Amphenol Corporation (APH) Q2 2011 Earnings Report, Transcript and Summary

Hello, and welcome to the Second Quarter Earnings Conference Call for Amphenol Corporation. [Operator Instructions] At the request of the company, today's conference is being recorded. [Operator Instructions] 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'd like to welcome everyone to our second quarter call. Q2 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 Q2 achieving strong growth and beating the high end of the company's expectations. Sales were $1,018,000,000 and EPS was $0.85 including $0.06 relating to certain acquisition accounting adjustments. Excluding these items, diluted earnings per share was $0.79. This represents the company's first quarter with sales over $1 billion and represents new record for both sales and earnings per share. Sales were up 15% in U.S. dollars and 12% in local currencies over the second quarter of 2010. From an organic standpoint excluding both acquisitions and foreign exchange, sales in Q2 2011 were up 8% over last year. Sequentially, sales were up to 8% in U.S. dollars and 6% organically from Q1. Breaking down sales into our 2 major components. Our cable business, which comprised 7% of our sales, was up 9% from last year and up 17% from last quarter. The sales growth from last quarter relates primarily to increased spending in both North America and international broadband markets. The growth from last year relates primarily to strong demand in South American communications market. The interconnect business, which comprised 93% of our sales, was up 15% from last year and 8% sequentially. Adam will comment further on trends by market in a few minutes. Operating income for the quarter was $215 million compared to $176 million last year. Operating margin was 21.1% compared to 19.8% last year. Operating income includes income of approximately $18 million relating to an adjustment to reduce a previously recorded contingent payment obligation for a 2010 U.S.-based acquisition. In accordance with the applicable accounting rules, contingent obligations are reassessed based on current performance expectations and adjusted accordingly through operating income. This adjustment relates primarily to the push out of certain defense-related program to periods beyond this year. We continue to be excited about the acquisition and expect strong future performance. Excluding this adjustment, operating margin was 19.4% for Q2 2011. Operating income as net of stock option expense of approximately $7 million this quarter and $6.2 million in the prior year quarter, or 0.7% of sales in both quarters. From a segment standpoint in the cable business, margins were 12.8%, down from 13.5% last year. The margin decline relates primarily to higher relative material costs. From a sequential standpoint, cable margins improved from 11.8% in Q1 as a result of higher volume and pricing action. In the interconnect business, margins were 21.6% compared to 22.3% last year. The lower interconnect operating margins reflect a slight reduction in gross margin as a positive impact of higher volume, cost reduction actions and price increases were more than offset by increases in material input cost. In addition, there were costs in the quarter that were somewhat higher as workforce reductions of about 4% were implemented in the areas of the business with slower demand. Overall, we're pleased with the company's operating margin achievement. Excluding the one-time acquisition adjustment, this represents a conversion margin on incremental sales over Q2 2010 of approximately 16%. While this conversion margin is below our long-term goal, the company's overall profitability level continued to be very strong in the face of significant global cost pressures and a mixed demand environment. 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 $11 million compared to $10 million last year, reflecting higher average debt levels from the company's stock buyback program. Other income was $2 million compared to $0.8 million last year, primarily as a result of higher interest income on higher levels of cash and short-term cash investments. In Q2, the company had an effective tax rate of 27.6% compared to a rate of 21.3% in the second quarter of 2010. The prior year quarter included a net benefit relating to a reduction in international tax expense, primarily due to the favorable outcome of certain tax positions and the completion of prior year tax audits of about $10 million or $0.06 per share. The 2011 quarter includes tax expense of approximately $6.6 million relating to the $18 million acquisition-related gain. Excluding this, the effective tax rate in Q2 2011 was just under 27%. We currently expect a rate of about 27% in the second half of this year. The reduction in the rate from 2010 reflects primarily a lower mix of U.S. income. Net income, excluding the one-time items was approximately 13.4% of sales in Q2 2011 compared to 13.5% of sales in Q2 2010, a very strong performance. Diluted earnings per share for Q2 was on -- and as reported basis $0.85 this year and $0.74 last year. After adjustment for one-time items, diluted earnings per share was $0.79 in 2011 and $0.68 in 2010, up 16% from the prior year. Orders for the quarter were a record 1,007,000,000, up 11% from last year, resulting in a book-to-bill ratio of approximately 0.99:1. The company is an excellent generator of cash and cash flow from operations with $105 million in the quarter. This is approximately 77% of net income for the quarter and 82% for the 6 months. The computation excludes the one-time acquisition gain. Operating cash flow in Q2 does reflect higher interest and tax payments in accordance with normal payment schedule. From a working capital standpoint, inventory in the quarter was $600 and -- $42 million at the end of June. This is up about 4% from March, excluding the impacts of acquisition and translation. Inventory days declined 2 days from March to 83 days. While we made some progress improving inventory turnover, we continue to hold a portion of the inventory build in Q1 and we'll continue to work in the second half to further improve inventory turns. Accounts receivable was $793 million at the end of June, up 4%, excluding the impact of exchange and acquisitions and reflecting the sequential sales increase. Day sales outstanding decreased 2 days to 69 days at the end of June from 71 days at the end of March. The cash flow from operations along with borrowings under the company's credit and receivables facilities of $209 million and $10 million in proceeds from option exercises were used primarily to fund $23 million in capital expenditures, $92 million in acquisition-related expenditures relating to both the previously announced acquisition in April of an automotive interconnect company and a performance-based payment for a 2010 acquisition. We also made payments to noncontrolling shareholders of $27 million to purchase the remaining shareholder interest, and cash and cash investments increased $5 million in the quarter. In addition, the company purchased 3.2 million shares of its stock for $172 million in the quarter under the company's stock buyback plan. We have approximately 13.4 million shares remaining under that plan and as you may recall the plan expires in January of 2014. At the end of the quarter, cash and short-term cash investments were $697 million, the majority of which is held outside the U.S. And debt was $1,158,000,000. Net debt therefore was $461 million at the end of the quarter. In late June, we completed an amendment to our $1 billion revolving credit facility to extend the maturity 2 years to July 2016 and reduce the pricing-to-market rates. This amendment results in a more staggered debt maturity schedule for the company and the current borrowing level will save about $5.5 million a year in interest expense. At June 30, the company had availability under its facility of $537 million. The company's leverage and interest coverage ratios remained very strong at 1.26x and 22x, respectively. And EBITDA for Q2 was approximately $237 million. From a financial perspective, this was an excellent quarter. Adam will now provide an overview of the business.

