Belden Inc. (BDC) Q2 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated Conference Call. Just a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Matthew Tractenberg. Please go ahead, sir.

Thank you, Joshua. Good morning, everyone, and thank you for joining us today for Belden's Second Quarter 2014 Earnings Conference Call. My name is Matt Tractenberg. I'm Belden's Vice President of Investor Relations. With me here this morning are John Stroup, President and CEO; and Henk Derksen, Belden's CFO. John is going to provide a strategic overview of our business, and then Henk will provide a detailed review of our financial and operating results, followed by a question and answers. We issued our earnings release earlier this morning, and we have prepared a slide presentation that we will reference on this call. The press release, presentation and a transcript of these prepared remarks are currently available online at investor.belden.com. Turning to Slide 2 in the presentation. During this call, management will make certain forward-looking statements. I would like to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Actual results could differ materially from any forward-looking statements that we make. And the company disclaims any obligation to update this information to reflect future developments after the call. For a more complete discussion of factors that could have an impact on the company's actual results, please review today's press release and our annual report on Form 10-K. Additionally, during today's call, management will reference adjusted or non-GAAP financial information. In accordance with Regulation G, we have provided a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. This reconciliation is in the appendix of the presentation, and has been posted separately to the Investor Relations section of our website. I'll now turn the call over to our President and Chief Executive Officer, John Stroup. John?

Thank you, Matt, and good morning, everyone. As a reminder, I'll be referring to adjusted results today. Following our remarks on the second quarter's results, we'll share some thoughts with you on the most recent and exciting addition to the Belden portfolio, ProSoft. Please turn to Slide 3 in our presentation for a review of our second quarter highlights. Revenues for the second quarter were $605.1 million, an increase of 13.6% from the second quarter 2013. Although revenue was at the high-end of our guidance, I suspect the configuration was slightly different than some may have expected. The intense focus on profit margin improvement within our Enterprise segment includes aggressive actions to improve product mix and allocate assets more wisely. As a result, our revenue declined year-over-year in a market where demand increased. As you expect, revenue declined in our low-margin cable products and increased in our high-margin connectivity products. This is a trend that we expect to continue. Although orders in our Industrial IT business were as planned, shipments fell short of our expectations. Conversely, our channel partners partially replenished inventory balances that declined in the first quarter. Both of these items are merely tiny and have no effect on our full year projections. Finally, our results included approximately $2.7 million for ProSoft during the quarter. After adjusting for acquisitions and changes in copper and currency, revenues increased by 50 basis points from the year-ago period. I'm proud of our record results, including earnings per share of $1.05 and gross margins of 37%, which continues to be best-in-class and highlights the opportunity that remains for improved profitability. Operating profit margin of 13% declined from the year-ago period. This decline is temporary, as we integrate Grass Valley with Miranda. Given the progress made in the quarter with this integration and the productivity improvement plans shared with you last quarter, I'm extremely confident that margins will quickly return to our target range of 14% to 16%. So far this year, we've deployed more than $340 million to strategic initiatives, including the purchase of Grass Valley for $209 million, ProSoft for $103 million and the repurchase of 424,000 shares of Belden common stock for $31.2 million. Additionally, we raised $200 million of debt at an attractive interest rate, to provide the capacity for further execution of our strategic acquisition initiative. Please turn to Slide 4 for a review of our business segment results. Broadcast revenue in the quarter was $252.3 million, as compared to $169.7 million in the year-ago period, an increase of almost 50%, and attributable to both solid organic results and the addition of Grass Valley. Organic revenue growth was 6.6% during the period, which is clearly in excess of market. Operating profit margins were 10.6%, decreasing 360 basis points year-over-year, mainly a result of the inorganic additions this quarter. Revenue within our Enterprise platform was $121.3 million, down from $132.9 million in the second quarter of 2013, a decrease of 6.9% after adjusting for changes in copper and currency. Operating profit margins were 13.1% during the quarter, an increase of 200 basis points. Industrial Connectivity had revenue for the quarter of $178.2 million, up $6.3 million from the year-ago period. After adjusting for copper and currency, revenues were up 5.7% year-over-year, also in excess of market growth. Operating profit margins were 15.2% for the second quarter, up 80 basis points year-over-year and well within our corporate goal. Industrial IT revenues of $53.3 million decreased $4.8 million, from $58.1 million in the second quarter of 2013. While the revenue decline is disappointing, our book-to-bill in the second quarter was 1.15, so we entered the second half with stronger backlog and far less challenging year-over-year comparisons. As you would expect, operating profit margins for this platform were down from the prior year on the lower volume. Healthy investments in R&D continue, despite the temporary revenue reduction. I will now ask Henk to provide additional insight into our second quarter financial performance. Henk?

