安費諾 (APH) 2009 Q4 法說會逐字稿

Hello and welcome to the fourth-quarter conference call for Amphenol Corp.

(Operator Instructions).

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.

Ma'am, you may begin.

Thank you.

Good afternoon.

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

I'm here together with Adam Norwitt, our CEO, and we would like to welcome everyone to our fourth-quarter call.

The results we released this morning, I will provide some financial commentary on the quarter, and Adam will give an overview of the business and current trends.

The Company closed 2009 with a strong fourth quarter, achieving sequential growth in sales and earnings per share and exceeding the high end of the Company's guidance.

Sales were $758 million, up 6% in US dollars and 5% in local currencies over Q3.

This represents the third quarter of sequential sales growth for the Company in 2009.

Compared to last year, sales for the quarter were up slightly in US dollars and down 2% from the local currency perspective.

From an organic standpoint, excluding both acquisitions and foreign exchange, sales were down 7% compared to the fourth quarter of 2008.

Breaking down sales into our two major components, our cable business, which comprised 8% of our sales in the quarter, was down 8% from last quarter, in line with normal seasonal patterns and up about 1% from last year.

The Interconnect business, which comprised 92% of our sales, was up slightly from last year and up 7% sequentially.

We saw sequential growth in the majority of our markets, and Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $138 million compared to $142 million last year.

Operating margin was 18.3% compared to 18.9% last year and 17.3% last quarter.

Operating income is net of stock option expense of about $5 million or 0.7% of sales in the '09 quarter compared to $4.5 million or 0.6% of sales in the '08 quarter.

From a segment perspective, in our cable business, margins were 15.5%, up from 11.2% last year and down from 16.1% in Q3.

The margin decline from last quarter relates both to higher relative material costs and lower volumes.

In the Interconnect business, margins were 20.6% compared to 21.4% last year and 19.6% in Q3.

The improvement in margin over Q3 results from the combination of higher volume levels and continued aggressive management of all elements of costs.

Overall we are extremely pleased with the Company's operating margin achievement of 18.3% in Q4, up a full 1% sequentially.

This represents a conversion margin on incremental sales over Q3 of 34%.

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

Interest expense for the quarter was $9.5 million compared to $10 million last year.

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

In the fourth quarter, the Company had an effective tax rate of 27.5% compared to a rate of 23.4% in the fourth quarter of 2008.

The lower tax rate in Q4 2008 represents an accumulative adjustment to achieve a 27.5% rate for the full-year 2008.

From an EPS perspective, the lower tax rate in the fourth quarter of 2008 added $0.03 per share to the '08 results.

We currently expect a tax rate of about 27.5% in the first quarter of 2010.

Net income for the quarter was $88 million, approximately 12% of sales, a very strong performance on any industry comparative basis.

Diluted earnings per share as reported was $0.50 for the 2009 quarter and $0.56 in the 2008 quarter.

Both periods include one-time items.

In 2009 earnings were reduced by a $0.02 charge relating to our financing which I will talk about in a minute, and in 2008 earnings were increased by $0.03 for the tax adjustment I mentioned earlier.

Excluding one-time items, EPS was $0.52 in Q4 of '09 and $0.53 in Q4 of '08.

Orders for the quarter were $765 million, up 3% from Q3 and up 8% from last year, resulting in a book-to-bill ratio of approximately 1.01 to 1.

In November the Company issued $600 million of senior notes due 2014.

The notes were sold at a slight discount and carry a 4.75% coupon.

Proceeds from the notes were used to repay the Company's revolving credit facility.

In conjunction with the issuance of notes, the credit facility, which matures in August of 2011, was amended to reduce the commitment from $1 billion to $752 million.

At year end borrowings and availability under the facility were $150 million and $602 million respectively.

The note issuance has a number of benefits for the Company, including the extension of staggering of the Company's debt maturity schedule, expansion of the Company's investor base and an increase in the Company's availability and liquidity.

As mentioned earlier, in conjunction of the repayment of borrowings under the credit facility, the Company terminated certain interest swap agreements and incurred a one-time charge of approximately $0.02 per share.

On the basis of the new debt structure, the Company expects Q1 interest expense to be comparable to Q4 levels.

The Company continues to be an excellent generator of cash.

Cash flow from operations was $152 million in the quarter.

Cash from operations was increased by about $6 million as the Company increased the amount of receivables sold under its securitization program.

Excluding this impact, operating cash flow was over 160% of net income in the quarter.

Working capital reduction was a strong contributor to cash flow in the quarter with improvement in both receivable and inventory performance that I will talk about in a minute.

