安費諾 (APH) 2010 Q3 法說會逐字稿

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

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

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

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

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

I would like to now 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, our CEO, and we'd like to welcome everyone to our third-quarter call.

The results were released this morning.

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

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

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

Sales were $948 million, up 7% in both US dollars and local currencies over the second quarter of 2010.

Compared to last year, sales were up 32% in US dollars and 33% in local currencies.

From an organic standpoint, excluding both acquisitions and currency impact, sales in the third quarter were up 3% sequentially and 28% year over year.

A very strong performance.

Breaking down sales into our two major components, our cable business, which comprised 7% of our sales, was down 2% from last year and 1% from last quarter.

The sales decline relates primarily to lower spending in North American broadband markets.

The interconnect business, which compromised 93% of our sales, was up 36% from last year and 8% sequentially with growth in all markets.

Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $189 million, compared to $124 million last year.

Operating margin was 19.9%, compared to 17.3% last year.

Operating income is net of stock option expense of approximately $7 million, or 0.7% of sales in Q3 2010, compared to $5.2 million and 0.7% of sales in Q3 2009.

From a segment standpoint, in the cable business, margins were 13.5%, down from 16.1% last year.

The margins decline relates both to higher relative material costs and the impact of market price reductions.

In the interconnect business, margins were 22.3% compared to 19.6% last year.

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 are very pleased with the Company's operating margin achievement of 19.9%.

This represents a conversion margin on incremental sales over last year of 28%.

This is excellent performance in any environment, but particularly in the face of increasing global inflationary pressures.

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

Interest expense for the quarter was $10.6 million, compared to $9 million last year.

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

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

In addition, interest expense includes one-time cost of $0.5 million for the early extinguishment of debt relating to the writeoff of unamortized deferred debt issuance costs associated with the refinancing in August of the Company's revolving credit facility.

In the third quarter, the Company had an effective tax rate of 22.8%, compared to a rate of 27.5% in the third quarter of 2009.

The 2010 quarter includes an $8.4 million, or $0.05 per share, net benefit relating to a reduction in tax expense, due primarily to the favorable outcome of certain international tax positions and the completion of prior year audits.

Excluding these adjustments, the effective tax rate is approximately 27.5%, and we currently expect the same type of rate in the fourth quarter of 2010.

Net income was approximately 14% of sales, a very, very strong performance.

Diluted earnings per share in the third quarter was $0.78, as reported.

Excluding the one-time tax adjustments, EPS was $0.73 and grew 55% over the prior year.

An EPS growth rate of approximately 1.7 times sales growth, demonstrating the Company's significant operating leverage.

Orders for the quarter were $943 million, up 4% from Q2 2010 and up 27% from last year, resulting in a book-to-bill ratio of approximately 0.99 to 1.

The Company continues to be an excellent generator of cash.

Cash flow from operations was $128 million, or 98% of net income in the quarter, excluding tax items.

The cash flow from operations, along with proceeds and related tax benefits from option exercises of $16 million and borrowings under the Company's credit and receivables facilities of $121 million, was used primarily for capital expenditures of $29 million, acquisition-related expenditures of $151 million relating primarily to the previously disclosed acquisition of Borisch in July, dividend payments of $2.6 million, $20 million relating to the purchase of a minority interest in the quarter, payment of $7 million in fees relating to the new revolving credit facility, and increases in short-term investments and cash and cash investments of $69 million.

In August, as previously reported, the Company refinanced its senior credit facility.

The new $1 billion facility matures in August of 2014, and at the end of the quarter, the Company had availability under the facility of $785 million.

The Company also has a $100 million receivables securitization facility that expires in 2013.

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

Effective at the beginning this year, those rules were changed, bringing the facility on balance sheet.

At the end of the quarter, borrowings under the facility were $84 million and were reflected as long-term debt.

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

In addition to its strong operating cash flow and availability under its revolving credit facility, the Company had cash and cash investments of approximately $588 million at the end of the quarter.

The Company continued a strong balance sheet focus during the quarter.

Days sales outstanding were within the Company's normal range at 67 days at the end of September, up one day from the end of June.

Inventory in the quarter increased one day to 76 days at the end of September from 75 days at the end of June, and down from 80 days at the end of December.

We are very pleased with the effects of the continued operational focus on inventory performance in 2010.

In addition, the increase in both accrued acquisition liabilities and other long-term liabilities at quarter end relates primarily to the accrual of additional performance-based payments relating to the acquisition of Borisch in July.

Debt was $904 million at the end of September, compared to $782 million at the end of June, reflecting borrowings for the acquisition in July.

The Company's leverage and interest coverage ratios remain very strong at 1.12 times and 17.8 times respectively, and EBITDA in the quarter was approximately $225 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 let me also add my welcome to all of you on the phone today.

I'd like to spend a few minutes to highlight for you our third-quarter achievements.

I'll discuss some of the trends as well as our progress in our served markets, and then I'll present some comments relative to our outlook for the fourth quarter.

As Diana has just discussed, we are very pleased that the third quarter for Amphenol was another record quarter in both revenues and earnings.

In this quarter, we capitalized on our leading technology positions across a broad array of diverse markets to further expand our overall market position.

Revenues increased 32% from prior year and 7% sequentially, representing our sixth consecutive quarter of sequential growth.

Clearly a strong achievement.