Thank you, John. I'll start my comments with results for the quarter, followed by a review of our operations and segment results, a discussion of the balance sheet, and close with our cash flow performance. As a reminder, I will be referencing adjusted results today. Please turn to Slide 5 for a detailed consolidated review. Second quarter consolidated revenues were $605.1 million. Compared to the second quarter 2013, [Audio Gap] $72.5 million, or 13.6%, from $532.6 million. The year-over-year improvement includes the additions of both of Grass Valley and ProSoft, with an impact of $72.9 million. Strength in our Broadcast and Industrial Connectivity platforms more than offset declines in our Enterprise and Industrial IT platforms. After adjusting for changes in copper and currency, revenues increased organically 50 basis points year-over-year. As mentioned by John, we experienced a partial replenishment of inventory by our channel partners. After adjusting for this, revenues for the second quarter declined by 50 basis points. Sequentially, revenues increased $116.8 million from $488.3 million. After adjusting for changes in copper and currency, as well as inventory at our channel partners and customers, revenues increased organically by 4.8%, in line with typical seasonal patterns. Gross margins were 37%, increasing 180 basis points year-over-year and 90 basis points sequentially. The additions of Grass Valley and ProSoft are accretive to gross product margins, with an impact of 160 basis points. Second quarter SG&A expenses were $116.3 million, or 19% of revenue. Excluding acquisitions, SG&A expenses, as a percent of revenues, were 17.6%, flat on a year-over-year basis. Our productivity improvement programs are progressing according to plan, and we are committed to achieving SG&A costs of approximately $111 million, updated for the ProSoft acquisition as we exit the year. R&D expenses for the quarter were $30.3 million, or 5% of revenue, increasing $10.3 million or 120 basis points year-over-year, and illustrating the shift to more innovative products and services. SG&A and R&D expense combined for the quarter were $146.6 million, an increase of $32.8 million year-over-year, a direct result of the inorganic activities completed during the quarter. Operating margins were 13%, down 120 basis points from the year-ago period, and down 10 basis points sequentially. Excluding the impact of Grass Valley, margins were unchanged from the prior year quarter. Net interest expense for the quarter was $18.1 million, down slightly from the year-ago period, and down $0.6 million sequentially. In June, we issued $200 million of senior subordinated notes at 5.25% due in 2024. This is in support of our strategic plan. Going forward, we expect interest expense to be approximately $22 million per quarter, an increase of $2.7 million on prior guidance. Additionally, the effective tax rate for the second quarter was 23%, compared to 23.4% in the year-ago period. For financial modeling purposes, we recommend using a 22% effective tax rate for the second half of 2014. Income from continuing operations for the second quarter was $46.5 million, up $2.3 million compared to the year-ago period, and up $11.1 million sequentially. Please turn to Slide 6. I will now discuss revenues and operating results by business segment. Broadcast Solutions generated revenues of $252.3 million during the second quarter. Compared to the year-ago period, revenues increased $82.6 million, from $169.7 million. The acquisition of Grass Valley contributed $70.2 million, ahead of expectations. Despite the strong start, we continue to believe that $225 million of revenue from Grass Valley is appropriate for 2014. Copper adjusted organic revenues increased 6.6% year-over-year and 9.2% sequentially. We are pleased with the performance of the segment during the quarter. Operating profit margins within the Broadcast segment were 10.6% for the quarter, down 360 basis points from 14.2% in the year-ago period, and down 340 basis points sequentially. Both were primarily a result of the addition of Grass Valley, with an impact of 300 basis points. The integration of Grass Valley is progressing per our plan, and we expect operating profit margins for the segment to be within the corporate goal of 14% to 16% by year end. Our Enterprise Connectivity segment generated revenues of $121.3 million during the second quarter, decreasing $11.6 million, compared to the year-ago period, and increasing $12.9 million sequentially. After adjusting for changes in copper and currency, revenues decreased 6.9% year-over-year and increased 12.5% sequentially. This platform is continuing its transformation, with a shift in focus away from cable products and towards connectivity. This shift in softer revenues with higher profitability, as evidenced by profit margins of 13.1%, increasing 200 basis points year-over-year and 340 basis points sequentially. I am encouraged by year-over-year improvement, a result of productivity gains and favorable mix. This improvement in profitability is in line with our recently stated objective. Our Industrial Connectivity segment generated revenues of $178.2 million during the second quarter. Revenues increased $6.3 million, from $171.9 million in the second quarter of 2013. After adjusting for copper and currency, revenues increased 5.7%, compared to the second quarter 2013. Sequentially, revenues increased by $18.9 million, from $159.3 million, slightly stronger than the typical seasonality. Operating profit margins were 15.2%, increasing 80 basis points from the year-ago period and 180 basis points sequentially. Both the year-over-year and sequential improvements are primarily a result of leverage on volume. The Industrial IT segment generated revenues of $53.3 million during the second quarter, including a $2.7 million contribution from the newly acquired ProSoft. Revenues declined $4.8 million, compared to the second quarter 2013, and $0.8 million sequentially. The $58.1 million of orders booked in the period, a book-to-bill of 1.15, supports our full year projections. Operating profit margins of 15.5% decreased 4 percentage points from the prior year period and 1.2 percentage points sequentially, again, a function of the timing of shipments. If you will please turn to Slide 7, I will discuss our balance sheet highlights. Our cash and cash equivalents balance was $445 million at the end of the second quarter, a decrease of $124.6 million sequentially. We deployed $342 million towards strategic initiatives, which was offset by the $200 million of debt issued in June and $33 million of free cash flow generated in the quarter. Inventory turnover was 6.9 turns, an improvement of 0.2 turns year-over-year and 1.2 turns sequentially. Days sales outstanding was 63 days in the second quarter, an increase of 7 days year-over-year and 6 days sequentially. The increase is primarily a function of the longer customary terms offered by Grass Valley, balanced by extended payable terms as well. This resulted in growing capital turns of 7.9 at a consolidated level, an improvement of 1.1 turns year-over-year and 1.9 turns sequentially. PP&E turnover was 7.3 turns, an improvement of 0.2 turns year-over-year and 0.8 turns sequentially. Net leverage increased from 2.7x net debt to EBITDA in Q1, to 3.0 in the current quarter, a result of the investments made in the second quarter. We remain committed to a level of 2.5 over the next 12 months. Please turn to Slide 8 for a few cash flow highlights. Cash flow provided by operating activities for the second quarter was $43.7 million, compared to $58.6 million in the year-ago period. Net capital expenditures for the quarter totaled $10.6 million, compared to $11.8 million last year. Free cash flow, after capital expenditures, was $33.1 million. We are on track to deliver our goal of free cash flow in excess of net income for the full year. For the quarter, we purchased approximately 424,000 shares of Belden common stock for $31.2 million, at an average price of $73.50 per share. On a combined program-to-date basis, we have repurchased a total of 5.8 million shares, or greater than 12% of the company, at an average price of $42.77 per share. We now have $100 million remaining available under the current program. Dry powder at the close of Q2 was greater than $700 million. That completes my prepared remarks. I would now like to turn the call back to our CEO, John Stroup, for comments on the newly acquired ProSoft and outlook. John?

