Amphenol Corporation
Q4 2010 Earnings Call Transcript

Published: 20 Jan 2011

[Operator:]

Hello and welcome to the Fourth Quarter Earnings Conference Call for Amphenol Corporation. [Operator Instructions] I would now like to introduce for today's conference your host, Diana Reardon. Ma'am, thank you. You may begin.

[Diana Reardon:]

Thank you. Good afternoon. My name’s Diana Reardon and I'm Amphenol's CFO. I'm here together with Adam Norwitt, our CEO, and we'd like to welcome you all to our fourth quarter earnings conference call. Fourth quarter results were released this morning. I will provide some financial commentary on the quarter, and Adam will give an overview of the business and current trends. We'll then have a question-and-answer session. The company had a record fourth quarter, achieving strong growth in both sales and earnings per share and exceeding the high end of the company's guidance. Sales were $950 million, up slightly from Q3 2010 and up 25% in U.S. dollars and local currencies over the fourth quarter of 2009. From an organic standpoint, excluding both acquisitions and currency, sales in Q4 2010 were up 21% from last year. Breaking down sales into our two major components. Our Cable business, which comprised 6% of our sales, was down 7% from last year and 12% from last quarter. The sales declines relate primarily to lower spending in North American broadband markets. The Interconnect business, which comprised 94% of our sales, was up 28% from last year and 1% sequentially. Adam will comment further on trends by market in a few minutes. Operating income for the quarter was $191 million compared to $138 million last year. Operating margin was 20.1% compared to 18.3% last year. Operating income is net of stock option expense of approximately $6.8 million in Q4 2010 compared to $5 million in Q4 2009, 0.7% of sales in both periods. From a segment standpoint, in the Cable segment, margins were 12.3%, down from 15.5% last year. The margin decline relates to higher relative material costs, the impact of market price reductions and lower volume. In the Interconnect business, margins were 22.4% compared to 20.6% last year. The improvement in margin reflects the benefits of higher volume levels combined with the proactive and aggressive management of all elements of cost. Overall, we're very pleased with the company's record operating margin achievement of 20.1%. This represents a conversion margin on incremental sales over the fourth quarter of 2009 of approximately 27%. This is excellent performance in any environment but particularly in the face of increasing global cost pressures. We continue to believe that the company's entrepreneurial operating structure and culture of cost control will allow us to react in a fast and flexible manner and achieve strong profitability going forward. Interest expense for the quarter was $10.2 million compared to $9.5 million last year. The increase over the prior year relates primarily to the inclusion in interest expense of fees on the company's receivable securitization program in accordance with the adoption of new accounting rules effective January 1. In 2009, these fees, which were approximately $400,000, were included in other expense. In the fourth quarter, the company had an effective tax rate of 27.2% compared to a rate of 27.5% in the fourth quarter of 2009. We currently expect a rate of approximately 27½% in 2011. Net income in the quarter was approximately 14% of sales, a very strong performance. Diluted earnings per share for the fourth quarter was $0.74 and grew $0.48 over the prior-year quarter on an as-reported basis and 42% after adjusting the prior-year earnings per share for one-time items. This represents an EPS growth rate of approximately 1.7x sales growth, demonstrating the company's significant operating leverage. Orders for the quarter were $948 million, up 24% from last year, resulting in a book-to-bill ratio of approximately 1

[R. Norwitt:]

Well, thank you very much, Diana, and welcome to all of you on the phone today. And I'd like to take this opportunity to wish all of you a happy new year as we start 2011. I would like to take this opportunity to highlight first the fourth quarter and the full year 2010 achievements for the company, giving a little bit of color to what Diana has just mentioned. I'll discuss the trends and progress in our served markets, and then I'll take a few moments to comment on our outlook for the first quarter and the full year of 2011. Before going into our performance, however, I would like to recognize one thing. We announced in early December that after 37 years with the company, Martin Loeffler would retire as the Executive Chairman but would continue to serve as non-Executive Chairman of our board of directors. I'd like to take this moment on behalf of all the Amphenol employees as well as our board of directors to thank Martin for his extraordinary contributions to long-term success of Amphenol. I personally look forward to his continued support as non-Executive Chairman of our board. Now with respect to the fourth quarter, I'm very pleased to report record revenues and earnings in what is still a very dynamic economic environment. Revenues increased a very strong 25% from prior year, up slightly from a record third quarter. And we were especially excited to build on our already strong operating margins, achieving, as Diana mentioned, a record return on sales of 20.1%. Our achievement of this level of profitability despite the significant inflationary pressures around the world is a clear reflection of the strength and discipline of our agile organization and our entrepreneurial management team. With respective the full year 2010, we're very proud of the strong recovery in our results in 2010, which reached new levels at every stage

[Operator:]

[Operator Instructions] Our first question comes from Amitabh Passi, UBS.

