, our next generation of solutions that enable location capable networks. GeoLENs helps communication carries support customer demand for location-based applications. It enhances their ability to address regulatory requirements such as E91 emergency services and commercial opportunities such as 411 information services and other new smart phone location based applications.

The proliferation of new frequencies and the increased efficiency of our power amplifier technology have also accelerated interest in our industry leading integrated amplifier products such as remote radio heads. These integrated power amplifiers provide higher power high efficiency 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.

Our enterprise segment sales rose 8% sequentially to $178 million in the seasonally strong third quarter. We saw a modest improvement in global corporate information technology spending in the quarter and believe the enterprise market has begun to stabilize, even though we did see continued destocking and distributor channel inventories, though at a slower rate compared to the last several quarters.

We do expect to see a seasonal decline in enterprise sales in the fourth quarter. Over the last three years, enterprise sales declined an average of about 16% from the seasonally strong third quarter to the seasonally weaker fourth quarter.

This year, that typical decline could be muted since the inventories are at historical lows and the economy appears to be slowly recovering. We are optimistic over the longer term because enterprises need to upgrade their local network infrastructure and data centers to handle expanding bandwidth requirements for data intensive applications such as collaborative software, video conferencing, as well as in building wireless applications.

We are confident that we have the leading technology portfolio to support these increasing bandwidth demands, especially in light of our recent introduction of the full SYSTIMAX 360 enterprise offer. This offering has been a major area of focus for our R&D teams for the past two years. It provides enhanced features, upgradeability, the best in class performance for copper, fiber, and wireless applications as well. We believe that this expanded offering uniquely addresses our customer's physical infrastructure needs both in the data center and in the office.

Our broadband segment sales rose 16% sequentially to $137 million in the seasonally strong third quarter. Sales rose in all major product groups and across all geographic regions as cable operators maintain and upgrade their networks to compete with satellite and wire line carriers. In the fourth quarter, we expect broadband sales to reflect both seasonal volume declines as well as lower prices for certain products.

Gross margin for the third quarter of 2009 rose to32.6% and included $4 million of amortization of purchased intangibles. Excluding this item, adjusted gross margin would have been 33.1%. Now despite lower sales volume, adjusted gross margin rose year over year due to cost reduction efforts including facility closures, reduction in staffing and the suspension, and certain incentive bonus programs for employees. Adjusted gross margin also rose slightly sequentially.

SG&A expense for the quarter was $103 million and was up slightly sequentially. SG&A expense declined year over year primarily due to cost reduction efforts including the elimination of incentive based bonuses for employees.

Operating income was $91 million in the third quarter compared to $74 million in the second quarter. Adjusted operating income which excluded amortization of purchased intangibles and restructuring costs were $119 million and was down slightly sequentially. Adjusted operating margin for the quarter was 15.8%.

We were particularly pleased with the operating performance of the enterprise and broadband groups in the quarter. The enterprise team consistently posts strong results as it builds upon its industry leading SYSTIMAX Intelligent Network Infrastructure Solutions. Through proven innovation, performance, and global support, the enterprise team continues to facilitate mission critical high bandwidth in emerging business enterprise applications globally.

Broadband margin continues to benefit from cost reduction and lat consolidation actions conducted over the past year. Broadband' strong operating performance in the quarter also reflected higher year over year sales prices and the benefit of suspension of incentive based cash bonus programs.

As I mentioned earlier, we do expected sales price declines and higher raw material costs in the fourth quarter, and as a result, expect broadband operating margin to decline from the third quarter level.

Interest expense declined $11 million year over year to $26 million primarily due to lower outstanding debt balances. Our effective income tax rate for the quarter was 29% which was lower than we had expected. The income tax provision for the quarter included combined benefits of $7 million related to the completion of prior US and foreign income tax returns, the resolution of various income tax uncertainties, and the settlement of certain US and foreign income tax (inaudible).