Well, thank you very much, Diana, and I'd like to also extend my welcome to all of you here on the phone today. I'll spend a few moments to highlight our second quarter achievements then I plan to discuss the trends and the progress in our served markets and then I'll close with some comments on our outlook for the third quarter and the full year of 2011. The second quarter was a record quarter for Amphenol, as we achieved quarterly sales of more than $1 billion for the first time in the company's history. We are very pleased that despite continued uncertainty in the economy, we were able to exceed the high end of our guidance in both sales and earnings per share with revenues growing 15% from prior year and 8% sequentially to $1,018,000,000 and EPS reaching the record $0.79, excluding one-time items. And although we continue to face significant cost challenges around the world, the Amphenol operating team executed extremely well in the quarter, achieving these operating margins of 19.4%. We're especially proud that our net margins reached 13.4% of sales, which remains a clear reflection of the financial strength of Amphenol. The strong cash flow of $105 million in the quarter, which was used in part for the continuation of our stock buyback program, is another excellent sign of Amphenol's financial strength. These results are clear and direct reflection of the strength and discipline of Amphenol's agile and entrepreneurial team of more than 70 general managers and group executives around the world. Turning to the trends and the progress in our served markets. The Military, Aerospace market represented 21% of our sales in the quarter. Sales in this market increased 20% from prior year, benefiting from an accelerated growth of our products sold into Commercial Aero programs as well as from the contributions from the Borisch acquisition. On a sequential basis, sales were up slightly with Military sales relatively flat from the first quarter as defense contractors continue to be cautious in placing orders. This was offset by stronger demand in the Commercial Aero market. In light of continued budget uncertainties as well as normal third quarter seasonality, we expect sales in the third quarter to moderate, particularly in the Military market. Although we have a positive outlook for the Commercial Aero market as jet liner volumes increase and as new programs take flight in the second half of 2011. Longer term, we're extremely confident that our technology leadership will drive continued expansion of Amphenol's market position into the future as we continue to expand our potential in the many new electronics applications that are emerging in the Military and Aerospace market. The industrial market represented 13% of our sales in the quarter. Sales increased a very strong 21% from prior year and an excellent 11% from the first quarter as we capitalized on the many exciting new technology opportunities in the global industrial market. Our progress is continuing to accelerate in emerging markets including especially in China and India. And we saw excellent performance in the factory automation, oil and gas, instrumentation, as well as the heavy equipment segments of the industrial market. While we expect this market to moderate seasonally in the third quarter, we remain very optimistic that our efforts in the many diverse segments of the industrial market will continue to drive strong growth into the future. Sales in the Automotive market represented 8% of our total this quarter and sales there increased a very strong 55% from prior year and 20% sequentially. As we benefited from the continued expansion of our participation in new electronics applications, in both traditional and hybrid-electric vehicles and as we benefited as well from the recent Santome [ph] acquisition. We are continually broadening our range of high-technology Automotive, interconnect solutions to capitalize on the many new electronics applications in vehicles. In addition, we are very encouraged by our expanding geographical diversification in this important automotive market. Although we expect normal seasonal moderation of the Automotive market in the third quarter, we remain very excited about the many opportunities for future growth in both traditional and hybrid vehicle applications. The Broadband market represented 8% of our sales in the quarter. Sales in Broadband were stronger than expected in the second quarter, rising 15% sequentially and down only slightly from prior year, as build-out activity increased in the U.S. cable market and as operator investment accelerated in Latin America and other emerging markets. We expect demand in the Broadband market to further strengthen in the third quarter as we continue to expand our technology offering to this very important market. The Information Technology and Data Communications market represented 19% of our sales in the quarter. While sales were down 3% from prior year, we were very pleased to experience 9% sequential growth in the IT market, as we were able to capitalize on renewed demand for our advanced interconnect products used, in particular, in networking and storage equipment. We continued to see accelerating in customer demand for higher performance equipment that is to support rapidly expanding IP video and other bandwidth-hungry applications, many of which are being driven in part by the proliferation of new data-intensive mobile Internet devices. We expect demand in the IT market to further improve in the third quarter and beyond as we take advantage of new design wins with our high-technology products across a broad array of IT customers as well as equipment platforms. The mobile networks market represented 12% of our sales in the quarter. Sales increased slightly from prior year and were flat sequentially as operators in certain geographies paused their wireless build-out activities. Nevertheless, we are excited by the expanding opportunities that we see for our interconnect products and antennas in the many newly upgraded base-station systems, and we look forward to continued growth across all the broad geographies that we serve. We expect demand to be stable in this market in the third quarter, and we look forward to a positive long-term trend in mobile networks as network operators upgrade their systems to support the explosive growth of new smartphones and tablets. The Mobile Devices market represented 19% of our sales in the quarter. Sales in this market increased a very strong 36% from prior year and increased sequentially by 11% as we capitalized on our expanded product position in new smart mobile devices. We are especially excited that our successful product and customer diversification drive has positioned us to participate in the expanding market for these devices, whether standard handsets, smartphones or tablet computers. We expect sales in the Mobile Device market to increase further in the third 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 summary, I'm extremely proud of our organization as we have executed very well in this tremendously challenging environment. These strong results are a direct result of our distinct and resilient competitive advantages, our leading technology, our increasing position with customers in diverse markets, our worldwide presence, a lean and flexible cost structure and most importantly, an agile entrepreneurial management team. Although there are unprecedented inflationary pressures as well as uncertainties in several end markets, I have tremendous confidence in the Amphenol management team in such an environment. We will continue to excel by reacting quickly to our changing customer needs to further strengthen our market position and we will continue to drive proactive actions to secure our leading operating margin. Most importantly, it is our commitment as a management team to pursue these results with the level of passion and effectiveness that ensures the continued superior performance of Amphenol. Now looking forward into the third quarter and the remainder of 2011, and based on the continuation of current economic trends and constant exchange rates, we now expect the following: Sales in the third quarter in the range of $1 billion to $1,015,000,000 and for the full year 2011, $3,975,000,000 to $4,005,000,000, respectively. Our earnings per share we expect in the range of $0.77 to $0.79 for the third quarter and $3.07 to $3.11 for the full year, respectively. Despite the many uncertainties that are in the economy today, I am extremely confident in our ability of our organization to build on these new record results by capitalizing on the many opportunities that we see to further expand both our market position, as well as our strong financial performance. Thank you very much and at this time, operator, we'd be very happy to entertain any questions that might be there.