Cash flow from operations and net proceeds from the senior note offering of $594 million and proceeds and tax benefits relating to stock option exercises during the quarter of $36 million were used primarily for $17 million of capital expenditures, distributions to non-controlling interest of $18 million relating primarily to the purchase of a residual interest in a subsidiary during the quarter, acquisition-related expenditures of $7 million and $638 million of repayments under the Company's revolving credit facility.

In addition, short-term investments increased by $19 million, and cash and cash investments increased by $77 million.

In addition to its very strong operating cash flow and availability under its revolving credit facility, the Company had cash and cash investments of approximately $424 million at the end of the year and has more than sufficient liquidity to meet its needs.

The Company also has a $100 million receivable securitization program that expires in May 2010 under which $82 million in receivables were sold at the end of the year.

In accordance with existing accounting rules, this facility has been accounted for off-balance-sheet as the sale of receivables, and fees associated with the sale, which were about $400,000 in Q4, have been included in other expense.

Effective January 1 of 2010, these rules have been modified by Statement of Financial Accounting Standards #166, and as such, in 2010 the Company will report transactions under the facility as short-term debt, and the related receivables will remain on the balance sheet.

Fees associated with the facility will be included in interest expense.

The Company's credit ratios and ratings have always treated the facility as debt and are, therefore, not affected by this accounting change.

During the quarter the Company continued its very strong focus on balance sheet performance, and this contributed quite nicely to cash flow in the quarter.

Days sales outstanding were reduced further to 64 days compared to 72 days at the end of last year, an excellent achievement for a global company.

In addition, inventory was held relatively flat in the quarter from Q3 levels, and inventory days decreased to 80 days from 83 days at the end of September and 89 days at the end of last year.

We are certainly very pleased with this achievement.

Debt at the end of the year was $753 million, down from $792 million at the end of September, and net debt was under $370 million at the end of the year.

If the receivables facility were included in debt at the end of 2009, debt would have been $835 million and net debt would have been $450 million at the end of the year.

The Company's leverage and interest coverage ratios remain very strong at 1.3 times and 15.6 times respectively, and EBITDA in the quarter was approximately $173 million.

Certainly from a financial perspective, we continue to be very pleased with the strength and consistency of the Company's performance.

Adam will now provide an overview of the business.

Well, thank you very much, Diana, and I would like to also extend my welcome to all of you on the phone, and hopefully it is not too late to also wish all of you a happy new year here in January of 2010.

We appreciate your joining the call.

Today I would like to first highlight the fourth-quarter and 2009 full-year some of our achievements.

I will then discuss the trends and progress in our served markets, and then finally, I will take a few moments to comment on our outlook going into the first quarter of 2010.

Relative to the fourth quarter, the fourth quarter was an excellent quarter for Amphenol as we continued to take advantage of a market environment that is recovering in many segments.

Revenues were essentially flat to prior year, and we increased sales sequentially by 6%, representing the third consecutive quarter of sequential growth in both sales and income for Amphenol.

We were especially pleased to further expand our already strong operating margins to 18.3%, as well to generate excellent cash flow of $152 million.

Both of these are a reflection of the strength and discipline of our agile organization and the entrepreneurial management team that Diana mentioned.

For the full year of 2009, despite the impact of the global economic crisis, we are very proud of our strong results.

For 2009 we achieved $2,820,000,000 of revenues.

We achieved operating margins of 17.3%, and we achieved earnings per share of $1.85, net of the expense related to the bond offering.

At the beginning of the downturn, early in 2009 and actually at the end of 2008, our team reacted quickly to adjust costs in the face of the sudden reduction in demand, thereby ensuring that we could preserve strong operating margins and continue to generate strong cash flow.

We continued at that same time to focus on technology innovation and customer support, resulting in Amphenol strengthening our position across all of our end markets.

In particular, even with the economic slowdown, the proliferation of electronics in all applications continued, driving more demand for our leading Interconnect technology.

The continued efforts at diversification enabled Amphenol to further expand our market position into new markets, into new customers within those markets, and into new applications within those existing customers.

We believe that we have created a strong platform as we close 2009, which creates then optimism for the future.

Now relative to the trends and progress in our served markets, we are very pleased to return to year-over-year growth in several of those markets and to achieve sequential growth from the third quarter in most of those segments.

First, the Military/Aerospace market represented 22% of our sales in the quarter.

Sales in that market increased by 4% from prior year with declines in sales related to the commercial aircraft segment more than offset by strength in military vehicles and communication systems, as well as acquisition-related gains.

We were especially pleased to experience 7% sequential growth in that aerospace market.

