安費諾 (APH) 2009 Q1 法說會逐字稿

Hello and welcome to the first-quarter earnings conference call for Amphenol Corporation.

Following today's presentation, there will be a formal question-and-answer session.

(Operator Instructions) Until then, all lines will remain in a listen-only mode.

At the request of the Company, today's conference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to introduce today's conference host, Ms.

Diana Reardon.

Thank you.

Good afternoon.

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

I am here together with Martin Loeffler, our Executive Chairman, and Adam Norwitt, our CEO, and we would like to welcome you all to our first-quarter call.

First-quarter results were released this morning.

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

We will then have a question-and-answer session.

The Company achieved first-quarter results that were in line with the high end of the Company's guidance.

Sales for the quarter were $660 million, down 14% in US dollars and 11% in local currencies over the first quarter of 2008.

Compared to Q4 2008, sales were down 13% in US dollars and 12% in local currencies.

From an organic standpoint, excluding acquisitions and currency, sales in Q1 2009 were down 14% compared to sales in the prior year.

A very strong performance in a difficult economic environment.

At the end of the quarter, the Company completed the acquisition of Times Microwave, an industry leader in RS interconnect technologies for military, aerospace, and wireless communications markets.

TMS had sales of approximately $108 million in 2008.

We are very excited about the potential created by this excellent addition to our RF technology offering.

Breaking down sales into our two major components, our cable business, which comprised 9% of the sales was down 17% in US dollars and 11% in local currencies from last year, reflecting a slowdown in spending and broadband cable television markets resulting from current weak economic conditions and difficult credit markets.

The interconnect business, which comprised 91% of our sales in the quarter was down 14% compared to last year.

Sales declined significantly in the automotive, IT datacom, and industrial markets as a result of weak end market demand while sales in the military aerospace market declined modestly and sales in the wireless communications market grew primarily as a result of strength in China-related programs.

The strong performance in a very difficult economic environment reflects the benefits of the Company's diversity and the strengths of its technology.

Operating income for the quarter was $111 million compared to $150 million last year.

Operating margin was 16.8% compared to 19.5% last year.

Operating income is net of stock option expense of approximately $4.8 million or 0.7% of sales in Q1 of 2009 compared to $3.2 million and 0.4% of sales in Q1 2008.

From a segment standpoint, in the cable segment, margins were 13.5%, up from 11.8% last year.

The margin improvement is a result of the positive impacts of lower material costs and to a lesser extent, operational cost reduction actions both of which more than offset the impact of lower sales volume in the quarter.

In the interconnect segment, margins were 19.3%, compared to 21.9% last year.

The achievement of these strong margins given the current economic environment and reduced volume levels is a significant accomplishment.

Our operating units around the world have reacted quickly and appropriately to current demand levels adjusting all elements of cost.

Overall, we are very pleased with the Company's margin achievement of 16.8% in the first quarter.

Q1 is typically a more difficult quarter from a factory performance standpoint due to Chinese New Year and this year given a significantly lower volume level was particularly a challenge.

Going forward, we believe that the Company's entrepreneurial operating structure and culture cost control will continue to allow us to react in a fast and flexible manner to preserve strong profitability going forward.

Interest expense for the quarter was $9 million compared to $9.9 million last year.

The decrease relates primarily to lower average interest rates in the 2009 quarter.

Other expense was $200,000 compared to $500,000 in Q1 2008.

Other expense is comprised primarily of bank fees, fees on the Company's receivable securitization program and interest income.

In the first quarter, the Company reduced tax expense by $3.6 million relating to the completion of the audit of certain of the Company's prior year tax returns.

This resulted in a first-quarter 2009 tax rate of 24.1%.

When compared to the Company's previous guidance for the quarter, this added about $0.02 to earnings per share.

Excluding this adjustment, the Company's expected tax rate in the quarter was approximately 27.5% compared to 29.1% in the first quarter of 2008.

We currently expect a tax rate of about 27.5% in the second quarter of 2009.

At the beginning of the year, the Company adopted Statement of Financial Accounting Standard number 160, non-controlling interest.

As a result, minority interest expense is no longer reported in other expense but is now recorded as a separate line on the income statement below net income.

Prior period statements have been restated to reflect this presentation as well.

Minority interest expense was $2.6 million and $1.7 million for the first quarter of 2009 and first quarter of 2008 respectively.