We'll take the next question from William Stein with Crédit Suisse. William Stein - Crédit Suisse AG: I'm hoping you can give us a bit of clarity on the mix of Military versus Commercial Aerospace in that end market. And then I have a follow-up if that's okay.

Sure. Well, Commercial Aero represents now roughly about 1/4 of that business. And as I said, we are very excited to see real progress in Commercial Aero and we have really great outlook for that market going forward. I was actually just last month at Paris Air Show and I think we saw at that air show just record orders for new jet liners. There's a tremendous momentum that seems behind the Commercial Aero market today and I think that gives us a lot of optimism leading forward. Even this morning, I think the largest aircraft order in history was placed just this morning to both Boeing and Airbus. So we feel very, very good about that Commercial Aero market. And the new technologies that are embedded in these new aviation platforms are something that we feel very well positioned to take advantage of for the future and really look forward to that market going forward. William Stein - Crédit Suisse AG: I appreciate that. We've heard the same thing certainly but obviously less robust in the defense end market. I think we all know that the total budget, if you consider the supplemental piece, is likely to shrink. And as you consider your end market exposure in this end market that you grouped together with Commercial Aerospace and as you consider everything else, maybe you could help us understand as the company may want to shift its end market exposure to get a little bit more exposure to the more rapidly growing or better positioned end markets, how do you think about the pace of that through either M&A or organic adjustments and how you're targeting accounts in end markets?

