Diana Reardon - SVP & CFO Adam Norwitt - CEO

Amit Daryanani - RBC Capital Markets Steven Fox - Cross Research James Kisner - Jefferies Amitabh Passi - UBS Sherri Scribner - Deutsche Bank William Stein - SunTrust Jim Suva - Citi Mike Wood - Macquarie Mark Delaney - Goldman Sachs

Welcome to the Third Quarter Earnings Conference Call for Amphenol Corporation. (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 am Amphenol's CFO. I'm here together with Adam Norwitt, our CEO and we would like to welcome you all to our third quarter earnings 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. Please note that all the share and per share amounts that we'll discuss today have been adjusted to reflect the company's 2-for-1 stock split that was effective earlier this month. The company closed the third quarter with sales of $1.359 billion and EPS, excluding onetime items of $0.58, achieving strong growth and new records of performance in both sales and earnings per share. Sales were up 18% in US dollars and local currencies compared to Q3 of 2013. From an organic standpoint, excluding both acquisitions and currency impacts, sales in the quarter were up 11%. Sequentially sales were up 3% in both US dollars and organically from Q2 of 2014, breaking down sales into our two major components. Our cable business, which comprised 7% of our sales, was flat with last year. The interconnect business, which comprised 93% of our sales, was up 19% from last year, reflecting the benefits of both good organic growth and the company's successful acquisition program. Adam will comment further on trends by market in a few minutes. Operating income, excluding onetime items increased to $270 million in the quarter. Operating margin excluding onetime items, increased to 19.9% compared to 19.7% last year and 19.5% last quarter. The sequential increase of 40 basis points in operating margins over the second quarter represents an excellent conversion margin on incremental sales of over 30%. This strong…

Well, thank you very much Diana and let me also add my welcome to all of you here on the phone today. I'm going to spend a few moments to highlight our achievements in the third quarter. As Diana mentioned, I will then discuss our trends and progress across our served markets and I will just make some short comments on our outlook for the fourth quarter as well as for the full year. With respect to the third quarter, I can just tell you that we're very pleased to have reported new records in sales and EPS, both of which exceeded the high end of our prior guidance. Sales increased 18% from prior year and 3% sequentially establishing a new record for the company of $1.359 billion in sales. As Diana mentioned, orders also reached a new record of $1.342 billion. We're very proud of our profitability in the quarter, which was very strong as we generated excellent sequential conversion margins leading to an expansion of our already industry-leading operating margin to 19.9%. And with our successful third quarter bond offering, we once again reaffirmed the financial strength of Amphenol. I can just tell you that I'm extremely proud of our global team who once again in the third quarter was able to react quickly to the many opportunities that are being created by the electronics revolution while continuing to exercise the discipline and drive necessary to achieve outstanding operating performance. Our record results in this third quarter clearly demonstrate the benefits of Amphenol's entrepreneurial culture. As we already announced early in the quarter, we're very pleased to have completed at the end of the quarter the previously announced acquisition of Casco Automotive Group which was completed at the very end of the third quarter. Casco is a global…

(Operator Instructions). Our first question comes from Amit Daryanani from RBC Capital Markets. You may ask your question.

Two questions for me. Maybe to start with Adam, in the press release, you talked about seeing some increased level of uncertainty on a geopolitical basis. I'm actually struggling to understand where in your guide are you factoring this in, other than the mobile networks, which I realize is down a fair amount. But if I look at all the other segments, kind of flat to up a little almost. Can you maybe just talk about where are you seeing these uncertainties? Where do you see a downtick from order pattern across these end markets?

First of all, let me say that the level of uncertainty in the marketplace -- we’re not seeing anything different than anybody else is seeing in the newspaper. You read anything and there is certainly a more complex array of incidences and circumstances around the market and I think that's reflected in some of the movements you see in things like exchange rates and interest rates that clearly have moved more significantly in the quarter than anybody would have anticipated three months ago. Look, we give a range for our guidance and we always do that. But, as you know we certainly always strive to get to the top end of that range and that's certainly the goals that we have within the company. But to the extent that we show a range, one could anticipate that if there were greater accelerating problems, that's why we have a low end of such a range and I think it's not necessarily that we're seeing specific things coming from customers but rather that there just appears to be as indicated by some of these movements a greater level of uncertainty around the world and that is whether it is political whether that is economic or whatever that is you see a flight to quality as evidenced in particular by the strength of the dollar and the interest rates today.