Now we'll turn to cash flow, the balance sheet, and liquidity measures. Cash flow from operations remains strong and nearly matching the second quarter’s record level. In the third quarter, cash flow from operations was $138 million. Over the last 12 months we have generated record free cash flow of $416 million which is $470 million of cash flow from operations less $54 million of capital spending — that's on a trailing 12 months basis.

We achieved these records by controlling costs, delivering solid operating margins, and managing both working capital and capital spending effectively. Capital spending in the third quarter was $7 million.

Now at September 30^th, 2009, total debt outstanding was $1.5 billion or about 51% of book capital structure. Net debt which by our definition is total debt outstanding less cash and cash equivalents was about $950 million at the end of the third quarter.

Now while 2009 has been a very challenging year, we are pleased to have delivered solid growth margins and operating margins as well as strong cash flow from operations which further strengthened our balance sheet.

Looking to the fourth quarter, we expect to see stronger global ireless spending as upgrade activity accelerates in certain markets and as wireless operators invest in infrastructure to handle bandwidth intensive applications and wireless subscriber growth.

We expect these strengthening wireless sales to be somewhat offset by seasonally lower enterprise and broadband sales in the fourth quarter.

Specifically for the fourth quarter of 2009 we expect revenue of $740 to $790 million, adjusted operating income in the range of $95 million to $115 million excluding amortization of purchased intangibles and other special items, and a tax rate of 34%-36% on adjusted pretax income.

So, overall we are pleased with our operating performance and we believe we have enhanced our competitive position in a tough environment. We are also pleased to see signs of stabilization in our markets. We also believe we have age good opportunity to post stronger sequential sales in the fourth quarter which is unusual from a historic standpoint. Global wireless subscriber and mobile data traffic remained robust. 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 have positioned CommSCope well and all of our served markets particularly for advanced next generation technologies. We expect ongoing waves of spending for 2G, 3G and 4G services globally for higher speeds in the data center and to the desktop, and for broadband services to the home. When the economy rebounds we intend to be even stronger operationally, competitively and financially, so that we can grow revenues at above market rates and continue to drive long-term shareholder value.

Now before I turn it over to Frank Drendel for his comments, I wanted to recognize Bill Gooden who is here with us today who on November the 15^th will be stepping down from his role as Senior Vice President of Corporate Control, having served in that and similar roles for CommSCope now for nearly 31 years. Bill joined us in 1978 at CommScope as Controller and Principle Accounting Officer throughout most of his career here.

During this period our sales grew from $18 million to more than $4 billion. Throughout this career, Bill has demonstrated leadership, integrity, and commitment, which enabled CommScope to maintain strong physical control during periods of rapid growth and changing business conditions and numerous transactions as well. We certainly want to publicly acknowledge Bill's significant contribution to CommScope and wish him much enjoyment in his coming retirement.

Mark Olson who's also here today will succeed Bill as Senior Vice President and Controller and Principle Accounting Officer. Mark has been with CommScope with the Andrew acquisition and has played a key role in the integration of the Andrew businesses. For the acquisition, Mark was Andrew's Corporate Controller and Principle Accounting Officer having joined Andrew Corporation in 1993.

We're pleased to have Mark assume a greater leadership role in the company. Mark is an exceptional leader and we look forward to benefiting from his experience and capabilities in (inaudible).

Also, Phil Armstrong's role is now also expanding to include treasury activities with the new title of Senior Vice President of Corporate Finance. Phil, who most of you know, will continue to lead CommSCope's investor relations and corporate communications functions as well. Now with the organizational announcements complete I would like to turn it over to Frank Drendel for his comments. Frank?

Frank Drendel

Thank you, Jerald. And Bill, congratulations. Thank you for 31 years of great service to CommScope. You have been a partner of ours for a long, long time.

Regarding the third quarter I would like to thank all of our employees for the outstanding performance that they generated in this quarter. Again, this is an unusual period we're in and we continue to see our strength and improving conditions.

If you look at our gross and operating margins, they continue to increase even despite lower sales. Our Andrew's solution team has been chosen for the wireless coverage and capacity providing South African stadiums with world soccer coverage’s similar to the Dallas Cowboys' stadium which we just completed.