And despite significant inflationary pressures, we continued to expand profitability of the Company, delivering strong 19.9% operating margins and an EPS growth of 55%.

We should not forget, as Diana mentioned, net income achieving more than 14% of sales.

An excellent achievement in any environment.

In addition, our close management of working capital resulted in strong cash flow that was used in part to fund our ongoing acquisition program.

This excellent performance is a direct result of the efforts of our agile entrepreneurial management team around the world.

Now turning to our served markets, the military and aerospace market represented 22% of our sales in the quarter.

Sales in this market increased a very strong 38% from prior year and 23% sequentially, with stronger than seasonal strength, especially in military vehicles and aviation applications.

We were especially pleased in the quarter to see some acceleration of growth in products for commercial aerospace applications, and look forward to further momentum in this important growth segment.

We expect in the fourth quarter modest sequential growth from this already very strong third-quarter performance, and continue to be optimistic about the long-term prospects for this market as new electronics proliferate across all categories of military aerospace equipment.

Our sales into the industrial market represented 12% of Amphenol this quarter, an increase of very strong 87% from prior year and 5% sequentially from the second quarter.

This growth was driven by a continued broad recovery in the industrial market, together with an acceleration of the adoption of our new technologies, more than offsetting any seasonal summer softness in demand in this market.

In particular, we are enjoying renewed growth from our efforts at targeting high-growth applications in emerging geographies, including especially rail mass transit and energy-related applications.

We expect this market to sustain strength in the fourth quarter, and are 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 sales increased 5% from prior year and declined 4% sequentially, as we return to normal demand patterns in the worldwide automotive market.

We have continued to see more growth in new hybrid electric vehicles and are encouraged by our ongoing progress in designing our innovative products into these new vehicle models.

During the quarter, we acquired a small automotive RF interconnect manufacturer.

While not material from a financial perspective, we're very excited about the excellent strategic fit and potential this new addition brings to our efforts to expand in telematics applications.

We expect demand in the automotive market to strengthen in the fourth quarter and retain a very positive long-term outlook for this market, with the general increase of electronics in cars as well as with the expanding opportunities in Asia and other emerging markets.

Our sales into the broadband communication market represented 8% of total this quarter, and increased 3% from prior year and were essentially flat with the second quarter.

Moderate demand for broadband network infrastructure was more than offset in the quarter by our sales of new value-add interconnect products.

We expect demand in the broadband market to moderate seasonally in the fourth quarter, but look forward to long-term opportunities for growth that are being created by our ongoing development of new cable and interconnect products, as well as by our position in the growth markets overseas.

The information technology and datacom communications market represented 21% of our sales in the quarter.

Sales were up a very significant 39% from prior year, with demand particularly strong in server and networking-related applications, and were flat sequentially, sustaining the already strong levels achieved in the second quarter.

We remain very excited about our participation in the ongoing acceleration of data-rich applications.

This is driven in large part by the proliferation of new mobile Internet devices, as well as by the expansion of video on the Internet.

In particular, we look especially forward to accelerating releases of new customer equipment, which incorporate our leading new high-speed products as end-customer demands continue to outstrip their current equipment capacity.

We expect some moderation of demand levels in the fourth quarter from recent highs, and are very confident that our broad customer position, together with new advanced technologies, positions us for further long-term expansion in the IT and datacom markets.

The mobile networks market represented 12% of our sales in the quarter.

We were encouraged to experience another strong year-over-year quarter in the mobile networks market, with sales increasing 17% from prior year, albeit with the decline of 7% from the second quarter on expected seasonality.

We continue to enjoy growth related to next-generation network upgrades in developed geographies, which is related in part to expansion in support of these new mobile Internet devices.

Although we expect demand to moderate slightly in the fourth quarter on normal seasonality, we remain very confident in the strength of our broad presence in new base station platforms, as well as our excellent position in a diverse range of emerging markets.

The mobile devices market represented 18% of our sales in the quarter.

Sales in this market increased a very strong 32% from prior year and 20% sequentially, as we capitalized on our strong technology position in a wide range of new mobile devices.

Our leading innovation in interconnect products and antennas has positioned us now as the partner of choice with high-growth customers in the mobile market.

We anticipate stable demand at these high levels in the fourth quarter, and look forward to further long-term strength as we partner with our diverse range of customers around the world to develop new products for these increasingly complex mobile devices.

In summary, with respect to the third quarter, I am extremely proud of our global organization, as we have continued to execute well in a very dynamic demand environment.

Our continued focus throughout all phases of the economic cycle on reacting quickly to changing customer needs while at the same time ensuring a relentless focus on profitability has resulted in the strengthening of our market position and further expansion of our already industry-leading margins.

Amphenol's success, as reflected in these new record results, is a direct reflection of our distinct competitive advantages -- our leading technology, our increasing position with customers in diverse markets, our worldwide presence, a lean and flexible cost structure, and an agile entrepreneurial management team.

Looking forward, in the third quarter our performance was stronger than originally anticipated, and we are very encouraged to have an outlook for the fourth quarter that is at or near these levels.

Based on a continuation of the current economic trends, and assuming constant exchange rates, we now expect in the fourth quarter of 2010 the following -- we expect sales in a range of $933 million to $948 million, or 23% to 25% growth over prior year.

And we expect earnings per share in the range of $0.71 to $0.73 -- again, 36% to 40% year-over-year growth.

I am very confident in the ability of our organization around the world 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 profitability.

