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Executives

Phil Armstrong – SVP, Corporate Finance

Jearld Leonhardt – EVP & CFO

Eddie Edwards – President & COO

Analysts

Simon Leopold – Morgan, Keegan

Jeff Beach – Stifel Nicolaus

Amir Rozwadowski – Barclays Capital

Steve O'Brien – JPMorgan

George Notter – Jefferies

Amitabh Passi – UBS

Will Power – Robert W. Baird

Tony Kure – KeyBanc

Shawn Harrison – Longbow Research

CommScope, Inc. (CTV) Q2 2010 Earnings Call Transcript July 28, 2010 5:00 PM ET

Operator

Good afternoon. My name is Schenel and I will be your conference operator today. At this time, I would like to welcome everyone to the CommScope second quarter 2010 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

I will now turn the call over to Phil Armstrong, Senior Vice President of Corporate Finance.

Phil Armstrong

Thank you, Schenel. Good afternoon and thank you for joining us on the call and sorry about the technical difficulties there. Joining me today on the call is Frank Drendel, CommScope’s Chairman and Chief Executive Officer; Eddie Edwards, CommScope’s President and Chief Operating Officer; and Jearld Leonhardt, CommScope’s Executive Vice President and Chief Financial Officer.

Please note the slide presentation that accompanies this call can be found on CommScope website at www.commscope.com under the Investor Relations tab.

Turning to that presentation, if you will take a look at slide two, which is our forward-looking statements, you will find the cautionary language related to forward-looking statements. During this call, we may make forward-looking statements regarding our financial position, plans and outlook that are based on information currently available to management, management’s beliefs and 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 our press release and CommScope’s 10-Q filed today with the Securities and Exchange Commission. In providing forward-looking statements, the Company 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.

In addition to GAAP information, we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides meaningful information to investors. Detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today and in the appendix to our slide presentation.

On one of the planning item, please note that CommScope intends to host an analyst meeting on November 15th and 16th in Dallas, Texas, at the Cowboys Stadium. After a formal management presentation, the Chief Technical Officer of the Cowboys organization will provide a behind-the-scenes IT tour of the facility.

Now, I’ll turn it over to Jearld Leonhardt. Jearld?

Jearld Leonhardt

Alright, thanks, Phil. We will review second quarter 2010 results for you today and our outlook, and then I’ll turn it over to Eddie Edwards to make a few comments before opening it up fir questions.

Slide three, starting there, provides a snapshot of CommScope’s second quarter 2010 performance. The second quarter 2010 saw sales increase by 7% year-over-year and 16% sequentially to $838 million. In the quarter, foreign exchange rates positively affected sales by $3 million on a year-over-year basis, but negatively affected sales by $6 million on a sequential basis.

As anticipated, North America wireless operators significantly increased spending in the quarter under 3G and 4G wireless infrastructure and from a geographic standpoint, the U.S. market was the most robust in the quarter. Strength in the North American wireless market and global enterprise markets were somewhat offset by lower sales in India and China.

The gross margin for the second quarter of 2010 was 30% and includes a gain of $9 million for an arbitration award related to warranty cost arising from a business that Andrew had acquired several years ago prior to the CommScope-Andrew merger. Now, excluding this special item, adjusted gross margin was 29%. Gross margin rose modestly on a sequential basis, but declined year-over-year due primarily to higher material cost, a return to normal business practices for salary and incentive compensation and lower prices for certain cable products.

SG&A expense for the second quarter of 2010 was $117 million, up $18 million year-over-year primarily due to the reinstatement of certain incentive-based employee cash bonus programs in 2010 that had been suspended for 2009 and higher selling cost due to higher sales.

Operating income in the second quarter of 2010 was $81 million compared to $74 million in the year-ago quarter. Adjusted operating income, which excludes the amortization of purchased intangibles and other special items declined 19% from the year-ago period to $101 million. The decline in adjusted operating income is primarily attributable to a decline in broadband operating income. However, adjusted operating income increased 53% sequentially primarily due to improved wireless performance.

Interest expense for the quarter was $23 million compared to $43 million in the year ago quarter. Last year we incurred non-cash charges of $17 million related to an interest make whole payment and the write-off of deferred financing fees in connection with accelerated debt payments. Excluding these items, interest expense in the year-ago quarter was $26 million. Interest expense declined year-over-year due to lower debt levels.