We continued the introduction of P&U solutions, SmartBeam antennas, SYSTIMAX 360 enterprise solutions worldwide. I was really pleased with the growing acceptance of our aluminum technology and the FXL technology during this quarter, and clearly our near record cash flow of $138 million was also an outstanding achievement in this quarter.

During the quarter we received 58 new patents which bring our total patents worldwide to about 3,300. If you look at CommScope long term, no one, in my opinion, is better strategically positioned to be the best of the best. We have the best team, we have the best execution in the marketplace, and the power of bandwidth expansion continues.

In the end, ladies and gentlemen, it's all about bandwidth and we are the bandwidth providers. And with that, Phil, we'll turn it over for questions and answers.

Question-and-Answer Session

Phil Armstrong:

Operator, I just want to remind people that during the Q&A, please limit your questions to one topic and if you need to ask several followups, step back into the queue. With that, operator, we'll open it up for questions.

Operator

(Operator's Instructions) Your first question comes from the line of Amir Rozwadowski with Barclays Capital.

Amir Rozwadowski - Barclays Capital

Thank you very much and good morning, gentlemen. In looking at sort of your fourth quarter guidance for sequential growth, certainly it seems as though there's some level of indications coming form the marketplace that in the area of wireless we should see a pickup in business. I was wondering if you can give us a little bit of color in terms of perhaps geographically what you're seeing (inaudible), and if we look at sort of the larger wireless OEMs, certainly their businesses are expected to be down sort of in the single digit sequentially and there seems to be a disconnect with how much your business has been down thus far this year. And so, should we expect some level of catch up spending in terms of your businesses sort of catching up to where the market trends have been? Thank you very much.

Brian D. Garre

Amir, I don't know if catch up is the right word. I will say that particularly in the wireless space, the third quarter represented a low for us from a sequential quarterly basis throughout the year. We are seeing strength in both India and China for a variety of reasons, both with the carriers and with the OEMs, and in North America I think you know well there are a number of carriers who are projecting a stronger fourth quarter in terms of capital spending which we agree with and anticipate participating in.

If we looked at the course of activity over the third quarter, we did see strengthening in revenues and margins in the September period versus the average for the quarter. So we think we've got momentum going into the fourth quarter reflected in the guidance that we've given in revenue.

Amir Rozwadowski - Barclays Capital

Great. Thank you very much for the color.

Operator

Your next question comes from the line of Ken Muth with Robert Baird.

Ken Muth - Robert Baird

Hi. Could you just give a sense on the bonuses that you did not pay this year? Will you be paying those next year and can you give us kind of a rough range of what that is so we can get our numbers more accurate.

Frank Drendel

Yeah, I certainly hope so. I mean, I think all of our employees have scarified and worked very hard to continue to build the corporation. We certainly have the capacity to fulfill the needs of the customers and I'm sure as we get through the planning process, the board will reconsider that. As to an exact dollar (inaudible) —

Well, a couple of things in that regard. First the bonus problems are incentive performance based plans, our annual incentive plan as it’s called, and so historically we have set, I think, demanding targets for that. So the payouts next year hopefully, if they come, will be based on the success of reaching those targets. In 2008 we paid out about $30 million, I think, in annual incentive compensation so target performance levels I would say for 2010 would be a higher number then that. So perhaps in the as high as $40 million SG&A related costs.

So we also have had a salary freeze in place this year and we do expect that salaries will be adjusting next year as well. So both those factors should be taken into consideration, I think, in the consideration of modeling for next year if that's your question.

Ken Muth - Robert Baird

Yeah, great. Thank you.

Operator

Your next question comes from the line of Steve O’Brien with JP Morgan.

