安費諾 (APH) 2010 Q2 法說會逐字稿

Hello, and welcome to the second quarter earnings conference call for Amphenol Corporation.

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

(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 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'm Amphenol's CFO.

I'm here together with Adam Norwitt, or CEO, and we'd like to welcome everyone to our second quarter earnings call.

Q2 results were released this morning.

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

We'll then have a question-and-answer session.

The Company had a record second quarter, achieving strong growth in both sales and earnings per share and exceeding the high end of the Company's guidance.

Sales were $885 million, up 15% in US dollars and 16% in local currencies over Q1 of 2010.

Compared to last year, sales for the quarter were up 29% in US dollars and 30% in local.

From an organic standpoint, excluding both acquisitions and currency impact, sales in Q2 2010 were up 15% sequentially and 28% year-over-year.

Breaking down sales into our two major components, our cable business, which comprised 8% of our sales, was up 6% from last year and flat with last quarter.

Sales growth over last year relates primarily to an increase in spending in international broadband markets.

The interconnect business, which comprised 92% of our sales, was up 31% from last year and 16% sequentially.

We saw strong demand in all of our markets, and Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $176 million compared to $115 million last year.

Operating margin was 19.8% compared to 16.9% last year and 18.8% last quarter.

Operating income is net of stock option expense of approximately $6.2 million or 0.7% of sales in the 2010 quarter compared to $5.2 million and 0.8% of sales in the 2009 quarter.

From a segment standpoint, in the cable business, margins were 13.5%, down from 15.8% last year and 14.9% last quarter.

The margin decline relates both the higher relative material costs and the impact of price reductions.

In the interconnect business, margins were 22.3% compared to 19.3% last year and 21.1% in Q1 of 2010.

The improvement in margin reflects the benefits of proactive and aggressive management of all elements of cost as volume has ramped back up.

Overall, we're extremely pleased with the Company's operating margin achievement of 19.8%.

This represents a conversion margin on incremental sales over 2009 of approximately 30%, and we continue to believe that the Company's entrepreneurial operating structure and culture of cost control will allow us to react in a fast and flexible manner and achieve strong profitability going forward.

Interest expense for the quarter was $10 million compared to $9.1 million last year.

The increase over the prior year relates primarily to the inclusion in interest expense of fees on the Company's receivable securitization program in accordance with the adoption of the new accounting rules effective January 1, 2010.

In 2009, these fees, which totaled approximately $400,000, were included in other expense.

The remaining increase in interest expense is due to higher average interest rates in the 2010 quarter.

In Q2 2010, the Company had an effective tax rate of 21.3% compared to a rate of 27.5% in the second quarter of 2009.

The 2010 quarter includes a $10 million or $0.06 per share net benefit relating to a reduction in international tax expense due primarily to the favorable settlement of certain tax positions and the completion of prior year audits.

Excluding these adjustments, the effective tax rate is approximately 27.5%, and we currently expect a similar tax rate in the third quarter of 2010.

Net income excluding the tax benefit discussed above was $119 million, approximately 13.5% of sales, a very strong performance.

Diluted earnings per share in Q2 was $0.74 as reported and $0.68 excluding the one-time tax adjustment.

This is a growth of 58% over the prior year quarter, an EPS growth rate of approximately two times sales growth, demonstrating the Company's significant operating leverage.

Orders for the quarter were $910 million, up 10% from Q1, 2010 and up 37% from last year, resulting in a book to bill ratio of approximately 1.03 to 1.

The Company continues to be an excellent generator of cash.

Cash flow from operations was $104 million in Q2, or 86% of net income in the quarter, excluding tax items.

For the six months operating cash flow is approximately equal to net income excluding tax items.

Cash flow from operations, along with proceeds and related tax benefits from option exercises of $5 million was used primarily for $25 million of capital expenditures.

Acquisition related expenditures, net of cash acquired of $11 million relating to the previously disclosed acquisition of an Asian manufacturer of specialty industrial interconnect products in April, dividend payments of $3 million, $20 million debt reduction, increases in short-term investments of $36 million and a $5 million increase in cash.

In addition to its strong operating cash flow, the Company had availability of $602 million under its revolving credit facility, $72 million under its receivables facility and cash and cash investments of approximately $519 million.

The Company has more than sufficient liquidity to meet its needs.

During the quarter, the Company renewed its $100 million receivables securitization program for a three-year term ending in May of 2013.

In accordance with previous accounting rules, the facility was accounted for off balance sheet as a sale of receivables.

Effective January 1 those rules were changed, bringing the facility on balance sheet.

At the end of the quarter, borrowings under the facility were $28 million and are reflected as long-term debt.

At the end of December, approximately $82 million of receivables were sold under the facility and were excluded from the balance sheet.

The Company continued its strong focus on balance sheet performance in the quarter.

Days sales outstanding were unchanged from March as 66 days and within the Company's normal range.

Inventory in the quarter decreased seven days to -- 75 days at June from 82 days at the end of Q1 as inventory built in Q1 for higher Q2 demand was flushed out.

We are very pleased with the strong operational execution that resulted in this inventory reduction.