Net income in the quarter was $74 million, approximately 11% of sales, a very strong performance on any industry comparative basis.

Diluted earnings per share in the quarter was $0.43, down 20% from last year.

Orders in the quarter were $635 million, a book to bill ratio of approximately 0.96 to 1.

The lower book to bill ratio in the quarter reflects lower order levels primarily in the IT data communications and industrial-related markets resulting from the previously described broad economic slowdown.

The Company continues to be an excellent generator of cash.

Cash flow from operations was $143 million in Q1, of which $6 million related to the sale of additional receivables under the Company's receivable securitization program in the quarter.

Cash flow from operations, cash and short-term investments on hand of approximately $64 million, and $86 million in borrowings under the Company's revolving credit facility were used for $17 million in capital expenditures; $261 million in acquisition-related expenditures relating primarily to the acquisition of Times Microwave and payments relating to prior acquisitions; and $5 million in dividend payments.

In addition to its strong operating cash flow and cash investments of approximately $151 million at the end of the quarter, the Company has additional liquidity in the form of availability under its revolving credit facility.

The Company's $1 billion revolving credit facility is provided by a bank group and expires in 2011.

Availability under the facility was $137 million at the end of the quarter.

The company continues to have more than sufficient liquidity to meet its needs.

Borrowings under the facility were $861 million at the end of March, of which $650 million are swapped at fixed rates through December of '09 and July of '10.

The remaining borrowings are at a spread over LIBOR.

The Company also has a $100 million receivable securitization program under which $91 million in receivables were sold at the end of March.

From a balance sheet perspective, accounts receivable was down 11% from the end of the year, primarily reflecting the impact of lower sales levels, partially offset by the impact of acquisitions in the quarter.

Days sales outstanding excluding the impact of acquisitions were 72 days at the end of March, the same as they were at the December year-end.

Inventory decreased 6% from Q4 levels.

Excluding acquisitions impact, the inventory reduction was about 10%; however, inventory days increased to 93 days at the end of the quarter from 88 days at the end of December.

While we are pleased to have reduced inventory by 10% in the quarter, we have more work to do in this area.

And the Company will continue to focus on further inventory reductions in Q2 as adjustments to production activity continue in response to lower demand levels.

Acquisition-related liabilities were reduced by $102 million in the quarter from $120 million at year-end to $18 million at the end of the quarter as payments were made for contingent performance-based obligations on prior acquisitions.

Other long-term assets increased to $101 million at the end of the quarter from $81 million at the end of the year.

The increase relates primarily to intangible assets recorded in conjunction with the acquisition of TMS.

In accordance with the Company's adoption of Statement of Financial Accounting Standard 160 at the beginning of the year, minority interest is no longer reported in other liabilities but is now reported as a separate line on the balance sheet as part of equity called non-controlling interest.

Prior period statements have been restated to reflect this presentation as well.

And the minority interest liability was approximately $19 million at both the end of Q1 and the end of last year.

Our debt balance at the end of the quarter was $871 million compared to $786 million at the end of December.

The increase in debt relates primarily to funding a portion of the acquisitions completed in the quarter.

And the Company's leverage and interest coverage ratios remains very strong at 1.3 times and 17 times respectively.

EBITDA in the quarter including a full quarter for the acquisitions completed in Q1 was approximately $145 million.

From a financial perspective, we are extremely pleased with the strength of the Company's execution in what continues to be a difficult environment.

Adam and Martin will now provide an overview of the business.

Thank you very much, Diana.

Before Adam is going to give you more details in the first-quarter results and an outlook of the second quarter of 2009, I'd like just to highlight the basic strategies that Amphenol has been pursuing over the last two decades to achieve strong results in economic slow periods.

The first strategy that Amphenol pursues starts long before an economic downturn really begins.

It consists of establishing strong competitive advantage and strength to retain a very lean and highly profitable organization.

We do this usually through diversification in products, markets, and geographies, establishing low-cost manufacturing and the like.

This clearly has been accomplished by Amphenol in the past upturn and has made Amphenol clearly very resilient not only in this cycle but in previous cycles when we experienced slowdowns in demand.

The second major approach relates to retaining strong profitability on cash flow.

Our agile organization and our very entrepreneurial management style allows us to quickly, swiftly, and decisively adjust our cost levels across the Company to then much lower demand level.

And we absorb the costs usually without any restructuring charges in the normal course of business.

We did so in Q4 and then again in Q1.