The Company’s effective income tax rate for the quarter was 25% while the overall tax rate on adjusted pre-tax income was 28%. These rates included a benefit of $2.5 million approximately for adjustments to valuation allowances related to various tax matters and a $2.5 million benefits related to adjustments to the estimated tax impact of repatriation of foreign earnings.

CommScope reported second quarter net income of $44 million, or $0.43 per diluted share in the second quarter. The reported net income includes after-tax charges of $15 million for the amortization of purchased intangibles and $2 million for restructuring, offset by a $5 million after-tax gain that was related to the arbitration award. Excluding these special items, adjusted second quarter 2010 earnings were $56 million or $0.55 of diluted earnings per share.

Moving on to slide four, this shows our revenue and adjusted operating margin performance over the last six quarters. Second quarter 2010 sales of $838 million were the highest they have been since fourth quarter of 2008 as sales rose sequentially in all segments. Sales of North American wireless operators where two of them were particularly strong, and included more than $50 million in solutions for initial rollouts of next generation LTE wireless applications including active and passive equipment as well as cable and some environmentally secured cabins.

Due mainly to the 16% sequential increase in sales, adjusted operating margin rose 52% sequentially to $101 million or 12% of sales, which was generally consistent with our expectations.

With that summary, I will now provide some specific commentary about each of our segments. Slide five highlights the financial performance of our Antenna, Cable and Cabinet Group, or ACCG segment, which includes product offerings of primarily passive transmission devices for wireless infrastructure purposes, including base station and microwave antennas, coaxial cable and connectors as well as secure environmental enclosures for both the wireline and wireless applications.

ACCG sales improved in the second quarter rising nearly 20% sequentially, but they were down modestly year-over-year. Sales grew on a sequential basis mainly due to U.S. operators’ increasing investments in next generation wireless and wireline communication infrastructure.

This robust North American spending was somewhat offset by decline in the Asia-Pacific or A-PAC region due to lower sales in India and China. Cautious operator investment ahead of the Indian 3G auctions was compounded by lingering security clearance process issues. The combination of these two items diminished sales into India. Sales there were below expectations and declined by more than 50% year-over-year and particularly affected sales of microwave and base station antennas. And at the same time sales in China also declined year-over-year primarily due to the timing of investments in 3G infrastructure, which were quite strong in the first half of 2009. Overall, we are pleased to see the sequential improvement in sales and operating margin and believe that we remain well-positioned to benefit from the transition to next generation wireless networks around the globe.

Turning to slide six, our Enterprise segment, which provides structured cabling and connectivity systems for business enterprise applications delivered another quarter of outstanding results. Enterprise sales increased 34% from the year-ago period and 12% sequentially. Sales increased across all regions and product groups.

And user demand for our products was once again the primary driver of sales growth as global sales into the distribution channels roughly equaled the sales out of the channels. Enterprise segment sales rose as corporations and other large entities continued investing in strategic information technologies.

We believe that our end-to-end intelligent solutions, our robust fiber portfolio, our in-building wireless solutions, our global sales force and our commitment to R&D all combined to separate us from the competition. We see many exciting opportunities if we look ahead, particularly in the sectors of technology, U.S. federal government, healthcare and education.

We are also pleased with our progress in expanding in-building wireless solution sales for enterprise applications, which include fiber distributed antenna systems, repeater platforms, radiating cables and other coverage solutions. Overall, it was a strong quarter for our enterprise group.

Turning to slide seven, our broadband segment sales consists mainly of coaxial and fiber optic cable for cable television operators. Broadband sales increased 9% year-over-year and 16% sequentially. The year-over-year sales increase was due primarily to higher volume in the central and Latin America or CALA region, while the sequential sales improvement was driven by both CALA and a seasonally strong North America market. These sales increases were somewhat offset by reductions in pricing of certain cable products.

The broadband segment continues to be essentially a maintenance market in the U.S. and is influenced by housing starts, maintenance of physical plants, and competition between cable, satellite and telephone companies. Now, as you may recall, in the second and third quarters of last year, a number of positive key factors aligned [ph] resulting in a typically strong broadband operating margins.

