Amphenol Corporation (APH) Q3 2011 Earnings Report, Transcript and Summary

Hello, and welcome to the Third 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 third quarter call. Q3 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 third quarter achieving strong growth and beating the high end of the company's guidance. Sales were $1,033,000,000 and EPS, excluding the effects of one-time items, was $0.81, both new records for the company. On an as-reported basis, EPS was $0.79 and included a one-time charge of $0.05, relating to the impact of the previously reported flood at the company's New York facility, partially offset by a $0.03 benefit relating to a reduction in tax expense from the completion of the audit of certain prior year tax returns. Sales were up 9% in U.S. dollars and 7% in local currencies over the third quarter of 2010. From an organic standpoint, excluding both acquisitions and currency effects, sales in Q3 2011 were up 5% over last year. Sequentially, sales were up 1% in U.S. dollars and 2% organically from Q2. In comparing Q3 to the midpoint of the company's guidance of $1,008,000,000, sales exceeded guidance by approximately $25 million. Sales in the Mobile Devices market were particularly strong, growing over 20% sequentially as demand previously planned for the fourth quarter was pulled forward by certain customers. This was partially offset by softness in the industrial market, particularly in Europe, reflecting weaker economic conditions and by a reduction of about $11 million as a result of the previously announced flooding at the company's New York facility, which resulted in limited manufacturing and sales activity in the month of September. Breaking down sales into our 2 major components, our Cable business, which comprised 7% of our sales in the quarter, was up 13% from last year and 2% from last quarter. The Interconnect business, which comprised 93% of our sales, was up 9% from last year and 1% sequentially. Adam will comment further on trends by market in a few minutes. Operating income for the quarter, excluding the $12.8 million casualty loss relating to the flood, was $199 million compared to $189 million last year. Operating margin was 19.3% compared to 19.9% last year and 19.4% last quarter. Operating income is net of stock option expenses of approximately $7.6 million in the third quarter of 2011 and $7 million in the third quarter of 2010 or about 0.7% of sales in both periods. From a segment perspective, in the Cable business, margins were 13.1%, down from 13.5% last year. The margin decline relates primarily to higher material costs. From a sequential standpoint however, Cable margins improved from 12.8%, primarily as a result of lower material costs. In the Interconnect business, margins were 21.5% compared to 22.3% last year. The lower Interconnect operating margins reflect the impacts of increases in material input costs and to a lesser extent, the costs associated with workforce reductions of approximately 5% or 2,000 people in the quarter. It also was impacted by the impact of the loss of sales and margin due to the temporary flood-related shutdown of the company's New York facility in September. These impacts were partially offset by the positive impacts of higher volume, cost reduction actions and price increases. Overall, we're very pleased with the company's margin achievement. The company's overall profitability level continued to be very strong in the face of significant global pressures and a mixed demand environment. We continue to believe that the company's entrepreneurial operating structure and culture cost control will allow us to react in a fast and flexible manner, and achieve strong profitability going forward. Interest expense for the quarter was $10.5 million compared to $10.6 million last year, reflecting lower average borrowing cost, partially offset by the higher average debt levels, resulting from the company's stock buyback program. Other income was $2.3 million in the quarter, up from $1.3 million last year, primarily as a result of higher interest income on higher levels of cash and short-term cash investments. The tax rate in the third quarter of 2011 was 23.5% compared to a rate of 22.8% in the third quarter of 2010. The prior year quarter included a net benefit relating to a reduction in international tax expense, primarily due to the favorable settlement of certain tax positions and the completion of prior year audits of about $8.4 million or $0.05 per share. The 2011 quarter includes a tax benefit of about $4.8 million or 37% of the $12.8 million casualty loss related to the flood described before, and a benefit of $4.5 million or $0.03, relating to the completion of certain prior year tax audits. Excluding these effects, the effective tax rate on Q3 2011 was about 26.8% and we currently expect the same rate in the fourth quarter of 2011. Net income, excluding one-time items, was approximately 13.4% of sales in Q3, a very strong performance. Diluted earnings per share on an as-reported basis was $0.79 in the third quarter of 2011 and $0.78 in the third quarter of 2010. After adjustment for one-time items, diluted earnings per share increased 11% to $0.81 in the quarter. Orders for the quarter were a record 1,017,000,000, up 8% from last year, resulting in a book-to-bill ratio of approximately 0.98:1. As we announced last month, in early September, the company incurred flood damage at its Sidney, New York facility. In addition to the loss of sales and margin from the temporary shutdown of the facility in September and October, the company incurred a one-time charge relating to the write-off of damaged inventory and productive asset in addition to cleanup costs. Net of insurance recoveries, this resulted in a charge of about $12.8 million or $0.05 per share in the quarter, and we currently expect an additional charge of $7 million or $0.03 per share in the fourth quarter relating to the remainder of the cleanup costs associated with the flood. The company continues to be an excellent generator of cash. Cash flow from operations in the quarter was about $184 million, approximately 136% of net income in the quarter and 96% of net income on a 9-month basis in 2011. From a working capital standpoint, inventory days declined to 79 days from 83 days at the end of June. Inventory was 635 million at the end of September. Day sales outstanding increased 1 day to 70 days at the end of September, and accounts receivable was $803 million at the end of September. The cash from operations along with borrowings under the company's credit and receivables facilities of $107 million was used primarily for $19 million of net capital expenditures, a $79 million increase in cash and cash investments and about $173 million to purchase 3.8 million shares of the company stock under stock buyback program. The company currently has about 9.6 million shares remaining under the 20 million share stock buyback program that was announced in January of this year, and expires in January of 2014. At September 30, cash and short-term cash investments were $781 million and these are primarily held up by the U.S. Debt at the end of the quarter was $1,265,000,000 and net debt therefore was $484 million at the end of the quarter. The company had availability under its revolving credit facility of $425 million at the end of the quarter. The company's leverage and interest coverage ratios remain very strong at 1.36x and 22x, respectively, and EBITDA in the quarter was $242 million. From a financial perspective, both an excellent quarter. Before I turn the call over to Adam, I wanted to just make a couple of comments relative to the assumptions that we've included in our guidance. The midpoint of our sales guidance for the year has been revised from $3.990 billion to $3.922 billion, a reduction of approximately $68 million or 2%. About half of this reduction is due to the impact of the flood and changes in currency rates, specifically a loss of approximately $18 million in revenues, resulting from the flood in our New York facility due to a lack of full production capacity in September and October, and a reduction of approximately $15 million in revenues, resulting from current translations impact primarily from the weaker euro. The remaining reduction reflects incremental weakness in demand in the defense market and in the communications equipment markets, including wireless infrastructure, IP data and broadband, and to a lesser extent, a slowdown in European industrial markets. We believe this weaker demand is a result of a higher level of market uncertainty caused by the multitude of fiscal and budgetary issues plaguing the global economy. Our fourth quarter guidance of $920 million to $940 million in sales or a 9% to 11% sequential decline reflects the majority of the impact of these items. And in addition, it's further impacted by the anticipated sequential reduction in sales in the Mobile Devices market. As I mentioned earlier in Q3, sales for the Mobile Device market were unexpectedly strong and we believe included some amount of customer pull-in of Q4 demand. Therefore, while sales in the Mobile Devices market in the second half of 2011 in total will be generally in line with our previous expectations, fourth quarter sales are expected to be lower and we now expect a sequential decline of over 20% in this market in Q4. For the full year, our gross expectations of about 30% for the Mobile Device market remain relatively unchanged. Of the 10% sequential decline in consolidated sales expected at the midpoint of our Q4 guidance, about 2% relates to the impact of the flood and currency exchange rates. Another 3% to 4% relates to the shift in the Mobile Device demand. Given our current expectations for Q4 sales, we are taking appropriate actions to adjust our cost structure, including Q4 headcount reduction in addition to those already made in Q2 and Q3. Our guidance in Q4, considering the lower volume and these actions, assumes an ROS decline of about 1% from Q3 levels. Additionally, I would note that the guidance assumes a diluted share count of approximately 167 million shares. Adam will now provide an overview of the business and current trends.