Steve O’Brien - JP Morgan

Hi, good morning, and thanks for taking my question. Could we talk a little bit again about China and the pace of wireless demand? Does it come back as soon as the fourth quarter or are we looking into 2010 there? And then I guess more broadly on the 4G upgrades, it seems like you listen to some of the carriers and they don't expect to be increasing their CapEx budget for 4G, so how does CommScope kind of drive revenue growth there if it's really just coming out of their 2G budget to switch from 2G spending to 3G spending to 4G.

Brian D. Garrett:

Yeah, Steve. The picture in both China and India in the quarter was a situation where the third quarter reprinted a low period in the year and so I mean your question is about China, but we've got a life situation in India and India is, quite frankly, a larger market for us. So both China and India, our expectations are for revenue expansion into the fourth quarter.

The issue and we may ask Eddy to put some color in there as well regarding WNS, the proposition for specifically LTE in North America, I suspect was what you were addressing in the second part of your question — yeah, I think our expectations are very modest in terms of what 4G will contribute to the revenue line in 2010. All of the CommScope businesses and wireless have positioned themselves very, very well in terms of approvals and trials for LTE, but revenue numbers will be modes, there's no question there. Eddy, anything to add?

Eddie Edwards:

I guess if you look from Q3 to Q4 in China for WNS, Q3 was hurt by the Phase II not happening as anyone had expected and that is beginning to shift in the fourth quarter. A lot of the inventory that we had in place has left our warehouses now. We're also seeing, I think — you ask about 4G LTE, we're seeing production shipments today for the United States. Currently we are shipping production units and production volumes for the early rollouts for one of the US carriers.

In the other side of 4G, in YMax, we're in production runs also in remote radio heads in Asia. So we are, for that segment of the business, seeing growth relative to what Q3 was and we do expect that to continue into next year.

Steve O’Brien - JP Morgan

Great, thanks.

Operator

Your next question comes from the line of Jeff Beach with Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Yes, good morning. Can you talk a little bit more about pricing trends in the market? There's been a pretty good move up in copper and aluminum; they may continue to go higher. I heard commentary about a squeeze in the fourth quarter and broadband with lower prices in some products. Can you just expand the raw materials? You have a lag to catch it, but what your expectations are ahead here over the next, say, couple of quarters?

Jerald L. Leonhardt:

Yeah, Jeff. We saw, in spite of expanding margins, we did see commodity increases in the third quarter. We had, I think in aluminum, an impact of some $0.10 a pound and a larger number in copper. And the outlook right now is that we will yet again see higher commodity costs in the fourth quarter. And as we've always done, we'll continue to monitor commodity costs. If we think that it's going to be a protracted period we will raise pricing in the marketplace, but we will probably continue to watch commodity costs for the remainder of this quarter before we make any decisions early in the coming year.

Jeff Beach - Stifel Nicolaus

And can you comment about broadband in the fourth quarter?

Jerald L. Leonhardt:

Well, we have announced in selected geographic markets price reductions in the third quarter so we know we'll have lower pricing in the fourth quarter, Jeff, for some products in some geographic markets.

Jeff Beach - Stifel Nicolaus

All right, thank you.

Operator

Your next question comes from the line of George Notter with Jefferies.

George Notter - Jefferies

Hi, guys. Thanks very much. I wanted to ask about the top line here in Q3 and specifically the WNS division. Coming into the quarter I would have assumed that the softness in India and China was embedded in your top line guidance, the $750-$800. You hit the low end of the range obviously. WNS seemed to be the biggest piece of the disappointment. I mean, I guess I’m' trying to understand what exactly surprised you here in Q3 about the WNS division? Thanks.

Eddie Edwards:

We had a big miss in China with almost no deployment of product into the 3G applications with our OEMs, both Chinese and Europeans. Also impacting the quarter is we had revenue realization, I guess, and we had a lot of project business in my segment so some of those projects were not realized in Q3, but had been substantially completed and will be recognized in Q4. So we're going to see a significant jump there.

So it's not where we wanted to be, but I think as we've said before, given the customer base that we've served here in the active products as well as the project-based business that we're in both in our GeoLENs business as well as our WIG business, we're going to see volatility from time to time.