And with that, operator, we would be very happy to entertain any questions that there may be.

(Operator Instructions) Our first question goes to Amit Daryanani.

The line is open.

Thanks.

Good morning, guys, and congratulations on a nice quarter.

A couple of questions.

First off, could you just talk about the operating leverage in the quarter.

It seems a bit below what you guys have been doing recently and below the target of 25% conversion.

I think you alluded to some component commodity cost escalation.

Was that the big delta, or were there other drivers at play?

Hi, Amit.

I think that -- first of all, I think we would just say that we're actually very pleased with the Company's profitability achievement in the quarter.

ROS of 19.9% and net income-to-sales of 14% we just think are really excellent accomplishments in any environment, but particularly in an environment where we do see increasing global inflationary pressures.

And we achieved the year-over-year conversion margin on incremental sales of about 28% against the backdrop of these costs.

And we really think this is a tribute to the commitment of the operating management team to deliver planned profitability levels irrespective of metal price increases, gold price increases, wage increases in China, and whatever other obstacle that may present itself in the next quarter.

I think that we have -- even though we've already achieved what we consider to be pretty high levels of profitability, as you point out, we do have a goal from a conversion margin standpoint to achieve 25% -- $0.25 on the dollar for incremental sales, and we still have that goal as a team.

And I think as a team, we do believe that there's still incremental margin expansion possible in the business.

This margin expansion will come, I think, from the same places that it's come from in the past.

And the first place that it comes from is by us continuing to create value for our customers with sales growth that's geared toward the highly engineered products that they need in focus technology areas of RF and power and harsh environment and high speed, the types of things that Adam has talked about in the past.

These create value for our customers, and they create value for us also.

And then, certainly, the ability of the local operating management to maximize the profitability of those products, and while that does get harder when you have some of these inflationary pressures, we believe that the focus that we do have on keeping all elements of costs low is going to allow us to continue to expand margins.

Now, these strategies have allowed us to expand margin in the past, and we believe they'll allow us to continue to expand margin in the future.

Got it.

And then, just on the mobile devices, the growth seems extremely strong at up 20%.

Could you just talk about what all do you guys do beyond phones?

Are you guys involved with tablets and so on?

And what percent of the business is roughly antennas versus interconnect products -- pure connector products?

Yes, I mean, we don't talk necessarily about what specific products by percentages, Amit.

But you can just rest assured that our presence on mobile devices is very broad.

And mobile devices -- the complexity of these devices is expanding.

The nature of those devices is also evolving.

And we have strong presence across the board in those products.

And we're very proud of that presence.

And I think when customers come to us for these products, they are coming exactly for that reason Diana just alluded to, which is, we are creating technology which allows them to create a better experience for their customer at the end of the day.

And so, whether that comes in a tiny mobile phone or whether it comes into a larger smart mobile device, it doesn't matter.

They still have a thirst for technology that our organizations around the world have been extremely successful at creating for them.

Thank you.

Thank you very much.

Our next question goes to Wamsi Mohan from Bank of America.

Thanks a lot.

Adam, could you perhaps talk about what changed through the course of the quarter that enabled another very significant beat in sales as relative to how you saw it three months ago?

And how much of sales did Borisch contribute?

Well, just relative to how things went in the quarter, I think when we first talked about the guidance, we certainly had expected some markets to be up and others to be more seasonally down.

In the military and the industrial markets in particular, we normally would see in that quarter a seasonal pause in demand, and we didn't necessarily see that.

And I think that was really the big change that came from the prior guidance, which really helped to push us forward.

Obviously, we had foreseen maybe in some other markets to see it grow where it was more flat.

But on balance, we certainly saw across the Company more strength there throughout the quarter, in particular in those -- in that military market and the industrial market.

Obviously mobile phones, mobile devices, was also stronger than we had originally anticipated.

I think from a Borisch perspective, I think the acquisition impact from a quarter-to-quarter basis is somewhere in the 3.5%-type range, and the bulk of that was Borisch.

Yes.

Okay, thank you.

And as a quick followup, Adam, you mentioned within industrial that you saw an acceleration of adoption of new technologies.

Is that something that given your R&D investments in various technologies, I mean, is it something that we should expect would continue sort of over the next few quarters?

Or is it something that you had specifically designed-in for a certain customer that came to fruition at this point in time?

No.

I think it's broader than just one customer.

I mean, look, I'm not going to tell you that we will continue to have 87% year-over-year growth.

But I would also guess that the overall industrial market certainly did not grow 87% on a year-over-year basis, and that difference is really where we see those new technologies taking hold.

And these are broader than just a single application, a single product.

We have talked before about those efforts that we made into alternative energy, which clearly start to bear fruit.

New technologies that go into rail mass transit, especially a concerted effort that we have made in emerging markets.

Whether that be in China, in India, where we have just tremendous ongoing efforts to work with new customers in those markets, again, to help them enable their technology.

And if you just look at some of the ongoing developments in these markets, whether it be with new subway systems, new high speed rail, new demands on alternative energy, a lot of the innovation in the world in the industrial market actually now starts to happen in these emerging markets as opposed to the more traditional markets.

And I think that's also partially explaining why that performance from a sequential standpoint where we would normally expect it in the third quarter to be down sequentially, was up.

5% on a sequential basis is extremely strong performance for industrial, which I think is really somewhat of a reflection of that same dynamic.

Okay.

