安費諾 (APH) 2011 Q1 法說會逐字稿

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

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

(Operator Instructions).

Until then, all lines will remain in a listen-only mode.

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

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

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

Diana Reardon.

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 would like to welcome you all to our first quarter call.

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 closed the first quarter with sales of $941 million, and EPS of $0.72, achieving strong growth in both sales and earnings per share, and meeting the high end of the Company's guidance.

Sales were up 22% in US dollars, and 21% in local currencies over Q1 of 2010.

From an organic standpoint, excluding the effects of the currency and acquisitions, sales in Q1 2011 were up 17% over last year.

From a sequential standpoint, sales were down 1% from a record Q4 of 2010.

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

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

The Interconnect business, which comprised 93% of our sales, was up 25% from last year and down about 2% sequentially.

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

Operating income for the quarter was $186 million, compared to $145 million last year.

Operating margin was 19.8% compared to 18.8% last year.

Operating income in both periods is net of stock option expense of about 0.7% of sales, or $6.3 million in the 2011 quarter and $5.4 million in the 2010 quarter.

From a segment standpoint, in the Cable business, margins were 11.8%, down from 14.9% last year.

The margin decline relates primarily to higher relative material costs and lower volumes.

In the Interconnect business, margins were 22.1%, compared to 21.1% last year.

The improvement in margin of about 1% reflects the benefits of higher volume combined with a proactive and aggressive management of all elements of cost.

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

This represents a conversion margin on incremental sales over last year of about 24%.

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

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

Interest expense for the quarter was $10 million, both this year and last year, reflecting a similar average debt level and interest rate.

Other income was $1.7 million in the first quarter of 2011, up from about $0.5 million in the first quarter of 2010, primarily as a result of higher interest income and higher levels of cash and short-term cash investments.

The effective tax rate in the first quarter was 27.5%, compared to 26.1% last year.

The prior year quarter included a one-time benefit of about $1.9 million or $0.01 per share from a reduction in tax expense for tax reserve adjustments relating to the completion of certain prior year audits.

We currently expect a rate of about 27.5% for the remainder of this year.

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

And diluted earnings per share for the first quarter grew 29% over the prior year on an as-reported basis, and 31% after adjusting the prior year earnings per share for the one-time tax benefit.

Orders in the quarter were a record $961 million, up 16% from last year, resulting in a book-to-bill ratio of approximately 1.02 to 1.

The Company continues to be an excellent generator of cash, and cash flow from operations in the first quarter was $108 million, about 83% of net income in the quarter.

Operating cash flow in Q1 is net of a $15 million contribution to the Company's US defined benefit plans, and 7% sequential increase in the operating components of working capital, reflecting an increase in inventory and receivables, partially offset by an increase in accounts payable balances.

Inventory increased about 10% over December to $603 million in the quarter, resulting in inventory days of about 85.

Approximately half the inventory increase relates to a higher investment in raw materials in the quarter.

We consider this higher investment prudent given the potential for disruptions in the broader supply chain resulting from the events in Japan and the potential for further significant increases in commodity costs.

The remaining increase is to support sequentially higher sales in Q2.

Accounts receivable was $744 million at the end of March, up 4% from the end of December, reflecting the heavy weighting of sales in March in the quarter.

Days sales outstanding increased 3 days to 71 days at the end of March, up from 68 days at the end of December.

In addition, accounts payable increased about 8% to $414 million at the end of the quarter.

Payable days increased from 54 days at the end of 2010 to 59 days at the end of March, reflecting both the higher overall inventory purchasing level and the proportion of activity for the quarter that occurred in March.

I would also add that the foreign exchange impact from the weaker dollar added about one day to all of these metrics for inventory receivables and payable days at the end of the quarter.

In the second quarter we would expect to see operating working capital and the related turnover metrics improve back to our historical norms, although we may continue to hold a slightly higher raw material inventory level.

Our cash flow from operations of $108 million, along with borrowings under the Company's credit and receivable facilities of $150 million, and $17 million in proceeds and related tax benefits from option exercises were used primarily for $23 million of capital expenditures, an increase in cash and cash investments of $67 million, and the purchase of about 3.5 million of shares of the Company's stock for approximately $189 million under the Company's stock buyback program.

The Company has about 16 million shares remaining under the 20 million share stock buyback program that we announced earlier this year.

If you recall, the program expires in January of 2014.

At the end of March, the cash and short-term investments were $691 million, the majority of which continues to be held outside the US.

And debt at the end of March was $950 million, bringing net debt to approximately $260 million at the end of the quarter.

At March 31, the Company had availability under its revolving credit facility of about $0.75 billion.

And the Company's leverage and interest coverage ratios remain very strong at 1 time and 22 times, respectively.