[Amitabh Passi:]

Adam, first question for you. Can you provide maybe a little more color in terms of how you're thinking about the full year guidance you just provided for 2011? Perhaps either your expectations across end markets or generally how you came up with sort of the 10% growth rate, what factors you might be factoring in? And then finally, I just wanted to clarify, does that basically just assume organic growth order or you also assume some level of M&A?

[R. Norwitt:]

I think I will answer your second question first, which is we don't forecast and we certainly don't guide towards acquisitions that may or may not come in the future. Relative to our outlook for the full year, first of all, in general, we think this is a very strong outlook. I mean if you look at any industry outlook or forecast, this would certainly be continuing the trend that Amphenol has over many years of outperforming our industry. And we're very pleased to be able to support such an outlook. Without going in real detail to each of the markets, we see great opportunities in each of our markets. I think where we see maybe above-average opportunities would be really in the Wireless Device, Industrial, Automotive. I mean, those would be markets that we would see as being maybe better-than-average drivers. I think we see good opportunities in Aerospace and IT. We see also good opportunities in Broadband and Wireless Infrastructure, if not necessarily to those levels that I mentioned before for those stronger markets.

[Amitabh Passi:]

And then perhaps for Diana, just to clarify, and I hope I'm doing the math correct here, but to get to your midpoint of the full year guidance of $3.05, I get incremental operating margin of kind of 23%, so below the 25%. Just wanted to clarify, I mean, is there maybe a level of conservatism here? Or perhaps there are some puts and takes below the operating income line that I may not be factoring, so maybe just some color in terms of the EPS guidance in the implied operating margin. It just appeared a bit conservative.

[Diana Reardon:]

I mean, roughly speaking, we still have the 25% conversion margin goal. That hasn't changed and the guidance reflects that. Whether it's exactly 25% with your math, given what you have in the rest of the income statement, it would be hard for me to comment on specifically. But I can tell you that the 25% conversion margin goal is still the goal for the company, and the management team remains very committed to that. And that is reflected in the company's guidance

[Operator:]

Next, Wamsi Mohan, Bank of America Merrill Lynch.

[Wamsi Mohan:]

Adam, you alluded to markets sort of stabilizing, returning perhaps to normal seasonality. You’re providing full year guidance here. What do you think is normal seasonality for your business? I mean, over the past five years, obviously, we have seen some very varied seasonality. And your mix has changed quite a bit, too. Mobile Devices have become a much larger part of the mix driving increased seasonality. So perhaps if you could comment on what do you think now is normal seasonality for your business.

[R. Norwitt:]

Sure. I think normal seasonality, we would typically expect the second and the fourth quarters to be somewhat stronger than the first and the third quarters. I think you're correct to say that Mobile Devices is a bigger part of our sales today, which certainly gives credibility to the first quarter being more seasonal than others because you would typically see in that market a seasonal drop off in the first quarter. I think we continue to see that the third quarter, with still having quite a significant Military/Aerospace and Industrial business, that can be usually seasonal in the third quarter, as it's more heavily weighted towards North America and Europe and the various vacation periods that are there. So I think even if Mobile Devices is somewhat larger, that traditional seasonality that we typically think of, of kind of second and fourth being stronger, we continue to think that, that would be the case.

[Wamsi Mohan:]

The margins in the Cable products, you alluded to pressure both from raw material inflation and pricing pressure. Could you give us some color by region on where the margins are holding up the best? And if the growth in this segment is primarily overseas, would you think that it's possible to have 2011 margins to be up year-on-year versus 2010 given that copper prices are likely to increase further?

[Diana Reardon:]

It's a little hard for us to comment on margins by region in that business. I mean, it's 6% of sales in total for us, so I think we aren’t really able to comment on that. From a expectation for next year, I think the fourth quarter was a difficult quarter for the business also because of the volume levels, which I think Adam mentioned were a little bit lower than what we would have expected. We do expect to see some improvement in the business in 2011. And I think we also, certainly, on our end, would hope to see some positive pricing impact at some point. Now that depends upon the competitive situation to some extent but certainly, would be our intention to look to try to offset some of the material pressures with price. So I don't think we would expect to see the margin trend down from this level. I think we would more expect to see it trend up as we move into next year.

[Operator:]

Next question, Shawn Harris (sic) [Harrison], Longbow Research.