Thank you very much.

Thank you.

Our next question goes to Matt Sheerin with Stifel Nicolaus.

Your line is open.

Yes, thanks.

Hi, Diana and Adam.

Hi.

So, just a question, Adam, on the guidance calling for flat to down slightly, and if you factor in that small acquisition, maybe a little bit worse than that.

And, typically, you're up in the low single digits on a sequential basis.

And certainly, you're coming off of a very strong quarter, and three or four quarters of better than seasonal growth.

So, how do we -- how should we read into that guidance?

Are you just being a little bit more conservative, or do you think we're seeing somewhat of a pause here as some of your counterparts in semiconductors and other components are seeing?

No, I think the most important point to make, Matt, which is integral into your question, is the third quarter was just a very, very strong quarter.

And we are very proud of the fact to be able to just sustain such strength and not say that that is a blip or that is some sort of a bubble.

That was really a strong quarter across the board in Amphenol, and then to have that sustained into the fourth quarter is something that we think is a very, very positive and strong guidance for the Company.

Relative to semiconductors and all of this, they go in their own cycles.

I think what we certainly see in some of the markets, for example, the IT datacom market, where there is more of a leveling in the short term at very strong levels.

And again, to have that leveling of demand in an IT datacom market at those strong levels that we have is something that I think we're very pleased to see.

Okay.

Thanks.

And Diana, you talked about that contribution margin going forward still targeting 25% or so.

Given that -- and you talked about materials prices like copper and gold going up, what's the outlook there?

Are you looking at passing along price increases?

Do you see any headwinds there on materials?

Sure.

I mean, clearly material costs have gone up, and this is something that we had to deal with this past quarter, we'll have to deal with it next quarter.

I think that the objectives that we have for profitability don't change as a result of that.

Clearly, there are actions that need to be taken in order to achieve the type of results that we did in the third quarter and that we certainly look to in the fourth quarter.

From -- certainly pricing is one action that's important for us, and I think pricing is a real art.

And I think that we certainly put a lot of effort into making sure that we are pricing the products for the value that we believe customers are receiving.

And I think in an environment where you do have these inflationary pressures, pricing is one of the important pieces of the puzzle in terms of how we're able to achieve the margin levels that we looked for.

There certainly are other actions, as well, I think that we talked about in the past.

I mean, we have a lot of effort that's expended in order to make sure that we use as little of certain materials as we can based on the assessment in the last year or so that there are certain metals that just seem only to be headed in one direction.

And so we're certainly working hard on the cost side, but you're correct to point out that pricing will certainly be an important aspect for us.

I think the one part of the business where it's a little bit more difficult, as you know, is on the cable side.

And, there, it may be that next quarter, as an example, if this pressure on materials continues to happen, that we may see some impact on the margin.

But in aggregate, for the Company we would look to still be able to achieve our goals.

It just is in a more difficult environment.

Okay.

Thank you.

Thank you.

Thank you very much.

Our next question goes to Brian White, Ticonderoga.

Your line is open.

Yes, Adam, I'm wondering if you could talk a little bit about both mobile infrastructure and also IT and data here.

It seems unusual, third and fourth quarter, neither market is going to grow.

Thanks very much for the question, Brian.

I think that would traditionally be the case.

I think number one, I want to emphasize that both those markets obviously have had a very strong recovery from their early lows.

We have a very broad position in both of those markets.

Speaking about mobile infrastructure first.

In that market, we have a broad position both on products to the OEMs as well as into the operators in all geographies, whether that be in emerging markets, whether that be in developing markets.

And in that market, clearly, there has not been that kind of bubble of spending among the operators in the emerging markets in particular which is there.

Relative to the Internet market, we believe that we, again, have very strong results in the third quarter and just to sustain those results here in the fourth quarter at a time when, as you point out, or I think one of your peers has pointed out, there's some uncertainty in that market among semiconductor players and others.

We feel very, very good about our position, and most importantly about our position with new leading-edge products.

I think those leading-edge products that we have in the IT datacom market in particular are going to carry us through to have great success in that market.

Okay, Adam.

And do you feel like customers are actually working down inventories in those two markets?

I don't know necessarily.

Again, we don't have full visibility into the warehouses of all of our customers.

I think in certain markets there has been in parts of that market, whether that be among contract manufacturers or other, they may have leveling of their demand or even a pause in certain areas of their demand.

Is that inventory related?

It certainly could be, as they seek to balance their warehouses.

But again, we don't sell through distribution predominantly into those markets.

These are sold predominantly to OEMs and to certain contract manufacturers, and we don't have full visibility into what their warehouses are.

Okay, thank you.

Thank you.

Our next question goes to William Stein, Credit Suisse.

Thanks.

I'm wondering if you can comment on the linearity of the bookings and billings through the quarter and then into this early part of Q4 -- any help understanding how the book-to-bills trended and demand generally, and in particular as it might relate to inventory levels at customers that you were just commenting on a moment ago.

I can maybe comment on the linearity during the quarter, and then maybe Adam can take the rest of the question.

In most third quarters, September is certainly a very important month.

We tend to have a little quieter activity levels during the summer in July and August, and I think that this third quarter followed very much that pattern where September was the biggest month in the quarter both from a booking and a billing perspective.

So, that's sort of what it looked like as we went through the quarter on a month-by-month basis.

I think the fourth quarter tends to usually be somewhat the inverse of that, obviously with the holidays in December.