In addition, accrued liabilities at the quarter end reflect bigger income tax and interest payments in the quarter in accordance with the related payment requirements.

Debt was $782 million at June 30 compared to $802 million at the end of March, down $20 million, and the Company's leverage and interest coverage ratios remain very strong at 1.09 times and 16 times, respectively.

EBITDA in the quarter was approximately $209 million.

From a financial perspective, this was an excellent quarter.

Adam will now provide an overview of the business.

Well, thank you very much, Diana, and I'd like to extend my welcome to all of you on the phone today.

It's a pleasure to speak with you on the occasion of our second quarter earnings release, and today I'll highlight some of those achievements in the second quarter, discuss the trends and the progress in our serve markets and then I'll provide some commentary on our outlook for the third quarter.

The second quarter was a record quarter for Amphenol in both revenues and earnings as our organization took advantage of a healthy demand environment to expand our overall position in the many diverse markets that we serve.

As Diana mentioned, revenues increased 29%, essentially all organic from prior year and a very strong 15% sequentially, representing our fifth consecutive quarter of sequential growth.

We were especially pleased to continue our track record of generating strong operating leverage, leading to further expansion of our already leading operating margins to 19.8%.

I would also like to note especially that we were successful in this quarter in growing our earnings per share at twice the rate of our revenue, achieving 58% growth in EPS.

This is a significant achievement, especially given our already high levels of profitability.

We generated strong cash flow of $104 million which was used in part to fund our successful and ongoing acquisition program.

We're very proud of these results which are a direct reflection of the strength and discipline of our agile organization and our entrepreneurial management team.

In early July, we did complete the acquisition of Borisch Manufacturing.

Borisch is a leading manufacturer of value add, interconnect and electromechanical systems for the military aerospace market, with else in the last 12 months of approximately $100 million.

The acquisition of Borisch builds upon a long-established strategy in Amphenol of offering highly engineered, value add solutions to customers in the military aerospace market, creating additional strength for us in this very important segment.

Also, consistent with our ongoing strategy, this acquisition is in line with finding complimentary companies with strong management, leading technology and an excellent market presence.

We're very optimistic that our acquisition program will continue to create value for Amphenol in the future.

Now, turning to the trends and progress that we have made in our served markets, the military and aerospace market represented 19% of our sales in the second quarter, and sales increased 8% from prior year and 8% sequentially, with strengths especially in communications and other military electronics systems.

We were especially pleased in the quarter to experience a return to year-over-year and sequential growth in products for commercial aerospace applications and look forward top continued improvement in this important segment.

While we expect overall organic demand in the military aerospace markets to moderate seasonally in the third quarter with the traditional vacation periods in North America and Europe, we continue to have a very positive outlook for this market as new electronic functionalities continue to proliferate across all categories of military aerospace equipment.

The industrial market represented 13% of our sales in the quarter and sales in that market increased a very strong 78% from prior year and 36% sequentially as we experienced a continued improvement across all segments of the industrial market.

We're very pleased to see an acceleration of our sales of new products for alternative energy applications across all regions, confirming our long-term strategy of focusing on new product development for those applications.

Although we do expect some degree of normal seasonal moderation in the third quarter, we remain optimistic that our efforts in the many growth segments of the industrial market will continue to build momentum into the future.

The automotive market represented 6% of our sales in the quarter, and there again, sales increased a strong 30% from prior year as we benefited from the continuing worldwide normalization of vehicle volumes.

Importantly, we are beginning to see contribution from products designed into new hybrid electric vehicles and continue to make products in designing in our innovative products into these new vehicle models as they are released.

Our long-term outlook for the automotive market remains very positive with the general increase of electronics in cars, as well as the expanding opportunities that we see in Asia.

Our sales into the broadband communication market represented 9% of revenues in the quarter, and sales increased 13% from prior year and strengthened as well from the first quarter.

We expect this market to strengthen further in the third quarter as we move into a typically more robust build out period, and we look forward to the new opportunities for growth that continue to be created by our ongoing development of new cable and interconnect products, as well as by our position in growth markets overseas.

These both position us very well for the future in the broadband market.

The information technology and data communications market data communications market represented 23% of our sales in the quarter and in this market, sales were up a very strong 58% from prior year.

We have seen demand continuing to improve across all segments of the IT market.

In this market, we are participating in the ongoing acceleration of data rich application, which is being driven in large part by the proliferation of new mobile internet devices, as well as by the ongoing expansion of video on the internet.

These exciting technology shifts continue to create tremendous demands on networking and information technology equipment, driving continued momentum in this important market.

Demand as well is still healthy for our high speed and power products which are used in servers, enterprise storage and networking equipment.

We expect further strengthening of demand in the IT market in the third quarter, driven by market expansion as well as our program wins with new advanced technologies, both of which position us for continued expansion in this market.

Our sales into the mobile networks market represented 14% of revenues in the quarter.

We're very encouraged to experience a return to year-over-year growth in the mobile networks market with sales increasing 12% from prior year and 10% sequentially.

We are enjoying growth related to next generation network upgrades in developed geographies, much of which is related to expansion and support of new mobile internet devices.

