安費諾 (APH) 2010 Q4 法說會逐字稿

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

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

(Operator Instructions).

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

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

I would now like to introduce for today's conference your host, Diana Reardon.

Ma'am, thank you.

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 you all to our fourth quarter earnings conference call.

First quarter results were released this morning.

I will provide some financial commentary 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 fourth quarter, achieving strong growth in both sales and earnings per share, and exceeding the high end of the Company's guidance.

Sales were $950 million, up slightly from Q3 2010, and up 25% in US dollars and local currencies over the fourth quarter of 2009.

From an organic standpoint, excluding both acquisitions and currency, sales in Q4 2010 were up 21% from last year.

Breaking down sales into our two major components, our Cable business, which comprised 6% of our sales, was down 7% from last year, and 12% from last quarter.

The sales declines relate primarily to lower spending in North American broadband markets.

The Interconnect business, which comprised 94% of our sales, was up 28% from last year, and 1% sequentially.

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

Operating income for the quarter was $191 million compared to $138 million last year.

Operating margin was 20.1%, compared to 18.3% last year.

Operating income is net of stock option expense of approximately $6.8 million in Q4 2010, compared to $5 million in Q4 2009, 0.7% of sales in both periods.

From a segment standpoint, in the Cable segment, margins were 12.3%, down from 15.5% last year.

The margin decline relates to higher relative material costs, the impact of market price reductions, and lower volumes.

In the Interconnect business, margins were 22.4%, compared to 20.6% last year.

The improvement in margin reflects the benefits of higher volume levels combined with the proactive and aggressive management of all elements of cost.

Overall, we're very pleased with the Company's record operating margin achievement of 20.1%.

This represents a conversion margin on incremental sales over the fourth quarter of 2009 of approximately 27%.

This is excellent performance in any environment, but particularly in the face of increasing global cost 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 $10.2 million compared to $9.5 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 new accounting rules effective January 1.

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

In the fourth quarter, the Company had an effective tax rate of 27.2%, compared to a rate of 27.5% in the fourth quarter of 2009.

We currently expect a rate of approximately 27.5% in 2011.

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

Diluted earnings per share for the fourth quarter was $0.74, and grew 48% over the prior year quarter on an as-reported basis, and 42% after adjusting the prior year earnings per share for one-time items.

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

Orders for the quarter were $948 million, up 24% from last year, resulting in a book-to-bill ratio of approximately 1 to 1.

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

Accounts receivable was $719 million, down 1% from the end of Q3.

Days sales outstanding were at the high end of the Company's normal range at 68 days at the end of 2010, up from 64 days at the end of 2009.

In addition, payable days increased from 51 days at the end of 2009, to 54 days at the end of 2010.

Inventory in the quarter was $549 million, up about 2% from the end of Q3.

From a days perspective, inventory was at 77 days at the end of 2010, down from 80 days at the end of 2009.

This is a good performance for the Company from a historical perspective, although we continue to focus on improving inventory performance.

The Company continues to be an excellent generator of cash.

Cash flow from operations was $161 million in Q4, over 120% of net income.

Cash from operations along with proceeds and related tax benefits from option exercises of $36 million were used primarily for capital expenditures of $36 million, acquisition payments relating to previous acquisitions of $15 million, and a reduction of borrowings under the Company's credit and receivables facilities of $104 million.

In addition, cash and short-term investments increased $29 million to $624 million at the end of the year.

Total debt was $800 million, and net debt approximately $176 million at year-end.

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 year the Company had availability under that facility of $896 million.

The Company also has a $100 million receivable 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 January 1, those rules were changed, and the facility was brought on balance sheet, reducing the Company's operating cash flow in Q1 of 2010 and for the year by $82 million.

At December 31, 2010, borrowings under that facility were $92 million, and are reflected as long-term debt.

At December 31, 2009, approximately $82 million of receivables were sold under the facility, and were excluded from the balance sheet.

Operating cash flow for 2010, excluding this accounting change impact, was $507 million, over 100% of net income, supporting the high quality of the Company's earnings.

The Company's leverage and interest coverage ratios remain very strong at less than 1 time and 22 times, respectively.

And EBITDA in the fourth quarter was approximately $226 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 welcome to all of you on the phone today, and I'd like to take this opportunity to wish all of you a happy new year as we start 2011.

I'd like to take this opportunity to highlight first the fourth quarter and the full year 2010 achievements for the Company, giving a little bit of color to what Diana has just mentioned.

I'll discuss the trends and progress in our served markets, and then I'll take a few moments to comment on our outlook for the first quarter and the full year of 2011.

Before going into our performance however, I would like to recognize one thing.

We announced in early December that after 37 years with the Company, Martin Loeffler would retire as Executive Chairman, but would continue to serve as non-Executive Chairman of our Board of Directors.

I'd like to take this moment on behalf of all of the Amphenol employees, as well as our Board of Directors, to thank Martin for his extraordinary contributions to the long-term success of Amphenol.

I personally look forward to his continued support as non-Executive Chairman of our Board.

Now, with respect to the fourth quarter, I am very pleased to report record revenues and earnings in what is still a very dynamic economic environment.

Revenues increased a very strong 25% from prior year, up slightly from a record third quarter, and we were especially excited to build on our already strong operating margins, achieving, as Diana mentioned, a record return on sales of 20.1%.

Our achievement of this level of profitability despite the significant inflationary pressures around the world is a clear reflection of the strength and discipline of our agile organization, and our entrepreneurial management team.

With respect to the full year 2010, we are very proud of the strong recovery in our results in 2010, which reached new levels at every stage.

Revenues of $3.554 billion, operating margins of 19.7%, and earnings per share of $2.82.