And I wouldn't read anything from our linearity into this comment relative to inventories.

I don't think we've seen any marked changes throughout the quarter that give us pause or give us some degree of concern, because as Diana said, the third quarter of September is usually a very big month, as you come out of the holidays.

Great.

That's very helpful.

One other question relating to cash, debt, and the balance sheet generally.

You're at about $315 million of net debt today.

It's the smallest level of net debt since, I think, early 1997.

And, by my math, it looks like if you don't source another meaningful deal in the next three or four quarters, you'll wind up in a net cash position.

And I'm wondering if that's an acceptable position for the Company to be in, or if there's no meaningful deal that winds up presenting itself, which I know is your preferred method of growth, would you wind up doing something with regard to buybacks, or would you tolerate that kind -- or would you accept that kind of cash position?

Yes, I think it's always a little hard to speculate about what may or may not happen in the next three or four quarters, and I think we probably wouldn't do that here.

But I think as we've said before, your comment is certainly valid that our net debt position certainly is at a low level.

It also -- you didn't say this, but it's also true and goes along with that that we certainly have quite some capacity both from a revolver availability, from a cash perspective.

The Company is a real cash machine, and so certainly from an operating cash flow capacity, that just adds to the Company's ability certainly to act upon the appropriate acquisition opportunity that may come along.

I think, as we've said in the past, from a prioritization standpoint, we look to use the Company's financial capacity to fund the acquisition program.

And it is difficult for us to forecast exactly which quarter a particular deal may become available to us.

But we do believe that there's a good pipeline of potential opportunities out there.

We still believe that this is the best vehicle for the Company in terms of its long-term strategic growth, both on the top and bottom line.

But clearly, if for some reason there was absolutely no acquisition opportunity for us over some longer period of time, then certainly there are other options for the Company such as stock buyback or debt service.

But I think at this point in time, we still feel very good about the acquisition program and the pipeline of opportunities that are out there.

Great, thank you.

Sure.

Our next question comes from Jim Suva from Citi.

Thank you, and congratulations to you and your team.

Thank you, Jim.

A quick question.

While Q3 was absolutely a stellar quarter in every metric that you look about on your Company, if we can just come back to the topic again about Q4 being pretty materially below seasonal outlook.

That basically means that some of your end markets are going to be worse than seasonal, because even though it was a great quarter, you should expect to see seasonality at some point.

Can you help me kind of bridge that gap?

Or, some people have asked me, have you booked some orders in Q3 from Q4 that kind of makes the comparisons a little bit difficult, or why not the seasonal outlook should we expect?

Yes.

I mean, I think that we -- just to answer the last question first, we certainly haven't booked any orders in the period that aren't related to the period.

So, I mean, there isn't any flip-flopping from one quarter to the next.

I think that we had an exceedingly strong quarter in Q3, and particularly in certain markets like the mil/aero and industrial markets, which aren't typically seasonally up in a third quarter but ordinarily are seasonally down.

And so I think that then, when we look at what Q4 expectations would be for those markets, to expect them then to sort of rebound in a normal seasonal fashion in Q4 doesn't make a whole lot of sense when you look from a quarter-to-quarter standpoint.

I think that we've gone through a year and a half, almost two years here, of sort of down and up cycles.

And I think that when you're still sort of at the tail end of that, I think normal seasonality is not so easy to define.

I think we sit here at Q3 coming off a record quarter for the Company that is at a significantly high level from a sales perspective.

And from our standpoint, to guide in the fourth quarter at the high end at that same level, again, we think is a very strong performance.

This guidance is put together in the same fashion that we put together guidance every quarter in a very bottoms-up fashion.

And we believe that this is strong guidance for the quarter.

Okay, then as a quick followup, can you talk briefly about the SG&A line?

Have you -- many companies are starting to fold back in merit increases and salary increases.

Has Amphenol already done that, or is that something we should start to expect in Q4 or Q1, or how should we think about SG&A?

With sales going down next quarter, you folded in an acquisition.

Should SG&A come down next quarter, be flat, or are we looking at some merit increases?

Thank you.

Sure.

We don't have merit increases, as you call them, for the Company as a whole with all the employees, that sort of are triggered at one date.

I mean, we have employees all around the world, and there are increases that are appropriate for the particular part of the world that happen at different times during the year.

So there's no step function, if you want, with those types of costs, either in SG&A or in cost of sales, that would trigger some sort of step function increase in costs.

Relative to SG&A levels in general, I think that our SG&A in the third quarter was something like, I don't know, 12.7% of sales or so, and I think we do a pretty good job of being able to manage our SG&A levels at a pretty low cost level.

That being said, I think in the quarter we actually did have a few probably small upward pressures on SG&A relating to the acquisition that we did in the quarter.

There are some intangibles that get recorded in purchase accounting for these acquisitions that get amortized into SG&A, and we did have some small level of transaction expenses, which also under the new accounting rules go into SG&A as opposed to going into goodwill, as they did under the old rule.

So, SG&A in the third quarter is probably a little bit higher than it would have otherwise been.

And at the high end of guidance, which is sort of flat sales, it could be that SG&A as a percentage of sales does come down some as we move into the fourth quarter.

I certainly wouldn't expect it to go up.

Thank you, and congratulations to you and your team.

Thank you.

Thank you.

Our next question goes to Amitabh Passi from UBS.