In addition, the prospect of additional investment in next generation networks in developing countries has the real potential to support additional demand in the second half of 2010.

Although we expect some moderation in the third quarter, we remain very confident in the strength of our broad presence in new base station platforms, as well as our growing position in a diverse range of emerging markets.

Mobile devices represented 16% of our sales in the quarter.

Sales in this market increased a very strong 26% from prior year and 34% sequentially.

We benefited from Amphenol's leading position on new platforms, including especially those products sold into new smart mobile devices.

We anticipate further sequential growth in the third quarter as our comprehensive portfolio of products for mobile devices, combined with our preferred supplier relationships with all major device manufacturers, continues to position us strongly for the future.

In summary, I am very proud of our organization as we have executed extremely well in a very dynamic demand environment.

Our continued focus throughout all economic cycles on reacting quickly to changing customer needs while ensuring a relentless focus on profitability has resulted in both a strengthening of our market position, as well as significant expansion of our industry leading margins.

The achievement of these new records in sales and earnings so soon after the economic crisis clearly confirms the strength of our strategies and solid execution.

And our success is a direct result of these distinct and competitive advantages, our leading technology, our increasing position with customers in diverse markets, our worldwide presence, a lean and flexible cost structure, as well as an agile entrepreneurial management team.

As we look forward into the third quarter and based on a continuation of current economic trends, as well as normal summer seasonality in North America and Europe and also assuming constant exchange rates, we now expect in the third quarter the following results.

We expect sales in the range of $880 million to $885 million(Sic-see press release) and earnings per share in the range of $0.67 to $0.69.

I am very confident in the ability of our outstanding organization to build on this new platform of record levels of performance and to capitalize on the many opportunities that we see to further grow our market position and to expand our profitability.

And at this time, operator, we would be very pleased to entertain any questions that may be there.

Thank you.

(Operator Instructions) Your first question comes Amit Daryanani of RBC Capital Markets.

Good morning, guys.

Just a couple of questions.

First off on the Borisch acquisition, at least on paper or from the website, it looks like it's a bit more of a contract manufacturing company versus an interconnect electromechanical company.

Just what percent of that business is really assembly versus components, and what does the margin profile look like for the company?

Amit, thanks so much for the question.

Certainly websites can look like websites.

But I want to tell you, we have had a strategy in the military aerospace market for essentially a decade to expand into value add products for our customers which completes that offering of interconnect products that we sell.

We have done this with an acquisition early on in 2001 where we got into the back plane assemblies for the military aerospace market ,and we were continue to do that over that decade, including an acquisition very similar to Borisch in Europe that we made over the last 24 months.

We're very pleased with Borisch, and we think that that company is going to continue to allow us to create for our customers in the military aerospace market a total solution of highly engineered products.

I'm not going to go into the breakdowns of various products of a company that is just $100 million in sales over the last 12 months, but I can tell you that the customers of Borisch and I have already met many of them.

They value them not because they can make something to a print that is given; they value them because they create value through engineering and through support of those programs.

And there is also a very significant component of products that we make today, as well, for Amphenol and we think this will fit very nicely with the Company.

And I guess, Adam, what is the margin profile for the company right now?

Again, we're not disclosing margins of the Company, but this is a very healthy margin Company.

Your next question comes from Amitabh Passi, UBS.

Hi, thank you.

First question, Diana, can you just help us understand some of the dynamics in the cable product segment?

You mentioned margins again, compression to 13.5%.

Maybe just some thoughts, how should we think about margins going forward?

Do you think they've kind of stabilized?

Are you seeing rationality back in the market, or is there still ongoing downward pressure?

Sure.

I think that the margin profile that you see in Q2 compared to the prior period does reflect the impact of some lower pricing actions that really happened towards the end of the last quarter.

Nothing new I think has really happened, I think more towards the end of the last quarter.

Nothing new has really occurred this quarter, and compared to the prior year, certainly from a materials standpoint, there has been some pressure there.

I think that, you we would expect that the margins, barring any significant change in either one of those two items, which we haven't seen as of this point, that the margins would probably be more stable at the current level, assuming that we have similar sales levels.

Got you.

And then, Adam, just a bigger picture question for you.

A lot of concern on everybody's minds and on Europe, incrementally Asia.

Maybe you could give us some sense just in terms of geographic trends across most of your end markets, what are you seeing across the major geographies?

Sure.

Well, this is a very good question, Amitabh.

We actually were very pleased in the second quarter to see strong double digit growth in every region and even on a sequential basis, had excellent growth in all of our regions.

One thing I should note is that Asia today is essentially for Amphenol the same size as North America.

We're very proud of this achievement.

Over the 77, 78 years of our history, this is quite a momentous achievement for the Company, to see that growth in Asia has now created a region which is on equal footing with North America.

Clearly, you have -- as we discussed in the guidance, there are summer vacations which come, and those create some seasonality, especially in the traditional markets mil/aero and industrial in Europe and North America, and that would not be surprising nor abnormal.

We have not seen any significant -- to refer to these macro trends, we have not seen any significant impact from these macro trends into our customers.

Rather, what we are seeing around the world is a continued drive for new electronics applications.