George Notter - Jefferies

I'm sorry, how big were those projects and is the trigger for revenue recognition next quarter just the simple completion of those projects or is these specific features or other obligations you have to convey to the customer?

Eddie Edwards:

We don't talk about the projects in specificity, but as to how you realize revenue, we have milestones, in some cases we have acceptance by the customers — sign off, piece of paper.

Brian D. Garrett:

Yeah, and some other cases. Obviously this is what we expect as you said, as we do expect that some of the problems will reach the point where they can be recognized for revenue. It is quite a normal situation in our WNS business and our entire project related business and sometimes the timing just doesn't quite square up with our quarterly reporting.

Jerald L. Leonhardt:

George, I would summarize it by saying timing is always an issue and to the extent that the third quarter was a underachievement relative to our expectations in the third quarter, it really leads to large expectations that will fall on the fourth quarter timing.

George Notter - Jefferies

Got it. I'm sorry, how big were those projects?

Jerald L. Leonhardt:

George, we didn't comment on the size of any specific project.

Eddie Edwards:

George, these are normal cycles that we will go through in this kind of thing. As long as the cycles bigger each quarter, that’s what you want to look forward to. I mean, that's the part that's important to understand. We want to have these periods where we've got sign offs, the projects continue to use our equipment — the most important thing is for our investors is we see no indication of us losing market share.

George Notter - Jefferies

Got it. Okay, and then one quick follow-up just on China and India, could you give us a sense for how big those markets are now as a percentage of your revenue stream? I know it's a little complicated given the OEM channel, but any help would be great, thanks.

Jerald L. Leonhardt:

Yah. I would bracket both of them in the 150-200 million ranges.

George Notter - Jefferies

Great, thank you.

Operator

Your next question comes from the line of Amitabh Passi with UBS.

Amitabh Passi - UBS

Hi, thank you. My first question just had to do with margins. Particularly if I look at enterprise and broadband, I believe you've posted sort of the highest level of margins again and I know you talked about some reversals going forwards, some pricing pressure — just wondering if there's any guidance you can give in terms of how we should think about "normalized" margins.

Does enterprise sort of go back into the 18%-20% range? Is that the right way to think about it? And then broadband, can you hold that above the mid-teens level? I mean, you've certainly had two very impressive quarters there.

Brian D. Garrett:

Well, Amitabh, it was an extraordinary quarter and both the businesses that you discuss have grown sequentially from the beginning of the year in both revenue and operating margin so they're performing very, very well. Yeah, there will be a pullback in the fourth quarter for a variety of reasons and our expectation will always be to keep our enterprise business in the upper teens, and if you look back over the last two or three years, we've had difficulty in getting our brand band business into double digits and the expectations going forward are to keep that business segment in the mid-teens if at all possible.

Amitabh Passi - UBS

Got you, and then may I ask just one more question on the balance sheet?

Phil Armstrong:

Sure, shoot.

Amitabh Passi - UBS

Just very quickly, I guess this is for Jerald, Q2-Q3, again very strong cash flow generation, just wondering as we look further on to 2010, would you consider further delivering your balance sheet? Would that be sort of a priority and is it fair to assume you would maybe take another $200-$300 million of debt down? Or just your thoughts around the use of cash now that you're building up on your balance sheet.

Jerald L. Leonhardt:

Sure. Thanks, Amitabh, for the question. We will expect certainly to pay some debt in 2010. We do have something called an excess cash flow sweep and since cash flow this year has been relatively strong, we think that'll generate the need, and then we'd pay debt probably close to the $200 million range in the first quarter. Beyond that I wouldn't be surprised to see some additional delivering going on, perhaps not at that magnitude, but I wouldn't be surprised to see some additional debt reduction over the course of 2010.

And we did have a good cash flow quarter. With a little growth anticipated in the fourth quarter we probably won't be quite as strong cash flow in the fourth quarter would be my expectation now, but should be a great cash flow year. Cash is returning to very strong levels and we will use cash for de-leveraging as well as looking for strategic opportunities.