Hi, thank you.

I had two questions.

One was around your end markets, just a couple of them.

Adam, on the aerospace and defense market -- and I apologize, I think you made some references to this.

But could you help understand the 23% sequential increase?

I mean, was this tied to maybe some one-time programs that sort of provided this pretty impressive sequential increase?

And does that sort of abate as we look further down?

And maybe if you could shed some color on what those programs were?

Relative to 23%, obviously there was some help in that 23% from the acquisition of Borisch.

But even without that, we had strong single-digit growth in that quarter in mil/aero.

But this was not coming from one program or any in particular program, but rather a generalized strength in that market, which has come from really our diversification efforts in that market.

I think I mentioned, we saw strength from military vehicles as well as from aviation platforms, and we really start to see those platforms whereby we have a broad presence on the entire bill of materials coming through.

Not from one in particular.

There's not just one airplane that is being released or another.

But rather, a very, very broad position that we have on a global basis in addition.

Okay.

And then, on your wireless infrastructure market; just curious if you could shed some color on what you're seeing from sort of global macro trends.

There's a lot of excitement as we look at 4G rollouts in the US, potentially 3G in India.

It certainly seems like things might be trending a bit slower than expected back half of this year.

But just -- your thoughts on sort of some of these macro trends, when do you think we start to see some of the benefits of these spending cycles?

Sure.

I think we have seen already in this year, with 17% year-over-year growth, some benefit from especially the developed markets.

And this is the infrastructure spending that has really gone to support all these new mobile devices and the various capacity constraints that had been in that market.

What we haven't really seen this year has been a strong push from the emerging markets.

I mean, you mentioned in particular India and their third-generation rollout.

When that comes, I certainly hope you let me know when you find out, because we don't have any better information.

My experience, though, in India is that that will come probably at a time when the rest of the world does not have strong demand, because the Indian operators are notoriously shrewd in terms of when they procure a product, that the OEMs and the equipment manufacturers are very hungry for business so that they get good pricing power.

And so when that comes, they have clearly spent the money on the licenses, and they have spent a lot of money.

But I think they will time the buildout of that to when they get the best power over the OEMs vis-a-vis price.

Relative to China, again, we had a year ago, year and a half ago now, the sort of launch of 3G in China.

And there's a constant upgrade of those 3G networks in China, but none of those have the magnitude of an individual launch at the time which, hopefully, India will have at one point.

Relative to 4G and LTE or whatever others, clearly there's a real momentum toward these that is coming.

The schedules of the build, whether those be in the United States or in other markets, I don't think these have been fully set forth, but we will have a strong participation.

We have a strong participation at both the operator and the OEM level on all these new base station platforms with both our interconnect products as well as our antennas, and when that does come, we will be very, very well positioned to perform on that.

I think at the time when China built their 3G network, we proved to all of our customers that Amphenol is agile enough to sort of turn on a dime and support them when they need the support.

And that's not forgotten by them as they go into these next several phases of buildout, whether in emerging markets or otherwise.

And we'll stand to enjoy very good business from that in the future.

Great.

And then just Diana, for you, on the cost structure side, you talked about commodity cost pressures.

Any incremental pressure from escalating wages in China?

Was that not as big a factor?

And then, again, I missed this.

It sounded like you were alluding to the potential of some price increases.

Just wondering whether that's part of the plan as we move into 4Q.

Sure.

I mean, I think that we've seen in the third quarter -- we saw, certainly, pressures on metals.

And we certainly have seen increased wages in China and anywhere from, sort of 12%-type levels to the mid-20%, depending on the province that you are talking about.

All of those types of pressures certainly are things that we've had to deal with this past quarter, and we'll have to deal with next quarter.

This is somewhat the nature of the world that we are manufacturing in.

And I think it's a matter of just keeping a very -- certainly close watch on margin and making sure that we're taking appropriate pricing actions, but also continuing aggressive cost-reduction actions with labor specifically.

One can have an impact on how much labor content there is in any particular product through use of things like semiautomation as an example through modifications and product design.

So, there are a lot of actions that you can take when you get those pressures, and I think our operating management team just does a great job in being very creative and coming up with new ways to deal and offset these types of pressures.

You know, from a pricing standpoint, we are constantly certainly reviewing and adjusting prices where we can in the marketplace.

It isn't something that's sort of done in a top-down price-list type fashion.

I mean, we have constant negotiations with many accounts throughout any given month.

As you know, the business is very diverse.

But I think that pricing decisions and actions are, in our Company, based off margin goals.

Obviously, there's a competitive nature to pricing that can't be overlooked, but we continue to certainly try to maximize pricing, and I think that becomes a more important factor as these inflationary pressures get stronger.

And so, we're certainly -- I would say we are spending more time on that in an environment like this.

But I think those are all the types of things that we just need to do to continue to meet the margin goals that we have.

I'd like to emphasize one thing that Diana said here, which is, there are always cost pressures and we have seen this in the past.

We saw it back in 2007.

We saw it -- see it again this year.

For an Amphenol general manager, the fact that gold price is $1,350 or the fact that a China wage goes up, this is not an excuse in our culture.

This is just a challenge that will be met and will be -- and will be surpassed.

I mean, our management team, to achieve these margins in this quarter, clearly demonstrates once again that regardless of kind of what gets thrown at them, they are able to really overcome those obstacles and still achieve fantastic results, and they will continue to do that in the future.