And whether this is in Europe, in North America, in Asia, there is clearly a strong drive towards upgrading of electronics in every one of the segments that we have, whether that be in IT, whether that be in automotive, in aerospace or whatever.

And so we -- we think that whatever these macro trends may be, we see in our market with the customers with whom we participate real sense and real basis for optimism in terms of that proliferation of electronics that is ongoing.

Next question comes from Matt Sheerin, Stifel Nicolaus.

Yes, thank you.

So Adam, just coming off of a very strong quarter here, stronger growth than you expected, could you talk about your ability to meet customer orders and lead times, how you are able to ramp?

And were there any gating factors like product shortages or manufacturing shortages that kept you from shipping product to customers?

Yes, Matt, that's an excellent question.

I'm very pleased to report that we continue to support very strongly our customers.

We do not have any shortages that are material in terms of saying that customers are screaming for these parts and we are the bottleneck here.

Clearly, there are shortages in the universe, but these are not shortages of our suppliers or of us.

But rather, we see a pervasive shortage that we see of semiconductors.

And I hear -- when I visit customers with the executives, the sourcing executives of our customers, they appear to be spending the majority of their time flying around the world trying to find somehow sources of semiconductors, but relative to our products and those which we sell, our organization has reacted so fabulously to this incredible uptick, 15% sequential growth in the quarter, five straight quarters of sequential growth, coming out of what was not a fun situation in the fourth quarter of 2008 and the first quarter of 2009.

Whereby as you all know, we really flexed our organization downwards, reducing headcount by 21% from peak to trough and now have really flexed it back up to satisfy those customers.

And we are getting just excellent commentary from our customers in terms of our ability to satisfy their upside.

And what many say is, if we had more semiconductors, we would give you even more today.

So does that explain why your book to bill is relatively modest compared to what we've seen in capacitors, for instance, and semiconductors?

And is that actually a positive for you because you have better visibility into what customers really need?

Yes, you took the words out of my mouth there.

Your summary, I would just say that is absolutely correct.

1.03 book to bill is a very strong book to bill for us, but you are not going to see with us this kind of year in advance ordering and double ordering that comes to those who can't support the demand that is out there today.

We are very adequately supporting the demand of our customers, and a 1.03 book to bill is a strong reflection of that.

Your next question Craig Hettenbach, Goldman Sachs.

Yes, thank you.

Just following up on the reference to the macro situation versus the micro trends that you are seeing.

Can you provide us with, in terms of your visibility and linearity as you went through the quarter, just how things developed in Q2 and kind of entering Q3 here?

Yes, sure.

Look, June in the second quarter tends to be a big month, and that was no different.

I think we did not see a kind of -- any surprising linearity, as you would put it, in the second quarter.

So coming out of the second quarter, we remain comfortable enough to give the strong guidance that we have given here in light of the seasonality and the vacation period.

I think that, again, we don't -- we read the paper like you do, but what we really pay attention to is what we hear from our customers and we have not seen any kind of change from our customers.

Most of them say the same thing, there is a disconnect between what we see in the papers and what we are seeing from our customers.

Okay.

If I can just follow up on the capital allocation front and post this recent acquisition, what else are you seeing out there in terms of the environment, and has that changed in terms of M&A opportunities?

Yes, I think we're very pleased to have another acquisition this quarter and as you recall, we reported an acquisition in the first quarter.

And we continue to see a healthy pipeline for acquisitions for us.

I think there are -- there's many talk about what happens with valuations, when the market comes up, it comes down.

At the end of the day, the way that we develop acquisitions is by developing long-term relationships with companies, by meeting with those companies, becoming acquainted and getting close to the management team.

We believe that those efforts that have been ongoing for many years show a very, very strong pipeline for us for the future.

Acquisitions remains our top priority in terms of capital allocation, together with new product development and investment on behalf of our growth.

But that acquisition pipeline for us remains a very healthy one.

And once again, as we look at these acquisitions, the receptiveness of the entrepreneurs and the owners of these companies towards becoming a part of Amphenol just grows with every day.

They see the success that we have.

They also see that we have an organizational culture and an organizational structure that is extremely hospitable to an acquisition, regardless of whatever idiosyncrasies may be.

In such an acquisition, they know that they fit in Amphenol and they can find a platform for future growth in our Company that they may not find with others.

And so I think that allows us to really excel in acquisitions and allows us to build a business over time, as we have done for a decade, has this element of acquisitions coupled with strong organic focus.

Your next question comes from Brian White, Ticonderoga.

Your line is open.

Okay.

Adam, when we look at the auto market, it looks like it was the only market that was down sequentially in the June quarter.

I didn't get a number from you.

Is that true?

Yes.

This is exactly what we said at the time of our guidance in the first quarter, and we were not surprised by that performance, so that is correct.

Okay.

Just slightly, by the way.

I think in local currencies it might have been slightly off.

Local currency was up, I think, a couple percent, but in US dollars, it was down sequentially slightly.

Then we expect seasonality in the September quarter in that market?

Yes.

You have, again, several shutdowns.

