安費諾 (APH) 2005 Q3 法說會逐字稿

Hello and thank you for standing by. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Ms. Diana Reardon, Senior Vice President and CFO.

Thank you and good afternoon.

My name is Diana Reardon, and I am Amphenol's CFO.

I'm here with Martin Loeffler, the CEO, and we'd like to welcome everyone to our third quarter call.

Third quarter results were released this morning.

I will provide some financial commentary on the quarter and Martin will give an overview of the business and current trends.

And we'll then have a question and answer session.

The third quarter was a good quarter in all respects.

Sales for the quarter were 447 million, up 16% in US dollars and in local currencies, and up from a sequential standpoint from a record Q2.

An excellent accomplishment in a seasonally slower quarter.

Breaking down sales into our two major components, the Interconnect business, which comprised 88% of our sales in the quarter, was up 18% compared to last year, with increases in all major end markets and geographic regions.

Our cable business, which comprised 12% of sales, was up 9% from last year as a result of increases in broadband cable TV markets.

Since December 31, 2004, the Company has completed a number of acquisitions.

The acquisitions complement and broaden the Company's presence in a number of its target markets.

Excluding the impact of acquisitions, sales increased approximately 7% from last year's third quarter, and were equal to the record Q2 of 2005.

Operating income for the quarter was strong at 86 million compared to 70 million last year.

Operating margin was 19.3%, an increase from 18.3% last year and down 10 basis points sequentially from a record Q2.

Margin improvement over last year was driven by expanding margins in the Interconnect segment, offset to some extent by a decline in margins in the cable segment.

Cable segment margins decreased approximately 170 basis points from last year to 11.7% in the quarter, as price increases implemented in 2004 were more than offset by a continued increase in material costs.

From a sequential standpoint, cable margins declined approximately 120 basis points from Q2, due primarily to higher material and freight-related costs.

Driven by higher commodities, particularly plastics and resins, and higher energy prices.

As a result of the significant increase in costs, the Company has recently announced a price increase of approximately 6 to 10% for coaxial cable products for broadband -- that is expected to be effective in December.

This price increase is expected to offset a portion of the impact of rising commodity costs and help to stabilize margins in the segment.

In the Interconnect segment, margins were 21.8%, up approximately 140 basis points versus last year, and declined approximately 10 basis points from record Q2 levels.

The increase from last year relates primarily to the continuing development of new higher margin application-specific products, excellent operating leverage on incremental volume, and aggressive programs of cost control.

On any industry comparative basis, profitability continues to be very strong.

Interest expense for the quarter was 5.5 million compared to 5.6 million last year, reflecting higher interest rates offset in part by lower average debt levels.

Other expense was 2.6 million compared to 1.6 million last year, reflecting higher fees on sales of accounts receivable under the Company's securitization program and higher minority interest expense.

As previously announced, the Company completed a refinancing of its senior credit facility on July 15.

In conjunction with the refinancing, the Company incurred onetime expenses in the third quarter of $2.4 million, or $0.02 per share.

Representing the non-cash write-off of unamortized deferred debt costs, net of a cash gain on the termination of related interest rate swap agreements of approximately $3.2 million.

Tax expense in the quarter was at an effective rate of 31%, bringing the effective rate for the nine months to 33%.

The lower rate reflects the onetime benefits associated with the repatriation of foreign earnings under the provisions of the American Jobs Creation Act of 2004.

Tax expense in the third quarter of 2004 was 34%.

The lower tax rate in Q3 2005 compared to Q3 2004 increased earnings per share by approximately $0.02.

Excluding the onetime benefit referred to above, the Company's effective tax rate remained at 34%.

Net income was 52 million and exceeded 11% of sales, another indication of our excellent profitability.

Diluted EPS for the quarter was $0.57 per share, up 21% from $0.47 last year.

The impact of the onetime expenses associated with the refinancing of $0.02 per share and the benefit of the lower effective tax rate of $0.02 per share offset, and had no net effect on EPS for the quarter.

During the quarter we generated a very strong cash flow from operations of 67 million.