Thank you both.

Sure.

Thank you.

Our next question goes to Steve O'Brien from JPMC.

Your line is open.

Hi, thanks for taking my question.

Just two quick ones if I could.

Certainly, the mobile devices growth has been very impressive this year.

As we look out into the next quarter, into next year, do you think that there's an opportunity to sustain sort of higher than unit volume growth based on increased complexity in the devices and increased connector content and increased antenna content?

I think relative to mobile devices, we're very proud of our achievements over the last number of years in continuing to expand our position in that market.

It becomes a very significant market for us.

18% of our total sales in the quarter.

And we have achieved that through, really, a multipronged approach.

We try to be the broadest supplier to the broadest level of customers in the broadest geographies.

And that's a very simple approach.

At the end of the day, it's the underlying -- the underlying driver of that is our technology.

And so, as the products become more complex, certainly we see opportunities to get more content in those products.

Whether that is that you're growing at a certain multiple of the market rate or not, that I'm not going to tell you because who knows what products are going to come, what the mix of those products will be.

But clearly, consumers are demanding products that have more functionality, that come in smaller packages, that have a real sort of seamless interaction with the Internet, with the mobile network.

And I think in that area, clearly our products, whether that be interconnect products or antennas or otherwise, find just a real strong receptive mindset from our customers because of the technology that underlies those products.

Thanks for that, Adam.

And, you know, another question on a different topic.

CapEx, if I've got my numbers right, has been running below sort of 3% of revenue.

Revenue is setting new record levels.

Where is facility utilization?

If you can, it's very hard, but if you could qualify it or quantify it.

And expectations I guess going forward in terms of CapEx needs.

Any commentary there would be helpful.

I mean, we don't track on a consolidated basis, really, facility utilization.

It's really not the mindset that we adopt.

I think we adopt a mindset in our Company really more like an accordion, where we seek to have flexibility around the world in both our people and our facilities, and that's why we generally don't own our facilities, we generally don't built big campuses.

We lease them.

We create options for where, if we need to expand facilities or equipment, we have the capability to do that.

If we need to shrink it, we also have the capability, as we showed 18 months ago.

And so, to say what is some statistic on facility utilization, I'm sure today it is higher than it was at the depth of the downturn.

That much I can tell you.

But is it a problem for us?

Absolutely not.

I think our organization on a worldwide basis has always followed a principle of preserving flexibility in terms of our infrastructure of the organization.

And that has been one of the drivers that allows us to have strong profitability in good times and in bad, because we are not writing things off when the bad times come, and we're not overspending on them in the good times with the inevitable write-off that comes after that.

So, with that, as we look forward, I think your question is, is there some sort of additional incremental spending that has to come?

Our CapEx varies, I think between 2.5% to 3.5% of sales over time.

And we don't see any reason why that would be any different in the future.

Great.

Thanks.

Thank you.

Our next question goes to Craig Hettenbach from Goldman Sachs.

Your line is open.

Great, thank you.

Just circling back to the topic of M&A, just given the size or increased size of the organization, does that change at all the strategy on M&A in terms of looking at potentially mid-sized deals as opposed to just tuck-in?

No, thank you very much, Craig, for the question.

I think our strategy with M&A has been and is consistent on one front, which is, we look for good, complementary companies with excellent management teams and excellent technology.

And that doesn't change regardless of size.

But I think if you look over the last two years, two of the three largest acquisitions we have done have been really in the last 18 months with Times Microwave in Q1 of last year, as well as Borisch just recently.

And I think that those are very significant acquisitions, second in size only to the TCS acquisition in 2005.

And will we find more companies of that size?

We certainly will, and we'll certainly have an appetite for companies of any size, regardless of what comes.

At the same time, we don't shy away from small companies as well, if they bring with them a proprietary technology that allows us to create a platform of growth in the future.

And I think that those platforms for us have been strong contributors throughout the history of Amphenol in our acquisition program.

We have what is today still a very vibrant acquisition pipeline.

And on that pipeline are companies of all shapes and sizes.

And I think the fact is, as Diana alluded to earlier today, we are in a very strong position from a capital structure and an availability of resources to do those acquisitions.

We're also in a very strong position in terms of the attractiveness of Amphenol to potential targets.

We are seen in this industry really as the acquirer of choice, in large part because not only do we have a strong track record of success with these acquisitions, but we have an organizational structure which makes acquisitions have a good home.

We don't seek to bring them into the Company and change them and remold them and change all the things that are maybe not necessarily value add.

Rather, we seek to create opportunities for those companies to come into Amphenol regardless of their own unique natures, which we applaud.

Those unique natures of those companies come into Amphenol and they prosper and they continue.

And for years, we have companies who still have the name that they had 50 years ago, even after joining Amphenol for half a century.

And I think that that mindset toward acquisitions is one that makes us a very, very attractive candidate and an attractive home when someone is looking to sell a company.

And I believe that that will allow us, going forward, to continue to have a strong acquisition program.

Okay.

Thanks for that color.

As a followup, most of the questions on order trends and inventory have been focused on the OEM customer base.

I'm just curious as to what you're seeing in the distribution channel.

Yes.

As you know, distribution is not a huge part of our business.

It's less than 15% of sales.

And I think that distributors certainly had strong momentum coming out of the downturn.

We did not see significant inventory builds in our distribution channel.

And that is one area where we get to see a little bit more visibility than in the others.