[Shawn Harrison:]

I guess another cost question but more on the Interconnect side. Do you think, with competitors raising prices right now, you probably likely doing the same, that will be enough to offset kind of the big move in copper? Or do you think if copper continues to move up, you'll have to maybe, before mid-year, look at revisiting pricing? Or do you have enough with the costs reductions plus maybe some market prices to negate the entire raw material headwind?

[Diana Reardon:]

I mean, I think that pricing isn't -- we don't necessarily make all of our pricing decisions at a point in time. I mean, I think there's pricing going on in the Interconnect market everyday with various OEMs. And I think at that point in time, certainly, we look to consider whichever commodities and other costs have become an issue for that particular part of the business. I think it's a challenging environment right now. I think we are certainly committed to getting as much as we can on price in all of our markets, again, giving full consideration as to whatever the competitive environment is. I think that cost reduction actions and cost control continues to be a very important part of the margin dynamic as well. And I think that we continue to watch what's going on from a commodity standpoint and continue to drive for this 25% conversion margin. But I think both price and continuous cost reduction is necessary in order to achieve that. We aren't going to be able in every case to recover completely just through pricing actions.

[Shawn Harrison:]

And then a follow-up just on capital spending for next year, should we assume kind of a 3% to 4% of sales range?

[Diana Reardon:]

Yes.

[Shawn Harrison:]

And then as a follow-up, just with the cash balance that you have right now and likely to generate probably another $300-plus million of free cash next year, at what point does the cash balance get to a certain level that maybe you would look at other alternatives instead of M&A? Just knowing that -- I know you're continuously looking for deals but at a certain point, does the balance sheet just get too cash-rich?

[Diana Reardon:]

I mean, look, the company is just a real cash machine, as you know. And we generate operating cash flow over 100% of net income. And as you just pointed out, we expect the same to be the case next year. So we certainly have a lot of capacity. We really continue to feel that our financial strength is a strategic advantage and one that we really prioritize towards the acquisition program because we just do feel that it's best both from a strategic and a return potential for the company. And we do still continue to see a lot of potential for acquisitions as the industry continues to consolidate. And our management team certainly devotes a lot of their time to the acquisition program as well. In 2010, about 15% of our growth came from the acquisition program. We have a longer-term target, as you know, to look to get about a third of our growth. But it is certainly true that our capacity from a financial standpoint continues to grow. And I think in addition to the acquisition program, the company certainly will continue to view options relative to stock buyback.

[Operator:]

Next, Ryan Jones, RBC Capital Markets.

[Ryan Jones:]

Is the amount of anticipated unrecognized tax benefits outstanding still $5 million? And is that at all included as part of the guidance for $3 to $3.10 for next year?

[Diana Reardon:]

There are no special tax benefits in the guidance, if that's what you're asking. The implied tax rate in the guidance is the 27½%.

[Ryan Jones:]

And does the $5 million amount that you still expect, is that still intact after Q4?

[Diana Reardon:]

I'm not sure exactly what the $5 million is you're referring to. When we issue the Q, there'll be full disclosure of our tax accounts and the balances as they are at the end of December.

[Ryan Jones:]

And then if you look at most industry forecasts, they've tended to peg the long-term industry growth for the connector industry between maybe 5% and 7%. So if you look at your full year guide for 2011, I was wondering if you could help me to bridge what you think the differential is next year for Amphenol between the broader connector industry and Amphenol's 9% to 11% growth rate.

[R. Norwitt:]

I mean I think one thing is we -- if you look back over the last decade, we have consistently outperformed the industry, I mean, in fact, by nearly 2

[Ryan Jones:]

If you look at your guidance for next year, I get to about 25% incremental conversion margins. And if you look at how you performed over the last, call it, two years, you consistently have been able to beat that level by 2% to 6%. Why do you think investors for 2011 should anchor their expectations around 25% when you've done so much better for the last two years?

[Diana Reardon:]

Look, I think 25% is the conversion margin goal that we have. I think this is a very high goal. We just achieved a long-term goal that the company has had for quite a few years to hit 20% return on sales in the fourth quarter. And we're certainly very excited about achieving this goal. I think that as profitability gets higher, I mean, the challenges to achieving these profitability increases grow. And I think the fact that the management team is still committed to margin expansion above and beyond this level is an incredible commitment on their part. And the fact that there may have been some mass in the past two years with sort of a recession and a recovery and so forth that was higher than that, I mean that may very well be the case. But the company is providing guidance for a reason. It's very strong guidance, both on the top and the bottom line. And in my view, I think it would be prudent to look at that guidance.