This year was just the opposite. Lower prices, unfavorable mix and higher cost combined to drive margins lower. Now, we are not pleased with our second quarter performance and are focused on improving margins and recovering our higher cost.

Turning to slide eight, our wireless network solutions or WNS segment, consist of base station subsystems, location based and network optimization systems, as well as products and solutions that extend and enhance wireless coverage. Sales in the quarter were essentially unchanged on a year-over-year basis, but were up 16% sequentially. The sequential sales increase reflected unusually shipments of active products such as power amplifiers and filters in North America for next generation or LTE applications. This North American strength was somewhat offset by lower shipments in China.

We also posted strong sales from our wireless innovations or WIT group, which provides capacity and coverage solutions for complex and challenging wireless signal distribution systems. Sales in the second quarter reflected the completion of solutions for a number of South African soccer stadiums used for this year’s 2010 Soccer World Cup competition.

Now, while we do not expect the same level of strength in the third quarter, we continue to see numerous opportunities at large venues like stadiums across North America. We believe that our ongoing technology leadership and our service model uniquely position CommScope to benefit from growth trends in both outdoor and in-building wireless applications.

We remain excited about the long term progress and prospects in the WNS segment. However, it is obvious from this chart on slide eight that the segment profitability has been relatively volatile since it is significantly affected by product mix and the timing of certain large projects. Despite the quarter to quarter volatility, we believe that this segment has the potential to be among the fastest growing segments of CommScope

Now, turning to slide nine, I will now discuss cash flow, the balance sheet as well and liquidity measures. Slide nine highlights our overall debt reduction over the past few years as a result of the – of capital markets transactions last year and strong cash flow from operations. Despite the $117 million sequential growth in sales, which consumed working capital, we generated $28 million of cash flow from operations during the second quarter of 2010 and with modest capital spending of $9 million, we generated $19 million of free cash flow in the second quarter.

We also continued to strengthen our balance sheet. In the quarter, we reduced total debt outstanding by $53 million, primarily through a $50 million prepayment of debt. And at June 30th, 2010, total debt outstanding was $1.35 billion, about 46% of our book capital structure. We ended the quarter with $577 million of cash and cash equivalents and short term investments. And our net debt, which is total debt less cash and cash equivalents and short-term investments, was approximately $777 million. We also remain well within compliance of the financial covenants in our credit facility.

Turning to slide 10 now, we have outlined some of the key factors affecting the current business environment. Recent economic and industry indictors have been mixed. Other issues include the timing of quarterly spending by global carriers as well as volatile input cost. And finally, while some supply chain lead times for components had improved, others have not, which along with these other concerns could be a restraining factor to our growth in the third quarter. Despite these uncertainties, however, we remain optimistic about improving performance in second half of 2010. We believe that we have a strong competitive position. We will benefit from the economic recovery even though recovery may be slow and may vary considerably among geographic regions.

We continue to expect strong North American wireless capital spending in the third quarter and the potential for increased wireless spending in India. And as the economy recovers, many corporations and other large entities have resumed investing in their date centers and other strategic information technology. We also believe that our expanding in-building wireless portfolio will begin to create additional opportunities but later this year.

Now, longer term, the explosive growth in wireless data, global subscriber growth, and the transition to next generation networks are expected to provide opportunities over the next few years.

I will now cover our outlook on slide 11. Overall, we expect business condition and our overall performance to remain relatively stable on a sequential basis in the third quarter excluding special items. This guidance is based upon the expectations of increased spending in India as security issues are resolved and as operators increase wireless spending for 3G networks as well as adequate component availability, solid enterprise spending and a stable business environment.

Specifically, for the third quarter, we expect revenue of $815 million to $865 million. We expect adjusted operating income of $90 million to $110 million, excluding amortization of purchased intangibles, restructuring and other special items and we expect a tax rate of 32% to 36% on adjusted pre-tax income.

Regarding calendar year 2010, challenging conditions in India and broader economic concerns have contributed to slower than expected recovery in wireless spending in Europe and in the Asia Pacific region. In addition, raw materials cost remain high despite the slow economic recovery. As a result of these factors, we believe that it will be difficult to achieve year-over-year growth and adjusted operating income for calendar year 2010. In spite of this, we anticipate stronger performance in the second half of the year. We continue to expect higher sales and adjusted operating income, excluding the special items than in the first half of the year.