Look, I mean, we are everyday adjusting our resources based on the opportunities. And certainly we recognize that defense budgets are under pressure. I mean, our country does not appear to be able to make a budget, let alone to say what that budget will be. So clearly we thought in the first quarter that with the budget passing that, that would bring some relief and that the orders would begin to become more strongly. Clearly now with all the governmental negotiations in the background, the budgets have not yet been released and there continues to be a tremendous amount of uncertainty in that market. Long term with the Military market, we're still extremely committed to that market. We believe that there is, and we continue to see that there is a tremendous explosion of electronics activities in that market. We are participating still on all the major platforms and really enabling these new electronics. In addition, I've spoken about it in the past that Military is not just a U.S., a U.K. or Western Europe phenomenon. We see a lot of opportunities in the Military market. In the long term, in emerging markets and we are very well positioned to take advantage of those. But obviously we will continually adjust our sort of feet on the street, the engineering resources, the sales resources, all across the board to attack those growth opportunities and that's the beauty of Amphenol. The beauty of the agility of our organization is such that we are not sort of locked in organizationally to one or another market or segment within that market. We're constantly reapportioning people to go after the growth segments. And within the Military, there continues to be very, very strong growth segments. Things like unmanned aerial vehicles, things like upgraded communication systems, the new jetliner, new avionics systems and these are still areas of the Military where we see tremendous strength. And obviously we reapportion our engineering, our technology development, our sales resources very rapidly to sort of redeploy onto these exciting opportunities. And with that, I'm very confident that regardless of what will happen long term with the budgets, we're going to continue to be very, very well positioned in that market.

The next question will come from Wamsi Mohan with Bank of America.

Adam, you always proactively adjusted your workforce and going back to '08, you were one of the first to cut fairly deeply and sharply, very quickly. As you have done some workforce reduction here in the quarter, is that more of an effort to cope with material cost pressures that you have cited as sort of at historical highs or are you seeing something on the horizon more from a demand perspective that sort of made you take this action?

No, I think Diana mentioned that we took headcount reduction in certain end markets where we did not see the demand coming. That's how we act. We are not running the company monolithically. So we have certain operations that saw not the expectation. The expectations that they had were not really realized and so clearly we take very quick and proactive measures in those operations to reduce the headcount and in this case, especially in light of the fact that some of that expectation was in western markets where you have defense-related with more western headcount, that's an area where we took very proactive measures and that certainly has some cost to it. But we are going to continue to constantly readjust our workforce at the operating unit level subject to what the demand profiles are in those markets. I mean, we are very proud of the total growth of the company, to grow as we did on a quarter-to-quarter basis in excess of our original expectations. But there were some parts of the company that didn't and they're going to take the actions that are necessary to secure also their margins.

And just as a quick follow-up, could you comment about when, through the course of the quarter, most of those workforce reduction happened. Was it more towards the end of the quarter or was it sort of seasonally spread through the course of the quarter?

They were more towards the end of the quarter and we will have some further actions that would probably be taken at the beginning of this quarter or around now. So they were not taken at the beginning of last quarter.

The next question will come from Jim Suva with Citi Bank.

When you guys look at the Department of Defense budget and when you think about the projects coming in or being placed on hold, is there a impact to the company's margin profile, the way that you think about -- a lot of people think about Military being more profitable than, say, a cellphone or something, can we talk about that a little bit?

Yes. I think, Jim, I mean, we make good margin on all of our products. I mean, there are sometimes different mix. I mean, if you look at the North American sort of base markets, the margins may be slightly higher but the tax rates are also higher. So I think on a net-net basis when we look at contribution to profitability, there's not a significant difference. One significant difference though is, I think that Adam just mentioned, is when we do have to take action relative to volume levels, those actions are a little bit more expensive clearly in developed markets and the things we do those in developed markets tend to be more on things like defense. So I think that, that certainly there is a little bit of pressure as I mentioned in the prepared comments from materials and also from the cost of taking these actions on margin.

Great, and a quick follow-up. You guys are in a great position with basically all-time high cash levels and I know it's probably burning a hole in Diana's pockets since interest rates are so low. But Adam's probably trying to go about the M&A world pretty disciplined. Can you talk about that a little bit, as to spend a little bit of time since Amphenol has made an acquisition? And has the pipeline, the pricing gone up a little bit more or are you being a little more cautious or has the pipeline slowed down a little bit? How should we think about acquisitions as your company has been really, really strong at integrating acquisitions?

Clearly acquisitions remain for us a very, very high priority in terms of the use of our cash, and Diana has talked about that in the past. I mean, that's clearly our top priority. But as we have mentioned many times, the sequencing and the timing of these acquisitions is always impossible to predict. We are clearly focused very hard and it's not just me, it's Diana, it's really our management team on finding and executing upon those acquisitions that are available to us and I think our pipeline today is extremely strong. We are very, very pleased that there are opportunities out there. Our pricing for acquisitions, has it gone up, has it gone down? It really depends on the individual case, it depends what type of a seller you have. It depends on what type of universe of buyers you have. And there's no question that private equity companies can borrow more money today than they can 2 years ago. Does that make their price that they're willing to pay go up? Yes. Does that always impact us? No. Because we are incubating these deals in many cases over a long time period, we're having a real kind of ongoing dialogue. In the end, we are going to pay a fair price and we're not going to win every acquisition, but we have won over the last decade more than 50 of them and we are very, very optimistic that going forward we will continue to have them. Will they come in the second quarter and the third quarter and the fourth quarter? I mean, that we cannot predict for you, Jim. But I can tell you that, that does not at all change in terms of the prioritization of our use of cash in the company.

Next question will come from Sherri Scribner with Deutsche Bank.