[R. Norwitt:]

I think one thing that I would like to add here as well is we have achieved these very strong conversion margins this year with excellent growth but also in a commodity and a cost environment that we should not understate. I mean, the costs of gold going up in the last year by 26%, copper up by 33%, I mean, these kind of things certainly hit us just as much as they hit anybody else. Wages going up in China, the renminbi appreciating. I mean, there are a whole litany of cost pressures that our management team has had to deal this year, and they have dealt with that just extremely, extremely well. And so we believe -- we are not certainly forecasting that all of these cost pressures are just going to disappear. And so with that, I mean this guidance that we give is actually a very strong guidance and is a continuation of that performance in the face of just what are tremendous pressures on a worldwide basis.

[Operator:]

Next question, William Stein, Crédit Suisse.

[William Stein:]

I just would like to discuss CapEx for a moment. The CapEx this quarter was a little bit higher as a percentage of revenue than it has been historically. And I'm wondering if that's kind of a one quarter blip. Or is there a trend here that perhaps when acquisitions slow, we should see more investment in fixed equipment to satisfy growth? Or what's going on there?

[Diana Reardon:]

It is true that the expenditures in the fourth quarter were a little bit higher. I think for the year, they were still around 3% or 3.1% of sales, which is very much within the normal range for the company. We don't expect that range to change. I think between 3% and 4% of sales and 3½%, I think, would be a good estimate as any for next year. We do sometimes have a quarter where we have more spending that comes in to that particular quarter, but I wouldn't necessarily read anything into that from a trend perspective.

[William Stein:]

So any particular end market -- was it's a relatively big one-time thing that was addressing a specific need of a customer perhaps? Or just a broader...

[Diana Reardon:]

No, I think it just happened that we had a number that happened to fall in the same quarter. There isn't anything special. I mean, I think on balance, it's still a relatively low level of capital spending.

[William Stein:]

Diana, can you tell us about lead times today relative to where they've been, let's say, in Q3, how they can trended in Q4 and today? And inventory levels at your customers, any changes there that are worth calling out?

[R. Norwitt:]

Well, I'll actually answer that for you. I think lead times, we have not seen among our own lead times any significant variation. Just recall that throughout this whole cycle, we really never did see any generalized increase of our lead times through that whole recovery in any way that upset customers. In fact, very proud that at the year end, we were recognized by several of our customers in a very public fashion by them in front of other suppliers to say, “You never disappointed us this year, in a year where virtually everybody else did.” And that's not just talking about our industry; it's their entire supply base. And I think a lot of credit goes to our organization around the world for having managed in a very flexible fashion through the downturn and then the follow-on upswing that we've seen. Relative to inventories, again, we have said in the past and this still remains the case, that we don't have full visibility on the inventories of our customers, with the exception of the small percent of sales that we have through distribution, which is somewhat less than 15% today. And in that area, we have not seen any significant big moves. They're always little moves either way, but we have not seen any trends in the fourth quarter in the inventories of our distributors, nor have we heard in other markets. I think the only area where I would comment is we mentioned and I mentioned in my remarks that in the IT market where we did see a sequential downturn, we saw somewhat of a pause in buying activity. if that is somehow also related to inventories at certain IT customers, again, I don't have that visibility into their warehouses, but it would not shock me if it were the case that some of that pause that we saw in the sequential basis in the fourth quarter could have been related to inventory corrections in that market.

[Operator:]

Next question, Steven Fox, CLSA. Steven Fox - Credit Agricole Securities (USA) Inc. Can you talk a little bit more about the Auto market? You obviously had very good growth. I was wondering if you can break down a little bit more how much was driven by new programs that you're ramping and how much is pure demand. And if you can take that into sort of Q1 and how much of a new program launch impact has on your optimism for Q1.

[R. Norwitt:]