Amitabh Passi - UBS

Got you. Thank you.

Operator

Your next question comes from the line of Mike Walkley with Piper Jaffray.

Mike Walkley - Piper Jaffray

Great, thank you. Just want to follow up a little bit on the operating margins and specifically on the WNS business. That sounds like a recovery coming in Q4 if you're north of say the 150 or in that 150-180 range of the prior quarters. Would we expect operating margins to return back to where they were say in the first half of the year or is there some kind of mix we should think about as it relates to margins in that division?

Brian D. Garrett:

I think they'll be very similar to the first half of the year.

Mike Walkley - Piper Jaffray

Okay, great. And just on the tax rate, the 34-36, is that the same rate we should think about for 2010?

Jerald L. Leonhardt:

Well, we're a little early for 2010 guidance. In 2009 we have done some repatriation this time. I'm not expecting to continue that process and that should help us beneficially in tax rights in 2010 if we’re not repatriating quite as heavily as this year.

Of course, what might happen legislatively is something we'll all have to watch as well.

Mike Walkley - Piper Jaffray

Great, thank you.

Operator

Your next question comes from the line of Steve Verosi (ph) with Stephens Inc.

Steve Verosi - Stephens Inc.

Hey, guys, just a quick followup on the WNS margin question. I understand you had some mix issues impacting margin in the September quarter, but I guess to what extent does that say anything about margins within some of the other businesses within Wireless Network Solutions? I am thinking bay station subsystems in particular — does that suggest that maybe those margins maybe weakened a bit during the quarter?

Brian D. Garrett:

I think it's more a function of volume than it is of margin erosion. This sis a highly fixed-cost oriented business, especially in those two businesses that you talk about, and as we said before, volume is our friend and our enemy. And so in the third quarter we saw in the segments in China where amplifier business, the OEMs are strong, we saw a lot of slippage there and so that's really what goes to the bottom line.

Steve Verosi - Stephens Inc.

Would it be fair to say standard gross margins are h folding very well?

Brian D. Garrett:

Yeah. I think you see very little movement in what the standard margins are and so it's really about absorption of periodic overhead. We've taken that business — today what we’re selling, 75% of it didn’t' exist in January so we've totally restructured the offering of that business into a higher-value added product, spent the money in R&D to develop a future for the business.

Steve Verosi - Stephens Inc.

Okay. That makes perfect sense. Just one quick followup, Jerald, maybe you can remind us of what a normal seasonal pattern is in the March quarter and any thoughts on deviations from normal seasonal in this coming March?

Jerald L. Leonhardt:

This coming March? Well again we're not providing any guidance about 2010 revenue certainly t this point and helpfully we'll be able to do so perhaps early in 2010, but the seasonal trends usually in the second and third quarter are strongest, sometimes one is a little stronger than the other, and the weaker ones are January or first quarter rather, and the fourth quarter. So with the first quarter typically the weakest, and gain what we're seeing this year is due to trends in the wireless business primarily we think we may overcome that traditional fourth quarter weakness looking ahead for our fourth quarter this year.

Steve Verosi - Stephens Inc.

Okay, thanks. Good luck going forward, guys.

Operator

Your next question comes from the line of Shawn Harrison with Longbow Research.

Shawn Harrison - Longbow Research

Hi, two brief questions on the cost structure; just getting back to the SG&A, should we expect that to be essentially flat here in the fourth quarter versus the third quarter. And then second, if you could speak of just any additional cost savings that you have coming out of the model, be it in the December quarter or in the March quarter either from Andrew related restructuring activities or other in process restructuring activities with the legacy CommScope business?

Jerald L. Leonhardt:

Yeah, on the SG&A, at present time I wouldn’t expect that we would see a lot of change in the SG&A although some of our expenses if revenues are up a little could be a little higher in the sales area where we do have sales incentives that are still in place. It could be working there, but wouldn't expect anything extraordinary. Of course the end of the year there is final true ups to certain accruals and that sort of thing. That can create a little volatility there, but since we do not have incentives in place for now, we wouldn't expect perhaps as much as that and so additional costs — Phil?