Thank you, Henk. Please turn to Slide 9 for a discussion of our most recent acquisition. As we've discussed, during the quarter we acquired ProSoft, a leading supplier of industrial embedded gateway and wireless products, for $103 million in cash. The company generates approximately $50 million of revenue on a full year basis, so please include $25 million of revenue from them in the second half of the year. Additionally, we anticipate $0.09 of EPS accretion in the current fiscal year and an additional $0.11 in 2015, resulting in a $0.20 on a full year basis. Going forward, their results will be included in our Industrial IT platform. ProSoft products include communication gateways that enable machine-to-machine communication regardless of protocol. They benefit from the continued deployment of industrial automation systems and provide a critical translation service required by complex communication devices. With gross margins above 50%, operating profit margins within the corporate range, a talented leadership team and strong customer relationships, I'm confident ProSoft will be a wonderful addition to the portfolio. Please turn to Slide 10 for our outlook regarding the third quarter and full year 2014 results. Belden's outstanding business portfolio and improved organizational structure provides us with an opportunity to perform well in a variety of economic environments. We continue to emphasize our strategic initiatives, including our Market Delivery System and Lean Enterprise. We also remain confident in our ability to deliver consistent operating results as we continue through to 2014. We expect our third quarter 2014 revenues to be between $605 million and $625 million, and adjusted income from continuing operations per diluted share to be between $1.05 and $1.15. For the full year, we continue to expect revenues of $2.3 billion to $2.35 billion, and have narrowed the range for adjusted income from continuing operations per diluted share to $4.10 to $4.30. These expected results now incorporate the addition of $25 million of revenue from ProSoft and $0.08 of EPS for the remainder of the year, and the additional interest expense from the recent bond issuance. It also assumes that inventory at our channel partners and customers returns to the levels seen at the end of the first quarter, a decline of approximately $12 million in the second half of 2014. This concludes our prepared remarks. Joshua, please open the call to questions.