Cash flow from operations is after a $10 million contribution to the Company's US defined pension plan.

The cash flow from operations, along with $7 million of proceeds from the exercise of stock options, were used to fund capital expenditures of 13 million, payments relating to acquisitions of 5 million, stock buyback of 4 million, and the reduction in debt of 35 million.

Cash on hand also increased $13 million in the quarter.

Approximately 3.3 million shares remain available for purchase under the Company's stock buyback program at the end of September.

The balance sheet is in good shape.

Accounts receivable days outstanding excluding the impact of acquisitions were 66 days at the end of the third quarter, compared to 64 days at the end of last year.

Inventory turnover, excluding the impact of acquisitions, remained relatively flat at 4.2 times.

Long-term debt was 426 million at the end of September, down 6 million from year end. (technical difficulty) The Company's leverage and interest coverage ratios remained very strong at 1.4 times and 15 times, respectively.

And the amount of receivables sold under the Company's receivables securitization program was 85 million at the end of September, compared to 80 million at the end of last year.

Orders for the quarter and nine months are strong and reflected a book-to-bill ratio of approximately 1.05 to 1 for the quarter and 1.03 to 1 for the nine months respectively.

Certainly from a financial perspective, it was an excellent quarter.

Martin will now provide an overview of the business and current trends.

Thank you very much, Diana.

Good afternoon.

Welcome to our traditional conference call at the occasion of our earnings release.

As Diana just said, I will highlight some of our achievements in the third quarter, and then discuss briefly the trends and the progress in our served markets, and comment on an outlook for the remainder of 2005.

The third quarter was an excellent quarter.

We're very pleased with the results, which reflect the continuation of the strong trends in our business.

We maintain the industry-leading growth as well as profitability.

Sales in the quarter increased by 16% over last year, and the interconnect products increased 18%.

This is very strong growth considering that the third quarter is a seasonally slower quarter.

The growth was very broad-based and has increased our position in all of our served markets and geographic regions.

We're pleased that the sales achieved a record level in the third quarter following a record of the second quarter.

As I said, in a seasonally slower quarter that is an excellent achievement.

Profitability and cash flow remained also very strong.

We maintained strong operating margins at 19.3%, up from 18.3% a year ago.

These are industry-leading margins, and we consider it an excellent achievement especially in face of a continuing challenging pricing environment and significantly increasing material, energy, and other inflationary increases.

We expect these margins to continue to be strong in the future.

We continue our development of application-specific and value added products at higher margins.

We have good conversion of incremental sales to profit and we continue our programs of strong cost control.

In addition, we will pursue certain selective price increases wherever possible.

Diane already mentioned the price increase that we have already announced relative to coaxial cable in December of this year.

We also anticipate price increases in our radio frequency microwave business, as well as in our military aerospace business as we move into 2006.

There are other indications of our continuing strong profitability.

Earnings per share in the quarter increased to $0.57 a share, 21% over last year.

This was well within our guidance.

Net income -- this is income after interest expenses and taxes -- exceeded again significantly the 11% mark of sales.

Cash flow was strong, actually the strongest in any quarter of 2005 at $67 million.

This continuing strong financial performance of the Company, we believe, is a direct result of our excellent strategic position in diverse markets.

Our competitive strength in product and costs, and our operating discipline migrating our business toward higher margin, value added products.

Last week we announced that we've reached an agreement to acquire Teradyne's Connection Systems Division from Teradyne.

We're very pleased with this announcement and I'd like just to give some highlights that we are already -- longer comment was made at the conference last week.

We feel that TCS is an excellent fit with Amphenol.

TCS adds leading technology and high-speed, high-density back-plane interconnect products entirely complementary to Amphenol.

On the other hand, we believe Amphenol can add strength to TCS.

We can provide access to lower cost sourcing, as well as low-cost manufacturing.

In addition, we have a much stronger global footprint with a broader customer base in TCS.

Combined, TCS and Amphenol will create the third-largest interconnect Company in the world, with significantly enhanced strengths in the communications and IT-related markets.

We have furthermore the potential as a combined company for increasing our product content on electronic equipment and systems, as we are offering a most complete interconnect solution to our customers.