We're especially pleased that in 2010 we were able to exceed our 2008 sales levels by nearly 10%, while the industry as a whole has not yet necessarily recovered to those pre-crisis levels.

Our consistent focus on technology innovation and customer support through all phases of this economic cycle have resulted in Amphenol strengthening our position across each of our end markets.

In addition, our organization has continued to create innovative technologies, which capitalize on exciting, new areas of an ever-expanding electronics market, thereby broadening the opportunity for our future growth.

In 2010, we have also successfully continued our acquisition program, adding three new family members to Amphenol during the course of the year, creating all new excellent platforms for future expansion.

As we close the year, we find it very rewarding that our entire organization has created an excellent new platform of strength, which creates optimism for our future performance.

Now, turning to the specifics of our performance in each of our served markets.

The Military and Aerospace market represented 22% of our sales in the quarter, and sales increased a very strong 27% from prior year.

This strength was broad-based, and included especially strength in military vehicles and commercial air applications, together with gains from our recent acquisitions.

As expected, our sales were stable in the fourth quarter from the third quarter.

We feel increasingly positive about trends in the commercial aircraft market, as existing program volumes grow, and as new aircraft platforms will begin to materialize during the course of 2011.

Although there remains uncertainty in defense budgets of certain developed economies, we are very optimistic that the increasing electronic content in military equipment, together with our broad program participation, and our strong positions in high-growth emerging markets, will continue to drive performance in the future.

While we expect demand to remain stable in the first quarter, we look forward to a very strong long-term outlook for this important market for Amphenol.

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

Sales in this very diverse market increased a very strong 69% from prior year, and had a slight increase from the third quarter.

Our growth in Industrial was broad-based, but was led especially by sales into the geophysical, and oil and gas, alternative energy, factory automation and instrumentation segments of the market.

We are very pleased as we close 2010 that we have experienced a very broad-based recovery in virtually all the segments of the Industrial market.

While we expect this market to be stable in the first quarter, we continue to be encouraged by a strong outlook in 2011, as our new technologies continue to proliferate into these exciting growth areas.

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

Sales increased in that market 11% from prior year, and a very strong 20% sequentially, as we benefited from an increase in vehicle volumes, as well as the ramp-up of new hybrid electric vehicle platforms.

We continue to be excited by the new opportunities that we see, which are driven by a rapidly expanding electronics platforms in cars.

We expect demand in the Automotive market to strengthen in the first quarter, led by our further progress in these new on-board electronics, as well as the ongoing ramp-up of hybrid vehicles.

Sales into the Broadband market represented 7% of our sales in the quarter.

Sales in this market decreased 8% from prior year, and declined sequentially by 15%, as the expected seasonal pause in spending by cable operators started earlier than we typically would see.

While profitability in this segment continues to be pressured by rising material prices as well as market pricing dynamics, we continue to be encouraged by our increasing position with new cable and interconnect products, as well as our strong position in international markets.

We expect demand in the Broadband market to improve seasonally in the first quarter, and look forward to realizing further benefits from our diversification efforts.

Our sales into the Information Technology and Data Communications market represented 20% of our sales in the quarter, and increased 10% from prior year, although declined by 7% sequentially on what was an expected pause in activity by customers in the IT market.

We are continuing to see an acceleration of adoption of our broad range of next generation technologies into networking, storage and servers, creating a strong basis for our long-term positive outlook.

While we expect demand to remain at these near term levels in the first quarter, we are excited by our ongoing new program wins with our advanced new technologies, which position us for a strong 2011 and beyond.

Our sales into the Mobile Networks market represented 12% of sales in the quarter, and increased 12% from prior year as we benefited from increased build-out of next generation wireless networks.

Sales also increased slightly on a sequential basis in what is typically a more seasonally soft fourth quarter.

We expect demand to be stable in the first quarter, as operators on a worldwide basis continue to invest in network build-out and capacity upgrades in support of the accelerating data usage that's arising out of smart mobile devices.

We look forward also to further long-term strength driven by our broad design-in position on many new base station platforms.

Our sales into the Mobile Device market represented 20% of the total in the quarter, and increased a very strong 58% from prior year, and 10% sequentially, as we benefited from strong sales of new mobile devices incorporating our leading interconnect and antenna products.

While we do anticipate a normal seasonal moderation of demand in the first quarter, we remain very excited by our strengthening position in the rapidly expanding range of new smart mobile devices, and the growth potential that these create for the Company in 2011.

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

So in summary, I am extremely proud of our entire organization around the world, as we continue to execute well in a very dynamic demand environment.

Our achievement of these new records in sales, earnings, and especially operating profitability is extremely rewarding, especially given the many challenges that we see in the marketplace.

Our 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, our lean and flexible cost structure, and very importantly, an agile entrepreneurial management team.

Now, turning to our outlook for the first quarter and the full year of 2011.

With the more normal market conditions that we are seeing, and that we foresee for the future, we are pleased to be able to return to our custom of now providing once again full year guidance for our performance.

Based on constant exchange rates and normal seasonal patterns, we now expect in the first quarter and the full year of 2011 the following results.

We expect sales in the range of $925 million to $940 million, and $3.885 billion to $3.960 billion, respectively.

And we expect earnings per share in the range of $0.70 to $0.72, and $3 to $3.10, respectively.

For the full year, this guidance represents sales and EPS growth of 9% to 11%, and 11% to 15%, respectively.

We are very encouraged by this strong outlook for sales and earnings, and I am very confident in the ability of our outstanding management team to build upon these new record levels of performance, and to capitalize on the many, many opportunities to expand our market position as well as our profitability for the future.

At this time, operator, we'd be happy to entertain any questions that there may be.

Thank you.