Phil Armstrong:

Yeah. There has been an ongoing culture of cost reduction that will continue, but I think we've got the major manufacturing benefit.

Brian D. Garrett:

Yeah. We're track. We're actually ahead of schedule of where we wanted to be relative to our public statements regarding synergies. In the fourth quarter it will pick up some incremental amount probably an additional $3-$4 million over the third quarter rate as a result of the merger synergies.

Jerald L. Leonhardt:

We have been on track or are ahead of that plan since the merger took place and congratulations to all of the employees. It is an outstanding accomplishment.

Shawn Harrison - Longbow Research

Thank you very much.

Operator

Your next question comes from the line of Simon Leopold with Morgan Keegan.

Simon Leopold - Morgan Keegan

Thank you very much. Just wanted to get a clarification first on the pro forma earnings per share calculation to make sure I have got the ad back and share count right on that based on the net income of $61.3 million?

Jerald L. Leonhardt:

You should be adding back the convertible debt because you got that in the share count of about 106 million shares, you should be adding back about $1.7 million related to the net of tax cost of the convertible debt. Shares outstanding should be about 105.7 million.

Simon Leopold - Morgan Keegan

Okay. I will have to check my formula, I am coming up with $0.60 and not $0.61, I will circle back with you on that. Bigger picture question, you made a comment in the prepared remarks regarding wireless talking about uneven spending patterns and antennas, and you sound very optimistic about the fourth quarter. Could you go into a little bit more color in terms of what's going on in the wireless market in that on the one hand we hear about strong subscriber growth and emerging markets and quality issues and mature markets due to capacity and my impression is that carriers are spending perhaps more on backfill and so I am trying to get a handle on the timing of the recovery in your wireless business and the sustainability of the pattern over multiple quarters and not just into the fourth quarter.

Frank Drendel:

Yeah, let me take a little cut at the broad market. You're correct in the backhaul. What has happened is on our fiber optic cable sales — it clearly indicates that the carriers — both cable TV carriers are leasing back all capacity to the wireless carriers and the wireless carriers are enhancing and reinforcing their backhaul. Adding site capacity without the capacity to handle it back to the switch makes no sense. So if you think about the trend, in my view it is that that's where this (inaudible) has been taking place both at the tower site and at the backhaul. The parts that will begin to affect us in on the tower and up the tower as you add the capacity to the antennas, the down cable, and all of that material. So the spending will skew itself at the beginning of this quarter and into 2010 on the products that we serve.

Simon Leopold - Morgan Keegan

And do you think of this fourth quarter pattern as lasting multiple quarters or should we expect a lumpy pattern where we'll get some big quarters and some bad quarters sort of alternating?

Frank Drendel:

I think this sis always going to be a build to order business. I think you have to understand that CommScope is positioned such that we can fulfill 95% of our input within 12 weeks and most of the time within six and faster. So the reason we're so fast at cycling is we can handle the customer input.

Now, looking out, I personally think that next year's going to be an outstanding year for our particular product lines, but there will be ups and downs as these carriers around the world go from — think about it, China and India are just beginning, the two. You got two, three, LTE, Ymax — each one of these technologies is moving through around the world at a different stage of completion. So for us the question has to be, and of you as an investor, who is best prepared in the world to feed that supply chain? And we are. We can react faster than anybody and we have the best product.

So the key element here is we're operating at at least 25% below capacity, proven shippable capacity that we've done in the history before in 2008. So if this thing turns and the margins we're producing on 25% less capacity are sales you're going to have an outstanding performance. For me, I want to continue the position for as strong balance sheet, best technology, best service levels, and when these customers start ordering, we'll be there to take care of them.

Simon Leopold - Morgan Keegan

Okay, thanks a lot, Frank.

Phil Armstrong:

Operator, I think we have time for about two more questions.

Operator

Okay. Your next question comes from the line of Blair King of Avondale Partners.