EBITDA in the quarter was $222 million.

From a financial perspective, this was a very strong quarter.

Adam will now provide an overview of the business.

Thank you very much, Diana.

And I would like to add my own welcome to all of you on the phone today at the time of our first quarter earnings call.

I'll spend a little bit of time to highlight some of our first quarter achievements.

I'll then discuss the trends and the progress in our served markets.

And then I'll finish up by commenting on our outlook for the second quarter as well as for the full year of 2011.

As Diana just detailed, the first quarter was an excellent start to 2011 for Amphenol, with the Company reaching the high end of our guidance in sales and earnings per share, despite significant cost challenges and a continued dynamic market condition.

Revenues in the quarter grew a very strong 22% from prior year, reaching $941 million.

And orders reached a new record of $961 million.

Despite significant and pervasive challenges on cost around the world, the Amphenol operating team executed extremely well in the quarter.

And we're very proud to have achieved operating margins of 19.8%.

We also continued to generate excellent cash flow of $108 million, used in particular for our latest acquisition as well as the renewal of our stock buyback program.

These results are a direct reflection of the strength and discipline of our agile organization and entrepreneurial management team of Amphenol.

In the quarter, as mentioned, we completed the acquisition of a European and North American based manufacturer of specialized high technology automotive lighting interconnect products.

This company has annual sales of approximately $50 million.

This acquisition builds upon our expanding range of high technology interconnect products for automotive electronics applications.

And is consistent with our ongoing strategy of finding complementary companies with strong management, leading technology, and excellent market presence.

We're very confident that our ongoing acquisition program will continue to create value for Amphenol into the future.

Turning now to the trends in our served markets, the military and aerospace market represented 22% of our sales in the quarter.

Sales in that market increased a very strong 27% from prior year, benefiting from continued strength in a broad range of military and commercial aerospace programs, as well as from the contribution of the Borisch acquisition completed last year.

On a sequential basis, sales declined slightly, reflecting some short-term caution on the part of defense contractors resulting, in particular, from uncertainties surrounding the recent US budgetary process.

Looking ahead, and despite any current market uncertainties, we remain very optimistic on our potential in this market due to the increasing electronics and military applications, the continued acceleration of spending in developing geographies, and the coming upgrades of commercial aircraft platforms.

We expect demand in the military aerospace market to strengthen in the second quarter, and look forward to our technology leadership driving continued expansion of Amphenol's leading market position into the future.

The industrial market represented 13% of our sales in the quarter.

And sales increased an excellent 49% from prior year and 3% from the fourth quarter.

We continued to benefit in the first quarter from a recovery in virtually all segments of the industrial market, as well as from the momentum generated by our new high technology products.

In particular, sales grew strongly in alternative energy, oil and gas, factory automation, as well as instrumentation segments, supported especially by strong progress in the high growth markets of China and India.

We expect the industrial market to strengthen further in the second quarter, and are optimistic that our efforts in the many diverse segments of this market will continue to drive growth into the future.

The automotive market represented 8% of sales in the quarter.

Sales in this market increased a strong 26% from prior year and 11% sequentially as we expanded our participation in many new electronics applications in both traditional and hybrid electric vehicles, and also took advantage of continued growth in automotive volumes.

We continue to broaden our range of high value automotive interconnect solutions and are especially excited by the new strength created by the Santome acquisition.

There's some risk of Japan-related slowdowns in vehicle production in the coming quarter.

Excluding this, however, we expect our sales to increase in the second quarter as our participation in new electronics and hybrid vehicles continues to expand.

Sales into the broadband and hybrid fiber co-ax communication market represented 7% of our sales in the quarter.

Sales decreased 11% from prior year and strengthened only slightly sequentially as we did not ultimately experience the expected seasonal pickup in activity in the United States Cable market.

We expect demand in the broadband market to remain at these levels in the second quarter, as cable operators continue to restrain capital spending in the short term.

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

Sales in this market were flat from prior year and down 5% sequentially as the fourth quarter 2010 pause in IT spending, particularly in the networking market, continued into the first quarter.

We expect improving conditions in this market in the second quarter and look forward to a more positive demand environment in the second half of 2011, driven especially by expanding requirements for enterprise equipment and our new program wins with advanced technology products.

All of which position us strongly for continued long-term expansion in the IT datacom market.

Sales into the mobile networks market represented 13% of our sales in the quarter, and increased 11% from prior year and 8% sequentially.

We benefited in the wireless infrastructure market from an acceleration of wireless build-outs to support next generation mobile services, as well as from continued subscriber growth in emerging markets.

We're especially excited by expanding opportunities for our interconnect products and antennas in the many newly upgraded base stations systems, and look forward to continued growth across all the broad geographies that we serve.