(Operator Instructions)Our first question comes from Amitabh Passi, UBS.

Your line is open.

Hi, thank you.

Adam, first question for you.

Can you provide maybe a little more color in terms of how you're thinking about the full year guidance you just provided for 2011, perhaps either your expectations across end markets or generally how you came up with sort of the 10% growth rate, what factors you might be factoring in?And then finally, I just wanted to clarify, does that basically just assume organic growth or you also assume some level of M&A?

Well Amitabh, happy new year, and thank you very much for the question.

I think I will answer your second question first, which is we don't forecast and we certainly don't guide towards acquisitions that may or may not come in the future.

Relative to our outlook for the full year, first of all in general we think this is a very strong outlook.

I mean if you look at any industry outlook or forecast, this would certainly be continuing the trend that Amphenol has over many years of outperforming our industry and we're very pleased to be able to support such an outlook.

If we-- without going in real detail to each of the markets, we see great opportunities in each of our markets.

I think where we see maybe above average opportunities would be really in the Wireless Device, Industrial, Automotive, I mean, those would be markets that we would see as being maybe better than average drivers.

I think we see good opportunities in Aerospace and IT.

We see also good opportunities in Broadband and Wireless Infrastructure, if not necessarily to those levels that I mentioned before for those stronger markets.

Okay.

And then perhaps, Diana, just to clarify, and I hope I'm doing the math correct here, but to get to your mid-point of the full year guidance of three or five, I get incremental operating margin of kind of 23%, so below the 25%.

Just wanted to clarify.

I mean is there maybe a level of conservatism here or perhaps there's some puts and takes below the operating income line that I may not be factoring in.

So maybe just some color in terms of the EPS guidance and the implied operating margin, it just appeared a bit conservative.

Yes, I think-- I mean roughly speaking, we still have the 25% conversion margin goal, that hasn't changed and the guidance reflects that.

And whether it's exactly 25% with your math given what you have in the rest of the income statement, it would be hard for me to comment on specifically.

But I can tell you that the 25% conversion margin goal is still the goal for the Company and the Management team remains very committed to that and that is reflected in the Company's guidance.

Okay.

I'll jump back in the queue.

Thank you.

Okay.

Thank you.

Thank you.

Next, Wamsi Mohan, Bank of America/Merrill Lynch.

Your line is open.

Yes, thank a lot.

Adam, you alluded to markets sort of stabilizing, returning perhaps to normal seasonality, your providing full year guidance here.

What do you think is normal seasonality for your business?

I mean, over the past five years obviously we've seen some very varied seasonality and mix has changed quite a bit too.

Mobile Devices has become a much larger part of the mix, driving increased seasonality.

So perhaps if you could comment on what you think now is normal seasonality for your business?

Sure, I think normal seasonality, we would typically expect the second and the fourth quarters to be somewhat stronger than the first and the third quarters.

I think you're correct to say that Mobile Devices is a bigger part of our sales today which certainly gives credibility to the first quarter being more seasonal than others because you would typically see in that market a seasonal drop-off in the first quarter.

I think we continue to see that the third quarter with still having quite a significant Military/Aerospace and Industrial business, that can be usually be seasonal in the third quarter as it's more heavily weighted towards North America and Europe and the various vacation periods that are there.

So I think even if Mobile Devices is somewhat larger, that traditional seasonality that we all-- that we typically think of kind of second and fourth being stronger, we continue to think that that would be the case.

Okay, thanks a lot.

And if I could just follow up.

The margins in the Cable products, you alluded to pressure both from raw material, inflation and pricing pressure, could you give us some color by region on where the margins are holding up the best?

And if the growth in this segment is primarily overseas, would you think that it's possible to have 2011 margins to be up year-on-year versus 2010 given that copper prices are likely to increase further?

Yes, it's a little hard for us to comment on margins by region in that business, I mean it's 6% of sales in total for us.

So I think we aren't really able to comment on that.

From an expectation for next year, I think the fourth quarter was a difficult quarter for the business also because of the volume levels I think Adam mentioned were a little bit lower than what we expected.

We do expect to see some improvement in the business in 2011 and I think we also certainly on our end would hope to see some positive pricing impact at some point.

Now that depends upon the competitive situation to some extent, but certainly would be our intention to look to try to offset some of the material pressures with price.

So I don't think we would expect to see the margin trend down from this level.

I think we would more expect to see it trend up as we move into next year.

Okay.

Great.

Thanks a lot.

Thank you.

Next question, Shawn Harris, Longbow Research.

Your line is open.

Hi.

Good afternoon.

Can you hear me?

Hello, Shawn.

Just I guess another cost question, but more on the Interconnect side.

Do you think with competitors raising prices right now you probably likely doing the same, that will be enough to offset kind of the big move in copper?

Do you think if copper continues to move up you'll have to maybe before mid-year look at revisiting pricing or do you have enough with the cost reductions plus maybe some market prices to negate the entire raw material headwind?

I think that pricing isn't necessarily - we don't necessarily make all of our pricing decisions at a point in time.

I mean, I think there's pricing going on in the interconnect market every day with various OEMs.

And I think at that point in time, certainly we look to consider whichever commodities and other costs have become an issue for that particular part of the business.

I think it's a challenging environment right now.

I think we are certainly committed to getting as much as we can on price in all of our markets, again, giving full consideration as to whatever the competitive environment is.

I think that cost reduction actions and cost control continues to be a very important part of the margin dynamic, as well.

And I think that we continue to watch what's going on from a commodities standpoint and continue to drive for this 25% conversion margin.

But I think both price and continuous cost reduction is necessary in order to achieve that.

We aren't going to be able in every case to recover completely just through pricing actions.

Okay.

And then a follow up just on capital spending for next year.