Thank you very much, Diana. And I'd like to add my own welcome to all of you on the phone today at the time of our third quarter earnings call. I'm going to spend a few moments to highlight our third quarter achievements that Diana has just detailed. I'll discuss the trends and the progress in our served markets, and then I plan to make a few comments further on the outlook for the fourth quarter. The third quarter was a record quarter for Amphenol with orders and sales again in excess of $1 billion. We are very pleased that despite increased uncertainty in the worldwide economy, we were able to exceed the high end of our guidance in sales and EPS, with revenues growing 9% from prior year and 1% sequentially to a new record $1,033,000,000 and with EPS reaching a record of $0.81, excluding the one-time items. Although we continued to face significant cost challenges in the quarter, the Amphenol management team executed very well in the quarter, achieving industry-leading operating margins of 19.3%. We're particularly pleased that we were able to produce net income of 13.4% of sales, which is a clear indication of the financial strength of Amphenol. We also generated record cash flow of $184 million, which was used in part for the continuation of our stock buyback program. These excellent results in the third quarter are a direct reflection of the strength as well as the discipline of our agile and entrepreneurial management team. I'd like to make a few comments on the flood recovery efforts. Diana discussed some of the specifics of the financials of the flood. As announced on September 8, we experienced a severe and sudden flood in our Sidney, New York military/aerospace factory, which resulted from the back-to-back impacts of Hurricane Irene and Tropical Storm Lee. No doubt, a flood like this has tremendous personal impact on the people and our heart goes out to those in Thailand, who are experiencing similar things today. Following a previous flood in 2006, we took significant flood abatement measures in conjunction with state and local governments and these measures allowed us to minimize the impact. We're very pleased with the phenomenal reaction of our local team together with our suppliers, equipment manufacturers and clean-up specialists. Our data systems were intact and operational within hours. Our offices were relocated within 24 hours and the facility is largely operational today, ramping up to full production later on in this month. Most importantly, our customers and distribution partners have been extremely supportive and understanding during this difficult time for us. As Diana mentioned, the flood resulted in approximately $11 million in lost sales in the third quarter, and we expect incrementally another $7 million in lost sales in the fourth quarter. Certainly, in light of having suffered through 2 floods in the last 5 years, we are working closely with state and local authorities to establish an alternative production location, safely away from flood risk. Again, we are very proud of our organization, which, once again, rises to whatever challenges can come our way. Now turning to the trends and the progress in our served markets. I just like to comment that during the course of the third quarter, we have seen more conservatism from customers in many of our end markets, as the various political and economic uncertainties around the world have increased most notably in developed economies. Turning first to the military and aerospace market. That market represented 18% of our sales in the quarter. Sales decreased 13% from prior year and 11% sequentially, impacted certainly by the Sidney flood as well as by a moderation of orders in several Military programs. Net of the flood impact, sales in that market were down in the mid-single digits both on a year-over-year and a sequential basis as we had expected. We are pleased to experience strong double-digit growth in sales to commercial air customers, as plane volumes began to increase and as new programs began to take off. We expect a slight improvement in sales in the military/aerospace market in the fourth quarter as our flood recovery efforts continue and as procurement begins to move ahead for certain military programs. Longer term, we continue to be very excited about the expansion opportunity available to us from the proliferation of new military electronics, together with our new excellent positions on commercial air platforms. Turning to the industrial market. That market represented 12% of our sales in the quarter. Sales increased 4% from prior year and were down 10% from the second quarter as a result of moderation demand in certain sectors of the industrial market, including, in particular, in Europe as well as resulting from expected seasonality. Our growth compared to prior year was driven by progress in the heavy equipment and energy-related segments in particular. And we remain encouraged by our continued inroads into many new industrial applications, including alternative and traditional energy, real mass transit and new lighting technologies. While we are sensitive to growing conservatism among certain customers, we do expect the industrial market to see some seasonal growth in the fourth quarter, as our technology and diversified positions continued to create excellent growth potential into the future. The automotive market represented 8% of our sales in the quarter and sales increased a very strong 55% from prior year, and were down 3% from the second quarter on expected seasonality. We are benefiting from the continued expansion of our participation in new electronics applications in both traditional and hybrid electric vehicles, as well as from the Sylumis acquisition, which we completed earlier this year. That acquisition, together with our ongoing internal technology development initiatives, has broadened our range of automotive interconnect solution, and is enabling us to capitalize on the many new electronic applications and vehicles around the world. We expect sales in the automotive market to grow moderately in local currencies in the fourth quarter and increase vehicle volumes. And we remain very excited about the many opportunities for future growth that we see today in the automotive market. The broadband market represented 7% of our sales in the quarter. Sales