While trends in the commercial air and European military spending remain uncertain, we have continued to see strengthening in orders throughout the quarter related to our North American military programs, and we are optimistic that our broad program participation, together with the increasing electronic content and military equipment, will drive performance despite any potential shift in government defense funding priorities.

We expect demand in the Military/Aerospace market to strengthen somewhat in the first quarter and look forward to a strong long-term outlook for that market.

The industrial market represented 9% of our sales in the quarter.

Sales in that market decreased 20% from prior year but increased 12% from the third quarter, the first quarter of sequential improvement in the industrial market since the second quarter of 2008.

We are very pleased to see improvement in many segments of the industrial market, including transportation, alternative and traditional energy generation, rail mass transit and the medical market.

While it remains too soon to predict the degree of any full recovery in the industrial market, we do expect further improvement in the first quarter and are optimistic that our efforts in these growth segments will build momentum into the future.

The automotive market represented 7% of our sales in the fourth quarter.

Sales increased a very strong 51% from prior year and did not experience the expected seasonal downturn in the fourth quarter, instead growing 13% sequentially.

We have now experienced three consecutive quarters of increased vehicle production volumes due in part to government incentive programs, as well as inventory replenishment due to greater consumer demand.

We expect demand in the automotive markets to moderate in the first quarter yet remain very encouraged by the longer-term outlook due to increased electronics in cars, our strong position in new hybrid electric vehicle platforms, as well that expanding opportunities in Asia.

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

Sales in that market increased 3% from the prior year, but declined seasonally 5% from the third quarter as expected.

We expect this market to moderate in the first quarter and continue especially to be mindful of pricing dynamics as we had begun to see some reduction in discipline among the participants in the broadband cable market.

We are especially encouraged, however, by our ongoing development of new cable and Interconnect products for the broadband market, which we believe positions us very well for the future.

The information, technology and data common communications market represented 23% of our sales in the market.

Sales were up slightly from prior year, and we were very pleased to see continued strong momentum across the IT market with sales increasing 18% from the third quarter.

In particular, we experienced in the fourth quarter strengthening demand for high speed and power products used in servers, as well as enterprise storage and networking equipment.

While we expect demand to be stable in the first quarter, we remain very excited by our ongoing new program wins with our new advanced technologies, which position us for continued expansion of our market position in the IT industry.

The mobile networks market represented 14% of our sales in the quarter.

While sales decreased 6% from prior year, the mobile network markets strengthened as expected in the fourth quarter, growing 5% sequentially.

Our strong relationships with OEM customers and wireless operators positions us very well for future phases of network buildouts, including importantly in emerging markets.

We expect demand to seasonally moderate in the first quarter.

Longer-term, however, we believe we will benefit from our design-ins on new base station models, which are accelerating with the increasing data demand that new devices are imposing on the networks globally.

In addition, we continued to diversify our business geographically, creating new platforms for growth in the wireless infrastructure market.

The mobile devices market represented 16% of our sales in the quarter.

Sales in that market decreased 2% from prior year and 8% sequentially, unexpected seasonality.

We expect further seasonal moderation of the global market demand in the first quarter.

However, we continue to strengthen our position in expanding smartphone applications.

Our comprehensive portfolio of products for mobile devices, as well as our preferred supplier relationships with all major device makers, positions us very strongly for the future.

In summary, I am very proud of our organization as we have continued to execute in the fourth quarter and to close 2009 very well in a dynamic demand environment.

While 2009 no doubt was a very challenging year, it is very rewarding that we have sustained our long-term industry-leading performance and strong profitability through capitalizing on our distinct competitive advantages.

Those are our leading technology, our increasing position with customers in diverse markets, our worldwide presence, our lean and flexible cost structure, and most importantly, an agile, entrepreneurial management team who has a true passion for performance.

Now looking forward to the first quarter of 2010 and based on constant exchange rates, as well as the return to normal seasonal patterns.

We now expect in the first quarter the following outlook.

We expect sales to be in a range of $735 million to $750 million.

We expect earnings-per-share to be in the range of $0.49 to $0.51.

Regardless of the size and the scale of the economic recovery, we are very confident in the ability of our outstanding organization to achieve superior performance and to capitalize on the many opportunities to expand our market position and very importantly our profitability.

With that, operator, we would be very happy to entertain any questions that they may have.

(Operator Instructions).

Amit Daryanani, RBC Capital Markets.

Congratulations on a good quarter there, guys.

Maybe just to start off with, I think the big issue I think everyone is dealing with is being the inventory and component shortages across the supply chain.