There is some discussion about how long those shutdowns will be compared to other years, but my understanding, especially in the European automotive market, which as you know, represents slightly more of that business than other regions for us, that there are going to be shutdowns this year.

I know my phone is not ringing as much and the gentleman who runs our automotive business tells me that, his phone is not ringing as much from customers while they are on vacation for a few weeks here.

Your next question comes from Steve O'Brien, JP Morgan.

Hi, thanks for taking my question.

Looking at the guidance for the third quarter, should we be assuming about a $25 million incremental contribution from the Borisch acquisition?

And if so, maybe that puts sequential guidance sort of down 2% to 3%.

Does that seem like a return to kind of more normal seasonality when you look at the puts and takes here?

Yes.

The acquisition was completed during July, so we wouldn't quite have that much impact in this quarter.

I think for the fourth quarter, that would be the $25 -- 5 million.

It's probably more like $20 million, so your percentages are off slightly.

But I think that general guidance for the quarter from an organic perspective does reflect a slight sequential decline for the reasons that Adam talked about before with the North American and European vacation periods having some impact on -- primarily on the mil/aero and industrial markets sequentially.

Understood.

And if I could follow up on that, I think last quarter the commentary was the industrial channel and not restocked, despite some strong sell through.

Huge growth this quarter.

Would you say that inventories have started to normalize there?

Yes, we have seen -- here you talk about distribution and industrial.

We have certainly seen good growth in distribution.

I don't know that there is necessarily significant increases in inventory in that channel, but we have seen -- there's good sell through.

The sell through is very, very strong in industrial, and I think over all our industrial business, we see very, very strong end demand that is there.

And so I think the guidance that we have, and that's really the root of your question, the guidance is a reflection of the fact that we had an extremely strong sequential growth, 35% or more in the quarter, and we view that it's prudent to see kind of a normal seasonality coming on the heels of that.

We have really recovered in that industrial business, which was traditionally 13% of our sales.

It dropped as low as 9% at the low point, and today is back to 13% of our sales as a total.

We're very, very pleased with that recovery, which is quite quick for a market that doesn't always -- is not always having such nimble behavior.

Your next question comes from Shawn Harrison, Longbow Research.

Hi, good afternoon.

Two questions.

The first dealing with -- maybe Diana, you can discuss on the connector side.

Lower copper prices, does that begin to benefit you later this year?

And then also, just what the overall pricing environment is doing right now, is it still relatively stable?

And then my second question just has to do with typical fourth quarter seasonality.

Past years maybe you've seen a little bit of growth.

Is that an assumption we should hold true in terms of typical seasonality for the December quarter?

Sure, maybe to start with the last question first.

I think -- we're not giving guidance for the fourth quarter, but I think if you would go back and look at what the typical seasonality has been, I think what you said would be fair.

I think that the third quarter does have this little lower level of activity in North America and Europe.

Clearly, that is not the case in Q4.

And so we would expect, I think, some -- to see some sequential improvement in a normal environment.

From a material cost perspective, whether copper or any other, I think that certainly, we use copper and gold and many other commodities in the production of our product.

I think as we have mentioned in the past, that we manage the total margin of our product, and that any given point in time have to deal with issues on material price, on labor, on inflationary pressures in certain parts of the world.

And we really look to manage the margin of each product on an individual basis to maximize that margin, and I think that we've been able to deal very well with commodity prices.

I think that typically when those prices start to go down there's a strong relationship between the price environment and the cost environment.

The customers that we sell to are also certainly very aware of the way that cost pressures, whether it's material or labor, move up and down.

And so I wouldn't think that anyone should expect to see some sort of a windfall that may result in margins if copper or any of the other input costs move in any dramatic manner.

I think that we've done a great job to manage that balance between price and cost to work towards achieving very strong margins.

We did that in Q2, I expect we'll do that in Q3 and in Q4 and into next year.

But I wouldn't expect to see, again, any specific windfall from any specific movement in material costs in our margins.

Okay.

Thank you very much.

Sure.

Your next question comes from William Stein, Credit Suisse.

Thanks.

Another question on pricing, actually.

With the very good revenue results we saw in the quarter, should we think of that all -- or almost entirely coming from better than expected units, or did pricing help materially on the connector side in the quarter?

We don't really compute on a consolidated basis selling 100,000 products exactly what the price movement is in a quarter.

I think that if we did compute it in an aggregate fashion, I don't think it would be all that significant.

I think that in many markets, prices tend to move down and not up.

So I think that to sort of make some sort of an estimate, I would think that the majority of the sales growth has to do with unit volume and not necessarily with pricing.

And then quickly on the margins if I can, at 19.8%, you're very close to your target.

You still achieved sequential drop through of just slightly above your target level, I think 25%.

I think you delivered about 27%.

Should we still think about a drop through of 25% on a kind of ongoing basis on the operating line from here?

Yes.

I think 25%, I think as you know, is the longer term target that we have.

We sort of view this as a minimum expectation and we've been able to achieve better than that in the past few quarters as we've had a fairly significant ramp up in volume.

And so I think it would be prudent to probably look to this 25% or so as we move into the rest of Q3 and Q4.

There's always an opportunity for us to do better, but we'll just have to kind of wait and see.