I visited last week and the week before several of the major customers?

They seem all to be very excited about that combination, as we now can provide interconnect solutions, talking in jargon inside and outside the box.

In addition, we're getting experienced management to join Amphenol that will continue to manage TCS as a stand-alone P&L center and adopt our proven operating discipline.

We're excited about this combination, as it creates a new platform for continued strong growth and profitability of Amphenol.

Let me now discuss very briefly some trends in the markets that we serve.

I mentioned already that the growth in the third quarter was again very broad-based, across all of our end markets as well as geographic regions.

The strongest growth we experienced in mobile networks, mobile handsets, the military aerospace and automotive markets.

Sequentially, the strongest growth was achieved in the handset market.

Geographically, as expected, Asia had the strongest growth while Europe was in the vacation period and had the slowest.

We continue to benefit from our diversity in markets, geographies and products.

A few comments to these market segments specifically.

In the mobile network market, Amphenol achieved the sales growth of 20% over last year.

New product introductions added to the growth, as the demand from the OEM mobile equipment manufacturers remained relatively moderate.

In addition, our continued strength strengthening position in the sell side installation market added to growth.

We expect the mobile network market, especially the side installation market, to somewhat taper off in -- towards the end of the fourth quarter.

This is very different from the mobile handset market.

Mobile handset market, we expect to remain very strong throughout the fourth quarter in preparation of the holiday season.

Obviously it's to be seen whether all these mobile phones are going to be all sold during that season as well.

Our sales in the third quarter for -- in the mobile handset market grew 49%, very strong growth and a 22% sequential increase.

We expected strengthening in the second half, as we mentioned at the last conference call.

And indeed, the leading manufacturers of mobile phones launched a series of new models in the third quarter that drove our growth.

In addition, the increased functionality on handsets accelerated new product introductions, and again added to growth.

We expect that to continue throughout the quarter four.

Sales in the broadband network market over HFC infrastructure, which includes the sales of our coaxial cable products, increased a strong 12%.

It reflects a seasonally strong build period as well as the continued subscriber growth for digital, video, data and voice services.

Margins, however, in that segment remained under significant pressure.

And in order to offset a portion of these significant increases, we announced a price increase as we mentioned further, which will help to stabilize margins in that segment.

In the IT-related markets, DataComm, computer and storage markets, we continued to improve our rate of sales increase.

Our sales increased in the third quarter by 8%, stronger than the growth we had in the second and stronger than the growth we had in the first quarter.

The demand strengthened specifically for high-end equipment.

In addition we saw volumes of the next generation technology products grow in the quarter and contribute.

However, as I mentioned at the last call, price points of these next generation products remain -- and are lower than the ones of the previously technology, and therefore comparisons in dollar values are difficult.

It will take a few quarters to flush out all the products and we will see strong comparisons at that point in time, as we are very excited about the new design wins and the new business that we are generating in these next generation products.

In addition, we are very excited about the growth that we experienced and continue to experience in the disk drive market, where we have clearly penetrated a new market for Amphenol.

We expect this market segment to continue to contribute to growth in the fourth quarter.

In the markets outside of the communication and information technology markets, we have also seen excellent growth.

Sales in the automotive market grew 33% over last year.

Without the acquisition of FELEC (ph) that we consummated in the fourth quarter of 2004, sales were up a strong 11%.

The strong sales in North America, particularly driven by the increased deployment of Telematic applications helped in that strong growth, as the European market was relatively soft during that vacation period.

However, we expect sales in the -- for new car models to continue to be strong, as increased electronics in those cars is being deployed where we participate strongly.

The sales to the industrial markets increased 6% in a seasonally slower quarter.

We are very pleased with it because we have seen strong increases in all the segments.

The medical market, the rail transportation market, the factory (ph) automation market, especially with our new products for data busing and power distribution.

As we expect again, in this segment sales to continue to contribute to our growth in the near and long-term.

And the last market segment, the military and aerospace market, was -- had another strong quarter.