I just wanted to ask a little bit about the guidance. It looks -- looking at it, it's largely in line. It looks like for the fiscal year you've rolled through to beat this quarter into the fiscal year guidance. So really no change in essentially in-line guidance. It seems like you're cautious on a number of the segments, Military, Aerospace and some of the other segments. I wanted to get a sense of what you're seeing in the market, is there any particular segment that is weaker than any other and are you seeing any inventory build ups in any of your segments?

Yes. I mean, look, the beauty of our company is we are very diversified and the diversification of Amphenol has always been really -- not just a real strategy of our management team but a real asset for the company. And there's no question. In any given quarter, some markets can be stronger than others and you see that in the consistency of the results. But clearly within each market, there can be ups and downs. I think as we sit today, I won't repeat myself from all the markets that I talked about, because I talked through each of those where we see them, but clearly there are ones like mobile phones, IT, where we feel that there is a good momentum, Automotive has good momentum, Industrial has a good momentum. We wish that the government would have a quicker ability to make budgets and thereby could get rid of some of the caution in the defense industry, feel strong about Commercial Aero. I mean, there is a real diverse in these markets. Overall, I think to your question, with an overall sense, I am not a macroeconomist so I'm not going to tell you my views on the economy, but I can tell you that we continue to believe that the opportunities in our industry and the opportunities in the electronics industry are fabulous. And those are really fabulous long-term because we see that there is a real revolution of electronics being proliferated into all aspects of life. And so whether that be in a fighter jet or in a smartphone, the new functionalities that are being driven and really being driven by end consumers are creating demand for our products. And we are matching that with leading technology innovation. And our technology innovation is accelerating. It is clearly accelerating as we push the limits of performance on new products in high-speed, as we push the limits on power efficiency, as we push the limits of products that can be put into harsh environment, in ROS environment. Our technology innovation machine is really running at high speed today to capitalize on those growth segments of the market that we see. So in overall, I feel very good about the market. I think the economy is going to be what it's going to be and we're going to deal with it as it comes.

And have you seen any inventory buildups anywhere? Is there anything that you're concerned about?

No, I wouldn't say that we have seen any significant inventory buildups. Again, we don't have full visibility into the warehouses of our customers. We have some visibility into the distribution channel, which is less than 15% of our sales. And there, we haven't seen anything out of the ordinary.

Next question will come from Craig Hettenbach with Goldman Sachs.

Just following up on the defense market, a lot of focus on what's happening in the domestic market but it feels also that the international market, there are some, at least deceleration. Can you talk about what's happened internationally and then also touch on dollar content in defense?

Yes, just to answer your last question first. Did you mean by dollar content -- geographically, obviously the U.S. military budget is -- represents, I think, more than half if not 2/3 of the worldwide defense budget. So that's -- and our business is not so different in terms of reflection of total defense budget. But clearly international is -- there are 2 types of international story. You have certain western geographies where they are under the similar budget pressures as the United States and you can expect that there will be military budget pressures there as well. On the other hand, the emerging markets, places like India, places like the Middle East, we see real tremendous opportunities in those markets and we're very happy that our positioning in those markets is not just a sort of Johnny come lately kind of a position. We are very, very well entrenched in many of those markets today to participate and believe that from that perspective, that can be actually a real help to the business long-term.

Okay. And if I could follow up with Diana just on the gross margin. Any help to come on pricing, I know the industry has been working to take up pricing to combat the rising commodity costs. So can you talk about pricing trends you're seeing and expectations in the back half?

Sure. I mean, I think that we certainly have worked very hard at pricing over the last 6 to 9 months and certainly had some success with pricing actions in certain markets. I think that the mix demand environment has made in certain parts of the business pricing harder. But clearly it continues to be a focus. I think that when we talked about profitability for this quarter, clearly the pressures from a cost perspective more than offset the pricing actions that we were able to realize in the quarter. I think that our guidance assumes at this point, a continuation of the margin levels that we've seen in Q2. As we move into Q3, we will continue to have some additional costs relating to some of the headcount actions that we will be completing early in Q3. I think that we would hope that as we move into Q4 that the benefit of these cost reduction actions perhaps pricing and then if the material environment were to stabilize more at these current levels, then it maybe in the end that the Q4 expectation that we have from an ROS perspective may prove to be a conservative one. But I think we feel at this point in time, that the guidance that we've given for the second half which essentially incorporate the Q2 ROS levels is the right one to give at this moment.

Steve O'Brien with JPMorgan Chase. Steven O'Brien - JP Morgan Chase & Co: Looking out to the fourth quarter, I'm doing -- trying to do my math, it appears that there's -- new guidance would imply sort of a 2% sequential increase over the third quarter based on where the third quarter guidance is. And I know there's various seasonality in different businesses. Are you seeing -- are you expecting $1 billion from expectations of weaker seasonality in some of the end markets or challenges or you think that sort of 2% is about right?