Your next question comes from Jim Suva of Citi.

Thank you and congratulations Adam and Diana and to your teams.

Thank you, Jim.

A question for you, Adam.

In the past, your company through some acquisitions has done some of them that needed some meaningful restructuring, like moving cost basis and production procurement from certain parts of the world, such as high cost to low cost.

And some of your other acquisitions have been more integration and synergistic that will provide future more content that you're going to do.

Adam, can you maybe talk a little bit about which -- on Borisch, is this more of the later, more content driven and futuristic as opposed to restructuring since it looks like it does a fair amount of information that maybe the government may want in North America?

And for Diana, a question.

You won a favorable tax ruling.

Does that mean that potentially, future, the tax rate could come down lower for the company since up won it in your favor?

And can you just confirm that the inventory for your acquisition was not on your balance sheet since I believe is closed after you closed your books?

Thank you.

Sure.

The acquisition did close in July, so we don't have anything on our books that would have been tricky to be able to record it prior to closing.

But from a tax rate perspective, I think, as I mentioned, these one-time discreet items were exactly that, and we expect the tax rate barring any other dispute items that could occur in the future, to be at that 27.5% rate.

And Adam, I think -- go ahead.

Yes.

Jim, just relative to your question on which of these kind of categories does Borisch fall into, let me just preface it by saying we are not a company that goes out and buys projects and restructuring projects.

Certainly we have acquired companies in the past where there has been a drive to improve the profitability and performance of the Company.

But we are not a company that goes in and says, let's go replace all the management and stick in new management and bring in consultants and restructure it.

That's not been our model at all.

In the case of Borisch, clearly, we view Borisch as an opportunity to both expand our offering to our current customers with whom Borisch may or may not do business, in terms of offering a more complete solution to those customers, number one.

And number two, offering to those customers of Borisch, also additional opportunities to expand their bill of materials participation.

What I can really tell you about the military aerospace market and why this acquisition makes so much sense is customers in that market have consolidated and have professionalized.

And professionalized meaning they have gone in many cases from somewhat of a diaspora of independent units to now a companies who say, we need to reduce our supply base, we need to go to a supplier who can offer us a one-stop shop in terms of all of our interconnect and electromechanical needs.

Borisch creates for us here in North America a new level of ability to go to these customers who are becoming more global, who are becoming more integrated and who are becoming more professional in terms of their sourcing management.

And that just creates tremendous opportunities for us, all with the backdrop of the proliferation of electronics with these customers, many of whom have never had to deal with complex electronic systems in the past.

They were making a vehicle, for example, which had just mechanical features to it.

And now such a vehicle has a full suite of electronics that are integrated into that system, and they don't know how to deal with that.

So the addition of Borisch, together with our -- with Amphenol makes for us now in the eyes of those customers a true partnership.

And it's a partnership that is embedded with technology, more than anything else.

It creates a platform of technology support for those customers.

Your next question comes from Wamsi Mohan, Banc of America, Merrill Lynch.

Yes, thanks a lot.

So,Adam, you commented that there was no significant impact from a demand perspective, but on the margin, are things tougher?

Especially in Europe, are you seeing any of your European business units start to cut heads in response to what they might be seeing from an order perspective or perhaps from a perspective that your phone is ringing less?

Look, maybe we don't do a lot of business in Greece, but I can tell you that we are not really seeing this.

We have seen real healthy demand in those sectors that we participate in Europe.

Some of the markets that were down before have not grown as quickly, but as up mentioned, we have even started to see growth in commercial aerospace, which was probably that market in which -- we have a significant European component and where we -- there had been somewhat more of a muted recovery in that market, and we're very pleased to start to see that.

And if you read the releases coming out of Farnborough this week, which are quite an indication of what's happening in that market, there seems to be a tremendous amount of positivism coming out of Farnborough and the commercial air market today in terms of orders which are four times higher than they were a year before.

In terms of the new jetliners that are flying, I think even the 787 made the trip from Everett all the way to Farnborough .

And so that plane is flying and making demonstrations today.

So again, Greece I'm sure is a problem for those who have invested in Greece.

I'm sure Spain and Ireland are the same.

But the customers with whom we deal continue to see strong momentum and opportunities, regardless

Okay, thanks for that color.

And then on the guidance front, I understand the fact that Europe, there is a seasonal slowdown and parts of the US business, there's the same seasonal slowdown.

But that's something that you encounter every year, whereas on an average basis, if you look over the last several years, your guidance for third quarter, and if you adjust for the acquisition here, we're looking down 2% or so sequentially.

Historically, that number has been a positive number, so is there -- how should we interpret that?

It's not -- it has to be other reasons above and beyond just what happens every year from the European slowdown.

Well, I think that these markets that we talk about that will be slower in Q3, I think, are ones that have historically had that pattern.

I think that it is true in some prior quarters where we've gotten an enormous sequential, sort of boom in places like the wireless device market, there have been -- if you go back historically, the wireless infrastructure market can also be quite lumpy.

There are years where we've had a big pop in Q3 in that market.

And the same is true of the IT and data com equipment market where you can have circumstances to your point where you have just these real big, big, big, big pops.