This strong profitability and cash flow has allowed us to continue in this economic downcycle to continue to invest in new technologies for our customers and to continue our acquisition program.

The third approach that Amphenol is pursuing in such times is to quickly align the resources with the pockets of opportunities that still continue to exist even in this slow demand cycle.

Adam is going to refer to several of these pockets of opportunities that we have been taking advantage of in the first quarter of this year.

This usually and in the past has allowed us to gain position during these downturns and we are right now on the path with the results of Q4, with the results and strong results in Q1 to again gain position during this downturn, emerge faster from the economic slowdown, and as a stronger Company.

So we are very confident in our future outlook.

With this, I ask Adam to continue with his comments on the first quarter and the outlook.

Thank you very much, Martin, and thank you, Diana, for your overview.

I also want to extend my welcome to all of you on the phone today.

As Martin mentioned, I will emphasize some of the highlights from our first quarter and 2009.

Then I'll discuss the trends and the progress in our served markets and then finally, we will provide some commentary on our outlook for the second quarter of 2009.

Diana reviewed the specifics of the first quarter, but I'd like to provide just several highlights.

The first quarter was a very difficult quarter in many respects but considering the economic environment, we are very pleased with our achievements in the quarter.

As Diana mentioned, sales were down 14% with reductions in most markets partially offset by stronger performance in the military aerospace and especially the mobile communications market, and specifically stronger performance in Asia.

Profitability and cash flow remained strong in the first quarter despite the significant volume reductions that we experienced in the first quarter following equally significant volume reductions in the fourth quarter.

We are very pleased with our industry-leading operating margins of 16.8%.

This 16.8% is truly a reflection of the strength of our agile organization and the entrepreneurial management team, a management team who is truly energized by the challenges that we see ahead of us.

We are also very pleased that the financial strength that we created enabled us to complete another significant acquisition in the quarter, the acquisition of Times Microwave.

We completed this acquisition in late first quarter and the Company expands our presence in two very important markets for us, both the military aerospace as well as the mobile network markets where Times Microwave is a technology leader with annual sales of approximately $108 million.

Times is a leading supplier of high frequency RF connector, cable, and cable assembly products to the military aerospace market as well having a strong position in RF interconnect products for high-growth segments of the mobile networks market.

This acquisition is consistent with our long-term strategy across all of our acquisitions.

It has excellent capabilities, strong technology, a complementary business.

It is accretive financially and most importantly, it has a strong and stable management team upon whom we can rely.

We are very excited about the growth and the profit (inaudible) potential that Times Microwave has now as a part of Amphenol.

Now I'd like to discuss the trends and the progress that we saw in our serve markets in the quarter.

Despite a very significant overall market decline, the strength of our technology and our consistent strategies of diversification have continued to benefit Amphenol.

The military aerospace market represented 22% of our sales in the quarter, which was a decrease of 3% from the prior year.

We are optimistic that our broad program participation in the military aerospace market will drive performance despite widely reported shifts in US defense funding priorities.

We are excited about the addition of TMS, which I already mentioned, which augments our already industry leading position in this military aerospace market.

While we see that distributors and certain OEM customers have changed their buying patterns, thereby impacting demand, and we have experienced some delays in commercial air-related procurement, the long-term outlook for this market remains strong for Amphenol as the industry leader.

The industrial market represented for Amphenol 11% of our sales in the quarter.

Sales decreased 28% from prior year.

We experienced a broad moderation of demand in many segments of the industrial market tied directly to the general economic slowdown that we've seen on a global basis.

We continued to make progress in certain expanding areas of the industrial market which include alternative energy, rail, mass transit, and other important segments.

Although overall industrial market continues to be impacted and we expect it to continue to be impacted by the general economic slowdown, we anticipate that these growth segments that we build on will continue to build momentum for us in the future.

The automotive market represented for Amphenol 5% of our sales in the quarter and sales declined a very significant 46% from prior year.

The near-term outlook is for continued lower vehicle production levels.

However, we continued to be encouraged by the longer-term outlook in this market due to increased electronics in cars and most importantly, our increasing position in new hybrid platforms.

While we do believe that vehicle production volumes may have reached bottom, it's very difficult to predict when normalized demand patterns will return to this industry, which certainly has experienced severe challenges.

The broadband market represented for us 10% of our sales in the quarter.

Sales decreased 15% from prior year with more significant reductions in overseas markets than we experienced in North America.