Could you just talk broadly what do you see in the supply chain from your perspective, and are you seeing connectors specifically get in short supply?

And if so, do you see any impact or benefit on the leadtimes and pricing?

I think certainly we have seen the same reports that I'm sure you have relative to certain constraints.

We, in particular, have not seen shortages of our own products, and in fact, we have done an excellent job we believe in satisfying upside demand from customers, and we have seen quite some upside demand.

If you look at our IT market, up 18% sequentially in the quarter, it is not so easy to ramp up the factories, to ramp up the tooling, to get the people really in place to support such an increase in demand, and our team around the world did just a fantastic job of executing on that.

We certainly have heard of semiconductor shortages in certain things, but have not seen any material impact to our business from shortages of other components.

That is helpful.

Then I guess a question on the Interconnect margin.

You guys have done a really good job sequentially on them.

But when I look at the year over year dynamic, right, Interconnect sales are basically flat, but your operating margins are still down 130 basis points.

Is there something structurally that has shifted, or is it a reflection on how fast we came down through the recession and how fast we have to ramp up?

I think from when we look from a year over year perspective that the primary difference in profitability would be a slightly higher SG&A in the current quarter than what we would have seen in the fourth quarter of 2008.

There is a portion of that, about a third at that, that perhaps you would prefer to as a structural change, which really just has to do with slightly higher stock option expense and some higher amortization in the non-cash charge that relates to some of the acquisitions that we did.

But I would say that the majority of the difference has, I would say, more to do with the fact that, as we did take SG&A down in 2009 in response to lowered sales levels, we intentionally maintained a certain higher level of spending in areas like R&D and certain sales areas on certain important technologies that we view as high growth as we look out in 2010 and beyond.

And so while we did take SG&A down I think 5% or 6% on a year-over-year basis, it does still when you look at Q4 to Q4 last year show us a slightly higher level, and I think that is probably the most significant change.

Having said that, we are certainly extremely pleased to have achieved 18.3% ROS in this fourth quarter and feel extremely good about the conversion margin from a sequential standpoint, which was 34% or so and is in excess of our goal of 25%.

So I think that we from an overall profitability standpoint feel that were in a very good place here to support good profitable growth and margin expansion in the future.

Diana, that makes perfect sense.

But if I extrapolate that further, that would imply that as sales start to come back you should see at least for the near term some outsized incremental margin expansion, right?

You know, I think we have a goal of 25% conversion margin.

We certainly always try to do better than that.

We had a lot of success in the fourth quarter as I think from an operating perspective everybody in the Company works very hard to achieve the level of profitability we were able to, and I think we will just have to see how things go here now in the new year.

Amitabh Passi, UBS.

I just wanted to follow up on the SG&A comments.

As we look into the fourth quarter of 2010 and perhaps for 2010, what is the best way to think about how SG&A potentially ramps for the year and particularly for the first quarter?

Sure.

I mean I think in the first quarter we have given guidance at the high-end that is slightly down from the fourth quarter.

So it's a little hard -- I mean this is a relatively minor change in sales, so it would be kind of hard to talk about exactly what SG&A does.

But I think in general we would look for SG&A to grow at about half of what sales would grow at and would look to really maximize the conversion margins through that process.

Certainly there are certain areas in R&D and in selling that are variable with sales and need to be adjusted both up and down, and then there are certain other elements of SG&A that we would love to keep pretty fixed.

Got it.

And then perhaps one for Adam.

I'm just curious, Adam, as you look through full-year 2010, which up end markets are you most excited about?

Where do you see sort of the most potential for upside surprise and which ones do you think would be relatively more like lackluster going forward?

Thanks very much.

We are obviously not giving guidance for 2010.

I think there remains still uncertainty in the macroeconomic situation.

That being said, we see great opportunities in all of our markets.

I think as we saw over the last several quarters the diversification of Amphenol has been just a tremendous asset for us to drive a real sustainable, long-term performance advantage in this industry, and that comes really by seeing how in each quarter those markets can move slightly differently.

In any given quarter, you can have some strength in one and not some strength in the other.

I think over the course of 2010 we see great opportunities in all of them.

I mean if I just mention the Internet market, for example, where we have seen very strong growth, we continued to see excellent underlying drivers of strength there.

The expansion of data demand, the acceleration of things like video on the Internet and other real data demand drivers.

In the aerospace market, we also see that proliferation of electronics that comes.

We see it also in the mobile phone market where the smartphone expansion that continues to accelerate where Amphenol has excellent penetration across those platforms.

Really in each of our markets we believe we see great opportunities for our own position to expand, regardless of what will happen in each given quarter.

Got it and just one final one for me.