Well, I mean, I think this is what we see today. We have a very bottoms up forecasting process and I think that one can go back and look, I guess, to see what normal Q4 seasonality has then. I think that one of the Q4 upticks typically from the seasonality's standpoint, I think those tend to be in the defense market, which tends because it's North American, European based, to have a more sequentially down Q3 and then a sequentially up Q4. I think based on the current environment, we haven't incorporated that kind of a step up to much of the degree in the guidance. And so based on the market mix we see right now, and this is what we're expecting clearly when we get closer to Q4, and we'll have a better view. But we think that this is the type of sequential expectation we have at the time. Steven O'Brien - JP Morgan Chase & Co: And regarding the optimism towards, in Adam's comments, towards IT and mobile networks, clearly IT had some sequential momentum this quarter and maybe mobile networks, not so much. But what's the basis for some of this optimism beyond proliferation of electronic devices? I mean, are you getting some reads or indications from customers here that bolster your optimism?

Just to be clear, I think when I talked about our outlook into the third quarter, I think I said that mobile infrastructure, we expect to be sort of stable with current levels and we expect the Mobile Devices to be up. So maybe that was just a slight difference. I think the optimism relative to IT and relative to Mobile Devices is not unrelated. I think that the proliferation of Mobile Devices is really driving in the IT a kind of a renewal of some spending. That spending is not across the board. Clearly, there is, in IT, we saw a couple of quarters in a row where we do not see that kind of sequential strength. We are very pleased to finally see that this quarter. And our position, especially in networking equipment and storage equipment with high-speed products, that has helped us in the second quarter to see that, finally, the sequential growth. And we expect to see further sequential growth going into the third quarter as companies continually have to upgrade especially their networking and their storage equipment. Relative to Mobile Devices, I think there is just a real expansion still of smartphones even if there are massive share shift that happened among the various vendors within that market, we're very pleased that we participate essentially with all of them and so we're able to enjoy the upside that comes when one or another wins or loses. And I think in general, we're seeing in these smart mobile devices that there is continually an acceleration. I mean, you saw yesterday in the big earnings release of yesterday just how that strong momentum can come in these new devices.

Next question will come from Shawn Harrison with Longbow Research.

Hopefully a few brief clarifications. In terms of the headcount reduction cost that are flowing through the P&L last quarter and this quarter, are we talking single-digit millions of dollars or is it tens of millions of dollars that you're dealing with right now?

Yes, I mean as you know, we don't really quantify these things, Shawn, because we don't like to do these sort of GAAP and non-GAAP measures. So we only call out things that are really huge and really sort of unusual, excuse me. But I think that you can assume that a portion of sort of this ROS decline relates to this item and I think we also pointed out the fact that we have these material cost increases that are -- that we have not been able to fully offset with our other actions. And I think those 2 items, the cost of the headcount reduction and this net cost that sort of left that we haven't been able to either take out or price through are what has contributed to the ROS change into Q2 versus where we were last year.

And as demand kind of continues to bump along where we're at even with the pricing actions, do you think you'll get full offset either with headcount cost reductions or price increases or is this something that you need to see a little bit stronger demand environment to help you out with the pricing?

Yes. I mean, I think that our expectation is that with these actions that we're taking on the parts of the business that are experiencing softer demand, I mean, this certainly should help if materials actually will stabilize, not continued to decline. This certainly will help. We continue to work on pricing. I think that some volumes certainly never hurts either. So, I mean, I think it's going to be a combination of those things. I mean, we as a management team, work extremely hard every day to maximize the performance of the company. And I think this quarter, we achieved new records in 3 areas: orders, sales and earnings per share. We would have loved to achieve new records in ROS also, but the environment right now is a little bit more tougher. So we are continuing to work towards margin expansion as we look down the road. It's just in the near term certainly it is tougher. But we have not given up at all on that goal, which has been a long-term goal for the company.

Let me also just add that the 19.4% given all that there is in the environment is actually a fantastic achievement for the company, but it's not one that we're satisfied with. And so just to reiterate what Diana said, our management team is driving everyday to offset that. Offset the raw material prices, offset the labor increases in China, offset the currency shifts that are there. And clearly that is the real fight. This is in many ways the battle that they are doing. But I have a tremendous confidence that our organization as it is, is more than 70 general managers, each of them being able and empowered to attack every element of cost, are going to find a way to do that. Can that come without volume? That makes it obviously much harder. But there is a clear commitment around the organization, one that Diana and I are driving, reviewing, really working together with our sleeves up with them to make that happen.

Armit Daryanani with RBC Capital Markets.

I guess when you guys look at the inflation pressure on both commodity and the weight side, I'm curious, does it make Amphenol change their thought process around one hedging commodities going forward potentially? And secondly, maybe looking to diversify your manufacturing base more aggressively away from China to other geographies.

Just to comment on the first part of the question. Hedging, I mean, we -- I think, Amit, probably have done and maybe we'll continue to do a little bit more prebuying, whether you call that a hedge, and I don't think that's exactly what your question is aimed at. I think we just truly believe that you have got to deal on a more permanent basis with these cost increases. And many of the pressures on commodities seem, to some extent, to be permanent increases in cost, at least in -- since the medium term here. And so we just feel that overall from an execution standpoint, to take that responsibility away from the operating units would be a mistake and it would cause an erosion of overall profitability that would more than offset any benefit we might get as when we would hedge at a headquarters level. And so we really believe that it's got to come through pricing, it's got to come through other cost reduction actions. Some may be related as your next part of your question goes towards reducing labor cost as an example. And so I really don't think that with our structure in the entrepreneurial way that we allowed each business unit to be run to layer a hedge on top of that, which at some point is a guess in terms of which way commodities are going to go, will help us from an overall profitability perspective. And maybe, Adam, you want to talk about the second part of the question?