Particularly in sort of the -- in the September timeframe in those markets.

And I think that is the circumstance where you then would see this other sort of -- this higher sequential performance in aggregate for the Company in the third quarter.

And it's certainly true that we are not guiding to expect a big sequential pop in any of those markets.

I think that when Adam went through the individual markets, he did say that we do expect to see a sequential increase in mobile devices, we do expect to see a sequential increase in IT data, but I would say that they're more modest.

And I think given the very strong sequential performance, , that we've had in some of these markets over the last, quite frankly, what, four or five quarters?

This seems to be the prudent way to think about the third quarter ,and I think those are the thoughts that have gone in to establishing

Your next question comes from Stephen Fox, CLSA.

Hi, good afternoon.

You guys have covered a lot of ground, but just I'm still a little confused on the industrial market.

It was up 36% quarter-over-quarter.

Can you sort of break that down a little bit?

I understand the market has been coming back, but that's still a very robust number.

No, it is a very robust number, and I think 78% year-over-year, 36% sequentially, as we mentioned, we have seen just excellent growth coming out of our products for alternative energy, that is one segment which is relatively new.

We have talked about our efforts in that market for quite some time, but we're very pleased to see really the fruits of those efforts coming here in the second quarter.

We also believe that we continue in other segments to expand our position.

I don't know that that industrial market is the totality.

If you were to look at market surveys and reports, we would be growing at 78%.

We believe that we are expanding our position in that market.

We have new technologies, new product developments.

We have significant new investments in China, for example, where we have strong vertical integration which creates for us also a platform to capitalize on that market which clearly has strong growth prospects in the industrial area.

Whether that be in rail mass transit, whether that be in factory automation, in infrastructure related.

So across the board, I think our strategy which has been a long-serving strategy, to really break up that industrial market into individual segments, oil and gas, geophysical, alternative energy, rail mass transit and so on has really paid some dividends here in terms of our position with the customers at the time of expansion.

Clearly,when everything in the industrial market is dropping significantly, which it did a year and a half ago, to expand our share at a time when everything is going down is not so easy.

But those efforts pay real dividends at the time of growth and I think that is what we are seeing here today.

The new products, the new technologies and those ongoing efforts that we have around the world with customers.

So that segment was mainly Amphenol driven, it wasn't as much market and demand, it sounds like?

No, I think there's clearly a market recovery in industrial.

That's no question.

You see it somewhat in distribution, but in terms of the growth rates, I think the significance of our growth rates, we believe in the end has some expansion of market position.

Okay.

That's what I was getting at.

Alright.

Thank you very much.

Thank you.

Your next question comes from [Tamil Depteter], Centennial Investments.

Thanks.

Inter connectors segment, you had 31% of year-over-year growth in the second quarter.

How much of that came from the market share gains?

Yes, we don't -- wouldn't be able to comment specifically on how much of the growth came from share gains.

This isn't something that we'd be able to really track.

Could you just give an idea about what rate the market grew at probably?

We don't know what rate the market grew at that point, not all the industry players have even reported their results yet, so it would be very hard for us to say how much the market had grown.

We're actually the first one that reports, so --

Okay.

You talked about the double ordering thing that pretty much, you know exactly what the customer wants and you can satisfy the demand.

But if the customer is over estimating demand, probably they might over place on you.

At any point of time, if they will place, do they have the ability to pull back, and what happens to your -- are there any kind of commitments from the customer, or they can pull back at any point of time?

Yes, I think that our visibility today really comes a lot more from contract with customers and understanding what their demands are.

We have customers that place firm orders, we have customers that order based on forecast sharing, where a certain portion of it is firm.

We have customers who pull inventory from hubs where the inventory remains on our books until the customer pulls it.

So I think that we have a vast array of methods of having demand come from customers.

And I think we have a pretty good track record of being able to interpret that demand and do a pretty good forecasting process for the business on the basis of that.

Thank you.

Your next question comes from Lou Miscioscia, Collins Stewart.

Okay, thank you.

Sort of tailgating on that question, maybe to ask it a different way.

If we look back to the first quarter, how much would you say that your growth was above what you'd say the market growth was?

Sort of trying to get an understanding as to when your growth might start to moderate a lot closer to the market?

Yes, look, we don't really track market statistics or compare necessarily our growth.

There are a couple of guys that cover the market.

If you want to sort of get information from them, you can maybe make your own conclusions about what the market's doing.

I think that our growth rates versus the markets that we sell into from an equipment perspective have been very strong and I think compare well to the other folks that you probably follow.

So I don't know that we can really get into a discussion about market statistics and market share and so forth on a call like this.

I think what we can say though, is that last year, we know that our revenues last year declined only 13% and the industry was down approximately 26% and that we are now on the back of that clearly outperformance last year, are growing at a very significant rate, establishing record income -- record revenues.

And I think also, the sequential growth of 15%, again, as Diana said, we will see what others will report and remember the industry is not just made up of three or four publicly traded companies, there are many in the industry.

But I think when all is said and done, this 15% sequential growth will compare very, very favorably.