As expected, demand was also seasonally slower in the first quarter from the fourth quarter.

We still continue to see that credit availability affects certain customer buying patterns.

Nevertheless, we expect demand levels in the broadband market to show seasonal improvement in the second quarter.

The information technology and data communications market represented for us 19% of our sales in the quarter.

Sales decreased 31% from the prior year due to reductions in IT investment across carriers as well as enterprise networks in addition to continued inventory reductions across the supply chain.

We see further slowing of demand in several segments of the IT market.

However, we remain excited with the new program wins that we continue to achieve with key customers through our industry-leading offering of a complete interconnect technology architecture.

This complete architecture prepares us well for the future as high speeds and other demanding requirements from our customers create new opportunities for Amphenol.

The mobile networks market represented 17% of our sales in the quarter.

Sales increased a very strong 18% over the prior year.

We benefited from continuing demand in site installations, especially in emerging markets, as well as from our broad presence on high-volume and next-generation base station equipment platforms.

We are especially encouraged by the strong demand that we experienced in the quarter related to the buildout of third-generation 3G networks in China where we have an extensive participation across all of the 3G technology platforms.

While we anticipate some seasonal moderation of demand in the second quarter, we are encouraged by continuing momentum in both next-generation equipment as well as in these important emerging markets.

The mobile devices market represented 16% of our sales in the quarter and sales in that market grew slightly over the prior year.

Our growth of innovative new products was offset by reductions in end demand as well as by certain inventory adjustments by operators as well as OEMs.

But we continued to be very well positioned with our leading technologies across an industry leading broad customer and phone model base.

We do expect stronger demand in the second quarter as customers adjust to currently low inventory levels and as demand related to the release of the 3G networks in China materializes.

In summary, with respect to the first quarter, we are very proud of our organization at Amphenol as we have continued to execute well and outperform the industry while generating significantly strong profitability in an extremely challenging demand environment.

In such a challenging environment, Amphenol's distinct competitive advantages continue to serve us well; our leading technology, our increasing position with customers and diverse markets, our worldwide presence, the lean and flexible cost structure, and very importantly, our dynamic entrepreneurial management team.

While forecasting market conditions remains challenging, we are confident in the ability of our organization to meet the challenges and to take advantage of the continuing opportunities that we see in front of us.

Now some words relative to the outlook.

Considering the uncertain economic environment, we will continue to provide guidance only for one quarter.

Based on stable exchange rates, we expect in the second quarter of 2009 the following results.

We expect sales to be in the range of $660 million to $675 million and we expect earnings per share in the range of $0.41 to $0.43.

In summary, we are very confident in Amphenol's future as our organization continues to take the necessary actions to preserve strong profitability and to position ourselves to capitalize on the many current opportunities to expand our market position.

Thank you very much and at this time, operator, we will take any questions that you have.

(Operator Instructions) Brian White, Collins Stewart.

Okay, yes, if you could talk a little bit more about the acquisition and maybe when it closed exactly?

Was it sometime late in March?

Yes, the acquisition closed in late March.

Okay.

And in terms of -- I'm not clear exactly what market does this get you into that you are not into today?

Well, I think Times Microwave has a very complementary product position with us.

Certainly they are on programs that we are also on in the military aerospace market, but in a very complementary fashion.

I mean they have the industry-leading RF interconnect assemblies, which are a value-add product in addition to the connector and the cable that goes along with it.

They have a very strong position in airframes, where we have traditionally been very strong on the modules in the avionics platform.

So together it puts us in a very, very strong position across the entire -- in the aircraft example across the entire aircraft portfolio.

And on the telecom side, Times Microwave has a strong position especially in indoor coverage solutions, which is certainly a growing market in the wireless infrastructure market and one where we have participated but this certainly augments our participation there.

Carter Shoop, Deutsche Bank.

Two questions, if I may.

First on FASB 141(R), I thought we were going to disclose what the transaction-related costs were in the quarter from acquisitions.

Are we not going to do that or --?

We did have some cost in the quarter.

We did not think they were significant enough to disclose as a separate line item.

But if you were to look at the segment schedule and look at the headquarters line, you see some increase in expenses there compared to last year and I would say that that increase relates to those expenses.

Okay, and then in regards to the Company's ability and desire and capacity for acquisitions on the immediate term basis, obviously we have levered up a little bit here for the acquisition.