in that market were down slightly from prior year and were flat sequentially as operators maintained stable build-out levels. Once again, we did experience strong growth in emerging markets with excellent sales progress, in particular, in Latin America. While we expect demand in the broadband market to moderate in the fourth quarter seasonally, we look forward to renewed momentum long-term through our ongoing drive to expand our range of technologies to broadband customers in both domestic as well as international markets. The information technology and data communications market represented 20% of our sales in the quarter. Sales in this market increased 4% from prior year and a strong 7% sequentially with growth, in particular, in storage and networking applications. Recently, we have begun to see customers reducing their outlooks to some degree. We believe this relates to market uncertainties and caution regarding inventory levels, which may have been built-up in anticipation of stronger end-market demand that our customers are seeing today. Nevertheless, our pipeline of high-technology new programs continues to grow. As customers are demanding higher performance equipment in support of the rapidly expanding IP video and other bandwidth-hungry applications, many of which are actually being driven by the proliferation of new data-intensive mobile Internet devices. While we expect a reduction in sales from the third quarter on these recent pullbacks in demand, we remain optimistic due to our new design wins with our high-technology products across a very broad array of IT customers and equipment platforms. The mobile networks market represented 12% of our sales in the quarter. Sales increased 6% from prior year as we benefited from expanded positions on new base station platforms, as well as from growing sales into site installations around the world. Sales were down slightly sequentially. We expect a reduction of demand in the fourth quarter, as economic uncertainties appear to be causing operators as well as original equipment manufacturers to reduce their installation and build plans, and to become more cautious with respect to their inventory levels. Regardless, we remain excited by the many expanding opportunities for our interconnect products and antennas in a wide array of newly upgraded base station systems. And we look forward to continued growth across all the broad geographies that we serve. In particular, we do believe that this short-term conservatism in build-outs is creating some degree of pent-up demand, as network operators will be forced to upgrade their systems to improve both coverage and capacity, especially in support of the explosive growth of new smartphones and tablet computers. The Mobile Devices market represented 23% of our sales in the quarter. Sales increased a very strong 39% from prior year and increased sequentially by an unexpected 23%, as we capitalized on our expanded product position in new smart Mobile Devices, in particular, tablets. We believe that this unexpected uptick in demand in the third quarter was driven in large part by pull-ins from certain customers that did not necessarily represent true levels of end demand, and thus will not repeat in the fourth quarter. Accordingly, we expect a sales decline of more than 20% in the fourth quarter in the Mobile Devices market, as those inventories of components and devices are consumed. Nevertheless, we still feel very positive about our full year outlook for performance in the Mobile Devices market with expected growth of approximately 30%. And we remain optimistic that our successful product and customer diversification efforts have positioned us to participate in the expanding market for new Mobile Devices, whether that be standard-feature phones, smartphones or tablets. We're very confident that our ongoing efforts will continue to drive success going forward in this very dynamic market. Now turning to our outlook for the fourth quarter and the full year. As I just mentioned, we did see a significant shift of demand in the Mobile Device market from the fourth quarter into the third quarter. In addition, we expect growing economic uncertainties in the market to have near-term impacts in most communication equipment markets as well as in the European industrial market. Accordingly and based on constant currency exchange levels, we now expect in the fourth quarter 2011 and the full year 2011 the following results. We expect sales in the range of $920 million to $940 million and $3,912,000 to $3,932,000,000, respectively. And we expect earnings per share in the range of $0.69 to $0.71 and $3.01 to $3.03, respectively, excluding one-time items. As Diana mentioned, in reaction to these near-term changes in market conditions and the resulting lower demand levels that we now see, we are taking immediate and appropriate actions to adjust our cost, including headcount reductions. As is the custom in Amphenol, our management team is taking these actions proactively and aggressively, with a 5% headcount reduction in the third quarter and further plans to reduce as necessary going into the fourth quarter. In summary, I'm extremely proud of the Amphenol organization, as we have executed well in what is still a very challenging environment. These strong results that we have produced in the third quarter are a direct result of our distinct competitive advantages, our leading technology, our increasing position with customers in our many diverse markets, our worldwide presence, a lean and flexible cost structure and most importantly, an agile and entrepreneurial management team. Although there are growing uncertainties in many of our end markets as well as ongoing inflationary pressures, I have tremendous confidence in that Amphenol management team. I am confident that we'll continue to excel in these challenging times by reacting quickly to changing customer needs to further strengthen our market position, and by driving proactively the actions that are necessary to secure our leading operating margins. Most importantly, this team will continue to execute with a level of passion and effectiveness that ensures a continued superior performance of Amphenol. Thank you very much. And Carol, at this point, we would be very happy to take any questions that there may be.