We expect continued momentum in this market in the second quarter and look forward to a positive long-term trend in mobile networks.

The mobile devices market represented 18% of our sales in the quarter, and increased a very strong 64% from prior year.

And we're down sequentially by only 7% as our new product launches offset the traditional first quarter seasonality that we had expected.

We benefited especially from an expansion of our technology position on a broad range of rapidly expanding smart mobile devices, including especially our expansion of our position in tablet computers.

We expect sales to increase further in the second quarter, as we continue to leverage our comprehensive portfolio of products for mobile devices as well as our preferred supplier relationships with all major device makers.

In sum, I am extremely proud of our organization as we have executed very well in this truly challenging environment.

Despite the unprecedented inflationary pressures and the many market dynamics that we see every day, our management team's consistent focus on reacting quickly to changing customer needs while driving always superior operating margins has resulted in a further strengthening of our market position and a continuation of our industry-leading profitability.

These strong results are a direct result of Amphenol's distinct competitive advantages -- our leading technology, our increasing position with customers across our many diverse markets, our worldwide presence, our lean and flexible cost structure, and most importantly, an agile, entrepreneurial management team.

Looking forward, based on a continuation of the current economic trends as well as on constant exchange rates, we now expect in the second quarter of 2011 and the full year of 2011 the following results.

We forecast sales in the second quarter of $985 million to $1 billion, and for the full year, $3.955 billion to $4 billion, respectively.

And we forecast EPS in the range of $0.76 to $0.78 in the second quarter, and $3.05 to $3.11 for the full year.

We have not experienced thus far any significant negative impact to our business from the natural disasters in Japan.

However, our guidance does not reflect any possible disruption to the electronics supply chain that could arise.

Despite any of these challenges, I am extremely confident in the ability of Amphenol's outstanding organization to capitalize on the many opportunities that we see to further expand both our market position and our profitability.

At this time, Operator, we would be very happy to entertain any questions that there may be.

(Operator Instructions).

Jim Suva with Citi.

Thank you and congratulations, Adam and Diana, to you and your team and your employees for a great result and outlook.

The question I have is, on the Department of Defense.

The, I guess, hesitation for them to pass it, did that impact some of the Q1 or Q2 guidance?

And are these long lead time projects that really don't turn off and on?

And is there any impact or not?

I'm just trying to understand, as in the newspapers we read about Washington, DC debating and continually pushing off and on, and on and on, about passing that budget.

Can you walk us through the impact to your Company from this?

It's, I believe, been maybe 15 or 20 years since we've had the budget be such a long, drawn out process.

No, Jim, it's a very good question.

I think as I mentioned previously, we certainly saw that customers were more hesitant to place orders in the first quarter because of the uncertainty surrounding the budget.

We saw this, if you will recall, back at the last time he we had a presidential election.

And I think this was not any different than that situation that we saw.

And I think now that there is a budget, we see a positive outlook, as I mentioned, for the second quarter.

These programs that are long-term, none of the budget discussions today have really impacted them.

And the most important is that, vis-a-vis Amphenol, we have such a broad position across every program, that we are not dependent on one or another program to get today funding, tomorrow funding, or the next day funding.

It was really, in this case, that our customers were just more cautious in terms of where they placed their orders.

They don't want to extend themselves without knowing what is, in the end, going to be funded, or in fact whether the government will have funding at all.

Okay.

And as a quick follow-up, I noticed that actually the last two acquisitions have been in the automotive space.

And traditionally I think of Amphenol not being a huge major player in automotive space.

Is the automotive sector now more of a focus than maybe it was a few years ago?

I think our focus, in general, in acquisitions has always been, and that has not changed, to look for companies that have exciting new technologies in markets where there are also strong adoption of new technologies happening.

It's very true that automotive has not been for us a significant market.

It is still just 8% of sales.

At the same time, we have seen, and that has helped to propel the growth organically in our automotive business, a real adoption of new technologies into cars.

And some of those new technologies come to us as attractive technologies where we would want to participate, where our interconnect technologies can add value, and thus, where we believe those would be good returns for us.

If we look at an example of hybrid, and we have talked before many times that we have not participated in the broad automotive wire harness.

At the same time, as cars transition to a hybrid drive train, they require more harsh environment, more knowledge of high power.

Those are the things where Amphenol has traditionally had an outstanding leadership position in technology.

These acquisitions that we have made, the one at the end of last year which was in RF technology, this one in the real transforming area of lighting technology, are both areas which are not general automotive, but rather, consistent with our ongoing strategy of niche high technology applications in the car.

To the extent that there's a continued adoption of new technologies in cars, I certainly would not tell you that we would shy away from finding other high technology applications of our products in automotive.