Should we assume kind of a 3% to 4% of sales range?

Yes.

And then -- I'm sorry.

And then as a follow up, just with the cash balance that you have right now and likely to generate probably another $300 million plus of free cash next year, at what point does the cash balance get to a certain level that maybe you would look at other alternatives instead of M&A, just knowing that -- I know you're continuously looking for deals, but at a certain point does the balance sheet just get too cash rich?

Sure I mean look the Company is just a real cash machine, as you know, and we generate operating cash flow over 100% of net income.

And as you just pointed out, we expect the same to be the case next year.

So we certainly have a lot of capacity.

We really continue to feel that our financial strength is a strategic advantage and one that we really prioritize towards the acquisition program because we just do feel that it's best from a -- both from a strategic and a return potential for the Company.

And we do still continue to see a lot of potential for acquisitions as the industry continues to consolidate, and our Management team certainly devotes a lot of their time to the acquisition program as well.

In 2010, about 15% of our growth came from the acquisition program.

We have a longer term target as you know to look to get about a third of our growth.

But it is certainly true that our capacity from a financial standpoint continues to grow.

And I think in addition the acquisition program, the Company certainly will continue to view options relative to stock buyback.

Okay.

Thank you very much and congratulations.

Thank you.

Thank you very much.

Thank you.

Next, Ryan Jones, RBC Capital Markets.

Your line is open.

Hi.

Thank you.

One housekeeping question.

Is the amount of anticipated unrecognized tax benefits outstanding still $5 million?

And is that at all included as part of the guidance for $3.10 for next year?

Yes, there are no special tax benefits in the guidance, if that's what you're asking.

The implied tax rate in the guidance is the 27.5%.

And does the $5 million amount that you still expect, is that still intact after Q4?

Yes, I'm not sure exactly what the $5 million is you're referring to.

When we issue the Q there'll be full disclosure of our tax accounts and the balances as they are at the end of December.

All right.

And then if you look at most industry forecasts, they've tended to peg the long-term industry growth for the connector industry between maybe 5% and 7%.

So if you look at your full year guidance for 2011, I was wondering if you could help me to bridge what you think the differential is next year for Amphenol between the broader connector industry and Amphenol's 9% to 11% growth rate.

Yes.

I mean, I think one thing is we -- if you look back over the last decade, we have consistently outperformed the industry, I mean in fact, by nearly two to one.

In 2009, obviously we were down less than half.

Last year we will see what the final results are but I think it will turn out also that we at least grew close to the level of the industry, even though we were down by less than half in 2009.

And that has come from really some very simple strategic principles that we think have allowed us to take share essentially in the industry.

First and foremost has been a drive for technology.

And we have seen over the last several years, really an acceleration over the last several years, that the requirement for technology in interconnect products are truly accelerating, with the demands on speeds, with the demands on harsh environment, the miniaturization, all of these things have put requirements on interconnect products to make it more and more difficult for niche companies to survive.

And that has allowed us through a broad range of technologies and a real leading innovation to take new positions at customers that we didn't necessarily have.

So that has clearly been a great effort.

I think another driver of that kind of above average growth has been over many years the desire of customers to consolidate their supply base and that does not change.

We have seen that certainly in a very mature fashion in the IT and the telecom industries.

And we start to see that more and more over the last couple of years in Mil/Aero and Industrial.

As those companies get more sophisticated in how they manage their supply chain, once again they're looking for a supplier who can be truly a partner for them on a broad basis of interconnect technologies.

I think our acquisition program, and Diana mentioned that in the past, that has generated over many years somewhere around a third of our growth.

And that acquisition program plays very well into those two elements, both the supplier consolidation where we find these strong companies, as well as the innovation of technology, where we're able to continually add to the various portfolios of technology that we have in the many markets that we serve.

So I think that with all of that, we see just tremendous opportunities.

The segments of the market that are really still so exciting, the data in Mobility, the electronic proliferation in Aerospace and Industrial and in Automotive, I mean these are just tremendous trends which we believe for Amphenol are going to continue to allow us to outperform the industry.

all right, and then just one quick follow-up, and I think this has been asked in a different way a couple times on the call.

But if you look at your guidance for next year I get to about 25% incremental conversion margins and if you look at how you performed over the last call it two years you've consistently been able to beat that level by 2% to 6%.

Why do you think investors for 2011 should anchor their expectations around 25% when you've done so much better for the last two years?

Yes, look, I think 25% is the conversion margin goal that we have.

I think this is a very high goal.

We just achieved a long-term goal that the Company has had for quite a few years to hit 20% return on sales in the fourth quarter and we're certainly very excited about achieving this goal.

I think that as profitability gets higher, I mean, the challenges to achieving these profitability increases grow and I think the fact that the Management team is still committed to margin expansion above and beyond this level is an incredible commitment on their part.

And the fact that there may have been some math in the past two years with sort of a recession and a recovery and so forth that was higher than that, I mean that may very well be the case.

But the Company's providing guidance for a reason.

It's very strong guidance, both on the top and the bottom line and in my view I think it would be prudent to look at that guidance.

And I think one thing that I would like to add here as well is we have achieved these very strong conversion margins this year with excellent growth.

But also, in the commodity and a cost environment that we should not understate.

I mean the costs of gold going up in the last year by 26%, copper up by 33%, I mean, these kind of things certainly hit us just as much as they hit anybody else.

Wages going up in China, the renminbi appreciating, I mean there are a whole litany of cost pressures that our Management team has had to deal with this year and they have dealt with that just extremely, extremely well.

And so we believe -- we are not certainly forecasting that all these cost pressures are just going to disappear.

And so with that, I mean, this guidance that we give is actually a very strong guidance and is a continuation of that performance in the face of just what are tremendous pressures on the worldwide basis.