Now, I will turn it over to Eddie Edwards for a few of his comments.

Eddie Edwards

Thank you, Jearld. I think as Jearld as pointed out, we are still clearly in the midst of a economic recovery and I think it’s going slower than many of us have anticipated. However, we remain the global leader in each of the markets that we serve. And we believe that we have a compelling value proposition for our customers.

What we’ve talked about for the last few quarters in LTE I think you see is happening now. we did greater than $50 million or over 10$ of our wireless revenue was generated from LTE sales, not only in the United States but in other parts of the world. We have a very strong position in enterprise globally in most every market around the world. This is something we’ve talked about for the last two quarters. And we see that strength continuing throughout the year.

We also continue to invest in our technology. I think this is one of the reasons in our new 4G products that we have a strong position in the marketplace. It’s something that we’ve decided to do and are dedicated to continuing that process. We’ve also talked about our commitment to profitable growth and our willingness to walk away from certain revenue that doesn’t make sense to us. We are going to continue that diligence and focus on maintaining our bottom line profitability to the highest level that we can get to.

As we focus on our cost reduction to offset pricing pressure, we know that these cost benefits will be realized. During the course of the year, we strengthened our balance sheet, as Jearld has talked about. We’ve improved our liquidity and although this quarter we had less cash flow generated, we did increase our revenue by over $100 million.

We continue to be excited about the growth in smart phones and also the new tablet such as the iPad and the other ones that are coming out. And this is going to drive the growth of the mobile Internet. We have products that serve every part of that bandwidth user and we expect good growth in that area.

We continue to be focused on executing and helping our customers connect and communicate through each wave of the growth. We’ve talked about from 2G to 4G and beyond. I think that the technology that we’ve shown not just in our wireless business what we are doing in enterprise in broadband to support the growth of wireless in the building or outside shows our commitment to that industry.

So, despite pressure on price that we’ve seen during the end of this quarter and Jearld’s comments of pressure in the price during the balance of the year, we think that we continue to perform well versus our peers and remain committed to the market.

Phil, I will now turn the floor back over to you.

Phil Armstrong

Thank you, Eddie. During the Q&A, we ask that you limit your questions to one topic and if you have a number of follow-up questions, to step back in the queue. And, Schenel, we’ll be now glad to address questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Simon Leopold with Morgan, Keegan

Phil Armstrong

Simon, you are there?

Operator

One moment please. Simon, your line is open.

Simon Leopold – Morgan, Keegan

Okay, you can hear me, yes?

Phil Armstrong

Yes, Simon.

Simon Leopold – Morgan, Keegan

Okay, sorry about that. One multi part question, I guess. I wanted to see if you could comment on what – your thinking about the product mix in Q3. I think you did make as suggestion that either WNS would be down sequentially or just he coverage enhancement will be down sequentially, but if you could delve a little bit more deeply about kind of what’s implied at the high end, low end of your guidance in terms of mix. Thank you.

Eddie Edwards

Well, you know, I can speak to WNS. I mean specifically if you look at the chart that Jearld presented, it’s a – it looks like the saw tooth. I think next quarter is the time it’s supposed to be down relative to how it’s followed the last six or eight quarters. But, it is very project oriented. It’s the timing of large projects that generate revenue at the end of periods, generally. And I think next quarter we’ll see one of those periods that’s less strong than this one was.

Also, in this quarter, as Jearld mentioned, we had a significant revenue generated from the 10 sports venues that were done in South Africa for the World Cup and those things are not recurring. There is another World Cup coming up in Brazil, so we’ll be actively pursuing that, but that’s not for a couple of years.

But – so we will see cyclicality there and in that segment we – mix is a big driver of the bottom line as you have seen also from the way the charts work. The other thing and – from Q2 to Q3 would be India, we do see some growth coming back there. It’s been out of our – it’s not something from a control standpoint that we can do much about. We are well-positioned there. We have relationships with most all the OEMs or the carriers in that market, but it’s just been a market that is stagnant. We were only down 58% versus some of the people seeing down 70 plus. So, it’s a challenge in that market to address that when it’s really controlled by the activities of the government.