Yes. No question about that. And relative to China, I mean, no doubt we are looking at every element of how do we offset these labor increases. And that can come through automation, that can come through driving more efficiencies in the factories and it can come from relocating facilities. And we have a tremendous effort ongoing to find new places for certain of our facilities and those are really in the middle of progress. And as you know, we don't consolidate all of these facilities. We have 24 of them around China in different regions. The good fortune that we have in having done that is that each individual place has different time schedules for increases, different dynamics that go along with the cost. And so as we seek to move production to lower cost, either lower cost areas of China or lower cost into different regions, it is not such a cataclysmic change where you have to move this monstrous facility. It is more the ongoing normal course of business movement of production from one facility to another. That is done on a more sort of business unit level within Amphenol. And clearly though, that is an area where we spend a lot of our focus, there are opportunities in other parts of China, which we have done extensive reviews of. And we have actually teams on the ground in several of those places even today looking at new facilities and new places where you can reduce the labor within China. The thing is China remains for us a significant marketplace. A lot of our customers are producing in China, and in fact, the end market of China has become a very significant market for Amphenol. And so to say that you move out of China and export into China, that also doesn't necessarily make a tremendous amount of sense. But clearly, you've got to go to those parts of China where the labor availability is such, where the cost of labor is such that you can get a benefit. And that's something that we are clearly driving over the course of the next quarter and beyond to make sure that we can offset these labor increases. The increases this year were particularly strong and acute. They were coupled with tax increases. They were coupled with other benefit increases. So there was a lot to chew on this year in China. But I can tell you that our team is one that can clearly manage through that over the long term.

And then if I could just follow up on the 4% headcount reduction, I think that's about 1,500 employees you guys have taken out. Will the charges that you take in Q3 in absolute dollars be larger than the ones you took in Q2? And then if you look at the conversion margins of 16% this quarter was just 25% long-term, I think you pointed a couple of things that impeded that, but if I look at the 9-point swing, would more than half of it be because of the charges?

Yes, I think that we don't quantify these charges. As you know, I know a lot of others do point these out on reconciliations and so forth with their press releases. We just don't believe that that's an appropriate thing to do. I mentioned it because it is a contributing factor in the spread. And in terms of whether or not they'll be higher or lower next quarter, I think they're around the same next quarter. We're essentially taking actions kind of late this quarter or late Q2, early Q3 as appropriate now that we have seen some shift in terms of that mix in demand [indiscernible] operations that are just not going to be at the volume levels that we anticipated to be at. And so we feel it's important to take these actions quickly so that we get those appropriate cost structures and get the benefit down the road. So I think that we will in both Q2 and Q3, have some pressure as a result of this that after that point won't be there. But you can just assume that it's a part of that spread between the prior year ROS and the current year ROS.

Matt Sheerin with Stifel, Nicolaus. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: So just back to the cost reduction, is there a correlation between the purchase price adjustment on the 2010 acquisition and the headcount reduction because you talked earlier, Diana, about the fact that, that acquisition was in the Military area. So is that basically the same area?

The defense market certainly is one of the areas where headcount adjustments are appropriate and are being taken. The acquisition adjustment is one of many units that operate in this business. And I would say, I think it's fair to say, that the vast majority of our units that are in that particular market do have some action that needs to be taken including the one that we had this earn-out accrual adjustment for. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: Okay. And I think you made a good point talking about your mobility business and the fact that there are big swings in market share, yet you've been able to grow the business pretty significantly and certainly a couple of your bigger customers have had some issues while others have gained shares. So how do you manage that particularly on the inventory side? And you did see some inventory creep higher. Was that related somewhat to the mobility business?