Do you think that we are going to take a few quarters to digest this size of an acquisition, or do you feel that the overall management bandwidth and capacity in the balance sheet is sufficient for future acquisitions during the next couple of quarters?

Yes, Carter, thanks for the question.

I think we as always, we manage our acquisition pipeline with a real long-term eye.

We don't have at any given moment a desire or a target to close something in a quarter.

We will continue to drive the pipeline that we have and to the extent that some of those materialize, we believe we certainly have the capacity whether it be organizational or from a financial standpoint to execute on those.

Thank you.

Amit Daryanani, RBC.

Thanks, all.

Congratulations on the quarter, guys.

I have two quick questions for you all.

One, could you just talk about -- given this deal, are we expecting it to be accretive in '09?

And could you tell a little bit about how the margin profile of TMS's versus Amphenol interconnect business?

Yes, I think as you know, we always have a standard that we look for deals that are accretive in the first year and we certainly completed this acquisition pursuant to those standards.

So we wouldn't expect anything different.

And I think TMS has a margin profile which is not so different from our own.

All right.

And then I guess could you just look at that military aerospace segment.

Could you just talk about how much of the business is military versus commercial?

You talked about changing auto patterns (inaudible) sales for you guys.

Could you just tell us what do you expect to see in that segment over the next one to two quarters in the military and the commercial side?

Well, I think as we have said in the past, the military represents about somewhere between two-thirds and three-quarters of the segment and commercial is the rest.

What we said relative to order patterns is that we have seen customers be more conservative in how they place orders.

Whether that comes from credit concerns or budgetary concerns or otherwise, that is more difficult to pin down.

I think we feel that regardless of what happens, we have a very strong position across the military platforms.

Whichever program comes and goes, we tend to have a strong position on those programs as the market leader.

So we feel comfortable and confident that regardless of where the funding goes that we will still have a strong position in that market.

Jim Suva, Citi.

Great.

Thanks very much.

Adam and Diana, can you talk a little bit about the underutilization charges about when you think that will be resolved?

It seems like in Q2 there will still be some more absorption.

Granted the overall economy is not strong, but when do you expect to see the Company not see those underutilization charges as I believe you had a workforce reduction of about 17% to 19% in Q1 and how should we think about the underutilization?

I think if you are referring to the fact that volume levels are lower and we're working through inventory reductions as well and the fact that that puts some additional pressure on absorbing some of the more fixed costs in the factory, I think that those certainly are things that you deal with when you have the sort of economic environment that we are experiencing now.

But I think that our profitability levels have -- have shown that we managed quite well through that and I wouldn't want to conclude that there was a significant sort of one-time charge that is inherent in those margin levels.

I think the fact that we've been able to achieve the margin levels that we have shows that our fixed cost structure is relatively low.

We do continue to target 25% conversion margin on incremental sales at the operating income line and this is harder to reach in some quarters than others.

We had a negative conversion margin that was about 30-some-odd percent in the first quarter and so you have some impacts I think there.

But I think overall, we are very well able to manage our cost structure to be able to achieve the margins that you've seen in the first quarter.

Right and maybe as a quick follow-up, not referring to one-time charges but more as a run rate basis, when do you think your inventory levels will kind of be lined up with kind of a utilization where we could expect to see maybe not some incremental pressure on margins to where then should the macro environment improve, we would be looking after the June quarter that things are more well and equilibrium aligned to improvement on topline would really flow through?

No.

I think that we made some progress on inventory in the first quarter.

We have certainly a ways to go to get back down to days that are in the low 80s.

We are expecting to make further progress in Q2.

I think when we closed that quarter it will be more clear to us what demand will look like in the second half of the year.

I think it's a little bit hard to say at this point as we sit here where inventory levels and demand levels will head in the second half of 2009.

Kevin Sarsany, Legend.

Thank you.

I have a question on your guidance, topline guidance with the book to bill at below one.

You are kind of implying a little bit of a sequential pickup and I guess that kind of flips with I am wondering about the order patterns in especially your IT industrial and automotive businesses regarding lead times and how customers are ordering and also pricing patterns?

I think you correctly surmise and I think I mentioned earlier that we have certainly seen customers be more cautious about placing large and long lead time orders.

And so certainly we see that there are some compressed lead times and that's how that foots as you say it from the order rate in Q1 to the revenues in the fourth quarter.

We also have some significant businesses where there are very short lead times.