All right.

Thank you.

Good quarter.

Thank you.

Thank you.

Thank you.

Next question, William Stein, Credit Suiss.

Your line is open.

Yes, hi.

I just would like to discuss CapEx for a moment.

The CapEx this quarter was a little bit higher as a percentage of revenue than it has been historically.

I'm wondering if that's kind of a one quarter blip or is there a trend here that perhaps when acquisitions slow we should see more investment in fixed equipment to satisfy growth or what's going on there?

Sure.

It is true that the expenditures in the fourth quarter were a little bit higher.

I think for the year they were still around 3% or 3.1% of sales, which is very much within the normal range for the Company.

We don't expect that range to change.

I think between 3% and 4% of sales and 3.5% I think would be a good estimate as any for next year.

We do sometimes have a quarter where we have more spending that comes into that particular quarter but I wouldn't necessarily read anything into that from a trend perspective.

So any particular end market?

Was it a relatively big one-time thing that was addressing a specific need of a customer perhaps or just a broader -- ?

No, I think it just happened that we had a number that happened to fall in the same quarter.

There wasn't anything special.

I mean, I think on balance, it's still a relatively low level of capital spending.

Okay.

And then just a quick kind of housekeeping follow up.

Diana, can you tell us about lead times today relative to where they've been let's say in Q3, how they trended in Q4 and today?

And inventory levels at your customers, any changes there that are worth calling out?

Well, I'll actually answer that for you.

I think lead times we have not seen among our own lead times any significant variation.

Just recall that throughout this whole cycle, we really never did see any generalized increase of our lead times through that whole recovery in any way that upset customers.

In fact, very proud that at the year end we were recognized by several of our customers in a very public fashion by them in front of other suppliers to say you never disappointed us this year in a year where virtually everybody else did.

And that's not just talking about our industry, it's their entire supply base.

And I think a lot of credit goes to our organization around the world for having managed in a very flexible fashion through the downturn and then the follow-on upswing that we've seen.

Relative to inventories, again, we have said in the past, and this still remains the case, that we don't have full visibility on the inventories of our customers, with the exception of the small percent of sales that we have through distribution which is somewhat less than 15% today.

And in that area we have not seen any significant big moves.

There's always little moves either way but we have not seen any trend in the fourth quarter in the inventories of our distributors, and nor have we heard in other markets.

I think the only area where I would comment is we mentioned that -- I mentioned in my remarks that in the IT market, where we did see a sequential downturn, we saw somewhat of a pause in buying activity.

If that is somehow also related to inventories at certain IT customers, again, I don't have the visibility into their warehouses, but it would not shock me if it were the case that some of that pause that we saw on a sequential basis in the fourth quarter could have been related to inventory corrections in that market.

Guys, that's very helpful.

Thank you very much.

Thank you, Will.

Thank you.

Next question, Steven Fox, CLSA.

Your line is open.

Hi.

Good afternoon.

Can you talk a little bit more about the auto market?

You've obviously had very good growth.

I was wondering if you could break down a little bit more how much was driven by new programs that you're ramping and how much is pure demand?

And if you could take that into sort of Q1 and how much of a new program launch impact has on your optimism for Q1?

Yes, thanks very much, Steve.

Automotive obviously did have a very strong performance, 20% up in the quarter, 11% year-over-year on what was already a pretty good recovery that we had seen there a year earlier.

And I wouldn't be able to break it down so specifically for you.

But what I can tell you is there is certainly substantial contribution from both of those things that you talk about, both the volumes, which on a global basis vehicle volumes this year I think hit something like 73, 74 million cars which was I think a 20%, 25% increase over the year earlier.

So clearly, there has been a strong overall volume increase for the full year.

But in addition, we have certainly seen the ramp-up of these hybrid platforms and the ramp-up of new electronics.

One thing that is really very exciting for us is we've seen the proliferation of electronics beyond just kind of the headline high-end cars.

More and more, you're seeing electronic functionalities that maybe were prototypes in a high-end car being then spread and proliferated across cars at all levels.

And that can be true with air bags, that can be true with on-board infotainment, that can be true with telematics, with anti-lock brakes, whatever it is, these niche electronic applications that are kind of our bread and butter in the Automotive industry have started to proliferate across more and more car platforms, which is really a response of the auto makers to the fact that there's where they can make money.

And so they see that these options allow them to make higher margins and I think they're really rushing to push them into every car platform.

And so from a future standpoint, I think whether it is volume growth, whether it is the proliferation of electronics, whether it is these new hybrids coming up, and those are all -- can be good drivers of growth for us for the future.

Automotive remains for us one of our smallest markets and we're excited about our niche position in that market as it relates to those new applications having further proliferation.

Thank you for that.

And then just as a follow up, can you just -- of the Industrial market, you mentioned new technologies driving some of the growth, and that you seem to be highlighting broadly speaking, energy.

I was wondering if you could just give us a little bit -- some examples of what these new technologies are and am I right in thinking a lot of them are related to energy?

Yes, no, I think they are-- there are certainly many related to energy.

But I would actually say that on an across the board basis, we have taken advantage of the real downturn.

I mean, there was -- Industrial was one of the hardest hit markets in 2009, you may certainly recall.

And I think during that time our organization really circled the wagons and focused on accelerating the innovation efforts that we had and the interaction with customers, so that as that market came back we could get kind of a lever effect on that growth by having also the new products coming in.

Relative to energy, I mean, we have actually seen really strong growth in the quarter in alternative energy, which has been a market that truly supported us through 2010 and helped to offset some of the pain in 2009.

These are efforts into things like solar and wind and a variety of other new, exciting growth markets in alternative energy.