You talked about some signs of some I don't know call it adverse pricing movements or potential for adverse pricing movements in your cable products.

I was wondering if you could just maybe elaborate on that.

Yes, I think we are always a very disciplined participant in that market and we are never the first mover on price, even if we maintained very close attention to what the competition is doing, and we have just started to see some signs where maybe that discipline of other participants is not as strong as it was in the past.

It is not something that we raise alarm bells about, but rather it is something that we stay very mindful of.

And we are very fortunate that we have taken a lot of steps over the last several years to reduce our costs and remain competitive in that market where we have also excellent position with new technologies and new value-add products.

But relative to the cable portion of that where we see certainly there are a limited number of competition, we will watch very carefully how that pricing goes, and we will be responsive if need be.

Matt Sheerin, Thomas Weisel Partners.

In your guidance in your commentary you talked primarily seeing normal seasonal patterns in Q1 in most of your segments.

Of course, we have been better than seasonal in the last couple of quarters.

And that it is a little bit different from what we are hearing from other suppliers and semiconductors and components that continue to see a little bit better than seasonal strength.

Does that have something to do with the fact that your leadtimes are still in good shape and customers don't have to look out and maybe double order or book out further so your visibility perhaps is not as strong?

No, I think that could certainly be an element.

We have, as I said, done an excellent job of keeping our support of our customers very strong, even with the recent increases in demand.

We have not had to extend dramatically leadtimes.

We have worked very closely with customers to make sure we have reduced our cycle times.

I think that again what you see sometimes in semiconductors or other components is not necessarily analogous to what we would see.

I think what is the good news here is that we believe that with these patterns really getting back to normal that is a great sign in terms of how this kind of cycle of the downturn has evolved, and we feel that that's a very positive outlook.

Okay.

Great.

And then just lastly, on the acquisition front, I think you announced some small use of cash for acquisitions.

Could you talk about that?

And obviously you have a big cash position now.

How does the pipeline for M&A look?

From a cash flow perspective in this past quarter, the dispersments that we made related to earnouts and those types of things on prior deals that were closed in prior quarters.

Maybe I will let Adam comment on the pipeline part of the question.

No, you are correct that we have a tremendous capacity in the Company, especially with the recent debt offering that we did, which had a very favorable debt offering.

So we have strong capacity, and we have a strong pipeline as well to suit that.

We continue to work that pipeline as we have always done.

There has really been no change or dramatic shift in how we manage the acquisition process, and we continued to be very, very close to many companies where we see strong technology in a good complementary combination with Amphenol.

When those will happen, we certainly always are trying to accelerate those processes, but again, you cannot predict with any certainty when those will happen.

But the pipeline still to us is a very strong pipeline and one which we continue to build as well.

Craig Hettenbach, Goldman Sachs.

Just following up on the topic of M&A and more broadly capital allocation, can you talk about how you view stock buybacks versus M&A opportunities this year?

Yes.

I think we certainly always have favored new product development and M&A as the use of our capital, and I think we will continue to look for M&A opportunities where we see good opportunities.

Okay.

And if I can go back to the book-to-bill just above one, can you talk about how the linearity of orders were throughout Q4 and just how visibility is different at all going into Q1 versus recent quarters?

In terms of the linearity of orders, during the quarter I think they were pretty linear.

I mean I think that the book-to-bill ratio for Q4 at this level I think we would consider pretty normal.

So I don't know that we see anything in either the order patterns or in the book-to-bill that would indicate any significant change from what we have seen in prior fourth quarters.

Jim Suva, Citigroup.

Congratulations to you and your team.

A quick question, as we think about the difficult year that we just passed and Amphenol had to go through some difficult decisions of restructuring and cutting costs, to the point about operating margins, we know that the December '09 margins operating compared to December of '08 were down year-over-year.

More looking forward, I wonder if the linearity of the cost-cutting and the leverage thereby allow us -- and it looks like this is true for the March quarter -- that year-over- year operating margin should be higher in 2010 versus 2009?

Can you talk about does that logically make sense?

I think, Jim, that, as you know, we have this goal within the Company to achieve at least 25% conversion margins from a sequential perspective, and clearly the guidance for Q1 indicates a volume level that certainly is significantly in excess of the volume levels we would have achieved in the prior year.

And so we certainly would expect to see the improvement in profitability that one would expect to see given those goals and given that volume.

Great.

And then a couple of quick housekeeping questions.

Can you just comment a little about you had mentioned that you're doing a little bit more stock option grants, which you expensed into your earnings as part of the cost of doing business.