There are portions of our business which operate on quite short lead times where that book to bill is not the greatest indicator on a quarter-to-quarter basis.

Relative to pricing, which you mentioned, we stay very much on top of pricing.

We are always sensitive in an environment like this that others may be aggressive or hungry for business, which is why we take proactive measures early on in our Company which we started even last year to get our cost line in a good position so that we can be ready if need be from a pricing standpoint.

Whether that be with raw material reductions or vendor reductions or our own overhead factory costs.

So we will be very sensitive and will manage pricing very -- in a very disciplined fashion as we move forward because that's certainly an area that you watch carefully in times like this.

Are you seeing aggressive pricing in your end markets out there?

I wouldn't say that we could draw any across-the-board conclusions right now.

There are certainly some pockets were you see a hungry competitor or two.

There are others where customers are really having a flight to quality and by quality what I mean is because of the severity of the credit situation, we have many customers who say do I want that extra nickel today or do I rather have a supplier that will be with me for the next decade and beyond?

And I think we as seen many of our significant customers gravitate more to us in this environment as they see that our financial strength is one which they can depend upon for many, many years to come regardless of the cycle.

And so I think that moderates a little bit, but still we would not be surprised to see some coming out with pricing that reflects a little bit more hunger than we would have seen last year.

Shawn Harrison, Longbow Research.

Good afternoon.

I just wanted to get back to the comment on raw materials and wondering if you've seen any inflationary pressure yet come to you given the spike we have seen in copper off the bottom as well as kind of the slight spike in aluminum prices as well?

And kind of maybe what you see that impacting margins in the second quarter as well as the third quarter, if there's any impact at all?

I think what we see is that there is really -- there is a lag always with these.

We are not just buying copper from a mine, so we are buying stuff that is somehow converted or finished by others.

And so it's not that we see these little upticks and downticks reflected in our P&L on a monthly basis.

Certainly the trend has been on a year-over-year basis, it is a positive trend in certain raw materials, not all.

Clearly gold has not been a positive and we worked very hard across our organization from an engineering standpoint and a sourcing standpoint to offset the impact of what have been pretty significant increases in gold over the long term that haven't abated so much.

I mean, they have come down $100 but it's not to the level that you would've liked to see gold.

I think these -- whether they are little blips or they are long-term trends is hard to identify at this stage.

We continue to work very closely with our suppliers to drive cost reductions regardless of whether there's kind of a one-time blip in copper.

Then my follow-up question is in regards to inventory.

You've mentioned your own inventory is looking to continue to work that down.

But maybe if you could speak on whether you are still seeing a disconnect between the sell-in of your product to the direct customer to distribution versus the sellthrough of that actual product.

And did that narrow significantly in the first quarter and is it almost at equilibrium is we are here early part of the second quarter?

I think it really depends on the customer and the channel.

I think if we look at distribution where we have a little bit more -- not total visibility on their inventory position, certainly some of those have come down and so you have seen as you would describe it the sellthrough rate maybe a little bit better than their buy-in rate.

I think relative to OEMs and some of the contract manufacturers that we deal with, it's kind of all over the map.

Some may be down and some may be up, but I wouldn't draw any general conclusions at this stage on all of those.

Will Stein, Credit Suisse.

Thanks.

A couple quick ones if I can.

First, were there any other acquisitions in the quarter, maybe a completion of something you already had a majority stake in or something like that?

Will, thank you very much.

We had also in the quarter a small acquisition of what was effectively a sales channel for TCS that had been a part of TCS in Japan in some years past and we acquired that sales channel, which has some limited value add capability.

It's not material to the total results of the Company, but we did complete that also in the quarter.

So that was previously consolidated and minority interest was backed out or am I wrong on that?

No, this was a company that we did not own, that we bought in the first quarter, but as Adam said, it was primarily a sales channel and quite small.

If you are trying to reconcile the number that on the cash flow from an acquisition standpoint, we did have payments relating to crude acquisition obligations that were on the balance sheet at the end of December that related to performance-based payments on acquisitions we closed in prior years.

And that liability came down about $105 million or something like that in the quarter.

A follow-up related to that, I think there's been an accounting change where there's a change in the way the earn outs are accounted for.

Is that correct?

That's correct.

I think I talked about that on the last call.

The accounting rules have changed and in essence, if there were contingent payment obligations in the future with acquisitions that were completed subsequent to the beginning of 2009, changes in those earn out obligations would essentially go through the income statement as opposed to in the past when they would be adjusted for against goodwill in purchase accounting.