[Operator Instructions] Mr. Matthew Tractenberg, your first question is from William Stein with SunTrust.

First, I just want to clarify on the earnings guidance for the full year. If I heard it correctly, the full year guide, midpoint doesn't change despite, I think, $0.08 or $0.09 coming from ProSoft. Is that all consumed by interest expense this year where the real upside effect to the model should be contemplated in 2015 or did I misunderstand that?

Yes, so you're correct. The guidance midpoint is unchanged. We narrowed it. We brought the bottom-up by $0.05 and we bought the top down by $0.05. You're also correct that the ProSoft assumption is $0.09 accretion in the year. That is being offset, though, by the additional interest expense of $0.10. And so as you look at 2015, our expectations for ProSoft are an additional $0.11 or $0.20 for the full year.

That helps. And maybe on M&A, more generally. Can you remind us of your current level of dry powder ROE capability? And for those of us who are little bit newer to the story, maybe remind us of your either anticipated or target spend or effect from new M&A in any given year.

The dry powder at the end of the quarter was approximately $700 million, in part because of the issuance of $200 million of due debt. Our M&A strategy is effectively unchanged. We have a full M&A funnel, and we hope to benefit from additional acquisitions as we make our way through the year and next year.

And we'll move next to Shawn Harrison with Longbow Research.

I wanted to dig into ProSoft and a couple of different questions. First, just -- the term wireless came up from ProSoft, and at least with Trapeze that was a bad thing, maybe. Why is it a good thing now? And then the implication is, if my math is correct, that the business should be doing a mid-20% EBIT margin next year based upon the accretion guidance.

Yes. So, Shawn, first of all, the wireless that ProSoft does, of course, is only in Industrial Applications. So their products are often in rack, so most of their products end up in the chassis, a PLC or a controller, and that includes a lot of different types and brands, most notably, Rockwell. So gateways, which allow the customer to be able to communicate to multiple devices that may not be on the same protocol. And then, also, some wireless products as well, so that they can communicate that way. So very, very different end market to Trapeze. As you know, Shawn, Trapeze was an enterprise wireless business that competed directly with people like Aruba, Juniper, Cisco. This is very much in our sweet spot in terms of our go-to-market model, customers, and of course the application is far more demanding than an enterprise application. In terms of operating margins, yes, you're right. It's about 20% operating profit as a reasonable sort of projection going forward. Based on the math you did on the accretion, you're just about right where it needs to be.

Okay. And then a follow-up, just switching to Enterprise, down 7% organic, and understanding that you're pruning your portfolio. But maybe you could just kind of parse it out a little bit further, how much pruning is going on? When would you expect to see that business finally begin to comp positively knowing that, at least Anixter and WESCO, are seeing positive growth in the enterprise market right now?

So I think that this trend, in terms of year-over-year declines, is likely to continue through the end of the year, Shawn. So the team has been very aggressive in making certain that we put our efforts around the higher-margin connectivity products, making certain that we do a better job in data centers, and that we recognize that some of the trends in LAN, converting from copper products, converting to wireless products, is going to be a headwind for our LAN business. And I think if you study some of the strong growth out of WESCO and Anixter, I think a lot of that comes from data centers rather than the LAN environment. So I think this trend will continue through the end of the year. We're asking them to focus on operating profit dollars and improving the operating profit dollars, as well as improving margin. And some of the changes they've made, I think, are going to benefit us even greater next year in terms of higher growth on the high-margin products. So I'm very pleased with how the team has done. And I think that by next year, we'll begin to see growth return.