Simon Leopold – Morgan, Keegan

And for the broadband segment and enterprise segments, what’s kind of the expectation of movement there? Broadband usually has I think some decent seasonal factors in Q3.

Eddie Edwards

Well, it – that’s true. But what we – remember when we talked about last year in broadband we were at 23.5% or 24.5% margin, and we said that those were not sustainable. We were on the good end of the difference between where our prices or customers were and what we were paying for materials. And now we are on the other side of that. And the pricing pressure throughout the world is very, very strong. That market is going to be determined by growth in residential housing. We don’t see that being a growth model for some period of time. But we will continue to fight.

One positive aspect there and something that is just started is the stimulus money that rules are now out. We’ve won a couple of jobs and bidding on others right now. So, as the government continues to make sure the rules are well understood and the MSOs or the smaller carriers apply for funding, we would expect to see some of that.

And in enterprise, as Jearld said, their inventory – the inventory of our distribution network remains very balanced. We don’t think there is any buildup there. We think that’s positive and our people see a strong market of the balance of the year.

Phil Armstrong

Thanks, Simon. Operator, we’ll take our next question.

Operator

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

Jeff Beach – Stifel Nicolaus

Yes, good afternoon.

Jearld Leonhardt

Hi, Jeff.

Jeff Beach – Stifel Nicolaus

You’ve really had a remarkable swing in your operating profitability in broadband and back down into the single digits. Can you expand a little bit on the decline in the margin? I was surprised how much your – how is cost pressures, how much is pricing pressure from competitor and what you see ahead, are you going to be able to restore this margin back up in the double digits in let’s say the next few quarters?

Jearld Leonhardt

Jeff, this is Jearld. Yes, we’ve – I’d say in the raw materials front we are clearly a little surprised probably a little bit the raw materials remain as high as they are with the economy as weak as it is. We would expect to see some improvement in that typically over most cycles, but raw materials do remain high and we will see some increases in areas like plastics even in the third quarter. So, there is continuing margin pressure there and as we talked about, we had some extraordinary positive broadband margins last year that I think we did say would not continue or would not last and that has certainly been the case. There have been some price adjustments that we’ve mentioned as well in the broadband segment. So, those are the factors that have made the margin a little lower. I’d say we are clearly not pleased with where margins is in our broadband sector and would be continuously looking at opportunities to improve margin performance in that business.

Jeff Beach – Stifel Nicolaus

And is there any issue from a change in mix that’s occurred here in the last quarter or two in broadband?

Jearld Leonhardt

That mix change was also negative looking from particularly a year ago period.

Jeff Beach – Stifel Nicolaus

Okay. Thank you.

Jearld Leonhardt

Yes.

Phil Armstrong

Thanks, Jeff.

Operator

Your next question is from the line of Amir Rozwadowski with Barclays Capital.

Amir Rozwadowski – Barclays Capital

Thank you very much and good afternoon, folks.

Jearld Leonhardt

Good afternoon.

Amir Rozwadowski – Barclays Capital

In looking at your guidance for the third quarter, you’d mentioned that there is expectations that the spending in India would come back. I was wondering if you could give us a little bit of color in terms of the delta between the low and the high end of guidance. Is that – what are the puts and takes there that could drive you to either end of the spectrum?

Eddie Edwards

I don’t think we get to that granularity in talking about this. But I think, Amir, this is Eddie, it depends on when the government fully turns the people lose or at least some of them. You know there are rules for some of the vendors today and those would be (inaudible). We are seeing orders now versus very few during the quarter. For the entire thing to be robust again, they are going to have to find a way that all of the suppliers are in there supplying product. We have relationships with each and every one of them whether they be Western or Asian suppliers. So, we have – we are ready and poised. We have daily conversations with everybody in the food chain. So it is not something that is – something that we are poised. We have some inventory in place to take care of ramp issues because when they come back, they don’t come back with a fever pitch and they want things very quickly. So, we’ve addressed that as you know we build many of our products there in India.