Sales increased a strong 11% in the quarter, and we continue to benefit from the breadth of our defense program participation.

In addition, we see an increase in momentum in the commercial aircraft market.

And we're very pleased with the many new design wins we have in this area as well as across all new programs on the military side.

We expect the fourth quarter to be seasonally stronger in that segment than the third quarter, and therefore a sequential sales increase.

Long-term, this (ph) market segment has a very strong outlook with excellent the print (ph) position that we have.

So in summary, we're very confident in our excellent position in diverse global markets.

We're very confident in our competitive strength and in our own ability to take advantage of the many opportunities that are in front of us.

Assuming no major change in the current economic environment or in currencies, we expect to finish 2005 with a very strong fourth quarter performance.

More specifically, we expect the fourth quarter sales in the range of $460 to $470 million, and EPS in the range of $0.59 to $0.61 per share.

This is a very strong sequential increase as well as year-over-year increase.

Considering this guidance for the fourth quarter, our sales for the whole year would be up 15 to 16% and EPS by 24 to 25%.

This is an excellent performance of the Company, and would end up -- make 2005 another record year for the Company.

We're excited about the continuing strong outlook of the Company, and look forward to a strong further development of the Company in the near and long-term.

The Company will provide some guidance relative to 2006, and that will include TCS data at that point in time, after the closing of the year 2005.

With this, I would like to open the session for any questions that you may have.

(OPERATOR INSTRUCTIONS) Scott Craig, Banc of America.

Good afternoon everybody.

I know you mentioned there is some potential price increases coming for the connector business.

Have those been announced, and do you have a better idea of the date that will go through?

And secondly, as you look out into next quarter and into 2006, what sort of raw material assumptions are you making from a cost perspective in your forecasting?

This is a very good question, close to our heart.

Obviously the most important thing for us was to announce the price increase in the coaxial cable.

Because the coaxial cable, as you all know, has a material content of about 80% of our cost, which is very significant, and thereby the most impacted.

So that was the most important action.

But the price increases that we plan for the other areas will be at the beginning of the year.

Usually that's about -- will be announced about 30 days before, and that's usually sometimes in the late November, early December time frame.

As far as material cost increases are concerned, it is not very predictable where these prices will go.

But we have certainly seen very significant increases over the last nine months or last twelve months.

And at this point in time, we don't see that this continues as energy prices which drive a lot of the material costs -- especially in the processing of the material, seem not to be coming down.

Stephen Fox, Merrill Lynch.

Can you take that question a little bit further and talk about the margin opportunity you see for the Company as a whole over, say, the next two to four quarters?

Do you think that the headwind created by raw materials will keep you from improving margins, or how do you think that's going to play out?

We have excellent margins.

The connector business at over 21% margin is significant, and obviously we continue to drive this at higher margins.

As we always say, we have operations that have higher margins.

But the third quarter was particularly difficult, as in the coaxial cable side we are just faced with significant price increases.

In addition, some shortages of material which don't help in pricing as well.

So I think the point is that we continue to target expansion of margin as we move forward.

We have seen over this past year, just between the three quarters, an expansion of 100 basis points, which is very significant.

We continue to drive margin expansion.

We believe that margin expansion in the Company is possible especially if we are able to stabilize the margin in the coaxial cable business.

Matt Sheerin, Thomas Weisel Partners.

If you could talk about your acquisition strategy, given the big acquisition that you're doing right now with Teradyne.

You have been very successful in doing small acquisitions, particularly in China, filling geographic voids in product areas.

Could you talk about whether that still a part of your strategy, and what opportunities exist there?

Thank you very much for that question.

As I mentioned at the conference call last week, Teradyne's Connections Systems business is actually not different from the acquisitions that we made in the past, except for size.

Otherwise, it fills all the criteria.

It has complementary products, totally complementary products, and therefore -- thereby will not create any disruption in the business.

Neither TCS nor of Amphenol, nor vis-a-vis our customers, which is very important.

We can add value to TCS in the future, as I mentioned just earlier.

And in addition, we just feel that as a stand-alone company like we have managed these other tuck-in acquisitions, it has exactly the same characteristics.