By virtue of it being automotive, it does not scare us away.

What we don't like is things where our technology has no value and appreciation from the customer.

Wamsi Mohan with Bank of America-Merrill Lynch.

Yes, thank you.

Adam, you've had roughly 30% year-over-year increase in the price of copper, both in the fourth quarter of last year and first quarter of this year, and achieved very strong conversion margins despite the significant headwinds.

However, as we look to 2Q and potentially similar raw material price headwinds, why are we looking for somewhat lower conversion margins?

Should we attribute this five point delta in conversion margins, mostly to revenue mix?

Any color you could share would be helpful.

Thank you.

Sure.

Perhaps I can give you an answer to that, Wamsi.

I think that, as you pointed out, the Company has a great long-term track record of achieving very strong profitability.

And certainly the profitability that we did achieve in the first quarter is something that we feel very good about, 19.8% ROS; as you say, it was 24% conversion margin over last year.

And these are certainly very excellent accomplishments in any environment but particularly, as you point out, in the current environment, which is really, I think, unprecedented from the pace and amount of the acceleration of these cost pressures.

We, as a management team, remain very committed to the goal of 25% conversion margins, which is certainly a goal that you're familiar with.

We've had it for quite some time.

And I think that then means that we are committed to further margin expansion in the future as the Company grows.

However, given the current global cost environment, we believe that margin expansion in the near term is going to be more difficult.

And, therefore, when we look at the guidance and think that it just makes more sense to be more prudent in the short-term, and to think more about the Company maintaining this very strong level of profitability that we've been able to achieve.

And this really is the thought process that's reflected in the current guidance and, therefore, it's true to say that the conversion margin that you may have computed as inherent in our guidance is more in the low 20% and not the 24%, 25% that we were able to achieve in the first quarter.

As a management team, we continue to be very committed to maximizing the profitability of the Company, irrespective of whatever obstacles may present themselves.

Although it is true that all of these goals have become more challenging as the profitability level gets higher and as these cost increases just continue to accelerate.

And so as a management team, we certainly continue to work very aggressively, as we have done in the past, to pursue both pricing and cost reduction actions to maximize the profitability of the Company in the future.

Okay.

Thanks Diana.

As a quick follow-up on a separate note, for the acquisition that you guys just closed in April, can you talk about what the growth rate of that business is that you anticipate, and what the margin profile is of the business relative to your current business?

This is about a $50 million business.

We closed it part way through April, so there's maybe $10 million of so that's included in the Q2 guidance, and a little bit more than that in the two outlying quarters.

I think from a profitability perspective, this is one I would say that was more at the-- a little bit lower than perhaps our average, but we see good potential both from a growth perspective and from a profitability perspective with this Santome company.

I think that Adam mentioned already the type of products that Santome is involved in and we're certainly very excited about the growth potential for these types of products in the automotive market.

Sherri Scribner with Deutsche Bank.

Hi.

Thank you.

I wanted to get a little bit of sense of your thinking in terms of the fiscal '11 guidance.

It looks like you took your revenue guidance above where your prior range was, but you really didn't change the EPS that much.

You seemed to have just tightened up the range.

So I'm trying to understand, is that baking in some of the acquisitions and then potentially some limited profitability?

But just trying to understand the thinking there for that guidance.

Yes, I think the guidance, you know we go through a very bottoms-up process in terms of the way we look at our business each quarter.

So, I would just put that out there, but I think that the guidance, in general, reflects the inclusion of this acquisition that we did.

So that is reflected in the new guidance and, of course, that would not have been reflected in the old guidance.

It also reflects the stock buyback that was done in the quarter which also would not have been reflected in the old guidance that we gave last quarter.

And other than that, reflects what we see the potential is for performance of the Company for the rest of the year.

Okay.

Then just following up on the automotive segment, we've heard a lot of detail about shortages and some supply disruptions in the automotive segment.

But your guidance seems to suggest you're still positive on that segment.

You're expecting increasing sales, but you did mention that there is some risk to Japan.

So, just wanted to get your thoughts around what the potential risk is there and what you're seeing in terms of supply disruptions.

Thanks.

No, as I said, we have not seen, to our business, whether related to automotive or otherwise, any meaningful impact relative to Japan.

I think, as I have gone around and talked with customers around the world in a variety of our markets, none have been able, and none are willing to, or see the need to, say anything tangible in terms of what the impact will be.

The fact is, everybody is working very hard to offset any problems that can come.

It appears that of any industries, the automotive on a broad basis is impacted more, especially among Japanese auto makers where we have very limited, if any, exposure.

In terms of that specific market going into the second quarter, again, we have not heard anything specific from customers.