But, it’s really timing as to when things let loose when the 3G license are fully implemented and they start building for those. You know, they are still adding tens of millions a month. So the quality of their networks is going to degrade rapidly as they continue to add subscribers. So, it’s a hard thing to gauge. We have built in a reasonable growth. You know it’s still at the best 5% to 7.5% of our total revenue. So it’s not the biggest market what we serve, but it is an important one too.

Both that and China. In the case of China, the bidding for – in China Unicom was delayed because of some legal issues over there. I think those have been worked through and that should happen in the next six weeks. we are an incumbent supplier in antennas and we believe that with our approval by the testing authorities that our smooth wall aluminum cable will be well positioned to win business there.

Amir Rozwadowski – Barclays Capital

And so, Eddie, if we think about the broader picture then in India and China, I mean if we look at sort of the regulatory hurdles being cleared, I mean certainly the carriers have spent a significant amount on 3G licenses. I mean if we perhaps look out into the first half of 2011, do you expect that to be a material growth driver for your folks or the size of the opportunity perhaps, may be some color on that?

Eddie Edwards

Well, you know, it – certainly we would have expectations that we get back to the levels that had been there before when they were adding 16 million subscribers a month and the market was booming and all of that. We have all the products that’s necessary for their build-outs. And so we think it could get back to that level. When it happens is really something that we have to watch on a daily basis and address.

Amir Rozwadowski – Barclays Capital

Thank you for the incremental color.

Phil Armstrong

Sure. Thanks, Amir. Operator, we’ll take the next question.

Operator

Your next question is from the line of Steve O'Brien with JPMorgan.

Steve O'Brien – JPMorgan

Hi, thanks for taking my question. This quarter, AT&T and Verizon both had pretty substantial CapEx increases. ACCG business was up 20% quarter-over-quarter. I guess WNS up 16%. Have you seen signs that the carriers have completed their 3G and 4G coverage plans maybe ahead of schedule for the year and may be ratcheting back some of their spending as we move to the second half? And if you could comment specifically on products like antennas and RF equipment, is there any sort of differing trends there that would be helpful.

Eddie Edwards

You know what, Steve, this is Eddie, what they have said publicly is that they or at least one of them has said publicly is that they plan to spend through the year as opposed to cyclically. That would be a good thing. I think we are seeing signs it is happening. We have installs in place with one of the carriers where we are doing the whole tower for them for their LTE applications. We saw a lot of strength in the quarter in amplifier sales to – with one of our OEMs to – in test sites. We would expect those – this test to progress to the third quarter. And then we would anticipate buying patterns to come back toward the second, towards the end of the year. That’s what they say. And I have no reason to believe that that’s not the case. But we are seeing no slowdown. The antennas are being ordered daily from that standpoint and I think their spending patterns are going to continue to stay as publicly said. Nothing different than that.

Steve O'Brien – JPMorgan

Okay. Thanks for that and then if I could on sort of the same note, with the European carriers maintaining really low CapEx levels right now, Vodafone talking about having ample network capacity, do you think data plans and WiFi, femto offloads in North America or Europe are may be limiting the network strains that you might have anticipated when you looked out at 2010 growth opportunities?

Eddie Edwards

No, I think the growth North America wise is consistent with I guess some of the things we heard. We see nothing that’s really changed that. And I don’t think that femtos have come online fast enough to make a difference from what we see. they are buying the sort of the same mix that they told us they would and I think we are optimistic about what they say for the balance of the year. I think in Europe, I think it’s more a function of the economy is challenged right now. And they are trying to figure out how to finance some of their smaller countries and with bigger countries having challenges themselves and I think the whole economy is challenged. It’s not just the wireless market.

Phil Armstrong

Thanks a lot, Steve, appreciate it. Operator, we’ll take the next question.

Operator

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

George Notter – Jefferies

Thanks very much, guys. I wanted to ask about your operating income guidance. You know, obviously 2010 I guess lower than 2009. What assumptions do you have built in there in terms of accruals for contemplation and memory serves, you guys were talking about $30 million or $40 million in additional incentive comp for this year. I mean is that factored in there or at some point must [ph] you dial that back given the new outlook.