It's managed along our operating disciplines like all these other acquisitions that we made.

The only difference really is size, but that doesn't change our basics in our acquisition strategy.

We want it to be accretive and TCS is assumed to be accretive in year number one as well.

So I think we haven't changed our strategy.

We just came across a very unique opportunity, a unique opportunity that will strengthen Amphenol in the communications and IT market segments long sought by Amphenol, but very difficult to enter into the -- if you like, the inside-the-box interconnect technology.

Teradyne's Connection Systems will bring this to us.

But that doesn't mean that we changed our outlook on smaller acquisitions.

We have a lot in the pipeline.

That doesn't change.

We look at those as we have in the past, with -- wherever they are, strategic holes in our own product portfolio, geographic region.

We will continue to take advantage of these opportunities in the future as well.

Carter Shoop, Deutsche Bank.

I had a couple questions here on the Teradyne acquisition.

First on the overall growth outlook.

Based on that calculation, TCS' sales were down roughly 2% sequentially in the second quarter and down another 4% sequentially in the third quarter.

Could you give us any color in regards to what you guys are expecting for sequential growth in the calendar 4Q for TCS?

And also, any color on the 2006 outlook for the TCS division?

And also, in regards to Amphenol's 4Q guidance, are you guys planning any incremental borrowing costs associated with the Teradyne acquisition in the current guidance?

I think this is a very -- a number of questions relative to a company that we don't own at this point in time.

We certainly have looked at TCS, but we are not -- at this point in time they're (ph) -- as we don't own the Company to provide any outlook or guidance.

We've seen the results in the press release today of TCS.

They are in the seasonally slower quarter as well.

What I would like to say is we're very excited about the growth prospect of the Company.

Teradyne is the leading supplier of high-speed, high-density interconnect solutions for back-plane and PCB boards.

We are excited about that growth opportunity, because this is a market that will continue to grow, to have tremendous value added capability which is sought by Amphenol.

As you know, about 40% of our business is value added products that we bring to our customers.

So we see excellent growth.

Whatever happens in the near-term here is in modulation in the markets that they serve, as part of Teradyne.

I think that will change as they become part of Amphenol, because we are portraying and bringing to our customers a totally different product portfolio image and technology that will certainly have a different impact on the growth opportunities in TCS.

Relative to the guidance, the fourth quarter does not include any aspect of the TCS transaction, and that includes any interest expense that would be associated with the debt to fund the transactions.

There is nothing in the Q4 guidance in -- including any cost of finance that relates to TCS.

Bernie Mahon, Morgan Stanley.

On the question on the gross margins again, is there anything else or any other way you can improve them outside of the price increases?

Or with the hopes that the raw material costs go lower?

We have done an outstanding job in increasing margins over all these years.

And they were achieved in face of significant price pressures from our customers, significant price down demands from our customers on a quarterly basis, on a yearly basis.

So our programs of increasing margins continue the same way as they have in the past.

We have engaged and been involved in very low-cost manufacturing areas that has helped improve margins; that continues to be the case.

The same is true with the development of next generation products.

A redesign of products gives always the opportunity to improve margins, and we are investing significant amounts of money, new tooling for next generation products, so that margins are improved and not only cost reductions being achieved on existing products.

I think I would like to take the focus really to the coaxial cable business.

That's where obviously the material cost increases have the most significant impact.

And this is where pricing is a very important element of stabilizing margins.

Much different than in the connector business, where volume and many other aspects play a very significant role to improve margins.

Where in the coaxial cable business, with 80% of the material of costly material, pricing is a very important aspect.

And pricing in the past has been generally accepted by our customers in an environment where material costs go up, because that's just the understanding.

The process itself doesn't change dramatically even if we manufacture today in several areas where you have lower labor input.

But that doesn't play as much as the material itself.

So the focus is really on this is on the coaxial cable as far as margin is concerned.

If we can stabilize it, I think expansion will continue.

For the overall company.

Gary Kraperman (ph), Lehman Brothers.

Good afternoon.

My question relates to the automotive market.