Automotive, obviously, did have a very strong performance and 20% up in the quarter, 11% year-over-year on what was already a pretty good recovery that we had seen there a year earlier. And I wouldn't be able to break it down so specifically for you, but what I can tell you is there is certainly substantial contribution from both of those things that you talk about, both the volume, which on a global basis, vehicle volumes this year I think hit something like 73, 74 million cars which was I think a 20%, 25% increase over the year early, so clearly, there has been a strong overall volume increase for the full year. But in addition, we have certainly seen the ramp-up of this hybrid platforms and the ramp-up of new electronics. Well, one thing that is really very exciting for us is we've seen the proliferation of electronics beyond just kind of the headline high-end cars. And more and more, you're seeing the electronic functionalities that maybe were prototypes in a high-end car being then spread and proliferated across cars at all levels. And that can be true with airbags, that can be true with onboard infotainment, that can be true with telematics, with anti-lock brakes. Whatever it is, these niche electronic applications that our kind of our bread and butter in the Automotive industry have started to proliferate across more and more car platforms, which is really a response of the automakers to the fact that that's where they can make money. And so they see that these options allow them to make higher margins. And I think they are really rushing to push them into every car platform. And so from a future standpoint, I think whether it is volume growth, whether it is the proliferation of electronics, whether it is these new hybrids coming up. Those can be good drivers of growth for us for the future. Automotive remains for us one of our smallest markets. And we're excited about our niche position in that market as it relates to those new applications having further proliferation. Steven Fox - Credit Agricole Securities (USA) Inc. And then just as a follow-up, can you just -- the Industrial market, you mentioned new technologies driving some of the growth and then you seem to be highlighting, broadly speaking, energy. I was wondering if you could just give us a little bit some examples of what these new technologies are. And am I right in thinking a lot of them are related to energy?

[R. Norwitt:]

I think there are certainly many related to energy. But I would actually say that on an across-the-board basis, we have taken advantage of the real downturn. I mean, Industrial was one of the hardest hit markets in 2009, you may certainly recall. And I think during that time, our organization really circled the wagons and focused on accelerating the innovation efforts that we had and the interaction with customers so that as that market came back, we could get kind of a lever effect on that growth by having also the new product coming in. Relative to energy, I mean, we have actually seen really strong growth in the quarter in alternative energy, which has been a market that's really supported us through 2010 and help to offset some of the pain in 2009. These are efforts into things like solar and wind and a variety of other new, exciting growth markets and alternative energy. But also, the geophysical market is one where we are very strong, both through some organic product development over the years and acquisitions we have made throughout the years. And that market also grew very, very strongly in the quarter. But those are not the only ones. We saw real strength in motion control. We saw strength in instrumentation, strength in medical. On an across-the-board basis, our strategy of really attacking on a broad basis the Industrial market with niche-focused strategies across each of the segments with new technologies has proven, I think, to be a very successful strategy in the short term and will be a successful one for the long term for that market for us.

[Operator:]

Next question, Matt Sheerin, Stifel, Nicolaus.

[Matthew Sheerin:]

So first question for you, Adam, is regarding your comments on the Military and Aerospace market. Sounds like the Commercial Aerospace is presenting some opportunities. There are some investor concerns that the Military market is slowing and in fact, may contract over the next two to three years. So could you break down and give us an idea of the revenue mix and what are your thoughts in terms of growth in each of those segments as it relates to the 10% growth number you're giving for the overall company?

[R. Norwitt:]

Sure. I think our mix is roughly a quarter of that segment is Commercial and 3/4 is military. I think I mentioned that we feel very good about Commercial Air. And we feel good about Commercial Air really because, as is not a secret, the companies, the manufacturers continue to announce upgrades to their production schedules in response to the demand from customers for new high-technology airplanes that essentially can save fuel. And so in the end, that fuel saving and with the price of oil having done what it does, becoming more and more important, that gives us a great deal of optimism for the future because all of these new platforms are really tied around the ability to use less fuel whether it be the 787, the A350. Certainly, even with the delays and I think there were even some announced today on the 787, the plane will fly. I have said it many times and I continue do to believe it with a tremendous amount of conviction, because the airlines need that plane. And we just have a much higher content on these new platforms because of the complexity of electronics. Now relative to the military, I mean, we believe, also and I believe personally very strongly, that, yes, there may be budget restrictions but that in the developed markets, specifically in the U.S. and in the European markets, the demand for electronic functionality is going to create further opportunities for us this year and beyond, and I see that really -- in the last couple of weeks, you may have seen that there was another announcement by Secretary Gates with respect to the budget. And in this, in fact, what comes true in this budgetary announcement is they are pushing for a lot of savings. I think they talked about some $78 billion in savings, which are coming not from equipment purchases but rather from things like reducing the cost of health insurance, reducing the number of flag officers, streamlining procurement, reducing contractors, all these things, and then not taking that money out of a budget but rather reallocating it to equipment upgrades. And they're talking about electronic upgrades of planes; they're talking new UAVs; they're talking about you radar systems, new long-range bombers. And yes, they talked maybe about a couple of programs that were a little bit more speculative from the get-go to be canceled. But in fact, we believe that, that electronic proliferation is something that the military recognizes as a real requirement for the future, and one where Amphenol is very well positioned to participate. And then the final thing I would mention is the emerging markets. I mean, we continue to see these emerging markets, places like India in particular, where the long-range growth prospects for our participation with the military are excellent. And so with all of that on balance between the Commercial Air, the Military and what we see, we continue to have a very positive outlook for the Military/Aerospace market in the future. I mean, if Military/Aerospace were to grow at kind of the average rate that we have guided, that would very strong performance historically for Aerospace. And I think that we feel positive about that and look forward to that strong performance.