We have not seen any reductions in forecasts or downgrades to the outlook.

And in fact, what we see is that many of the new niche electronics applications in cars continue to have strong momentum.

At the same time, it is still, I think, for many too early to say whether some of these products that come out of Japan, whether they be semiconductors or other things, whether those could have some impact onto the broader supply chain.

That's something that, despite many questions that we've asked to customers, we don't have any real visibility on at this stage.

It does not appear today that there will be anything real meaningful for the Company.

Shawn Harrison with Longbow Research.

Hi.

Good afternoon.

Just a first question is a clarification on the share repurchase.

Two aspects.

What should we see the share count in the second quarter?

Just really trying to judge the timing of the share repurchase activity in the March quarter.

And was there any share repurchase done in April, as well?

Sure.

I think that there was more activity towards the end of the quarter, so the Q1 diluted share count, as you implied, doesn't fully reflect all of the stock buyback that was done.

I think the Q2 would be somewhere in the 175 million range from a diluted share count, and that would reflect what we did in the first quarter and a smaller amount that fell into the beginning of Q2.

Okay.

Were the equity awards greater than normal to start the year?

No.

There were option exercises that occurred, some towards the end of the fourth quarter that were more fully reflected in the weighted average shares calc in Q1.

And then you've got always some impact from changes in the share price, as you know, with the mathematics, the way the diluted calculation works.

Matt Sheerin with Stifel Nicolaus.

Yes, thanks, and good afternoon.

A question for you, Adam, on the mobility segment.

You seem to continue to be very bullish on that market, especially in the tablet space.

Obviously there's one clear winner in tablets right now but we're seeing entrance of many different vendors in that market.

How do you see that playing out?

How are you positioned with the multiple players?

And how do you prioritize your capacity and your attention given that we likely will see some winners and losers in that market?

This is an excellent question, Matt.

Thank you very much.

We are not treating this any differently than we have our long-term strategy for mobile devices.

And that is very simple.

We don't pick winners.

We're not trying to pick who is going to be successful, which product is going to get fanfare in the marketplace, which will be adopted more or less heavily by consumers.

Rather what we do in this business, and that's why we view this very much as a mobile device business, is our goal is to get the broadest print position on the most platforms as possible, using the lowest cost R&D and tooling as we can.

And that has been very successful for us for many years in terms of participating and being able to participate on the winning devices.

We also have participated on the losing devices and that is certainly the case.

And I think here we will continue to follow that.

We will get the broadest position possible.

We will have quick turn designs.

We will do this all in low cost areas.

And we will just try our hardest to make sure that we are on every platform.

And many of those will be losers and some will be winners and all of them will have some content from Amphenol.

Okay.

That's great.

And then just a follow-up on a question regarding the military business and orders.

Since the budget was passed, have you seen a return to normal order patterns from your customers?

I wouldn't say that there has been any big change.

This was just passed a couple of weeks ago and, as you may know, the government does not operate necessarily as quickly as private enterprises do.

So, we have not seen any meaningful change.

There are maybe some small signs that people are feeling a little bit better, I think, in general.

The people, the communications with the people say -- Okay, now that the budget is passed we can get back to our normal daily duties.

And those daily duties will, at some stage, also involve placing orders to our vendors.

I think clearly over time that will have a positive effect.

And that's why we do look forward in the second quarter to a more positive outlook for the military aerospace market.

I think in general, the trends that we have seen in this market, which in particular is increasing adoption of electronics, that has not slowed, by any means, with any government budgetary issues.

We see just more and more every day the adoption by military contractors, by the US and foreign militaries, and emerging markets, of new technologies that help them to adapt to the new demands that are really in the world today.

These new technologies, whether they be unmanned vehicles, whether they be new RF detection systems in cars, new communication systems, these are really accelerating in their prevalence.

And if there is a short-term budgetary delay in placing orders, that does not at all take away from the real imperative that is there.

It's very much analogous to what we are seeing in many other markets where there is this real acceleration of technology adoption.

And I think in many respects the military around the world is playing catch-up there.

The other element of that market that is important to emphasize, about a quarter of our sales are to the commercial air market.

There, clearly we have seen strong performance on a year-over-year basis and see still good progress in that market on a sequential basis.

We are very hopeful, and that is not just misplaced hope, that there will be good momentum in that market as we go through this year, into next year, as the new airplane platform is very highly fuel efficient.

New planes that are being released really start to have production volumes behind them, and as we start to participate on a broader basis in these new commercial air platforms, again with new, more high technology interconnect products.

William Stein with Credit Suisse.

Thanks.

Most of my questions have been answered, but I just want to dig into Japan yet again.