We saw a little bit of inventory build, but clearly the turns were much stronger than they were one or even two years ago.

And I think we have not seen in distribution necessarily a worrisome inventory trend that you may look out for at this time.

Relative to distributors going into the fourth quarter and towards the end of the third quarter, I wouldn't say that it was as frothy, maybe, in terms of the growth as it had been in the past, but there's not these kind of warning signs of inventory levels that we certainly look out for.

Got it.

Thank you.

Thank you very much.

Our next question goes to Shawn Harrison from Longbow Research.

Hi.

Good afternoon.

Hello, Shawn.

Hi.

Just maybe a few clarifications.

In your prepared remarks, Adam, you talked about the commercial aerospace market beginning to come back.

Boeing was a little bit more bullish today, as well.

If you could maybe just speak to the time frame when commercial aerospace would begin to -- at least the strength you're seeing begin to impact your revenues.

Is that more of a middle of 2011 dynamic?

Yes.

I think it already has some impact on our revenues, in that it's now growing.

Commercial aerospace was certainly a sector that was hit very, very hard in the downturn, as you know, and as everyone is very clear on.

I think what -- whether with the Boeing results today or the results that we see and the words that we hear from the customers, clearly the trend in commercial air is one that is more positive today than it was six months ago.

I think it's very encouraging to see that the new airplane platforms, whether that be 787, whether that be A350, which combined between the two of them have nearly 1,400 orders on the books.

I mean, it's just a fabulous prospect for that industry, which has to adopt these new platforms.

Regardless of what is happening in the economic cycle, the price of fuel is not dropping in any significant way, which means that these new airplane platforms, on which there is a much more -- a much higher opportunity for electronic content by Amphenol, those are going to fly in the sky whether they get delayed one or two or three or in some cases five quarters out.

Those planes are going to fly, and at the time they fly, we'll be very happy to enjoy the business.

I can't tell you when they will release these planes.

You know, I'm certainly not going to be the one to bet on when that will actually be flying in the sky in a big way.

But there's no doubt that it will be.

And at that time, that's going to be a significant contributor for the Company.

Okay.

And commercial aerospace right now is maybe a quarter of that mil/aeros?

Roughly.

Roughly that.

Okay.

And then, my two other clarifications.

The small acquisition that you recently completed, what is the annual revenue contribution?

Is it somewhere around $20 million?

This is a pretty small company.

I mean, it's a few million maybe, in the quarter, is what it would contribute.

So maybe 0.5% from a growth sequentially quarter-to-quarter perspective.

Okay.

And then finally, just on the $943 million in orders reported for this quarter.

You know, how much of that is, I guess, typically shippable or shipped within 90 days?

Yes --

You know, on a consolidated basis, Shawn, we don't even really track that, because each market is so different.

I can tell you that there certainly is a portion of that that would ship within the quarter, but there's a large portion of what we ship in the quarter that's based on hub pulls and based on forecast schedules and things that really come in and go out in the same quarter, if you will.

And so, if your question is whether or not this is a sort of normal or abnormal book-to-bill ratio, I would say that this is a very normal sort of book-to-bill ratio.

And I wouldn't necessarily read anything into that.

Okay.

Thank you very much.

Sure.

Our next question goes to Steven Fox from CLSA.

Your line is open.

Hi.

Good afternoon.

Just one quick question.

A lot of stuff has been covered.

But I was just wondering, getting back to the cost pressures, you've talked about some of the strategies you've employed.

I was wondering specifically if there's any particular moves, whether it's within China, either to western China, or moving production into more low-cost countries that you could highlight that are going to happen in the next few quarters that could help along those ways.

I know those are always underway, but is there anything in particular we could talk about today?

Well, I think you've said it yourself, Steve.

These are always underway for us.

We have factories throughout China.

We're not just in one area or another.

We are in the west, we are in the north, we are in the south, we are in the east.

And I think there's not any particular kind of one-off move.

You know enough about how we operate that this is done on a very evolutionary, constant, ongoing basis in the Company.

And the same goes for other markets, or other geographies, where we have manufacturing, whether that be in India, whether that be in the low-cost areas in eastern Europe and Africa, north and south Africa.

I mean, we continue to, on a real-time basis, adjust our manufacturing to the cost realities of the markets that we're in.

I think Diana mentioned, as well, that it's not just moving of factories, it's also taking those steps to take labor out of those products where we have to take labor out of, through automation, and all of those various tools and levers to pull that the general managers have in the Company.

So there's not necessarily one thing that I would highlight for you, but there's an ongoing process within Amphenol, every day of the week, every month of the year.

Just a quick followup.

Is there any neighborhood, for instance, that you've gotten -- seen much more higher costs where maybe you've decided recently just sort of to move to other parts, close up facilities, since you have that flexibility?

No.

I wouldn't point to one neighborhood.

I mean, Diana mentioned there's a range of wage increases in China, and those wage increases are all over the map somewhat.

And the timing of them is also in different areas.

But it doesn't say to us, well, we just shut down facilities and restructure them and we consolidate them.

Again, that's not how we operate.

We have been ongoing facing these pressures, and we'll continue to move forward with those cost-reduction efforts.

Fair enough.

Thank you very much.

Thank you very much.

And I think, operator, at this time we would wish everybody well for the remainder of the year, and look forward to seeing everybody next year.

Thank you.

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

Thank you.