[Operator Instructions] Our first question is from Wamsi Mohan, Bank of America.

Adam, I was wondering, given the heightened economic uncertainty that you referred to, could you speak a little about the linearity in the quarter? And any color by end market and geographic region will be especially helpful.

Sure. I mean, I think that there was no real special unique linearities to the quarter. Obviously, in a third quarter, September tends to be a bigger month and it was still a bigger month. I mean we had excellent overall results for the quarter. I think what we did see was in August, whether that was related to politics or economic news or otherwise and continuing to September, that customers just became much more cautious. Again, are they reading the newspapers? Are they seeing what their end-customers say? There was clearly more caution coming from customers starting in that time period. Relative to the regional -- our regional performance, you can imagine that Asia was very strong in the quarter. I mean it grew fabulously on a year-over-year basis. That's where a lot of that Mobile Devices business is consumed. And Europe did also very well in the year-over-year basis in the quarter, given our strong performance in automotive. From a sequential standpoint, we really saw growth particularly in Asia. Again, not surprising given the strength of the Mobile Devices market.

Adam, and as a quick follow-up, was the pull-in in Mobile Devices really specific to 1 or 2 customers, or was it more broad-based?

Yes, I mean, I think we're not going to comment about one specific customer or another. But I can tell you that there were certain programs where, clearly, they were buying product with anticipation of sales levels, which whether that appeared or not is unclear. But the amount of product that was bought from us in the third quarter is clearly not going to repeat into the fourth quarter. Whether that is because they produced more, they gathered more components or otherwise, we certainly saw -- with a few programs, in particular, that there was more buying in the third quarter in anticipation of what maybe customers thought would have been better results than in the end they got.

Amit Daryanani, RBC Capital.

A couple of questions from my side. One just on the military/aerospace side, looks like about a $18 million impact from the flooding issues. With the assumption that those end-customers are able to get the products they need through their own inventory channel, should we expect that Amphenol is able to recover revenues in the first half of 2012?

Yes, Amit. That's a very good question and, certainly, we would anticipate to be able to recover those revenues. We're very, very pleased how in reaction to the flood, our distribution partner as well as our own internal operations, some sister divisions around the world, other factories have responded just tremendously to keep our customers whole. But you can imagine that we have certain also proprietary products, which we have certain capacity levels of. And that will take some time to catch-up to and our customers are being very understanding. If we look towards the next 6 months, we -- our goal is certainly to get those sales back over such a time period. Does that come all in 1 month or 2 months or 1 quarter? It doesn't necessarily come that way. It is a very complex initiative to bring that factory back up. We have an outstanding distribution channel, who is able to create an excellent buffer when necessary, and has really been able to do that. I mean the thing that we are just most proud about here is that none of our customers have really had any complaints to Amphenol about how we've handled this. I have personally visited and spoken with many of those customers, where we had critical products ongoing, testing new product ramps happening. And the team up in Sidney just did such a fabulous job to prioritize those things, which are so critical to the customer. We had machines running 3, 4 days after the flood for certain products, which were very, very critical to have for customers. Others that we knew the distribution channel could support, those were ones where we were able to prioritize those, a little less important than the most critical sole-source products. So I think the simple answer is yes, we would anticipate over the course of the next kind of half year. But is that exactly a half year? That is impossible, really, to pin down.

Fair enough. And then Adam, maybe you could just talk a little bit on the M&A side. I think 2011 has been relatively quiet so far. Just from your experience, given the macro uncertainty, do you expect kind of smaller companies to be more open to an acquisition at this point? Are you going to wait to see how the macro shakes out before they decide to do it?

Well, it's interesting. We obviously had that same topic in consideration during the downturn in 2009. And I think what we saw in that downturn was those companies who are not going to -- who don't need to sell are not going to sell. At the same time we made and we continued to make acquisitions in every economic environment. We've made one acquisition this year with Sylumis. We continued to have a strong pipeline. And I would not tell you that because whatever turmoil is happening in the world that we have seen owners retrenching, far from it. I think we have continued dialogues that are there are, and which we would expect over time to be able to complete some acquisitions. And we're very excited about the pipeline. There's a wide variety of companies and a wide variety of industries and a wide variety of regions. And again, how to get those closed, at what time period, that is something that we work very hard on. But in the end, have not really the ability to pin it down to a certain day. Do multiples change in such an environment? Again, our experience in the last -- in the downturn of 2009 was that yes, you saw certainly some more reasonable outlook on multiples. I think in this environment, we haven't seen really unreasonable multiples being talked about by at least the companies that we talk to over the last couple of years. So I don't anticipate any significant changes, given today's environment.

Jim Suva, Citi.

So the first question I have is on the defense softness. We all know in Washington DC, everybody has their own special interest and agendas to get across. Do you think that we're at a level now of stabilization in this business and visibility remains more stable, or do you think that it can continue to get softer? And is it mostly just OEMs kind of sitting around, not sure where the appropriations are going to be? Or can you kind of help us out what your discussions and visibilities are like and what type of phase are we at as far as stability or even getting worse?

Sure. I think we are still in what I would call an uncertain but stable environment. Let me put it that way. I mean, clearly, there is this sword that hangs over the whole military industry on, I think it is November 23 or 13, whatever the date of the super committee deadline is. That is something that is kind of out of everybody's hands. Nobody knows what they talk about inside the room. And at one point, hopefully, they will issue a report and they will come to an agreement. Whether that happens, I can tell you that customers in the military industry don't have a tremendous amount of optimism that a committee of 12 people, 6 from each party, will eventually come to an agreement. So I think that, that continues to hang over people's heads. At the same time, we saw in the quarter and we continue to see that the military industry has not just ground to a halt. There are still programs being funded. There are things being made. I mean, we continue to have a very, very significant sales into that market. And yes, it was down on a year-over-year basis, certainly impacted by the flood, but also impacted by these concerns. But we still see a lot of programs that are ongoing. And what gives me optimism for the long-term, Jim, is even with that sword hanging over people's heads from a governmental and a congressional standpoint, the drive for new designs and new electronics and new functionalities, we have not seen that slow down whatsoever in terms of the programs and the type of engineering challenges that we see. And so I think from that perspective, our belief that long-term, the proliferation of electronics into this market is going to allow a significant offset to whatever budgetary pressures are going to come, we still subscribe very much to that conviction because of what we see with our customers, where they are, continue to innovate and to develop new technologies everyday of the week.