Jearld Leonhardt

Yes, I will take that, George. The – we do adjust that based on expectations for outlook, but yes there is incentive compensation baked into both obviously our current results and into our outlook guidance as well. Our incentive plans are performance based. And as various business units exceed or fall short of their goals, they do get adjusted. Of course, we are at mid-year; we are estimating that as best we can. So, yes, there is some adjustment for that. That is both in obviously our results as reported as well as into our outlook. And keep in mind what’s extraordinary is that last year there was none. There was zero amounts paid out in incentive. That would be a most extraordinary year based on purely performance and in fact performance last year under our plans at that time would not have indicated that payout. So we took some extraordinary measures last year because of the extraordinary situation that we felt that the economy as well as our company was in and decided that it was not a practice that was – that should be continued into 2010 and restored the program. So, there – that cost that you have is still a pretty good estimate of what that cost would be for the full year.

George Notter – Jefferies

Got it. And just one quick follow-up just on India and China. How much did you say that is as a percentage of sales this quarter? I mean I – I think each market in the past were [ph] 5% or 7% of sales, but where are we now just as a benchmark?

Phil Armstrong

India, George, this is Phil. India is quite low. I mean a couple of percent for a range in the wireless would be a big number. It was – as Eddie said, it was down –

Eddie Edwards

well over 50% year-over-year.

George Notter – Jefferies

Got it. And China?

Phil Armstrong

It could be probably towards the low end of the range is what we’ve talked about on the 5% to 7%, 4% to 7% something like that.

George Notter – Jefferies

Great. Thank you.

Operator

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

Amitabh Passi – UBS

Hi, thank you. I had a clarification and then a question. The clarification, Eddie, on your commentary with respect to North American wireless operators, did I interpret your comments correctly in that your expectation is that your business with them should be up sequentially in the third quarter? And I also wanted to clarify, the $15 million for next generation LTE spending, was that all in 2Q or was it cumulative for the first half?

And then my question is just around margin. I was hoping you could help me understand North America and EMEA were big contributors to the second quarter. I had assumed these were better margin businesses – segments for you. Enterprise did well. So just trying to understand why margins in enterprise and ACCG also continued to set a lag I think expectations.

Eddie Edwards

I’ll answer some of those and Jearld can take on some of the rest. The greater than $15 million number that we said for LTE is entirely in the second quarter. So, it’s shipments in these three months. So, it’s – we think is a reasonably good number for our business in the new technology. I don’t know that I said sequentially if North America was going to be up or not, I don’t believe I said that in Q3 and we’ll have to look at that.

Jearld Leonhardt

Yes, I believe that on a sequential basis, all of our businesses were – did show very nice sequential growth in operating income from the first quarter this year, as expected. And again the issues that we’ve talked about again stubbornly high cost, if you will, and some slowdown in some markets that we were not able to address in the quarter I think were the primary reasons for lagging margins if you will based on the revenue growth that we were able to generate in the quarter. And enterprise did grow strongest in the period as you pointed out and we did incur some higher investment, I will call it related expense around marketing programs there around R&D and around sales commissions. I will add that aside from other incentives but sales commissions based on the strong sales. So those things did have a little bit of muting effect to the operating performance leverage from the increased sales.

Amitabh Passi – UBS

Were those one-time investments?

Jearld Leonhardt

Well, if they continue at higher rates, we will see those investments – higher revenue rates, we’ll probably see those investments continue or at least our – at least the sales commission part of that, which is not really an investment, part of that program. Yes, I think they are at run rates that are going to be sustained and not onetime in that nature.

Amitabh Passi – UBS

Got it. Thank you, guys.

Jearld Leonhardt

Yes.

Operator

Your next question is from the line of Will Power with Robert W. Baird.

Will Power – Robert W. Baird

Great, thanks, good afternoon. I wondered if you could comment on the impact of component shortages in the quarter on your various businesses I know that something – some of the other vendors have alluded to. I guess just trying to get a sense for how much that might have impacted results and may be any color on how that might have trended through the quarter if it did have a meaningful impact.