Just to make sure I understand, you haven't seen any impact thus far, and your guidance doesn't contemplate any demand hiccup going forward, is that right, Adam?

That's correct.

Are there any opportunities for share gain around disruptions?

I think one of your competitors had, perhaps, some production delays owing to some factory damage.

Are there any opportunities for share gain there?

Look, we're certainly not trying to capitalize on a natural disaster here.

At the same time, Japan is a relatively small footprint for us.

There have clearly been instances where customers have come to us to seek replacements of products that they need in the short-term.

Whether that translates into a long-term share gain, I think that's too early to say.

Clearly, there will be in Japan a significant reconstruction effort.

I have heard numbers in the hundreds of millions being talked about here.

That is a large stimulus program that will come in and of itself.

And I'm sure there will be elements of that that come into the markets that we serve, the industrial market, the wireless infrastructure market, the aerospace market.

So long-term, any reconstruction, and I'm very, very confident that with the resiliency of Japan, the economy and the people of Japan, that they will reconstruct and they will no doubt build it bigger and better and higher technology than it was built in the past.

Do we stand to be an enabler of that reconstruction and thereby benefit from it?

I think long-term we certainly would.

Vis-a-vis short-term share gains, there may be some odd things but that's not something necessarily that we are counting on even if we're there to support the customers.

Thanks for that clarification.

If I could just dig into the Cable segment a little bit.

Margins have been declining for the last few quarters there.

And I'm aware you're not really the price setter in this market but can you give us maybe an update as to both demand pricing and other trends going on in that market for you?

Sure.

This was one market where this quarter we clearly were disappointed in terms of the end market demand.

We had expected demand to go up as it usually does in the first quarter.

That has been for a long time, seasonally, the first quarter where you would see an increase in build-out in demand, and we just simply did not see that this quarter.

And I think that is arising out of a real reluctance on the part of especially the US cable operators to spend capital.

Whether that is because of different competition that they have, different take-up rates, whatever that is, maybe we're not so close to, but there clearly was some restraining of capital spending.

Vis-a-vis the pricing environment, I have to tell you that we certainly look forward to the market leader always being aggressive in pricing when you have seen these increases in raw materials that have come.

While there were some announced pricing actions, the actual implementation of those pricing actions was much less than one would have expected.

We're still hopeful.

We're very hopeful that there will be discipline in the market.

And as always, we will be there within an extraordinarily short time to follow on any pricing activity from the market leader.

And that's something that they can be very confident in, that the market should be confident in.

Amitabh Passi with UBS.

Hi.

Thank you.

Adam, I just had a related question on the cable products segment.

What is the strategic imperative to remain committed to this segment?

The segment used to be 20% plus-ish years ago, we're now under 7%, margin dilutive.

I think you've gone relatively small scale.

And it just seems to be much more seasonal and susceptible to commodity cost moves.

So I'm just wondering, from your perspective, what the rationale is to remain engaged in the segment.

It's actually quite simple.

We seek to work everywhere where the Internet is being enabled.

And if you look in the United States in particular, broadband or the cable market is really still the predominance of how people access to the Internet through broadband.

We're not placing bets.

We're not betting whether someone is going to get their Internet through cable or through DSL or through broadband over power, through LTE, through WiMAX, whatever it may be.

It's not our business to bet on which is going to be successful.

It's our business to participate across all of those.

It's true, this market today is dilutive from a profitability standpoint.

It is also much smaller than it ever was before.

And in terms of the impact on the total Company at 7% of sales, it's much less.

I think our technology position in the cable market has allowed us on interconnect products to really achieve strong technology positions on the equipment, and there is a lot of new equipment upgrades that go into this, in the broadband market.

And that is something that we feel has been an excellent strategy of the Company for some years now.

Going forward, we remain committed to stay as part of the enabler of that broadband, as again, as part of the mix of how people get Internet to their homes.

We believe that broadband Internet access is an important market for the interconnect industry and for our industry, and we want to be a part of each element of it.

Got it.

And then just maybe a follow-up for Diana.

Your balance sheet right now at a leverage ratio of about 1 times.

Any contemplation of thought maybe to increase your leverage by tapping into your revolving credit facility and continue to buy shares more aggressively?

Yes.

I mean, I think you've seen what we've done in the first quarter relative to the buyback of stock.

I think that we, from a prioritization of using that balance sheet strength that you refer to, it's still true certainly that the acquisition program would be the number one.

But clearly stock buyback represents a good option certainly to return value to shareholders.

You saw us do that in the first quarter.

Even after the purchases that we've made, we still remain about 1.5 million to 2 million shares higher than we were at the time we stopped our last buyback program just before the global recession hit towards the end of 2008.