[Matthew Sheerin:]

Diana, you didn't talk about any acquisitions in the quarter. I know there was about $15 million in the cash flow line for acquisitions. Was that related to earn outs of previous deals? Or was there something in the quarter?

[Diana Reardon:]

No, that was related to payments on deals we closed earlier in 2010.

[Matthew Sheerin:]

So there were no acquisitions to talk about?

[Diana Reardon:]

There were no acquisitions. That's right.

[Matthew Sheerin:]

And then, just a quick on one on mobility sector, is tablets part of the mobility devices now?

[Diana Reardon:]

Yes, it is.

[Operator:]

Next question, Steve O'Brien, JPMorgan.

[Steven O'Brien:]

First off, on the overall guidance, looking at first the full year net of the first quarter, it seems to predict the latter three quarters would grow in aggregate about 7% to 8%. Is that above market growth for the connector market in your mind for the back half of 2011?

[R. Norwitt:]

Well, I think one of your colleagues also did mentioned that the connector market is expected to grow somewhere 5%, 6%. Who knows what it will be. Historically, it has been around that level. And so yes it would be above the market growth.

[Steven O'Brien:]

On your comments on sort of normal seasonality in Mobile Devices is kind of hard to figure out what that is. So if you could give any more color or range. And also, now the tablets would be included in that segment, would that also be a benefit to what normal seasonality might bring?

[Diana Reardon:]

I think the comments on seasonality for the business as a whole that we made, not for that particular market. I mean I think that, that particular market because it's pretty China-dependent from a production perspective, I think we think we did say that it tends to be down fairly significantly sequentially in the first quarter. But the other comments I think were in relation to Amphenol as a whole.

[Steven O'Brien:]

Is there, I guess, any mitigating benefit to that segment from either tablets or just new product launches, which seem to be maybe coming in a little earlier in 2011 than they may have in the past?

[R. Norwitt:]

I think our guidance actually assumes a more modest sequential downturn in that market than you would normally see. Normally, you would see a solid double-digit decline in any year, for Chinese New Year as well because of the holiday season. And so I think our guidance does not necessarily assume such a significant downturn and whether that's because of new product releases or otherwise. I mean, those certainly can be elements to it.

[Steven O'Brien:]

On the IT demand in the quarter and some of the comments around maybe inventory or sort of maybe minor slowdown in the fourth quarter, did you see acceleration through the quarter and as you work through January signs that activity was increasing?

[R. Norwitt:]

Well, I mean I think the comment was with respect specifically to the IT Datacom market. And I think I had a question relative to inventories and that's one where maybe inventories did have an impact. We were down 7% sequentially. Relative to performance through the quarter, I guess we could say that towards the end of the quarter, it was maybe a little better than at the beginning of the quarter, not so material. I think we have a fairly stable outlook for that, which is a good sign from that perspective when we back up sort of towards the tail end of the quarter, it solidified.

[Operator:]

Next question, Jim Suva, Citigroup.

[Jim Suva:]

When we think about -- a lot of times I get tremendous push back by investors who's saying, Amphenol, the best is over, their peaking margins and things. And my rebuttal is if you look at gross margins, that’s one thing, but as the company leverage its sales base to grow higher, there's still room for operating margin improvement as the company sees more leverage from the operating base. Am I crazy or is that a way to think about it? Because if I did my math right, it looks like your gross margins actually came down in the December quarter, yet your operating margins came up. Is there still more leverage to model there from looking at it from that framework?

[Diana Reardon:]

I just would want to say just first, Jim, that we certainly were very excited to hit 20%, our last target, in the fourth quarter as you can imagine. I mean, the entire management team was certainly very excited about that. And it is true that this is a very high level of profitability. But we truly believe that there is still margin expansion potentially in the business. And this 25% conversion margin goal that we've talked about for quite a while and continue to be committed to and is reflected in the guidance that we just gave certainly does show the commitment that we do have to continue a margin expansion in the business. I think particularly if you look at the Interconnect margins, which were almost 22½% ROS in the quarter, this is I think the part of the business where we would see the potential, as you say, as we grow the top line with really technology-focused products and continue to drive for low cost. This has been the combination that's worked so well for us in the past in terms of margin expansion and in the Interconnect portion of the business, specifically where the vast majority of our operating units are involved in. This is the part of the business where, clearly, the management team has taken on that next return objective from an internal perspective. I mean, their next long-term goal is to drive certainly towards that 25% return on sales for that portion of our business. And so we do believe that with that growth on the top line and that strong technology focus, that we will continue to drive margin expansion in the business.