Can you talk a little bit about what we should expect for diluted share count for, not only March but going forward, and then also what we should think about for the debt that you did?

Is the interest costs amortized over the life of the loan, or did you take all those discounts -- I'm sorry, the discount, did you take that all upfront right now?

Or how --?

Sure.

On the first question relative to weighted average shares, I think the fourth quarter would be a decent proxy for 2010.

And the fourth quarter was a little bit higher than the prior quarter, largely due to just the increase in the stock price, which, as you know, mathematically has an impact on the value of options that are outstanding, which go into the diluted weighted average share calculation.

Relative to interest expense, we would expect interest expense not to be all that different than it was in Q4 with the one exception that fees on the receivables program, which in 2009 were included in other expense, will now be included in interest expense under the new accounting rules, and so there's 400,000 or so a quarter that will move from other expense up to interest expense.

But if you make that adjustment in [Q9], I think the first quarter of 2010 would be about the same.

Great.

And CapEx?

CapEx, you know, our historical range has been between 2% and 4% of sales -- 2% being a real maintenance level and 4% being quite a big expansion level.

I think that in 2009 our expenditures were a little lower, probably 2.5% or so of sales.

In 2010 I think we would expect more of a normal rate, which would be somewhere between 3% and 3.5% of sales.

Thank you and congratulations.

Steven Fox, CLSA.

Can you just talk a little bit about the challenges facing you in manufacturing in China with maybe some extra inflation pressures this year?

Are there any other plans to offset that with different footprint expansions, and how do you see that environment this year?

We certainly have in the past gone through time periods where China has waxed and waned in terms of the cost and inflation.

And currently it does seem that there may be some more degree of inflation in China, this is really not a different phenomenon than we have faced in the past, especially in 2007 when you may recall that there were quite significant increases then in the minimum wage in China.

I think what we will do this year is really from the same playbook as we adopted that year, which is to hold our general manager on the ground accountable for an operating income line.

And what that means is they will find other ways.

So whether that is moving to other locations in China, implementing semi-automation in some of the facilities in China, as well as going to new locations, we continue to expand in other locations now having four facilities in Africa, having three facilities in India.

So China is not the only answer for Amphenol, and we will continue on this kind of unending quest for low cost.

At the same time, China is a very important market for us.

So I'm very pleased with the diversification that we have in China.

We have 22 factories today in China, not on any one location but rather dispersed around the country.

So that in the event there is a kind of locality where there is some issue to the total of Amphenol, that will not be a material impact.

And so that diversification that we have within China is also really a tremendous asset that we have as we face potential inflationary pressures around that country, and those factors include really in every region in China.

So I'm very comfortable to see that even if we see some input prices or some input costs going up in China that we will be able to manage that as we have in the past.

Great.

And then just as a follow-up, I know you sort of touched on handsets for this year.

Given that there seems to be increased competition, maybe increased innovation around smartphones, etc., can you talk specifically about some of the key products that maybe Amphenol is going to see benefit from those types of trends?

I think in smartphones you certainly have a higher content on a smartphone than you have on just a regular voice only phone.

And our content really runs the range of all of those Interconnect antenna and electrical mechanical hinge products that go on the bill of materials.

We see great success with all of the smartphone makers with a real breadth of product offering.

So there is not one product in particular that I would point to and say that only benefits from smartphones.

Rather our entire portfolio of products does benefit from smartphones.

I think what is great about smartphones as well is that these are higher cost items that are sold to sometimes more discerning customers that the attention of the customer to a quality technology is maybe even more focused than it would be on the low-end phones.

And that really plays very strongly into Amphenol's advantage of having a very high technology solution at the same time as we can offer cost competitiveness from our very low cost base that we have in that market.

Will Stein, Credit Suisse.

I just wanted to follow up on something you spoke about before about the cable business where you were starting to see some maybe lack of discipline among the bigger competitors here.

Margins in this segment are still quite a bit higher than they were a year ago, 15.5% versus just over 11% last year.

Do you think cost actions will allow you to remain at this relatively high level in cable, or should we expect margins there to trail off?

Well, I think that we will certainly strive very hard to preserve margins, but look, if there is significant pricing pressure that comes, there is still a high material content in that product.

And so you cannot take -- you probably cannot take enough cost out to preserve margins if there is such a pricing action.

That being said, we continue to also focus on products in that market where there is more value-add.

And I think that value-add product provides the opportunity to offset just the bulk cable margins.

And that has also been a contributor to our expenses of our margins over the last couple of years, not just the reduction in material costs but also the expansion of our products that sell into really where there is more value in that product.

More technology, more that you can offer to the customer.