Just your comment on profit dollar and profit margin. You saw 200 basis points of improvement this quarter. Is that something we should expect for the next couple of quarters in terms of that level of margin expansion in the business year-over-year?

Not that much sequentially. So the margin expansion sequentially was very significant for a couple of reasons. Remember that Q2 seasonally is always stronger than Q1. So if you look at the sequential improvement in the business, even though revenue was down year-over-year by roughly $11 million, probably $9 million of that being volume versus copper and currency. On a sequential basis, their revenue was actually up $13.5 million. So there was leverage sequentially on the additional revenue of probably $2.5 million to $3 million. We wouldn't see that kind of leverage from Q2 to Q3. So Q1 to Q2 was especially good in terms of margin expansion, Shawn, because of the portfolio actions, as well as the benefit from the volume.

Got you. But year-over-year, that 200 basis points that you witnessed, is that a level sustainable through the back half of the year at least?

So if you look at the third quarter, what we did last year, our operating margins last year in the third quarter were about 11.5%. And so if you look forward going next quarter, I think by the third quarter, I think we'll be close to that 150 to 200 basis points improvement on a year-over-year basis.

And we'll move on to Steven Fox with Cross Research.

Just a follow-up on that line of questioning. John, can you just talk a little bit more about the strategy around product pruning at this point and find a walkaway from some of that LAN market? It seems to put you more into the -- competing with higher valued companies, portfolios like a CommScope. Do you feel like the portfolio, as it stands right now, is able to do that? Or as you go more into data centers, it's going to be more of a challenge to get your fair share of the market? And then I had a follow-up.

Yes. So I think you're right, Steve. I mean, I think, clearly, what we're doing is we're trying to put our commercial resources in front of the people where we think we're going to get the best return. Which means that I think we will probably compete more often with companies like CommScope, and maybe less often with companies like a General Cable, or a company like Prysmian or Draka, where they're really only going in as a cable-only business. We felt strongly that our product offering has always been there. We continue to make investments to improve the product offering. And a big part of our pruning is that we've been very clear about the fact that we are not interested in adding or investing in additional capital to grow any of our product lines where they're falling short of our operating margin goals. We would rather invest that capital into other higher areas. So I think you're right. I think that's our focus. And it includes probably a different class of competition.

Great. That's helpful. And then secondly, on the inventory drawdown you expect in the channel in the second half, the $12 million, what kind of earnings impact should we think about that being? And can you give any more color around why that would be happening in sort of expanding markets? And then, lastly, just maybe some color on what you're seeing in your emerging markets, which I know has been sort of volatile in the last few quarters?

Sure. So let me start with the reason. So the reason why -- first of all, the earnings impact, that $12 million, is probably around $0.05 to $0.06. And the reason for that is our distributors do generally manage their inventory balances pretty tight at the end of the calendar year. Some of that's economic. More tax, for example, is paid based on year-end balances, so they're careful there. Secondly, they certainly would like their balance sheet to end strongly. And cash flow statements, of course, matter. So we've just generally seen a pattern where balances of inventory channel partners at end of the calendar year are a little bit lower than what they would be, say, for example, in the second quarter. I'd say in a more general comment, as we continue to reduce our lead times and improve our on-time delivery, we're just seeing our distributors get more comfortable with carrying less inventory, which I think is a compliment, which we appreciate, but it means have to be on top of that particular trend. The second question was I think around emerging markets, is that correct?

Yes, that's correct. But before you answer that, just to clear, the $12 million isn't something new to guidance, is that correct?

That's right. The only thing that changed was that there was a bit of a replenishment in the second quarter, but our view on the full year is exactly the same as it was last quarter.

Great. And then just, yes, on emerging markets would be helpful.

Okay. So a bit of a mixed bag. So believe it or not, we actually saw a little bit of growth in Brazil, which was good. Our business in China was down, but that was less a factor of China and more a factor of we had some significant pruning actions within our Enterprise business in China. So I mentioned earlier about the pruning in Enterprise, a big chunk of that was in China. And then also our Industrial IT business had a really nice order 1 year ago. So if I put that aside, our China business was actually up 8%, particularly strong in the Industrial Connectivity business. So I would say, in general, we're pretty happy with how things went in China. And then in terms of other emerging markets for us, Mexico was down a little bit, but it's actually relatively small. Indonesia was down a little bit, mainly because of some of the issues with currency and the elections. But I would say the biggest of them all, China, I feel good about, and I was pleased with the results in Brazil.