Matt Sheerin, Thomas Weisel Partners.

Yes, thanks.

Adam, you commented earlier about the competitive environment and mentioned that some of your weaker competitors are perhaps in a disadvantage because of credit.

But are you seeing market share opportunities either short-term or long-term because of the competitive environment and because of the credit crisis that we are in?

I think as we discussed it also last quarter and we continue to see this quarter that as I described, there is this kind of flight to quality.

And a flight to quality certainly opens up the opportunity for us if we execute on it which is something we are quite focused on to expand our market position.

And so whether that is market share sometimes you think of similar part numbers sold by customers or by two suppliers.

Really where we have great opportunity is to expand our long-term position with customers in all of our markets because they now see Amphenol as a true strong pillar in the industry, one who will be around for many, many years who has the greatest breadth of technologies and products to offer.

As well as the management team, who is at this stage truly energized out in front of the customers, excited about the opportunity, not demoralized by a downturn that you read about every day in the Wall Street Journal.

Okay, great.

My follow-up just is in regard to your cost structure.

You gave relatively flat guidance if you back out the acquisition and EPS guidance also flat, which implies that expenses in margins are about where they were in March.

Are we to assume then that you are pretty much done with the big or the heavy lifting in terms of cost cutting and going to keep your footprint, if you will, where it is right now until you see signs that things are either getting worse or better?

I think first of all, we don't really look at it as a footprint.

I think the -- our organization is every day adjusting their resources and adjusting our costs in light of the market that we see.

And so this is why in the fourth quarter of last year we took a very significant and proactive measure across the Company, not a top-down measure at all but one really that was taken across the Company which resulted in a headcount reduction in the fourth quarter of 17%, which on a revenue reduction of 13% sequentially.

Which put us in a cost position that allowed us to really enjoy the margins that we did enjoy and achieve in the first quarter.

I think we -- I would never say that the work is done.

It is an ongoing effort to adjust our costs and our team will continue to adjust those costs as appropriate and as we see the market changing.

The market is -- it is not that there is a static quarter that we have a perfect picture of.

We will see how it goes forward and we will adjust our costs accordingly as need be.

[Sean Conner], [SAS Advisers].

Thanks for taking my call.

Just kind of a follow-up on that last question.

From a restructuring or a layoff standpoint, have all of the employees that were going to be laid off, have they now been laid off or are there still some to take place in Q2?

And then just that would be my first question.

The second question is just could you maybe give us an update real quick from a CapEx standpoint what your expectations are for the year?

Yes.

Just relative to your first question, Sean, we don't have necessarily a practice of announcing restructurings and then letting the people find out, first read about it and then hear about it.

Normally they hear about it at the time the position is eliminated and then later on we may or may not report about that.

It's part of the normal course of operating for Amphenol.

And so I wouldn't say that we have any announced restructurings which still have to come.

Most -- in the fourth quarter, all of this was accomplished and the people were gone and there were some additional also in the first quarter.

But there is nothing that is still sort of announced and pending to execute upon.

From a CapEx standpoint, from a historical standpoint, we've spent between 2% and 4% of sales depending upon the particular quarter and depending upon sales trends.

I think we spent about 2.5% in the first quarter of sales and I would expect our CapEx spending to probably stay at about that level given no significant change in topline expectations.

Amitabh Passi, UBS.

Thanks, Diana, the first one was for you.

Just a couple of clarifications.

Why were debt expense and share count lower sequentially quarter-over-quarter?

Interest expense was lower because the interest rates have continued to come down.

The unhedged portion of our borrowings are at LIBOR rates and those rates are extremely low right now.

And the share count has a number of elements that are included in it, one of which would be dilutive impact of options which move sort of in conjunction with the share price.

The lower the share price, the less dilutive the assumed exercise of options are for the fully diluted share count.

Okay, and then is it fair to assume that you've suspended your share buyback program for the time being?

You know, I think that every quarter as we have said in the past, we look at what opportunities we see from an acquisition standpoint and the acquisition program in our mind is the most important and number one priority from a use of cash and use of liquidity standpoint because it's the option that provides the best long-term growth potential for the Company.

And in the first quarter, as you see, we completed what we consider to be a very important acquisition for the Company.

I think what happens in future quarters will depend upon the demands that we see out there relative to acquisitions that we may do in the future.