[R. Norwitt:]

Jim, let me just add that this is not just words here. There is a real conviction, and it's backed up by the technology and the trends that we've seen in this market, which really creates the opportunity for us, which is all these things I think I mentioned earlier, the high-speed, the RF [ph] technology, the power technology that we see, the harsh environment. I mean, these technologies and the continued acceleration of those technologies creates true opportunity for us to create value for our customers. At the end of the day, we can continue to expand our margins, and we can continue to grow at a rate faster than the industry if we can allow our customers to solve the challenges that they face more and more every day in terms of being able to make equipment that can solve the problems of the end customers. And I can tell you that our team around the world has just a real singular focus on making sure that we're able to do that day in and day out. And the diversity that we have built over the last decade really creates a base and a basis to say that, actually, the future can be even better than the past.

[Operator:]

Next question, Craig Hettenbach, Goldman Sachs.

[Craig Hettenbach:]

Adam, the comments around improving or increasing confidence about the demand environment, certainly 2010 was a bit choppy at times. So can you just talk about, as the environment improves, just what you're picking up from customers in terms of their confidence in forecasting or product introductions? Any color there would be helpful.

[R. Norwitt:]

I think, Craig, it's a very excellent question. The thing is customers have gotten somewhat spoiled in terms of two elements. One is our service has been very strong. And so in order to say, hey, we're going to give longer-term forecasts and we're going to extend our lead times to Amphenol, there's no need for them to do that. So I can't tell you necessarily that we've seen this kind of across-the-board strengthening of forecast. And in addition, a lot of the products that we are selling, especially into the more dynamic markets like IT and mobile and Wireless Infrastructure, are coming already off in their managed inventory and hub systems. So I wouldn't have any read necessarily from customers from the forecast standpoint. What I can tell you, which is more the qualitative reason that I get from meeting with customers, talking to our sales teams who's meeting also with customers around the world, is that customers are very excited and they see those same trends that I talk about. In mobility, the demand that's created by the smart mobile devices. In Military, I mean, there's just no question in the Military that these electronics are proliferating. I mean, I encourage you to read the transcript of Gates' press conference when he talked about these budget transformations. The word electronic upgrade was listed so many times in here. And that's something that we are hearing from our customers, and that they're very excited to hear as well. And so I think that these are trends that our customers are seeing, and they feel like their feet are a little bit more on solid ground. And we have seen that. There have been already in this earning season a couple of releases in the technology industry which have been not so bad, I think. And I think that, that gives further credibility to that sense of confidence that we have. It was not without a lot of consideration that we went through to make that decision to issue a full year guidance at this time. And that was really based on our conviction that we were kind of back to normal, whatever normal may be, but certainly back to a normal that was not the last two years.

[Craig Hettenbach:]

And, Diana, if I can follow up just on the cost. If we look at the guidance for 11% to 15% EPS growth, even if it's just kind of rough percentages, does that assume that commodity costs stay kind of where they are, increase a bit? Any color there?

[Diana Reardon:]

We don't sort of a model off of assumptions on whether it's commodity costs or exchange rates or these types of things. We look at the cost structure as it exists today in consideration of pricing actions and cost-reduction actions that we would take to the extent things changed from what they are today. So we feel that barring some strange event in the market where you have just some astronomical cost change that for some reason couldn't be recovered on price, which is hard for us to envision occurring, the guidance reflects this sort of 25% conversion margin on the incremental sales, and we believe based on our historical ability to manage through all of these things including commodity costs change, that we would be able to achieve that in any sort of normal economic environment.

[Operator:]

Next question, we have Brian White, Ticonderoga.

[Brian White:]

Adam, could you talk a little bit some about some of the trends you're seeing in India on the Mobile Infrastructure side of the business? You're, obviously, starting a 3G build out similar to what we saw in China.