And so I think that from a prioritization standpoint, both acquisitions and share buybacks will continue to be an important part of the picture for us.

Craig Hettenbach with Goldman Sachs.

Yes, thank you.

And Adam, just a follow-up on that last question.

Any read-through in terms of the size of the buyback activity in Q1 versus acquiring a company with $50 million in sales, in terms of what the M&A environment looks like and opportunities going forward?

No.

We're very happy to have completed another acquisition.

We completed several acquisitions last year and the year before and we continue to really incubate a very strong pipeline of deals for the future.

Again, I've said this many times, we are not going to predict when we will close the next deal, how many deals we will close, what value those deals will have for the future.

But there is no question that Amphenol is positioned, continues to be positioned, and will be positioned as really the acquirer of choice in this industry.

As we go out, and I go out and meet with companies, both large and small, there is a real warmness and an open arms towards people saying we want to be part of Amphenol.

Our organizational structure and entrepreneurial managers, the general managers, my group executives, that is a very hospitable environment for companies to become a part of.

When they become a part of Amphenol it is really a seamless transition for them.

I spoke just one day afterwards to the general manager of our newest company and he feels just right at home, because he gets to continue to run his business, yet he gets to avail himself of really the opportunities around the Company now that he is part of a global company.

And I think that example every time plays out for those entrepreneurs who, at the end, decide to sell to Amphenol.

Obviously, others want to do acquisitions and we're not always going to win every acquisition.

We're certainly not going to pay the highest price for every acquisition.

And these acquisitions can sometimes take a very long time to develop and to incubate and develop the mutual trust that is required in a relationship to, in the end, decide really to get married.

So, what that will be this year, what that will be next quarter, that I'm not going to be able to forecast for you.

But I can tell you that we continue to have a very active engagement in developing our acquisition pipeline, a strong pipeline.

And there are a lot of companies in this industry that are attractive, that have unique technologies, that have broad application across our global customer base.

Okay.

Thanks for that.

A follow-up for Diana just on the current margin environment, the opportunity on pricing and ability to pass through.

What are you seeing out there?

I think that the entire team in every market, with every customer, is spending certainly a tremendous amount of time on pricing to ensure that we get the maximum price for the technology that we bring to the customer.

I think each individual market has its own dynamics.

Certainly there aren't any customers out there who are just dying to get a price increase from their vendors.

But by the same token, with the environment that we find ourselves in, this is a very important part of the puzzle relative to maximizing the profitability of the Company.

And so we are, certainly both from an executive management standpoint and from an operating management standpoint, spending a tremendous amount of time on pricing right now.

Let me just say that, to reiterate this from Diana, there is an extreme organizational focus on this.

Pricing is an art.

We have certainly-- you can always to distributors, there are the regular price increases, but this represents less than 15% of our sales.

And so with these discussions with OEM customers, that is a real art and a drive, and it takes courage.

And one thing that it takes, most importantly, and where Amphenol has a strong position, is it takes leadership of people who are really involved on both sides of that business, both the operational, the engineering, as well as the customer-facing side.

Our general managers are really our greatest asset in terms of being able to sense the costs going up because they see it every day, and then translate that into meaningful discussions with their customers.

As opposed to just saying the price goes up a flat number, we issue that from headquarters, rather, they are able to go in and truly adapt their pricing to the reality of the market that they see.

70 general managers around the world, they're each taking different strategies, but one thing in common, it is an extreme focus, it is in the front of everybody's mind.

No doubt, with these commodities having done what they are, with the wages in China, with the currency, the renminbi and others, there is really fewer and fewer options except to go to the customer with price.

And we're hopeful that we're not the only company in the industry who has that mindset.

Amit Daryanani with RBC Capital Markets.

Good afternoon, guys.

Just want to follow up on the Military Aerospace side.

I think military alone is 17% of revenues there.

Could you just talk about how much of that is centered around US defense versus rest of the world?

And do you expect mil-aero generally to be up in line with the 12% revenue growth you guys are guiding for, for the full year.

Thank you very much, Amit.

Essentially, it's about right.

Commercial air represents about a quarter or 22% of sales so your math is pretty close there.

Relative to what amount of sales is US versus others, it is largely similar to if you were to look at what amount the US spends compared to other countries.

Clearly the US is the largest expenditures for military and that would accordingly be for us also the largest piece.

That being said, we have very, very strong position in essentially all the other global markets where we are as an American company allowed to participate.

That includes in Europe.

That includes in India where we are really the leader in that extremely fast-growing market.

So, we see that, while the US continues to be very important for us, there remain excellent growth opportunities in other areas around the world.

And those growth opportunities may actually be with US military contractors who are exporting their products.

That we have seen more and more of over the recent years.