Blair King - Avondale Partners

Hi. First, Bill, congratulations on your retirement — sounds good.

Bill Gooden:

Thank you, sir.

Blair King - Avondale Partners

I would rather talk about that than a followup on Frank's last comment — Frank, I think you had mentioned that — did you just mention you're running at less than 25% below full capacity?

Frank Drendel:

Yeah. If you look at our sales, in our historical sales it's very obvious that we've had sales that were 25% higher than when we're running. I mean, I'm just saying that if you look at the fact that our capacity has proven shipments that we've done before versus where we are today, and still very profitable, tremendous cash flow, excellent margin from the team. We have the capacity to respond on fairly short notice to the orders that would be coming forward from these customers. So I can —

Blair King - Avondale Partners

Okay. And just a followup to that just broadly, when you look at the enterprise segment in your ACCG segment, enterprise seems to be trending higher and the ACCG segment seems to be trending at least sequentially over the past couple of quarters sort of flat to down a little bit.

Frank Drendel:

No question, but I think —

Blair King - Avondale Partners

So obviously there's something going on there, and I'm wondering if you can just talk about the dynamics outside of the economy and where you see the trajectory of those two segments heading maybe over 2010?

Frank Drendel:

Well, before I hand it to Brian who's working on it a little bit, let me tell you about how I view it in the sense that in the ACCG you'd have that great buildup in the cabinet business or AT&T when they were doing wireline — it had nothing to do with wireless, when they were doing their wireline operations for fiber to the curve and fiber to the home. That program continues, but they've pretty much gone through the initial build out phase.

If you look at AT&T and Verizon and the other carriers, they haven't even begun to move tow whatever you want to consider 4G, LTE or whatever it is, but they are certainly in the planning stages of that and there's no question that everybody that's using anyone of the cellular carrier's phones today is getting more drops and blocks and lost signals. Your system is not working as efficiently as it has before. So there can't be much doubt in anybody out there's mind that this will need some reinforcement.

I think the issue is that they have to have the make ready, the backhaul, and everything else prepared before it starts. Now, enterprise is improving faster, ACCG in my mind has made a major move broadly with our aluminum strategy. We've had more traction in this quarter around the world than we've had ever before in the aluminum cable traction which will offset any of these concerns everybody has about copper long term. So in my 30+ years in telecommunications and 15 years on a cellular carrier board, I've never seen a hand like this for what it's going to take to get cellular at these rates and the speed and capacity in the future. So I am really bullish about this company in the next 2-5 years.

Blair King - Avondale Partners

That's great. Thank you very much.

Operator

Your final question comes from the line of Anthony Kerr (ph) with Keybanc.

Anthony Kerr - Keybanc

Good morning, gentlemen. Just wanted you to hit on maybe a longer term question in regards to your exposure and maybe outlook for YMax. I understand that the (inaudible) wires of the world are much smaller on a scale basis relative to the bigger carriers, but I wanted to get your take on that build out as they are moving through North America here.

Frank Drendel:

Anthony, I think the impact certainly in North America is going to be minimal just because of the scale or lack of scale of YMax in North America. Our participation in that particular technology today is really more about backhaul than it is cable or BSA. We've done very well with that account in technology in our microwave antenna product and we'll continue to.

Anthony Kerr - Keybanc

Okay. Thank you.

Operator

Ladies and gentlemen, at this time we have reached the allotted time for our Q&A session. I would now like to turn the call back over to management for closing remarks.

Frank Drendel:

Well, I want to thank all of you. I think we had an outstanding quarter. We continue to perform at much reduced sales rates than we have historically, excellent margins, excellent cash flow — none of us could do this without our strong employee base and our technology around the world so I want to thank all of our partners around the world for their performance and I want to thank all of you for investing in CommScope. I think we have a real future. And Bill, congratulations and thanks again.

Phil Armstrong:

Operator, that wraps up

Operator

Ladies and gentlemen, this concludes today's third quarter earnings release conference call. You may now disconnect.

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