Great, and maybe a follow-up question for Diana. During the conference call you mentioned that this is your second flood in 5 or 6 years or whatever, which is truly unfortunate and your team's done a great job at recovering. You mentioned that there's going to be -- you're looking at potentially a new facility there. And can you just help us as investors, put our arms around is -- are there transactional or transition financial items that we need to be aware of such as facility qualifications or duplicated operating, running operations or yield issues or timeline? And do you really need to like kind of earmark some -- a fair amount of cash for that? Or how should we think about that additional facility and impact to the financials?

Sure. I don't think, Jim, we anticipate any significant negative financial impacts outside of the ones that we mentioned relative to the losses associated with the flooding itself and the loss of sales, the sales we expect to make up at some point during 2012. I think Adam actually was the one that mentioned this facility and the fact that we are working very closely with government in the state to find an appropriate location and also to get support for a project that would help us to relocate the facility. We do not anticipate a significant negative financial impact. There may be some costs associated from a capital expenditure perspective. But, again, in the grand scheme of things, we would not expect this to be a significant financial impact on the company, and feel that some expenditure relative to the risk of potentially another flood, given the fact that we've had 2 in 5 years would -- makes this well worth the effort on our part. We do expect to get a substantial support from government on this. These are -- this is an excellent facility that produces high-tech products with a very, very heavy skilled workforce. And so the importance of the facility and the employment to the state is, as you can imagine, is as important to them as it is to us. And so we expect a high level of cooperation and support and quite frankly, really look forward to being able to transition the facility to this new location. I don't know, Adam, if you want add anything to that or if that's...

Yes, I mean the only thing that I would say in addition, is we had this flood in 2006, which was a terrible event. On the side, we have become real experts at dealing with these things. And so I think our organization, they really know how to deal with the flood. We're not going to ever go through that again though in Sidney. One of the things that we did do at that time was we took the decision to move essentially our whole industrial business out of Sidney, New York and that was an outstanding move. That was why our industrial business essentially was not impacted by this flood. That was one of the mitigation efforts that we took. This time, we are going to continue to make sure that our customers and our people, our staff are not put at risk from a flood. I agree with Diana. This is not going to be any real meaningful expense to the company. We're going to have tremendous support, we anticipate, from the local government. And our organization is going to rise and create an even better operation for the future than we ever imagined before in support of our customers, in support of the high-technology products that are developed from this company.

Our next question is from Matt Sheerin, Stifel, Nicolaus. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Diana, so just question on the margins, looking at your sales and EPS guidance and your share count guidance, it looks like you're looking at operating margin decline of about 100 basis points quarter-on-quarter. Obviously, the lower volumes will impact the margins. How much of the impact will be from the additional headcount reductions? Because I know you had those costs the last couple of quarters and the expectations that was going to go away. Now, obviously, you're doing some more cuts. So could you tell us sort of what that ballpark is going to look like? And then on the material side, I know that's been a headwind for you in the last few quarters. We're seeing material spot prices of things like copper come down. Would that start to benefit you and when would that be?

Sure. Maybe starting with materials first. I mean, it certainly is true, Matt, that we have seen over the past few quarters this year, certainly, some negative impact resulting from this discontinued pressure on commodities, particularly in our case on the interconnect side with gold. And then, certainly, also copper and aluminum are important, particularly on the cable side of the business as are plastics. I think that it's certainly fair to say that there have been some improvements in certain of those in the last couple of months. Gold, unfortunately, is still higher than it would have been when we had closed Q2. I think that in terms of copper and aluminum, which have done better during the last quarter, I mean, if those can continue to stay at or come down from the levels that we're at, today, we would expect probably to see some improvement in the cable side of the business towards the end of the fourth quarter and then as we move into next year. As you know, we carry some inventory level of these items, and so we don't get an immediate benefit. To the extent that from the interconnect side of the business, to the extent that, again, as we look into next year, we get some improvement in both demand levels in the commodities maybe, including gold, would start to get a little bit better. I think that we would also hope to see some positive impact on the interconnect side of the business. So I think from a commodity standpoint right now in the immediate short term, we don't see a large benefit. But I think it's very fair to say that things are moving in a more positive direction. Hopefully, those continue. In terms of the restructuring, you're absolutely right that we didn't anticipate -- from a restructuring standpoint, you're absolutely right that when we talked last time in July, we said we were taking action in Q2 and Q3 that would put some pressure on ROS. And I think if you recall in Q2, we had about a 0.4% decline in ROS. And we did say that there was a portion of that, a smaller portion than the material pressure, but some portion of that, that was being impacted by structuring cost. And we did not, at that time, expect to see lower volumes in Q4 and therefore, more headcount reductions. We now do see that. And so we are ending up really with 3 quarters, where we're taking out a fair number of folks in the workforce, which is resulting in the same type of pressure in Q4. And therefore, a little higher issue from a conversion margin standpoint. We don't, as you know, like to specifically quantify these things because we do consider them part of the normal operating part of the business. But it certainly does put some additional pressure on Q4. This is a fairly more significant volume reduction in Q4, which also makes, from a profitability standpoint, things are a little bit harder. We'll be -- have gotten through these actions by the end of Q4, and that should provide some support to profitability as we move into 2012. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just quickly on the headcount reduction, I know a lot of that in the last couple of quarters has focused on the military sector. Is that still your focus, or has that moved into other areas?