And we'll take our next question from John Quealy from Canaccord Genuity.

Back to ProSoft. So we mentioned Rockwell, I think Emerson is also a sort of an OEM partner. Can you comment on contribution from those 2 businesses in the overall mix of ProSoft?

So we're not going to disclose that particular, but I would say that a big part of their business model is an intimate relationship with the global automation players, and that's entirely consistent with what the Industrial IT platform is. So if you look at the Industrial IT platform today, we have very important relationships with ABB, with Schneider, with Emerson, with Yokogawa, with Rockwell, and the ProSoft business is entirely consistent with that.

Got you. Okay. Moving forward, on Broadcast, my math might be wrong, but was that flattish sort of year-on-year excluding Grass Valley and some of the contributions? Can you just talk little bit more about the dynamics of the quarter there?

So the Broadcast revenue on a year-over-year basis, when you exclude Grass Valley, was up 6.6%. So revenue growth was quite strong in the business. From an operating profit point of view, which may be your question, I'd say the business was actually fairly flat year-over-year, predominantly because the mix of business was a little bit unfavorable on a year-over-year basis. I wouldn't consider that to be a trend or a concern. Our business was pretty strong within our broadband business within Broadcast. That comes at a lower gross margin than our Miranda business, for example. So I would consider that to be normal variation, rather than anything that would be concerning.

And then, John, with the reconstituted Broadcast business and enlarged footprint, when we look forward, I don't want to get too far ahead, but '16 presidential elections, can you -- should we see a notable pickup in order flow in '15, as some of the Broadcast boost refit with the advertising dollars? Or how do you think it's going to play out this cycle for you folks?

Yes, so that's exactly right. The cycle is as you described. In years of the Summer Olympics and the U.S. presidential election, those tend to be the peak years that you're following as the trough. Advertising dollars are going up, that's not intuitive to some folks, but that trend continues. However, advertising dollars per channel continue to go down. And that's good news for us, because it means our customers need to continue to become more efficient, more productive, and therefore, they need to automate more. So that's a clear trend, in addition to the trends we've talked about already, whether it's 4K, channel count proliferation. And I'd say, the trend going on here is customers' adoption of IT-based products into the marketplace, which is an area that we're very active in. So we're very bullish on the business from a macro point of view, but we are also extraordinarily bullish from a micro point of view now that we've been able to bring on Grass Valley and integrate it with the Miranda business.

Great. And then lastly, Henk, $100 million left on the buyback, $30 million done per quarter the last couple of quarters, is there a level where we get more selective now? Or how should we think about your intentions there?

No change in strategy. We continue to execute per our plan. So effectively, no change in strategy.

And we'll take our next question from Gary Farber with CL King. Gary Farber - CL King & Associates, Inc., Research Division: Just a couple of questions. Just on this acquisition, an area of -- an attractive area to get into. It seemed like an area you're trying to get into full-on industrial automation. How should we think about sort of your -- you have an acquisition bias from here as far as do you want to get deeper into this market? Or are there other areas that sort of look also complementary to what you're doing?

Yes. So, Gary, you're right, this is an area that we've been looking at very, very intensely for quite some time, and we're delighted to be able to bring something to all of you in the form of an acquisition. There's obviously, for every one of these, a tremendous amount of work that happens that just doesn't work out for a variety of reasons. The strategic imperatives with Industrial IT continue to be the same: embedded, wireless and security. And this is an example of a company that fits 2 of those 3: embedded and wireless. As you know, we made the acquisition of Byres not long ago, not a big acquisition, but an important one. And our funnel continues to be extremely full in those 3 areas, and we hope to continue to bring forward great, great opportunities like the one -- ProSoft. But every one of our platforms has full funnels. And I would say that we've got great examples of good quality companies in each. And it's really a matter of whether we can make the financials work, and that continues to be our disciplined approach. Gary Farber - CL King & Associates, Inc., Research Division: And can you also possibly provide some color at this point -- it sounds like there's good overlap between your existing customer base and their customer base. How do you think -- do you think -- is this more about selling more products to the existing customers, or how you think about expanding beyond existing customers with their product?