The short answer to the last part of your question is, no, it was not. I mean, our Mobile Devices is such a short life cycle business. We are very careful in that business in terms of how we run the business in every aspect. We've run the business to a business which lasts between 3 and 6 and 9 months for each product life cycle. So you're not going to build up 3, 6 months of inventory on something that only has a 6-month life cycle. So no, that was not an inventory issue. I can tell you that running that Mobile Devices business is really one of the most nimble, agile organizations that we have. They are constantly reallocating people to different customers constantly reapportioning engineering resources. Because what we don't try to do and I think I've said this many times, Matt, we are not trying to guess which is going to be the hit product on the market. We're just trying to be on the hit product by being on as many of the products as possible. And that means you've got to do this in a very low cost environment. Essentially, we do all of our engineering in Asia for this non -- I mean, high-cost areas. We have very lean customer coverage teams who are there to really be, again, constantly reallocating their time to those accounts where there is the opportunity. We just -- we never know which model is going to be successful. I mean, so many times we have thought one would not be successful and it was a wild success and vice versa. It's a very, very exciting market Mobile Devices. Because as you think about it, the technology, the transformation of the technology, given the short life cycle of the product is such that we can constantly innovate and constantly be gaining share, gaining position with new customers as we then create new technologies that help them enable the functionality of their end device. And that's something that Amphenol and our organization just does so well. And we have a tremendous reception from our customers. And then in the end, you have to execute and the execution on those new designs means you've got to ramp as quickly as the customer needs you to ramp. Sometimes you've got to double your capacity from what they originally told you to do. How do you do that in a less capital-intensive way? How do you do that in a rapid way where maybe others don't have the flexibility in how they do business? That has been a tremendous asset for us and has allowed us to really capitalize on what has been just a wonderful trend for the business. Now we certainly don't expect that always to grow 36% year-over-year. I mean, that -- clearly the law of large numbers would take hold. But we do expect to always be participating very strongly in that market and we're very excited about that market going forward.

Next question will come from Brian White with Ticonderoga.

Adam, could you talk a little about the tablet market, what you're seeing there, how Amphenol is participating? I think you wrapped that up in your Mobile Device segment.

The tablet has been a great story for us. Obviously, we did not participate so strongly in things like laptop computers and PCs and to the extent that tablets, which we view really as an extension of a smartphone in its functionality and the technology that needs to be embedded in it, those tablets have, I believe, replaced to some extent, the purchases or at least the replacement cycles of products that we never participated in the past. And so net-net that has been a real positive for us. I think tablets are a product where the end customer and thereby the equipment manufacturers demand on technology on the ability to ramp, the things that I just spoke about, they're magnified even more than they are in a smartphone. And so to that extent, our ability again to execute and to deliver the strong technologies in tablets is something that I think our customers very, very much appreciate. And that translates then into getting the good position. Obviously, there appears to be one who has had the most successful tablet but that doesn't mean that that's the only one that we're going to work on. We work on many, many of these applications. In the end, it appears that customers migrate towards one of those models.

Okay. Just on networking and storage. It sounds -- the tone sounds a lot better in that market for you guys. And I'm wondering, are these new products that are coming out, you're gaining share or is it just inventories are lower, demands are getting ready for the second half of the year?

Yes. I mean, I would say that if we look at the second quarter performance, which obviously year-over-year was muted but sequentially we thought was very strong, that is a result of all of the above. It's new products that we have developed and we have been talking a lot about the new high-speed products that our company has been developing over many, many years. I think over the course of the last year, we have accelerated those efforts beyond just [indiscernible] products into I/Os, cable assemblies, where we are really creating for our customers an end-to-end high-speed solution. I think that real uplift that we are seeing from those efforts is something that's helping us out. In addition, we continue to drive the relationship of those customers, the total solution with those customers allows us to take share with them. There are ups and downs clearly in the IT market. I mentioned we saw networking and storage to be very strong, servers I wouldn't say was as strong in the quarter but that's going to keep happening. Those will come up and down. For us, the mission is to really get the content with these new high-speed products. And I think regardless of how that goes, which customers win, which share, that will position us very, very well for the future.

Last question will come from Amitabh Passi from UBS.

Adam, my first question is for you. We've heard from several companies in the supply chain that business may have sort of moderated, tailed off towards the end of the quarter. I just wanted to get your thoughts in terms of how business might have trended for you in the quarter and perhaps if you could even just maybe add some geographic commentary, what you're seeing just in terms of order trends, sentiment, psychology of customers across geographies.

Yes. I think I wouldn't necessarily say that that's what we saw. I mean, in the first quarter March tends be a pretty big -- sorry, in the second quarter, we tend to have are pretty good performance towards the end of the quarter. And we didn't see anything different, it didn't trend differently than we would have expected it to. I think that resulted in us surpassing our guidance in our original expectation. But I wouldn't say that, that necessarily has seen any difference from what we would have expected.

And then just in terms of geographies, any interesting trends across your geographies?

No. I mean, Asia continues to perform very, very well. I think if you look at the markets where we have had good growth over the quarter. Mobile Devices clearly is something where most of those products are going to ship into Asia because that's where they all get made. But at the same time, we saw double-digit growth in Europe. We saw good performance in North America. We mentioned, and I think Diana mentioned in her remarks, and I as well, that we are very pleased especially in the cable segment of the business to see a real acceleration of growth in several emerging markets, in particular in Latin America. And I think those markets are going to be strong markets for us going forward. I mean, you look at a place like Brazil, which has World Cup and Olympics and all these things coming up over the course of the coming years, I think that, that really is going to create a lot of momentum behind things like telecom infrastructure, Aerospace, Automotive. I mean, Broadband as well. So I think we will see real contributions from those emerging markets continuing to be there that we have seen over the last -- over many, many years actually. Well, very good. Again, we very much appreciate all of your interest in the company, wish you a pleasant summer holiday season for those who takes a holiday. And for the rest, we look forward to seeing all of you in 3 months from now. Thank you very much.

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