Obviously you saw some very nice growth in Q3.

To which extent do you think that growth was driven by OEM incentives, specifically employee type discounts?

And is there a reason (ph) that market will slow down materially for you in the near future?

That's certainly a very difficult question for us to answer for us.

We're not as close to these incentive programs and so forth.

What we know and what we're very close to it is that the electronics in the car is growing.

And that is growing our business.

And actually, even if car volume, volume of manufacturing is changing, seasonally and so forth, as well as kind of over the years, the increase in electronics in cars is going to continue.

And that is going to continue to drive our growth.

That has driven our growth over the last several years, on a very consistent basis.

Continues to have an impact, a very positive impact on the Company here in this quarter, and will have a very positive impact as we move forward into Q4 and into 2006.

Thomas Dinges, JP Morgan.

Good afternoon.

A quick one on the cable business again.

Martin, you've announced price increases a couple of times in the past.

What's been the general move on the part of your customers ahead of these price increases?

In terms of -- if you're normally expecting maybe a couple percentage points sequential increase in that business, just on normal business trends, do you get an incremental increase ahead of that price, the price increase that's coming of say 20 or 30% more business ahead of that?

And therefore the quarter following it, meaning into the March quarter, maybe you'd have a little bit lighter business because guys bought ahead of that price increase there?

Then I have a quick follow-up.

Thank you very much.

Obviously that's always the case when you announce a price increase.

The customers look at the inventories and look at the opportunities, especially in the coaxial cable side of the business.

We have seen not a big volume increase as a result of this, especially now where some of -- because of -- some of supplies and so forth seemed to be on a shorter basis.

It's not going to have a very significant volume impact as we can see it in the fourth quarter.

But there could be a little bit of a spill into the fourth quarter that may not return in the first quarter.

But those two quarters are seasonally slower anyhow, and it's always been that it's going to be a couple of million plus or minus between the two quarters.

But not an extensive change that impacts the total Company as a whole.

Michael Walker, Credit Suisse First Boston.

Good afternoon.

I had a question on the margin front again, specifically to Q4.

Does a price increase take place in time in December to be able to allow margins in the cable business to be able to go up sequentially?

Or are they probably looking flat to down again?

My second question is on the wireless infrastructure market.

You expected that part of the business to be a little bit on the weaker side here in Q3 and it turned out to be relatively strong.

But now you're saying again it should be weaker in Q4.

Can you just talk about what's going on in that market?

That's certainly -- somewhat an indication that it is not everywhere in all markets.

We don't have total visibility because customers tell us certain things, and then they get quick projects like it can happen, and it continues stronger.

What I said I think at the last meeting was especially the OEM equipment manufacturers have a somewhat more moderate demand.

That really was the case in the third quarter, and will continue to be the case in the fourth quarter.

What was strong in the third quarter is the site installation market.

And that is a market which is driven by operations inside installations, where usually you see a somewhat slower slowdown.

Like in the cable television build outs and so forth, towards the end of the quarter in December that is usually just slower.

That's what I meant to say, I'd like just to clarify that.

On the margins on the cable business in Q4 and the trends there, the price increase is really only effective for the last few weeks of the quarter, so it won't have a material impact on the fourth quarter.

It will be fully effective in the first quarter.

Based on where we've seen material prices as we enter the fourth quarter, we would expect there would be some lower margin in the cable business in Q4 versus Q3, even with a couple of weeks of price increase in December.

So we would expect the margins somewhat to probably trend down in Q4 before they would trend back up in Q1.

Relative to the EPS guidance, (indiscernible) we certainly maintain strong operating margins for the whole Company.

So that's going to be a mix change between the coaxial cable as well as the connector business, because the connector business, as you know higher volumes always have the opportunity for generating good conversion margins, and to offset that.

So we expect fourth quarter margins to be strong.

Amit Daryanani, RBC Capital Markets.

Your towline guidance, it's much harder than I think most of us anticipated.

I'm wondering just given the rising raw material prices and expectations of this pricing won't improve in the near term, are you seeing some of your customers maybe trying to build some buffer inventory?