Sanil Daptardar, Sentinel Investments.

Yes, thanks.

A question on the inventories.

You talk about inventories were up about (inaudible).

Was it sequential or on a year-to-year basis and where do you think that the sales level has to go in order to bring down your inventories to low 80s?

The inventories were up sequentially in terms of days I think from about 88 days or so to about 93 or so this quarter.

I think that we expect to bring inventory days down in the second quarter given the guidance that we provided for sales.

Okay, so you mean to say that around $[670] million in sales will bring your inventories days back to about the low 80s or like --?

No, I don't think we have given a specific inventory days target.

I think we have said that we are continuing to work to reduce inventory and sales is not the only element of inventory reduction.

It also is influenced by how much you procure and how much you produce and so forth.

So --

Jeff Beach, Stifel Nicolaus.

Yes, this question might be for Martin, but could you compare the current period with the 2001/2002 time period specifically?

There's a lot of fear that this recession when it's over is going to be deeper than the last couple of recessions.

And I just wondered if you could make some comments about how this current recession is shaping up?

That's a very broad question in the sense that if I had 12 economists around the table, we probably would get 12 different answers.

So I add mine on.

I think what is important for us at Amphenol is we deal with the downturn.

We don't know how long it will take.

It has definitely a different shape in terms of its origin and so forth than the one in 2001/2002.

But clearly what we have done is essentially the same approach as at that time; adjust quick, stay focused on the market, retain strong profitability.

And I think applying the same strategy will seem a good path forward for us.

We have seen a significant reduction in Q4 in demand and adjusted quickly, kept the profitability and I think to say now whether the second half will rebound or not is not yet visible to us.

But it is a very fine --a good sign for us to see that the second quarter clearly is already somewhat leveling out and not has an outlook over further decline that we have seen between Q4 and Q1.

So I think from that standpoint it may even be shorter than the period that we have seen even if comparisons for the year will remain very, very difficult because we obviously had in 2008 very strong increases of sales and profitability also throughout the third quarter.

So the comparisons will remain somewhat difficult.

But from a sequential standpoint, I think it is good news that you have two quarters down and the third quarter already shows a more stabilizing situation.

So that is very encouraging compared to the 2001/2002 period.

Thanks.

Stephen Fox, Analyst.

Good afternoon.

Just one other question on the Times acquisition.

Could you talk about how complementary it is from a manufacturing standpoint?

How specifically do you have to integrate it into your existing operations?

Yes, Steve.

It is, as you know when we do acquisitions, our strategy is not one to just integrate companies and look for sort of optimizing of factories.

Certainly Times has a lot of complementary processes that we have.

They have a factory here in Wallingford and in addition, they have a factory in China and we understand the processes and we certainly can be helpful to each other on making improvements.

In addition, we see good opportunities from a sourcing standpoint with the company and I wouldn't say that we look at all towards any consolidations or optimization from that standpoint.

It's a very complementary company really in all respects when we look from a market standpoint, from a managerial standpoint, a technology standpoint, as well from a manufacturing standpoint.

Great.

Thanks.

Carter Shoop, Deutsche Bank.

Just a quick question and then a clarification.

I was surprised that the PP&E didn't go up a little bit more following the acquisition.

Do you expect depreciation and amortization to be roughly equivalent to where it was in 1Q the second quarter?

And the clarification is did you say the tax rate for 2Q is 27.5%?

Yes, I said the tax rate was 27.5%, which would be about the same as it was in the first quarter without the adjustment that we booked.

We will have a little bit of an increase in amortization primarily as a result of the intangibles that we recorded when we did the purchase accounting for the TMS acquisition, which relates customer relationships and technology, the types of things that you value in purchase accounting.

But I wouldn't expect it would be that significant from a quarterly perspective.

We would take just one more question if there is one.

Amit Daryanani, RBC.

Thanks, Diana, just a quick question for you.

Could you just talk about the revolver?

I think the limit is $1 billion with a $250 million accordion.

Do you think you can get the accordion extended if you needed at this point?

I would not think that given the terms of this agreement are extremely favorable compared to what the current market environment will allow us to obtain.

So I would not think that the exercising of the accordion is anything that anybody should count on.

Very good.

Well, thank you all very much for sharing your time with us.

We appreciate your interest in the Company and wish you all a very happy rest of the week and a happy second quarter.

Thank you for attending today's conference and have a nice day.