Relative to our outlook for the full year, we were obviously very pleased that that market grew 27% in this quarter.

And I think we said last quarter when we gave our full year guidance that military would be sort of in line with the overall growth of the Company and we wouldn't see that to be much different at this stage.

Got it.

Thanks.

And then just a second question, Diana, for you.

You guys have done a great job generating cash.

You're sitting at close to $700 million now.

At least the way we are modeling it, you will end up with close to $1 billion of cash on hand by the end of the year.

Do you, a, really want to sit on that much cash on your balance sheet?

And if not, should we expect the pace of buybacks to be around what you did this quarter going forward?

Yes.

I mean, I think that we don't so much forecast exactly what the buybacks are going to be.

I think we really look on a quarter to quarter basis and look at the acquisition pipeline and so forth.

I think we have a lot of capacity to do both acquisitions and, again, stock buybacks, based on the strength of the balance sheet, as you point out.

And I think that you've seen what we've done here in the first quarter relative to that, and I think you can expect to see some of both as we move along through 2011.

Steve O'Brien with JPMorgan.

Hi.

Thanks for taking my question.

Can we talk a little bit more about industrial?

The growth there was remarkable in the first quarter.

The end markets are very diverse.

With maybe a macro indicator like oil being $115 a barrel, how do you see that impacting the piece parts and the growth trends here going forward when you look at transportation, oil and gas?

Is it an inhibitor or potentially a positive or neutral?

I think, just to answer the general question, our industrial business is a very, very diversified business.

It ranges everything from connectors that go into alternative energy, solar, wind and other, to high speed rail to geophysical, to medical, to marine, entertainment, heavy equipment.

It's just a wonderfully diverse marketplace for us, and one where we're very excited to see the ongoing technology adoption happening, really in every one of those segments.

Relative to the price of oil and what that can mean, it can mean different things to different segments.

I think, clearly, if you talk about oil exploration, you talk about energy generation, that can be not a bad thing.

If price of oil is up, people are going to dig for more of it, but people are also going to try to use less of it.

And so if you dig for more, that's more exploration.

And if you use less, that's more alternative energy and more hybrid drives and more efficient power.

So, I think either way that's not a bad thing.

I wouldn't tell you, though, that we have seen our industrial business that is so correlated necessarily to how the price of oil goes up or down in a given short or long term.

We just feel very excited by the real diversity and the outlook of strength that comes across that industrial market.

And as I mentioned earlier, we see excellent opportunities in particular in emerging markets.

The infrastructure building that is happening in these emerging markets.

You wish on one hand that you would have more infrastructure being built in the US, but you see this infrastructure being built in places like China and India.

And that is not just roads and bridges and tunnels and airports.

It is totally new rail systems.

It is new energy generation systems, new medical equipment, new automation, motion control, machine tool industry.

There is just such a broad base of growth prospects that come in these emerging markets.

And as they adopt these new technologies they are adopting, really, the latest generation, and the latest generation has more and more of this electronic functionality and the stronger drive towards efficient power transmittal.

Do you think it's fair to say that category is a longer term out-grower versus the corporate average?

Yes, I think we have seen that certainly over the last five, six quarters here.

And as I mentioned, we continue to see strength in the industrial market going forward into the second quarter.

And we feel very good about the fact that those are real strong growth segments going into the future.

Shawn Harrison with Longbow Research.

Just a brief follow-up.

CapEx -- any change this year?

And second, Adam, your commentary on the networking market seeing maybe a bottom, is that because demand is coming back or is that because you're seeing just a completion of, say, an inventory drawdown through the supply chain?

From a CapEx standpoint I think we still would expect 3%, 3.5% of sales for CapEx for the full year.

So that's really no change, I think, from what we've done on average historically.

And relative to the networking market, which is part of our IT datacom, clearly we saw in the quarter still some pause in that market in particular.

And I think what you are seeing in the networking market is a couple of things.

One is there were upgrades that happened in the year prior and there's some cycle that comes to that.

More importantly, we have seen a real enhanced competitive marketplace in networking where it has been no secret that there have been share shifts that are happening between the networking OEMs and driving price competition, different formats, different types of networking equipment into the different segments.

And I think that can certainly have, in one instance, it can cause some customers to every once in a while say maybe we wait, we get a better price if we wait a month or two, to buy that equipment.

Because there seems to be some very, very aggressive actions between the OEMs and the networking market today.

Okay.

Thanks a lot and congratulations, again on the quarter.

Thank you, Shawn, I appreciate it.

I show no further questions at this time.

Very good.

Thank you all again for your continued interest in Amphenol.

And I would like to wish you all a very successful and a happy second quarter.

And we look forward to talking to all of you again here in three months.

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