And is that (indiscernible) helping your Q4 towline guidance?

We haven't seen inventory build of our type of product, neither with the OEMs directly, nor with distribution.

So we have no indication at this point in time with the exception of the handset business, where obviously there is quite a build of new phone models in the third quarter.

Which appears to continue also into the fourth quarter.

And we expect it to continue in the fourth quarter.

Here obviously the jury will be out whether all these phones will be sold in the fourth quarter during the holiday season, or whether there would be some aftermath as we sometimes see it in the first quarter.

That's an area where we obviously see some strength in the handset business from our supply standpoint.

But that could taper off in the first quarter.

That hasn't happened before, but considering the diversity in our business we deal all the time with these relatively small and moderate swings in these various market segments.

And that's essential to the strength of the Company, to have that diverse feature.

Mark Katzenberg, Nottingham Capital. (ph)

Last week you talked about the Teradyne acquisition and discussed the margins currently.

And I can't remember, I apologize.

When you bought the other piece of the business, did you disclose margins of that acquisition?

We did not disclose margins of the business.

What we represented at the last call was that when we acquired the factory (ph) and assembly business for the military from Teradyne, the margins were low.

And by adding the value that we could add from our side in many different ways, similarly like we're planning to do for that commercial business, we today have excellent margins in that business.

Certainly in the average of -- spending on the quarter above the average of the Company.

Errol Rudman, Rudman Capital.

I wanted to ask about the motivation systems to -- for the people at TCS.

That is, you've outlined ways in which you hope to broaden their product offering.

Could you indicate their opportunities as a stand-alone company now or going forward to make more money, either through revenue enhancement or through improved profit margin?

How do these people -- will they do better under the association with you than they did alone, with Teradyne?

This is a very good question.

Obviously when we talk about stand-alone, we mean the P&L Center, the accountability for numbers.

Not dealing with allocations from headquarters and so forth, but truly be accountable for what their top and bottom line should look.

That's what we mean by stand-alone.

On the contrary, what we're trying to add here with other of our acquisitions, exactly the same thing.

By opening up the opportunities to go faster, to lower cost sourcing.

To open up the opportunities to get access to our facilities.

Obviously we don't have facilities with over -- with undercapacity where we just can move things in.

But we can accelerate all this because we have the know-how, we have talent in those regions where it is required.

And we can, from a customer relations standpoint now, really market together a product like we do it today, with our product portfolio.

And still having stand-alone companies, we do offer a complete product portfolio to our customers in many areas.

Especially in the military aerospace area where we have anything inside and outside the box, and I think this is the way we're going to clone (ph) those moving forward.

But still with keeping clear accountability in the various operating unit, and TCS will be one of these operating units.

(OPERATOR INSTRUCTIONS) Jeff Beach, Steifel Nicolaus.

Good afternoon.

Can you tell us in this TCS acquisition, roughly what percentage of your customer base in your interconnect, where you see the opportunity to increase sales by having TCS products available that you don't have right now?

The opportunity is really in the combined offering.

Our customers all around the world, especially in the communications and information technology sectors, seek to reduce that interface (ph).

Amphenol having today connectors inside the box which are the back-plane connectors, essentially, has now the opportunity to sell more of the products that we have today into that same application.

The reason why that enhances our position is because TCS has in some of the communications-related market a stronger presence with the customer than we have it.

And that is giving us the opportunity to bring in product that they otherwise, our customers otherwise would buy from maybe smaller companies and rationalize them away.

It's really a vendor-based reduction play on one side.

It's also a technology play on the other side, where we can offer a complete solution and the customer gives us the opportunity to develop the complete interconnect solution with them, rather than with two or three other companies simultaneously.

And they're developing it with one alone, that will be Amphenol.

So I think the opportunity for the growth is right there.

In addition we have customers in Amphenol that TCS today is not present in.

So we can open the door for TCS into these customers, and vice versa the same is true.

There is really a great opportunity on cross selling, increasing the content where we have already content today.

But increasing that content, as well as from a technology standpoint be even more in the forefront of the next generation development to develop these and continue to develop the application-specific, more value added products with higher margins.