But also, the geophysical market is one where we are very strong, both through some organic product development over the years and acquisitions we have made throughout the years, and that market also grew very, very strongly in the quarter.

But those are not the only ones.

We saw real strength in motion control.

We saw strength in instrumentation, strength in medical.

So on an across the board basis, our strategy of really attacking on a broad basis the Industrial market with niche focused strategies across each of the segments with new technologies has proven I think to be a very successful strategy in the short term and will be a successful one for the long term for that market for us.

Right.

Thank you very much.

Thanks, Steve.

Thank you.

Next question, Matt Sheerin, Stifel Nicolaus.

Your line is open.

Yes, thank you and good afternoon.

So first question for you, Adam, is regarding your comments on the Military and Aerospace market, sounds like the commercial aerospace is presenting some opportunities.

There are some investor concerns that the military market is slowing and in fact may contract over the next two to three years.

So could you break down, give us an idea of the revenue mix and what are your thoughts in terms of growth in each of those segments as it relates to the 10% growth number you're giving for the overall Company?

Sure.

I think our mix is roughly a quarter of that segment is commercial and three quarters is military.

I think I mentioned that we feel very good about commercial air, and we feel good about commercial air really because as is not a secret, the companies, the manufacturers continue to announce upgrades to their production schedules in response to the demand from customers for new high technology airplanes that essentially can save fuel.

And so in the end, that fuel saving and with the price of oil having done what it does, becoming more and more important, that gives us a great deal of optimism for the future because all of these new platforms are really tied around the ability to use less fuel.

And whether it be the 787, the A350, certainly even with the delays and I think there were even some announced today on the 787, the plane will fly.

I have said it many times and I continue to believe it with a tremendous amount of conviction because the airlines need that plane.

And we just have a much higher content on these new platforms because of the complexity of the electronics.

So relative to the Military, we believe also, and I believe personally very strongly that, yes, there may be budget restrictions but that in the developed markets, specifically in the US and in the European markets, the demand for electronic functionality is going to create further opportunities for us this year and beyond.

And I see that really in the last couple of weeks, you may have seen that there was another announcement by Secretary Gates with respect to the budget.

And in this, in fact, what comes through in this budgetary announcement is they are pushing for a lot of savings.

I think they talked about some $78 billion in savings, which are coming not from equipment purchases, but rather from things like reducing the cost of health insurance, reducing the number of flag officers, streamlining procurement, reducing contractors, all these things and then not taking that money out of a budget but rather reallocating it to equipment upgrades.

I mean they're talking about electronic upgrades of planes, they're talking about new UAVs, they're talking about new radar systems, new long range bombers and yes they talked maybe about a couple of programs that were a little bit more speculative from the get-go to be cancelled, but in fact we believe that that electronic proliferation is something that the military recognizes as a real requirement for the future and one where Amphenol is very well positioned to participate.

And then the final thing I would mention is the emerging markets.

And we continue to see these emerging markets, places like India in particular, where the long range growth prospects for our participation with the military are excellent.

And so with all of that on balance between the commercial air, the military and what we see, we continue to have a very positive outlook for the Military/Aerospace market in the future.

I mean if Military/Aerospace were to grow at kind of the average rate that we have guided, that would be a very strong performance historically for Aerospace and I think that we feel positive about that and look forward to that strong performance.

Okay.

That's very helpful.

And then just two quick questions.

One, Diana, you didn't talk about any acquisitions in the quarter.

I know there was a $15 million in the cash flow line for acquisitions.

Was that related to earn-outs of previous deals or was there something in the quarter?

No, that was related to payments on deals we closed earlier in 2010.

Okay.

So there were no acquisitions to talk about?

There were no acquisitions.

To talk about.

That's correct.

Okay, okay.

And then just a quick one on Mobility sector.

Is tablets part of the mobility devices now?

Yes, it is.

It is.

Okay.

Yes.

Thanks very much.

You're welcome.

Thank you.

Next question, Steve O'Brien, JPMorgan.

Your line is open.

Hi, thanks for taking my question.

First off, on the overall guidance, looking at first the full year net of the first quarter, it seems to predict the latter three quarters would grow in aggregate about 7% to 8%.

Is that above market growth for the connector market in your mind for the back half of 2011?

Well I think one of your colleagues also did mention that the connector market is expected to grow somewhere 5%, 6%.

Who knows what it will be.

Historically it has been around that level and so, yes, it would be above the market growth.

Great.

Thanks, Adam.

And then on your comments on sort of normal seasonality in Mobile Devices is kind of hard to figure out what that is, if you could give any more color or range?

And also now that tablets would be included in that segment, would that also be a benefit to what normal seasonality might bring?

Yes, I think the comments on seasonality for the business as a whole that we made, not for that particular market.

I mean I think that particular market, because it's pretty China-dependent from a production perspective, I think we did say that it tends to be down fairly significantly in the first quarter.

But the other comments I think were in relation to Amphenol as a whole.

Okay.

Is there I guess any mitigating benefit to that segment from either tablets or just new product launches which seem to be maybe coming a little earlier in 2011 than they may have in the past?

Well I think our guidance actually assumes a more modest sequential downturn in that market than you would normally see.

Normally you would see a solid double-digit decline in any year, for Chinese New Year as well as because of the holiday season.

And so I think our guidance does not necessarily assume such a significant downturn and whether that's because of new product releases or otherwise, I mean, those certainly can be elements to it.

Great.

And one last one, if I could.

On the IT demand in the quarter and some of the comments around maybe inventory or sort of a-- or maybe a minor slowdown in the fourth quarter, did you see acceleration through the quarter, and as you worked through January, signs that activity was increasing?