Yes, I think that this would be more on the communications side of the business. I mean, the most significant sequential decline is in the Mobile Devices market in Q4, so -- and this does tend to be a labor-intensive business and so this will certainly have a significant action to taking there, and also some of our wireless infrastructure units in addition to that, we'll have some action there. I think the majority of the actions in the Defense business have been taken. There may be a few smaller actions. But I would say it's predominantly in the communications side of the business.

Steve O'Brien, JPMC. Steven J O'Brien - JP Morgan Chase & Co, Research Division: Just want to go back to perhaps the Mobile Devices segment and in the context of potential for near-term maybe headcount actions. Is there any headwind, I guess, to the business from customers diversifying their suppliers here? And with the clear trends Adam pointed out in terms of Mobile Device and smartphone penetration growth and proliferation, would the headcount reductions be indicative of an outlook for softer demand, maybe lasting beyond a couple of quarters?

Look, I mean, we made headcount reductions in the moment. And so I think what has been the hallmark of the Amphenol organization over many, many years has been that we don't adjust our resources with an expectation of what the future is. We adjust our resources based on the reality of what faces us today. And clearly, we have a sequential reduction of more than 20% in the Mobile Devices market, which we've -- both Diana and I mentioned, and that is going to lead the general managers to run the businesses within that Mobile Devices market to take immediate and significant actions. And I think that is exactly the case. If that business comes back and when it comes back, they will add the resources using that kind of accordion-like way of doing things that we have always done. And I think that is just the hallmark of how we run the business. You should not take away from the fact that we're making headcount reductions in one or another segment as a statement that we are -- I mean, to recharacterize what you say, we are losing share in that market. That is certainly not the case that we see. Just again to recharacterize it, we saw in the third quarter a very significant pull-in of demand, which clearly now comes out -- was demand that maybe otherwise would have been falling into the fourth quarter. And we, obviously, had the resources in place to satisfy that demand. And these were significant pull-ins, whereby, customers hit us with orders that we didn't expect to come, and we're able to ramp up and satisfy the demand from those customers in a very, very significant and effective fashion. And when you have that than to reverse course, we're going to make the resource adjustment that we always make at Amphenol. And that is true across every one of the markets and every one of our 75 general managers around the company. They're running their business after having gone to the customer, they listen to what the customer says they need in the future. And they go back and they adjust their resources, really, in realtime relative to what the market needs. And that has allowed us to always react in difficult times and always be able to ramp up more quickly in good times. And I think that flexibility that we preserve, that in-the-moment management of the resources of the company, that is something that we will continue to drive. And so whatever comes our way here, whether that be floods or whether that be pull-ins of demand, we're going to react very rapidly to those events and we're going to drive them. We're going to be successful following that. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Adam, can I ask one more maybe on the mobile networks division. On the -- we've certainly seen talk of CapEx cutbacks. Do you have any additional color on regional trends in the near term? And then where maybe your expectations' longer-term, for which regions will be more soon to recover?

Sure. No, I mean, clearly this is a case or we have also seen those same trends that you mentioned here. We see it from both the OEMs as well as the operators because we do business with both parts of the chain in the wireless infrastructure market. And I think what has happened recently, I mean, whether you have some big mergers that are sort of stalled, whether you have customers being more conservative about certain build plans, clearly, the build plans and the installation plans of operators, in particular, in developed markets have not met the expectations of the OEMs. And we have really seen that on a global basis, that conservatism. What does it mean in the end? I think I am not the only one on the phone here today, who is just intensely frustrated by the coverage of my phone when I'm driving around the highways of the Northeast. And there is clearly a significant pent-up demand for both coverage and capacity. The new Mobile Devices, whether those be tablets or smartphones or whatever, Android, iOS, all of those formats, those are driving levels of data and levels of capacity restriction in these markets on a worldwide basis. And so we believe that there's no question that at one point, you’ve got to have these things built. And what we hear from our OEM customers is certainly the same story, which is that they are hearing from their operator accounts that, yes, there may be some pause here. We're doing whatever, whatever it takes to get a merger done, or we are doing whatever it takes to sort of preserve capital in an uncertain time. They are going to have to install these base stations. They're going to have to install lot of them. The beauty of the new type of base stations that the leading equipment manufacturers have created and where we have worked with them on new technologies, is these new base stations are much smaller. They're much more flexible and they allow the operators to more quickly make these installations. These are not big refrigerator boxes from the past. They are much smaller. In that sense that you can get coverage in a much, much quicker fashion in certain places. And look, I know very well when I go home and I barely have cell phone coverage anymore that they're going to have to change. They're going to have to install these base stations. When that comes, does it come in the first quarter? Does it come in the second quarter? This is very hard to predict. Only those in the boardrooms of these operators know that. But clearly, it will come because it is getting worst and worst around the world in terms of coverage. And the only answer is to put in place new and more of these base station platforms and we're very, very well-positioned on those systems.

The next question will be from Amitabh Passi from UBS.

I just had a couple of questions for you. Adam, you talked about some levels of caution around inventory levels in the IT Datacom wireless infrastructure markets. Any sense how long any sort of inventory digestion takes place? The last time we went through this in 2010, I think, it lasted for 2 or 3 quarters particularly in IT Datacom. Just wondering if you will venture, if you have any sense in terms of is this a 1-quarter phenomenon or could it drag out?

Yes, I -- unfortunately, I'm not going to be able to give you a great answer because I hope it is a 1, 2-quarter phenomenon. What we saw in the IT market very clearly was that going into the quarter, customers had certain expectations about what would normally be growth going into the fourth quarter. And I think you've seen in the many earnings releases that have come out over the last several months that those expectations have been moderated. But they already drove the supply chain to put in place the capacity for that uptick in demand, which in the end, does not happen for those customers. And so, is that something that gets consumed in 1 quarter? Does it get consumed in 2 quarters? Certainly, I would hope it not to last much longer than 2 quarters. It depends in the end on what the final customers take. An inventory position is only healthy, given a certain level of demand. And so to the extent that our customers see a level of demand that is kind of a more normal or flat demand from the third quarter going into the fourth quarter, then I would hope that, that would be a more positive outlook. If they see further caution from their customers, from the government, from the financial services, that other big customers, then you could potentially have more time for an inventory correction. I would hope this is not more than a 1, 2-quarter phenomenon.