All of this will drive top line as well as bottom line.

David Pescherine, Citigroup.

Good afternoon.

Could you talk a little bit about 3G network rollouts specifically with regard to your mobile networking segment?

Can you give us a little bit about the visibility as you're looking to 2006, and how that's been shaping up?

Maybe versus your expectations at the beginning of the year, have things been pushed out at all?

Also, can you talk a little bit about how the TCS acquisition might impact Amphenol's content into 3G infrastructure, again as we look into 2006?

That's a very good question.

Obviously the expectation for 3G is two years old.

The rollout was accelerated and so forth.

It was a significant expectation especially that in China licenses would be given out.

And that hasn't happened and therefore has slowed down the deployment of 3G, especially -- actually not only slowed down, not even started in China itself.

Now it is expected it can happen sometime in the second half of next year.

But we see 3G deployment, both on the CDMA side as well as on the GSM equivalent side, wide band CDMA.

So I think there is deployment.

The deployment is certainly not at the pace that some would have anticipated.

But on the other hand, because of the significant subscriber growth that is still happening, GSM networks are being upgraded, upgraded to higher speeds.

That is continuing.

But overall, the market is still somewhat more moderate in the build of base stations than it used to be at the beginning of 2004.

And where there was quite some pent-up demand.

We believe, though, that 3G is going to be deployed. 3G is going to be a significant success, and Amphenol will be strongly participating in this.

And TCS together with Amphenol will also be strongly participating in this, as we're going to have more content on the 3G base stations together then we had stand-alone Amphenol before.

Thomas Dinges, JP Morgan.

A couple quick follow-ups.

One, on the balance sheet.

You guys have paid off about $200 million in debt over the last couple years, very consistent sort of $20, $30 million on average per quarter.

And with TCS, obviously you're going to lever the balance sheet up a little bit more.

As you look out is there anything that you can see that would change the initial assumption that we wouldn't be able to see sort of $20, $30 million a quarter of debt paydown on the revolver?

And as an unrelated follow-up, a couple questions for just modeling purposes for Diana.

The higher fees on AR and higher minority interest, should we expect that to go forward?

And also, does the tax rate change at all going forward, at least for Q4 or into next year?

Or should we still continue to stick with 34%?

Sure.

Relative to the modeling questions, at this point the tax rate we expect to remain at 34% once we get through this year, and the onetime effect I talked about before.

We of course fully evaluate what effect the TCS acquisition would have on the tax rate. 34% is what I would use right now.

The other expense level relative to the receivables fees and minority interest will I think be higher and more in line with what it was in Q3.

Obviously there are other things in that line that are a little bit hard to predict, like foreign exchange gains and losses.

As an example, we had some gains in Q2 of '05.

But for the two items that you mentioned, I would model them at the higher level.

Relative to our deployment of operating cash flow, post the acquisition of TCS, I think from a prioritization standpoint, we will, as Martin said, continue to look at some of the smaller tuck-in type acquisitions that we've done in the past.

And I think that from a debt service standpoint, we will have I would think a little bit more bias towards debt service post the TCS acquisition than we had prior to it.

So in terms of giving an exact amount of debt service per quarter, can't really do that.

But I think if you look from historical perspective of the strong cash flow the Company does generate on quarter by quarter basis, certainly there will be a good cash flow for debt service post the TCS transaction.

We're going to take one more question, please.

Amit Daryanani, RBC Capital Markets.

Apologies if you already answered this, but you spoke about 11% year-over-year growth in the military segment.

Was that all organic?

I guess was it excluding the contribution from RF Interconnect and the Fiber Systems acquisitions you did?

From a year-over-year standpoint, there was obviously the contribution from FSI included, and as we microwave (ph) also as a big portion of that business is in the military segment.

Yes, that's correct.

I would like to thank everyone for their interest in Amphenol, and obviously we're very excited about the third quarter result.

It was a challenging quarter in a seasonally slower quarter.

But profitability and growth remains strong.

We look forward to a strong finish in 2005.

Thank you very much, and we will talk soon.

Goodbye.