So we will continue to focus on that.

We will continue to focus on new innovation, and we will continue to focus on reducing our costs and all of the overhead that goes with that with offshore manufacturing and other methodologies.

But if there is a real dramatic reduction in price, then certainly that could have the impact of hurting our margins.

Thanks and just another follow-up.

Diana, you spoke about the changes in the accounting related to Accounts Receivable financing and and having to replace the balance sheet going forward.

Is that going to change the Company's policy as it relates to factoring receivables?

No.

I think we have always viewed the facility as a low-cost option relative to additional cash flow, and I think whether it is on balance sheet or off balance sheet does not make any difference as far as that is concerned.

So I think it does not change our view.

It is just a nice addition from a credit perspective at a lower cost than our other facilities, and we would continue to have such a facility and to use such a facility in the future.

Shawn Harrison, Longbow Research.

Diana, first, on the cash cycle and the working capital management, would we expect to see any substantial change or improvement in the cash cycle days in 2010, or should we assume just kind of a general stability around the back half range going forward?

Yes, I think we have certainly made some significant improvements during 2009.

I think we went into 2009 when the recession and so forth started with -- both from a receivables and an inventory perspective with slightly higher ratios than we would have liked, and I think we've done just a great job from an operating perspective to get those really down I think to some of the best levels we have been able to achieve as a Company.

I think from an inventory perspective I would believe that we would be able to maintain -- we are around 80 days, and I would think that that would be a good estimate for what we would be able to do next year.

From a receivables perspective of 64 days.

which we achieved at the end of this quarter, is probably one of the best results I think that we have had, and if I was going to model 2010, I probably would use the range that would be 65 to 67 type of days, which I think would still be certainly a great performance given the global nature of the business.

And I think that from a cash flow perspective, we would still expect to achieve certainly very strong cash flow in 2010.

Okay.

And then, Adam, as a follow-up, I have a two-part question.

First, on the automotive markets, you suggested you would see it down sequentially for the March quarter.

Maybe if you could just speak in terms of what you're seeing there, just a seasonal factor, if it is just a pause in demand and maybe the trends you are seeing globally?

And then the second question, on a different topic, is, maybe if you could talk a little bit about some of the success or the opportunities in cross-selling the Times Microwave in those products in the Amphenol product line, the potential for 2010?

Sure.

Thanks very much for the question.

I think relative to automotive and then the first quarter we do expect this just to be slightly down, which is really from our perspective seasonality.

In that market we did not actually expect it to be up in the fourth quarter, and that continues to be a very resilient growth return for that market, which up 51% year-over-year in the fourth quarter certainly from some low numbers in the year prior, but that is still very fantastic performance for that market.

And we would expect this to be in a more normal phase now going into the first quarter.

Relative to Times Microwave, which we acquired about nine months ago now, that has been an outstanding acquisition for Amphenol, and you mentioned the cross-selling.

Certainly with acquisitions that we always look for opportunities to bring the technologies of that new Company, new family member as it were, into the existing customer relationships that we have and vice versa, and I can tell you that with Times Microwave we have already seen good success there in really having a response from our major customers that say, now we see with Amphenol really the complete offering, which includes now this RF technology for the military.

RF technology in the military is an area of real expansion potential.

If you look at all the new equipment, whether that be vehicles, airplanes, boats, whatever that is, all of these equipment are now being fitted with detection devices whether it be IED detection with new radar systems so that the amount of RF content in a system today is much greater than it was 10 years ago.

And certainly in the military you do not always see moves happening in one quarter or two quarters, but we have certainly seen signs of real response from our customers that this can be a tremendous addition to the Amphenol family.

Wamsi Mohan, Bank of America/Merrill Lynch.

Can you comment perhaps on the distribution inventories in the defense segment, which were particularly lean at the beginning of the fourth quarter?

How many points of the sequential improvement in that business would you attribute to an inventory replenishment, and what is your view on the level of inventory and distribution for the defense segment?

Well, what I can tell you relative to their own inventory I don't know necessarily that we are seeing a replenishment, so to speak.

I mean certainly they reduced their inventories over the last year.

And so our sale into distribution was certainly suffered during that time period.

And I can tell you that in the fourth quarter our sales into distribution were strengthening by quite a large margin from what we had seen in the past.

Now what did that represent as a percent of the total growth in the aerospace, which grew sequentially by 7%?

I could not tell you exactly what that is with granularity, but certainly it was a component of that growth.

Now going forward are they going to build back inventory to the levels that they had one year ago?

I would not personally think that will.