Got it. And just on the topic of inventories, how would you characterize inventories at your distributors at this point?

I think those levels are actually pretty healthy. Certainly, with the flood we have seen some of those -- some consumption of inventory on the margin is not such a huge impact. But the beauty of having inventory in the distribution channel is that in a time of an emergency like this flood that they are able to consume some of that inventory, and then it's up to them to replenish it. Those levels today appear to be largely in line with historically comfortable level for our distributors.

Sherri Scribner, Deutsche Bank.

I was hoping to get a little bit of detail on your expectations for growth going forward. If we look at the midpoint of the guidance for the December quarter, it implies a revenue decline year-over-year of about 2%. And I know customers are being cautious, but we haven't seen a year-over-year decline since the recession. So I wanted to get your sense of what your expectations are, what you're hearing from customers, what you're bookings are for the March quarter now as we move into 2012 and if you think this decline in revenue continues?

I think at this point, we really are not going to talk about guidance for 2012 or either for the full year or for the first quarter of 2012. I think that in the prior question, I mean, Adam did talk a little bit about how long we've sort of -- things that might take -- or some of the excess inventory to work its way through. I think that in terms of the year-over-year comparisons in Q4, I think we do have a phenomenon, certainly, in the wireless devices market, where we're experiencing a quarter that we believe has if you want somewhat artificially lower level of demand because of this kind of Q3, Q4 phenomenon that we saw. And I think that's driving to some extent some expectations of year-over-year decline that would be more temporary in nature. But I think at this point, it isn't that we can really talk about our expectations for 2012.

Okay. And then, Adam, I know in the past, you've given some detail on the Aerospace and Military business. I think you commented that this quarter, the commercial aerospace piece of that business grew in the double digits. In the past, I think you've said commercial aerospace was about 20% of that total aerospace and military budget. Has that number changed and can you update us on that?

Sure. It was -- as you can imagine with the performance in the military and the double-digit growth in commercial air, the proportion of that military/aerospace market that is represented by commercial is a bit more -- now I’d say it’s more like quarter of the market, if not, even slightly more than a quarter of the market. So we're very pleased with that development and we think that, that's something that's going to, long-term, be very favorable for the company. If we look at commercial air, as I mentioned, it grew very strongly in the quarter. And if you take out the impact of the flood, it would have grown somewhere around 20% year-over-year. So very, very strong performance in commercial air. And we have continued a very positive outlook for that commercial air segment. The number of new planes, the degree of kind of the electronic architecture changes in these new planes is really just fabulous. I had the good fortune to be crawling around some of these planes over the course of last month or 2. And it is really just not only the new platforms and the amount of electronics in them, but the vision of our customers for the future of electronics, whether that be in the fuselage, in the avionic system, even in the engines, which have been something that long-term has not changed so much. There is just a real drive to wherever possible implement electronic functionalities to drive either fuel efficiency, either a simplification of the control mechanisms for the pilot, either to drive a better passenger experience. And there's really just phenomenal things that our commercial air customers are not just implementing today, but even considering long term for the future that creates just an amazing level of opportunities for the company. And we are really capturing that with technology. When I go out and I sit with the engineers of some of these customers and really talk about technology, that's where you get so excited because the new innovations that we are driving for those customers are real game changers in terms of allowing those customers to do things that they didn't know they could do in the past, whether that is bringing electronics closer to harsher environments in the plane, whether that is bringing new functionalities to the passengers. Those are all things that -- the interconnect that we are innovating are helping to drive those customers to create those new experiences. And I think that's going to serve us very, very well in the future for commercial, and we're really excited about that market.

The next question is from Brian White, Ticonderoga.

Adam, when you look at the guidance for fourth quarter here, I know you've had some pull-ins, but third quarter doesn't seem to be any better in seasonality. When we look at fourth quarter, this is even a worse outlook than you gave in October 2008. So my question is does this feel like we're in a downturn?

Well, look, I mean, let's take the second part first, Brian, I appreciate very much the question. October of 2008, if you recall, we saw sort of a normal environment. And then I think it was at the first week of December, Diana, when we really saw November orders kind of fall off a cliff back in that time period, and that's when we had to unfortunately issue a press release at the time to say that those expectations were not going to be there. I think this is a little bit different. We have not seen everything fall off a cliff here. Certainly, we see that there are a lot of questions among our customers. People are nervous. People are nervous about the environment. They are nervous about the political, the economic environment and we did see this very significant shift between the Mobile Devices from the fourth quarter to the third quarter. If you take that shift away, and I think Diana went through the numbers, we would be -- if you take currency and that shift away, this would be something like a 4%, I think, reduction from Q3 to Q4. Certainly, not what we would like and not what we would normally see seasonally. And I think that difference is really the environment that we are facing today and that many of our customers are facing, in particular, in the communications market, as we talked about, in wireless infrastructure, in IT as well as in the European industrial market, which is one where, clearly, the events in Europe are causing many customers in some of the biggest industrial zones of Europe to tighten their belt, so to speak. They don't want to get overextended until they really know what's going to be happening in Europe.

And our next question will be from Craig Hettenbach, Goldman Sachs.

Yes, just a follow-up on the industrial end market, the expectations for slight growth in Q4, a little surprising, given some of the dynamics in terms of demand, and focus on the channel to bring inventory down. So I was hoping you can provide a little more color in terms of any specific programs or what gives you the confidence in the growth in industrial.