So I would say, if you compare the penetration rates of the 2 companies, they're pretty good, they're pretty complementary. ProSoft's penetration of some of their customers is higher than ours; ours is higher than some of theirs. So I think there's going to be examples of both, where we can take some of their product lines into some of the existing customers and relationships we have where maybe their relationship isn't as good. And we certainly think there's opportunities for us to sell more to the companies that they have deep relationships with. Gary Farber - CL King & Associates, Inc., Research Division: Right. And then just one last one. Can you give a sense, post this acquisition, for depreciation and amortization separately, what it should look like?

Sure. So the intangible amortization impact on an annual basis, Gary, for this asset is around $4.5 million, $5 million. So it's about $0.07.

And we'll move on to Noelle Dilts with Stifel. Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division: I'm sorry if I missed this, but is there anything notable in the margin structure at ProSoft in terms of growth versus operating margins that we should know about, as we look to model this in?

So gross margins in the business, Noelle, are about 50%, maybe a little bit higher. And operating margins, as we said, are in the range, somewhere probably around 16%. Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, great. And then just looking to get a little bit more clarity on what you're seeing in the -- in your geographies. Could you comment on Europe and the transitioning there?

Sure. So Europe was a mixed bag. We actually saw a growth in Germany. So Germany growth was up about 2%, but we saw a decline in Southern Europe. And if you put them together, Europe was down about 2.5%. In total, strength in Germany, weakness in Southern Europe. And in a particular, Industrial IT business suffered from some reduced spending by Southern European governments in transportation and energy applications. So Europe, I would say, continues to be a bit of a mixed bag. No significant changes in the quarter, I would say, in terms of the demand environment, neither positive or negative. Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then could you comment on the U.S. versus Canada?

Yes. So the U.S. business was up about 4% in the quarter and Canada was up about 6%.

And we'll take our next question from Alyssa Johnson with D. A. Davidson. Alyssa Johnson - D.A. Davidson & Co., Research Division: This is Alyssa in for Brent. So first, do you -- the restructuring and severance costs in Industrial Connectivity, was that part of the initial plan announced last quarter or is that something new?

No, this was part of the original productivity programs, and it's developing per plan. Alyssa Johnson - D.A. Davidson & Co., Research Division: Okay, perfect. And in addition, can you kind of touch on what some of your expectations for free cash flow in 2014 are?

Sure. We expect free cash flow to exceed net income. I would think we will end around $185 million, $190 million of free cash flow for full year 2014. Alyssa Johnson - D.A. Davidson & Co., Research Division: Perfect. And then, finally, how much of the SG&A cost savings did you realize in the second quarter?

So the SG&A cost savings are per plan, and the expectation is that, going forward, we will reduce our SG&A as a result of that, $2 million in Q3 and an additional $4 million in Q4.

We'll move on to Shawn Harrison with Longbow Research.

I'm going to try to put some words in your mouth.

Oh, good. Oh, wow.

So Grass Valley is off to a hot start, understanding that the fourth quarter is a little bit seasonally slow. But maybe you can explain, if it's off to a hot start, maybe why you're holding back a bit on just being more bullish on the business?

I'd say at this point, we've only owned it for 90 days, Shawn. We are off to a good start, no question about it, pleased with the performance. We did better the second quarter that we had guided and a little better than we expected. And at this point, we think it's prudent just to keep with the full year.

Was there anything in particular that went really well or was it across the board within the...

No, nothing in particular, I would say. I think that -- when we buy a company, I think we try to do our best to be prudent with regard to the expectations. And the company came to us pretty much the way we thought it would. There were a few things that were maybe a little different. And I think the team's done been a nice job addressing those issues, in terms of making sure that gross margins are where they need to be, cost structure is where it needs to be. Obviously, when you put as much attention on decreasing costs on a combined business, you worry a little bit about how that might affect revenue. But the team did a good job. They really are off to good start. I agree with you.

Okay. My math says, it was probably about $0.02 accretive to the earnings for the quarter, am I in the right range?

You're close. Yes, you're close. I'd go [ph] with you, Shawn.

[Operator Instructions] At this point, Mr. Tractenberg, there are no further questions at this time. Please continue.

Thank you, Joshua. And thank you for everyone for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our e-mail address is investor.relations@belden.com, and we're happy to help. Have a great day, everyone.

Thank you. And ladies and gentlemen, this concludes our call for today. You may now disconnect from the call, and thank you for participating.