No I mean, I think the comment was with respect specifically to the IT data com market and I think I had a question relative to inventories and that's one where maybe inventories did have an impact.

We were down 7% sequentially.

Relative to performance through the quarter, I guess we could say that towards the end of the quarter it was maybe a little better than the beginning of the quarter, not so material.

I think we have a fairly stable outlook for that, which is a good sign from that perspective, and went back up that sort of-- towards the tail end of the quarter it solidified.

Thanks.

I appreciate all the additional detail.

Thank you.

Thank you.

Next question, Jim Suva, Citigroup.

Your line is open.

Thank you and congratulations to you and your team.

Thank you very much, Jim.

When we think about -- a lot of times I get tremendous pushback by investors who say in Amphenol, the best is over.

They're peaking margins and things.

And my rebuttal is if you look at gross margins that's one thing, but as the Company leveraged its sales base to grow higher, there's still room for operating margin improvement as the Company sees more leverage from the operating base.

Am a I crazy or is that a way to think about it?

Because if I did my math right it looks like your gross margins actually came down in the December quarter, yet your operating margins came up.

Is there still more leverage to model there from looking at it from that framework?

Yes, I think I just would want to say just first, Jim, that we certainly were very excited to hit the 20% or less target in the fourth quarter as you can imagine.

I mean the entire Management team was certainly very excited about that and it is true that this is a very high level of profitability.

But we truly believe that there is still margin expansion potential in the business and this 25% conversion margin role that we've talked about for quite a while and continue to be committed to and is reflected in the guidance that we just gave, it certainly does show the commitment that we do have to continuing margin expansion in the business.

I think particularly if you look at the Interconnect margins, which were almost 22.5% ROS in the quarter, this is I think the part of the business where we would see the potential as you say as we grow the top line with really technology-focused products and continue to drive for low cost.

This has been the combination that's worked so well for us in the past in terms of margin expansion.

And in the Interconnect portion of the business, in specifically where the vast majority of our operating units are involved in, this is the part of the business where clearly the Management team has taken on that next return objective from an internal perspective.

I mean their next long-term goal is to drive certainly towards the 25% return on sales for that portion of our business.

And so we do believe that with that growth on the top line and that strong technology focus, that we will continue to drive margin expansion in the business.

Thank you.

And Jim, let me just add that this is not just words here.

There is a real conviction, and it's backed up by the technology and the trends that we've seen in this market which really create the opportunity for it which is all these things I think I mentioned earlier, the high speed, the RF technology, the power technology that we see, the harsh environment.

And these technologies and the continued acceleration of those technologies creates true opportunity for us to create value for our customers.

At the end of the day, we can continue to expand our margins and we can continue to grow at a rate faster than the industry if we can allow our customers to solve the challenges that they face more and more every day in terms of being able to make equipment that can solve the problems of the end customers.

And I can tell you that our team around the world has just a real singular focus on making sure that we're able to do that day in and day out.

And the diversity that we have built over the last decade really creates a base and a basis to say that actually the future can be even better than the past.

Great.

Thank you and congratulations to you and your team for great results.

Thanks again, Jim.

Thank you.

Next question, Craig Hettenbach, Goldman Sachs.

Your line is open.

Yes, thank you.

Adam, the comments around improving or increasing confidence about the demand environment, certainly 2010 was a bit choppy at times so can you just talk about as the environment improves, just what you're picking up from customers in terms of their confidence in forecasting or product introductions?

Any color there would be helpful.

Sure.

I think, Craig, it's a very excellent question.

The thing is, customers have gotten somewhat spoiled in terms of two elements.

One is our service has been very strong.

And so in order to say, hey, we're going to give longer term forecasts and we're going to extend our lead times to Amphenol, there's no need for them to do that.

So I can't tell you necessarily that we've seen this kind of across the board strengthening of forecasts.

And in addition, a lot of the products that we are selling, especially into the more dynamic markets like IT and Mobile and Wireless Infrastructure are coming already off better managed inventory and hub systems.

So I wouldn't have any read necessarily from customers from a forecast standpoint.

What I can tell you, which is more the qualitative read that I get from meeting with customers, talking to our sales team who is meeting also with customers around the world, is that customers are very excited and they see those same trends that I talk about.

In Mobility, the demand that's created by the smart mobile devices, in Military, I mean, there's just no question in the military that these electronics are proliferating.

You go-- I mean, I encourage you to read the transcript of Gate's press conference when he talks about these budget transformations, the word electronic upgrade was listed so many times in here and that's something that we are hearing from our customers and that they're very excited to hear as well.

And so I think that these are trends that our customers are seeing and they feel like their feet are a little bit more on solid ground.

And we have seen that.

There have been already in this earnings season a couple of releases in the technology industry which have been not so bad, I think.

And I think that that gives further credibility to that sense of confidence that we have.

It was not without a lot of consideration that we went through to make that decision, to issue a full year guidance at this time.

And that was really based on our conviction that we were kind of back to normal, whatever normal may be.

But certainly back to a normal that was not the last two years.

Got it.

Thank you.

And Diana, if I can follow up just on the costs, if we look at the guidance for 11% to 15% EPS growth, even if it's just kind of rough percentages, does that assume that commodity costs stay kind of where they are, increase a bit?

And any color there?

Yes, look, we don't sort of model off of assumptions on whether it's commodity costs or exchange rates or these types of things.

We look at the cost structure as it exists today in consideration of pricing actions and cost reduction actions that we would take to the extent things changed from what they are today.

So we feel that barring some strange event in the market where you had just some astronomical cost change that for some reason couldn't be recovered on price, which is hard for us to envision occurring, the guidance reflects the sort of 25% conversion margin on the incremental sales.