And again, thank you very much for the question, Craig. Appreciate it. I mean when we will look for the fourth quarter, you would normally have a seasonal growth coming out of the third quarter. And we did see that the industrial business was down sequentially in the third quarter by some 10%. And because the industrial business does have a significant component in Europe as well in North America, that seasonal impact can be -- not insignificant going to the fourth quarter. I think we feel very good about our position in that market. Recall that our industrial business is very, very diversified. It ranges in things from high speed rail to alternative energy to oil and gas exploration to factory automation, industrial instrumentation, heavy equipment, I mean, lighting. I could go on for a long time about these sub-segments. And I think we still see in many of those markets, especially those new markets like alternative energy, like lighting, where there's a big transition happening in the nature of lighting and outdoor and harsh-environment lighting. Those are areas where we continue to see that there is momentum among the customers, and there's still great opportunities for growth. I think you take those kind of new markets in industrial, in addition, there's maybe a more muted, but still a little bit of a seasonal uptick that comes in the fourth quarter. And that in the end, results in us having that outlook that we gave.

Okay, if I could, just a quick follow-up for Diana. You mentioned the 5% headcount reduction in Q3, a rough range in terms of what you're putting together for Q4 here.

Yes, I mean I think that we would expect something in the same sort of range is going to be appropriate in Q4. I think, as Adam said, these actions are very much done on a grass-roots level and each business will adjust appropriately for the volume and obviously, some are more impacted than others. But we would expect and have anticipated something around the same size as what was implemented in Q3.

William Stein, Credit Suisse. William Stein - Crédit Suisse AG, Research Division: I think investors tend to be very interested in the inflection point. So Adam, you talked about seeing how customers were getting more conservative in August and September. We're about 3 weeks into October. Are customers getting more conservative, more nervous, about the same? Or are you seeing things start to bottom out with regard to the kind of attitude and approach to ordering and forecasts?

I think with regard to the mindset of the customers, I wouldn't say that there has been any incrementally more negative mindset coming just into the first few weeks of October. I mean, look, the situations that gave rise to that are clearly not resolving themselves automatically. And so if you're a military customer, do you feel better today than you felt 3 weeks ago, probably not, but I don't think you feel lot worse either. I think you're going about your job, you're still building the programs that you got to build. I think relative to the IT market and the wireless infrastructure market, it's a similar story. I believe that the customers there, some of them may, just now, be coming to the realization, "Hey, we're not going to hit that step-up that we thought we were going to get." And so, did that translate into a slightly more negative view today than 2 months ago. I would say in those markets, maybe we've seen those revisions more recently in terms of the mindset, only because they clung to the hope that they would have that real big sequential step-up that they all anticipated. And now, it seems to be coming through a realization that's not going to happen with how long it's taking, the governments of the world to make resolution to some of these uncertainties, and to really help to drive the economies in a better direction. I think that's causing some to just sort of say, "Well, look, we're going to -- we're not going to have that step-up, so let's adjust accordingly." William Stein - Crédit Suisse AG, Research Division: Great. A quick follow up, if I can. Diana, in the past, I think many times, you said that companies preferred use of cash is a value-creating M&A. Is that still the case and what's the approach to buybacks going forward?

Sure. I think that is absolutely still the case. I mean, we just continue to feel that this is certainly the best use of the company's financial capacity. I think that we all continue to work very hard on the acquisition program, and would hope to be able to use a majority of our capacity for that as we move ahead. We have bought a fair amount of stock back this year as well, I think, about roughly 10.5 million shares. So far, this year, counts down to about 167 million at this point, also, we believe is a good use of the capacity of the company and is a way, certainly, to return value to shareholders. I think we also will continue to consider the dividend level of -- on the stock, and I think that we'll continue to look certainly at all 3 of these. But clearly, the acquisition program is the number one priority as far as the management team is concerned.

The next question will be from Shawn Harrison, Longbow Research.

I'll try to make it brief. 2 questions. Just first, with the headcount reductions, the 5% in the third quarter, was that incremental to the 4% announced for the second quarter, so you would have a double-digit headcount reduction over the past 3 quarters in a cumulative amount?

Yes, that's correct.

Absolutely.

Okay, and then the second question is it seems as is a few of your peers are just trying to raise prices at least through parts of the supply chain right now. Do you think you're able to raise prices in this environment, or is it more of an environment where you hold prices steady and then you hope commodities help you out in early 2012?

I mean, look, when you are in an uncertain market, raising prices at least to OEM customers is not an easy thing to do. And I think we took a lot of pricing actions early in the year. And as the market environment became more mixed and then later became more certain, the ability to execute on those price increases, especially with OEMs, became more of a struggle. I think relative to the channel, as you correctly point out, distribution is one area where you can raise prices a little bit more easily. We do this on an ongoing basis. We don't do it monolithically. So you may not hear about it in a way that says, "Well, Amphenol want and raised prices monolithically across distribution channel" That's just not how we operate. Our price increases go out, really, on a product or a technology basis, and those are an ongoing -- throughout the year, pricing exercise with our distributors and we will continue to follow that as well. Remember, distribution represents only some 14%, 15% of our sales and so that's not the big issue. The big issue is how you go about getting price increases with the OEMs. We will be disciplined on price. One of the areas that is the most essential for price is actually new product development. And as we look forward, new products for Amphenol consistently have represented more than 20%, nearly 25% of our sales for a number of years. And that is a focus that allows us to get pricing in the end, not by changing the price on a certain part number, but by having more functionality embedded in the product, creating more value for your customer. And, thereby, they're willing to pay you a comparably higher price. But it's an apples-and-oranges comparison in the eyes of the customer. And so at the end of the day in a market like this, innovation is the real answer to that pricing. We're going to drive that innovation very, very hard going forward. Thank you very much, Shawn. And I'd like to thank all of you for your time today and your attention and wish you all a very, very good completion here to October and going into the full year. We'll talk to you again in January. Thank you.

Thank you.

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