[R. Norwitt:]

India is certainly a market that we know very well, and we watch it very carefully. And I think I have commented over the last couple of calls that we'll see when they build it, they will build it at a certain time when it's most opportune for India from a cost standpoint. And what clearly seems the case is that operators in India start to move more towards the build phase of 3G. What we do understand is that the OEM or the manufacturer of the equipment and really the breakdown of who is getting what awards in India is very different this time around than it was in the 2G. I mean, for all of the talk, of politics about Chinese vendors and everything else, the Chinese seem to have done an excellent job in terms of positioning themselves with a lot of presence in India. They talk in India, I'm sure you're very familiar Brian, with circles and who has how many circles in India. And it appears that the Chinese have gained nearly as many circles as the two other large Western players. And that others who, in the past would have participated, have maybe been a little bit more left out in India. I can tell you that we participate with all of the OEMs who stand to gain in India. What I can tell you also, though, is that the 3G build out in India is going to be based on equipment which may not be necessarily this kind of large refrigerator-type cabinet base station of the past, but moreover, it will be these more modular base station, more flexible, cheaper to install, easier to install in the field, which in India is a very important criteria for the operators. And so what that translates to for us is that we will certainly benefit, and we have a strong position with those base stations. The content in a small base station naturally would be less than the content in the large base station. If there are more of them, you can make up for that. So we continue to mind it very carefully, and we're very well positioned for that build out, which we certainly hope to come here in the year. It won't be in India, though, as China was, which is all of India will build it and then they turn it on, on one day because you have so many operators, so many different circles. And I think there are some 65, 70 circles in India who each are going to have a different schedule in which they will build their network. And so I wouldn't anticipate a real sort of one-off hit that would come from India, but rather that can be a general positive for us for the year and for beyond.

[Brian White:]

Adam, when we think about tablet market, Amphenol is obviously not a big player in the PC market, have done very well in the Smart phone market, how many tablet programs do you think Amphenol can participate in this year?

[R. Norwitt:]

Well, look, we don't talk about number of programs. I mean, that's certainly something that I wouldn't elaborate on here. What I can tell you is our focus in Mobile Devices is on what we call smart Mobile Devices. And that includes tablets, that includes Smart phones. I mean the line here start to blur dramatically. I mean, what do you call a seven-inch tablet or what do call a four-inch Smart phone. I mean that starts to be quite blurred. We have a very, very strong position here. Our technologies are very broad. We continue to expand the types of products that we get designed in on. And that is not just all one customer or another but really on a broad basis. And that market, whether that be Smart phones or whether it'd be tablets or whatever other new device that’s going to be released in the future, we are really viewed by the major OEMs in that market as a partner of choice. And so, that's excellent. And from a net-net relative to PCs and laptops, where we had very little participation, that can be a driver of growth for us in the future. Because as the devices become mobile, the demand to put upon the Interconnect and the antennas are much, much more significant than they were for just a simple laptop or a PC.

[Operator:]

Our last question comes from Ryan Jones, RBC Capital Markets.

[Ryan Jones:]

Everyone knows and I think understands the magnitude and the scale of inflation that is currently happening in China. Can you just give us a quick synopsis on the options that you have available to offset inflation in China? And are you thinking any differently about incremental capacity or incremental CapEx dollars in the way of how they're invested in China?

[R. Norwitt:]

Look, I mean, we don't think in that way where we say, “What's our new flavor du jour? How are we going to react on a global basis to something?” We're very much by virtue of the organizational structure that we have where we have 70 general managers around the world, each of them operating really at a slightly different context, we're able to tailor-make our reactions. There are certainly operations who are saying is China the right place for me to be? There are others who are saying I got to go to China right now because I'm not yet there. And so that really runs the entire spectrum in Amphenol. I think that with respect to China, which is a very important market for us, China is also not just a monolith. You have, in Western China, opportunities; you have outside of the places like Shenzhen and Shanghai opportunities. By virtue of our organization, the fact that we have today in China 24 operations around the country, we have an experience operating essentially everywhere in the country and in every context in the country. That allows us really to have really a leg up where when we see a pressure in one area and we decide to slowly migrate to another, it is not just a greenfield start-up where we have to go commission studies about what's the environment, what are the labor regulations, what are the environmental regulations. We're already an expert essentially everywhere in China. And that gives us a significant leg up. We have also seen strong progress of our facilities in other geographies in India, in Eastern Europe, in Africa, in Latin America. So there are going to be and there are in Amphenol other options in China. The other thing is because of our organization, the general managers who are real business people in China, these are not just plant managers, they know that they've got to offset whatever pressures are there, whether that be the renminbi whether that be the wages. And they do that through automation. They do that through changing sourcing, through driving material costs down, through working also on price. And so I think that the same thing that a general manager would do in the West, he would also do in China in terms of looking to offset those challenges that are there. Well, at this time, we'd like to once again, on behalf of Diana and I and our whole team, thank you, all, and wish you a happy new year. And we wish you a very successful completion to January and the Q1 and look forward to talking to you here in about three months. Thank you.

[Operator:]

Thank you for attending today's conference and have a nice day. You may disconnect at this time.