And we believe based on our historical ability to manage through all of these things, including commodity cost change, that we would be able to achieve that in any sort of normal economic environment, excuse me.

Okay.

Thank you for that.

Sure.

Thank you.

Next question we have Brian White, Ticonderoga.

Your line is open.

Yes.

Adam, could you talk a little bit about some of the trends you're seeing in India on the Mobile Infrastructure side of the business?

They're obviously starting a 3G build-out similar to what we saw in China.

Sure.

Yes, hi, Brian, I'd be happy to make that comment.

India is certainly a market that we know very well and we watch it very carefully.

And I think I have commented over the last couple of calls that we'll see when they build it, they will build it at a certain time when it's most opportune for India from a cost standpoint.

And what clearly seems the case is that the operators in India start to move more towards the build phase of 3G.

What we do understand is that the OEM, or the manufacturer of the equipment, and really the breakdown of who is getting what you awards in India is very different this time around than it was in the 2G.

I mean for all the talk of politics about Chinese vendors and everything else, the Chinese seem to have done an excellent job in terms of positioning themselves with a lot of presence in India.

They talk in India, I'm sure you're very familiar, Brian, with circles and who has how many circles in the India and it appears that the Chinese have gained nearly as many circles as the two other large Western players and that others who in the past would have participated have maybe been a little bit more left out in India.

I can tell you that we participate with all of the OEMs who stand to gain in India.

What I can tell you also, though, is that the 3G build-out in India is going to be based on equipment which may not be necessarily this kind of large refrigerator type cabinet base station of the past, but moreover it will be these more modular base stations, more flexible, cheaper to install, easier to install in the field which in India is a very important criteria for the operators.

And so what that means, what that translates to for us, is that we will certainly benefit and we have a strong position with those base stations.

The content in a small base station naturally would be less than the content in a large base station.

If there are more of them, you can make up for that.

So we continue to mind it very carefully and we are very well positioned for that build-about which we certainly hope to come here in the year.

It won't be in India, though, as China was, which is all of India will build it and then they turn it on on one day.

Because you have so many operators, so many different circles, I think there are some 65, 70 circles in India who each are going to have a different schedule in which they will build their network.

And so I wouldn't anticipate a real sort of one-off hit that would come from India but rather there can be a general positive for us for the year and for beyond.

Okay.

Great.

And when just-- Adam when we think about the tablet market, Amphenol is obviously not a big player in the PC market, have done very well in the smartphone market, how many tablet programs do you think Amphenol can participate in this year?

Well look, we don't talk about number of programs.

I mean that's certainly something that I wouldn't elaborate on here.

What I can tell you is our focus in Mobile Devices is on what we call smart mobile devices and that includes tablets, that includes smartphones.

I mean the lines here start to blur dramatically.

I mean what do you call a 7-inch tablet or what do you call a 4-inch smartphone, I mean they start to be quite blurred.

We have a very, very strong position here.

Our technologies are very broad.

We continue to expand the types of products that we get designed in on.

And that is not just all one customer or another but really on a broad basis.

And that market, whether that be smartphones, whether that be tablets or whatever other new device is going to be released in the future, we are really viewed by the major OEMs in that market as a partner of choice.

And so that's actually -- and from a net/net, relative to PCs and laptops where we had very little participation, that can be a driver of growth for us in the future.

Because as the devices become mobile, the demands put upon the interconnect and the antennas are much, much more significant than they were for just a simple laptop or a PC.

Great, thank you.

Thank you, Brian.

Maybe we would take at this time one further question.

Okay, thank you.

Our last question comes from Ryan Jones, RBC Capital Markets.

Your line is open.

Hi.

Thanks for taking my follow-up question.

I just wanted to real quick ask you, everyone knows and I think understands the magnitude and the scale of inflation that is currently happening in China.

Can you just give us a quick synopsis on the options that you have available to offset inflation in China.

And are you thinking any differently about incremental capacity or incremental CapEx dollars in the way of how they're invested in China?

Look, I mean we don't think in that way where we say what's our new flavor de jour, how are we going to react on a global basis to something.

We're very much by virtue of the organizational structure that we have where we have 70 General Managers around the world, each of them operating really in a slightly different context, we're able to tailor make our reactions.

There are certainly operations who are saying, is China the right place for me to be.

There are others that are saying I've got to go to China right now because I'm not yet there.

And so that really runs the entire spectrum in Amphenol.

I think that with respect to China, which is a very important market for us, China is also not just a monolith.You have in Western China opportunities, you have outside of the places like Shenzhen and Shanghai opportunities.

By virtue of our organization, the fact that we have today in China 24 operations around the country, we have an experience operating essentially everywhere in the country and in every context in the country.

That allows us really to have really a leg up.

Where when we see a pressure in one area and we decide to slowly migrate to another, it is not just a greenfield start-up where we have to go commission studies about what's the environment, what are the labor regulations, what are the environmental regulations., we're already an expert essentially everywhere in China and that gives us a significant leg up.

We have also seen strong progress of our facilities in other geographies in India, in Eastern Europe, in Africa, in Latin America, so there are going to be and there are in Amphenol other options in China.

The other thing is because of our organization, the General Managers who are real business people in China, these are not just Plant Managers, they know they've got to offset whatever pressures are there.

Whether that be the renminbi, whether that be the wages.

And they do that through automation.

They do that through changing sourcing, through driving material cost down, through working also on price.

And so I think that the same thing that a general manager would do in the west he would also do in China in terms of looking to offset those challenges that are there.

All right, thank you.

Very good.

Well at this time, we'd like to once again on behalf of Diana and I and our whole team thank you all and wish you a happy new year and we wish you a very successful completion to January and the Q1 and look forward to talking to you here in about three months.

Thank you .

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

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