And just reiterating, those -- there have been a few reports coming out of our customer base, and you can compare these numbers yourself and see that they compare extremely favorable, especially when you look by market segment.

Okay.

One quick follow-up.

Like to see the days of inventory down.

Could you just maybe comment on what your lead times are now and if you are concerned of any double ordering out there?

Yes.

We -- again, we don't have a consolidated lead time.

I think Diana mentioned, we sell more than 100,000 different products to seven different markets, to thousands of customers around the world, and we don't keep a kind of track of what is our overall lead time.

Clearly, as I've said, we have a very healthy response to our customers, and we're able to satisfy our customers very, very well today given even that significant increase in revenues that we have had over the last several quarters.

And so from a lead time standpoint, I couldn't tell you actually what is our consolidated or average lead time, but it is not meaningful to us to run the business.

What's meaningful to us to run the business is, are we satisfying our customers, and there I can tell you that we very clearly are satisfying our customers in their needs today.

(Operator Instructions) Your next question comes from Amit Daryanani of RBC Capital Markets.

Yes, guys, just have two quick follow ups.

I guess maybe when you look at your revenue growth this quarter, is the revenue growth dramatically different for the products that you sell directly to the OEM versus the growth you're seeing in the channel, be that the EMS or distribution?

No, we've had good growth actually in all channels during the quarter, as we did last quarter.

Got it.

And then Diana, just on the CapEx side, you guys are basically hitting all-time highs on the revenue line right now.

Would you have to up the CapEx north of that 3%, 3.5% range you've historically talked about, and would that happen in the back half of 2010?

Yes, I don't think that we would go above the 3.5% sort of range.

I think we've been historically between 3% and 4%.

We could hit 4%,, but that's I think the highest it's been in the 20 years or so that I've been here.

So I think right now the CapEx has actually -- is actually probably a little bit on the low side in the first half of the year as a percentage of sales.

And it may come up some, but I think for the year we probably would still be in that 3%, 3.5% range.

Perfect.

Thank you.

Thank you very much, Amit.

Currently at this time we have one question left that comes from Amitabh Passi of UBS.

Hi, thank you.

I had also one follow-up question.

Adam, a lot of chatter in the media relating to increasing wage pressures in China.

Most companies I think that have operated in China have kind of dealt in an environment where wages have gone up 15%, 20%, but now we're incrementally hearing chatter about wages potentially doubling.

So I just wanted to get your perspective.

A, from your perspective, is there any validity to the concern about wages doubling and B, how do you sort of mitigate that risk if it were to materialize?

This is a very good question.

And I think we have lived, as you mentioned, through kind of the perfect storm of price increase -- or cost increases in China back in 2007 with currency revaluations, with wage increases and this year is potentially no different.

Whether those wages are going to double, that is really a question mark, I think.

When you were over there and I was in China the week that some of these announcements came out with respect to Foxconn and some of these other notes in the media, and there is always a different side to the story in terms of what's really happening.

Clearly there is a minimum wage increase, and that is something that is in the same sort of ballpark as what we experienced in 2007.

Beyond that minimum wage increase, what happens in terms of the market and the ability to hire people, we have not yet seen any significant changes in that respect vis-a-vis direct labor.

And remember that these numbers that were thrown around were talking in general.

And there are plenty of people, for example, who we employ who make more than 2,000 renminbi a month.

We have engineers, we have supervisors, we have a lot of staff in China.

We are not just running a factory with only workers at benches.

And so these numbers need to be taken in the context which is, there is a full organization in China ,and what do these blanket numbers really mean?

At the same time, clearly in Amphenol, our organization is oriented in such a way that our general managers who run these 24 facilities that we today have in China, are not just held to one metric and say, well, if that metric goes up, then now you have absolution for performance.

As we have discussed many times, our general managers in China run businesses, and when you run a business, sometimes one or another input can change in its price.

A commodity price can go up or down, a wage can go up or down, a pricing dynamic can go up our down.

And so you have got to deal with that in the context that it is.

Every city is somewhat different.

Every operation is different in terms of its labor intensity, and our philosophy is that we are going to trust and empower those general managers to deal on the ground with what they have.

That has proven itself for decades in Amphenol to be the best way to do battle with these cost increases.

And whatever they will come this year, we are very confident in our ability to offset them.

And pricing is another element where we are not going to be the last to raise the price.

Pricing is something that needs to take leadership, and we clearly view ourselves as a leader in this industry, and so we will act accordingly in those instances where it is feasible and where there is really the opportunity for pricing with our customers.

I think that in 2007, we were able to expand margins given that kind of perfect storm that happened, copper doubling, wages going up, currency going up 15%, and I'm confident that this year, even with the cost pressures that we have already seen, we have been able to expand our margins much more than maybe some even would have expected, and we'll continue to have that opportunity in the future.

Great.

Thanks, Adam.

Thank you.

Currently at this time there are no further questions.

Very good.

Well, I would like to extend to everybody my best wishes for the completion of the summer and hopefully you all will get an opportunity here in July and August to get a little bit of rest after earnings season, and we look forward to seeing you again recharged back in the fall.

Thank you all very much.

Thank you for attending today's conference.

Have a nice day.