What I do think is that the distributors are adopting a policy where they say that we will service the business and we will continue to try to service the business that we say, but we will not necessarily fill our coffers with inventory in the Military/Aerospace.

So I think that that is really real demand that we have seen from them as opposed to that pullback in inventory that we saw for a number of quarters before.

Okay.

Thank you.

That is helpful.

Is there any way you can help quantify how much of a headwind raw material cost increases were to operating margin dollars either on a quarter-on-quarter or year-on-year basis that you were perhaps unable to offset through your initiatives of product improvement, mix or pricing or anything else?

We don't have the sort of consolidated statistics on commodities and so forth that I know some others have.

We just don't run the business that way.

We view material costs as just part of the cost of the product, and I think as Adam said in response to an earlier question, our general managers manage their business as a whole.

And if we see pressure on one particular element of cost, we look to try to offset it through reduction of another cost or adjustment of price, whatever is appropriate for that particular business.

And so we just do not compile all these statistics because, quite frankly, we would not use them to run the business.

And so I'm afraid we just cannot give you the specific percentage changes that relate to specific commodities.

I think you should just see with the 34% conversion margin leading to 18.3% operating margin, regardless of the puts and the takes, so to speak, from raw materials that we had excellent profitability, and that comes down to exactly what Diana said.

That that is really the goal of our general managers and our executive team around the world.

And whether one input or another goes up or down, that is not really an excuse at the table in Amphenol.

And just to follow up on that Adam, are there revenue opportunities that you think are being left on the table that can you actually deliver a higher revenue growth and 25% conversion margin if you wanted, or is the demand really not there to support that?

No, I don't think we are leaving revenue on the table to the benefit of profitability.

Certainly we are disciplined on price.

So let me just say that we are not going after everything with price.

But at the same time we go after opportunities with our customers where they value the total offering from Amphenol, the technology, the relationship, the breadth of the product that we can bring to their application.

And price is one of those, but all of those other aspects come together to bring a real total value to that customer, and I don't believe that we are really leaving something on the table because of a pricing policy.

Brian White, Ticonderoga.

When we look at innovation by your customers and measure it by new product introductions this year, what market are you seeing the most activity?

Well, I think we have seen a tremendous amount of activity in the IT market.

We have seen a tremendous amount of activity in the mobile infrastructure market with the new base station platforms that have come out to satisfy high-speed devices.

We see a lot of innovation among smartphones, which we talked about earlier.

And those are three areas where clearly the innovation over the last year despite this very, very severe downturn that we all had to live through has continued to accelerate as if there were no downturn, and the innovation that is really being driven by user experience being improved.

Whether that be a smart Internet device that you hold in your hand, whether that be having the core systems just being really clogged with data, the number of servers that are being required to support some of these Internet sites, all of this sort of fatality of data demand is driving those three markets very, very strongly regardless of the downturn.

At the same time, we see it also in the aerospace industry, one where you don't expect quick technology innovation in aerospace.

But then you do now see it as the wars that are being fought are more dynamic, and you have to equip soldiers with new functionalities on a much more rapid basis.

All of a sudden, we start to see actually innovation in that market accelerating as well.

So I really believe that in every one of our markets we see great opportunities for this innovation, and our goal as a Company has always been to create an Interconnect technology that can enable the application of our customer to be better and thereby sell their product more effectively.

I think that very simple technology development strategy has paid strong dividends in 2009 and creates a great platform for the future as well.

Okay.

And Adam, just in the data center there is a convergence of storage networking servers.

I'm curious the impact that might have on the connector content and specifically how well positioned is Amphenol for that trend?

I think whether you have the convergence, which there is certainly one camp, whether you have the cloud, which is another camp, and whether you have the multi-sourcing, which is the third camp, all of these have great benefits for Amphenol.

Because at the end of the day, how do these systems compete?

They compete on performance.

They compete on performance vis-a-vis data, they compete on performance vis-a-vis power consumption, and all of those are areas where our devices and our Interconnect products can enable a further functionality of those products.

Whether it be a more efficient power consumption -- and power is a huge deal in the data center today.

It is becoming almost on the same par with data transfer speeds.

And on the data transfer, that is another area where our high-speed connectors really lead the industry in providing a total solution.

And what Amphenol can offer into these integrated systems more than almost any other supplier can do is a modeling of the end-to-end Interconnect system that our engineers can provide through our integrated approach to that system where that is something that creates a tremendous value for our customer if they are creating an integrated system.

I show no further questions at this time.

Very good.

Well, we appreciate everyone's interest in the Company.

I wish you all a very strong and happy new year as we go forward into 2010, and we look forward to talking to you again in three months.

Thank you very much.

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