Eddie Edwards

It was probably at the top of our list on a daily basis and I think the OEMs or the customers that we have probably all have talked about it. I know our end user carrier customers have and that – you know from our standpoint it impacted us by millions of dollars of revenue. You know it’s primarily integrated circuits. It was in our amplifier and enterprise business. From the standpoint of where are we now, the enterprise business has recovered okay and I think is decent shape. In the case of amplifiers we still have very long lead times versus what is the norm. And you know it’s up to us to get good forecast from our customers to be able to support their need to meet whatever demand they may have during the balance of the year. So, it’s something that’s – and may be as not as desperate as it was during toward the middle of this quarter. But it is something – this is situations where we and our customer base were both leveraging the suppliers to get into queue as best we good and an enormous amount of time and money spent to expedite – to hold hands and work with our supplier base as well as our customer base. So it’s – but it’s not an abnormal thing in this business. It was just more a queue than as normal.

Will Power – Robert W. Baird

Yes, thanks.

Phil Armstrong

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

Operator

Yes, sir. Your next question is from the line of Tony Kure with KeyBanc.

Tony Kure – KeyBanc

Good afternoon. Just wanted to get some color. I think we haven’t touched on this topic yet. Do you expect any cost savings to materialize in the second half with the closure of the smaller facilities? I think it was Ohio and North Carolina. And – could you start with that?

Eddie Edwards

Those closures in Ohio is progressing and it would be a -- this year would be a small savings, if any. Those things although you do it one point in time, you end up with lease accruals and severance accruals and things like that. So, most of the savings there would come during the balance – during early part of next year.

Yes, in the case of the larger in Omaha we talked about, that’s going to be a multiyear transition, and that revenue – I mean that cost savings will be realized in the back end of ’11 and the ’12 and thereafter.

Tony Kure – KeyBanc

Okay. Anything beyond the facility closures, sort of are you looking at from a cost reduction standpoint?

Eddie Edwards

You know, we do that all the – everyday and one thing that we did during this I guess this quarter was the sub-supplier for aluminum tubing. We are now vertically integrated. That business decided to do something else. So, we now have that as an ability to save cost. It happens to be co-located at our factory. So it’s very, very easy to do. That will help in the broadband business, may be generate some small revenue outside to third parties. But that – we are looking given as Jearld has said, we are not happy with where we ended up in some businesses. We are looking under every rock, and we’ll take whatever action is necessary.

Tony Kure – KeyBanc

Okay. Thank you.

Operator

Your final question is from the line of Shawn Harrison with Longbow Research.

Shawn Harrison – Longbow Research

Hi, good evening. Two questions. The first just going back to the margins at ACCG, wondering if you could talk about the decline in margins year-over-year on relatively similar sales. Is it similar to the factors that you enumerated earlier in terms of the sequential headwinds or are there other factors at work on a year-over-year basis pressuring margins?

Phil Armstrong

It’s mainly the year-over-year, which – this is Phil, Shawn – it’s mainly the return of incentive based compensation in ACCG. That’s one of the biggest items.

Shawn Harrison – Longbow Research

Okay. There is no significant mix factor involved in terms of the year-over-year variances, just incentive comp?

Phil Armstrong

But there is always mix, year-over-year, but the biggest one is the incentive comp.

Shawn Harrison – Longbow Research

Okay. And then my follow-up is on the broadband business. You mentioned some participant pressure. Now is that competitor initiated pricing pressure or is that customer initiated pricing pressure you are seeing in the market?

Jearld Leonhardt

Yes. It’s one steals on the other and so you know it’s a lot of this – these auctions are done with e-auctions that generates a behavior. There is a lot of pressure from outside the United States with product coming in that generates a lot of pricing pressure, but we are addressing all of that. We have inventory management systems and a service model that the other – our competitors don’t have and we are going to exercise that to its fullest.

Shawn Harrison – Longbow Research

Okay. Thank you.

Phil Armstrong

Thank you, and operator, just one final thing, to follow-up on Amitabh’s question, I think we do expect an ACCG in North America continue to be very solid sales moving into the second half. And with that, Eddie, if you have any final – ?

Eddie Edwards

No, I think we met our guidance, we believe, in the quarter. I think that’s positive. We do see the second half being better overall than the first half was. This economy except for certain parts of the United States is still not healthy and you know it’s a fight every day. So, we are well positioned. We are happy with the products we have and we look forward to competition going forward.

Phil Armstrong

Thanks very much.

Operator

Thank you for joining today’s conference call. You may now disconnect.

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