And then just on the mobile devices, you obviously had a nice Q3, but how do we think about the growth in Q4? Because I was looking at the last five years and it's gone from as good as plus 30% to as bad as 20%. I know you said you expect growth, but is there a way to think about what do you think seasonal growth is? Is it low teens again in December and is it more tablet centric or more broad based this time around?

Let me just put this in some perspective. We had excellent performance here in the third quarter, growing 13% year-over-year, 14% sequentially and as I mentioned we expect that to be somewhat higher in the fourth quarter. I think we would expect that kind of (indiscernible) high single-digits sequentially. If you put that in perspective compared to last year, in the second half this year, our growth is essentially going to be somewhere around the low 20% growth second half to first half and that's essentially what we saw also last year. And you may also recall that last year in the fourth quarter, we had a very significant uptick in demand, which was essentially us picking up market share when others could not support the demands of certain new program ramps for customers. So we actually think that our performance this year in mobile devices is very consistent with prior years and very consistent with what we see in the marketplace where you have clearly a wide array of different results and expectations among customers, but our strong growth here across all the product lines that we're participating in. Again to grow by more than 20% second half to first half and to grow in the third quarter by 13% is we think not only consistent, but a very strong reflection of our excellent position in that mobile devices market.

Thank you. Your next question comes from Steven Fox with Cross Research. You may ask your question.

Just backing up on some of the acquisitions that you've done this year Adam, I was curious, especially around the GE business and some of the momentum you're seeing in auto, could you talk about how you've been able to leverage the acquisition into those end markets, how it's translating into organic sales growth now? And then what those deals are doing in terms of adding to earnings for the full year? And then I had a follow-up. Thanks.

Well, I will talk a little bit about the leverage and then I will let Diana comment to some extent on how those are contributing. But let me just say that we're so happy with the Advanced Sensors acquisition and I think that's the one you mentioned. Obviously, we did five acquisitions last year, four of them completed in the fourth quarter that included Advanced Sensors and Tecvox to name two and we're just very, very pleased in particular with Advanced Sensors. As we've talked about from the day that that company joined Amphenol, it's a fabulous company from numerous respects. Number one, great technology and I think now as we're coming upon soon the first year anniversary of that company joining Amphenol, we feel even stronger about the value of the technology of the company across the range of sensors that they supply because it is a very diversified company. I think the second thing that we talked a lot about was the fact that it is a very diversified company, about 2/3rds of the sales in industrial and 1/3rd in automotive, but within those markets has a very, very diversified array of applications and then customers from medical, heavy equipment to advanced smart building, Internet of Things type applications and then within the car from pressure and temperature, CO2 and all of those type of sensing applications. And all that I can tell you is, again, our great expectations have been really surpassed in terms of the depth that that brings us with the customers. I myself have been to a number of these customers over the course of the year and in each time I go to those customers, you hear a very common refrain and that is that the challenges that the customers are experiencing relative…

And Steven, in terms of the impact of the acquisitions on a year-over-year basis, if we look at the high end of guidance, our sales growth is expected to be about 15%. About 8% or so is the contribution from the acquisition program on the top line and I would say it's a little bit less than that from a bottom-line perspective, but certainly a very strong contribution all the way around from the program in 2014.

Then just a quick follow-up. In terms of two of the markets, auto and industrial, and I think you touched on this a little bit in just what you talked about, Adam, but those two markets seem to be drawing more attention relative to some of the geopolitical concerns in Europe. Can you just give us a base case for how you see those markets right now and whether you're more concerned about end demand or how maybe you're able to overcome it a little bit more given some of these acquisitions? Thanks a lot.

Again, thank you very much. I think relative to Europe, clearly, I've been in Europe a couple times in the last month and you don't want to read the paper if you want to have a smile on your face. But I can tell you that our team has executed fabulously in Europe and in fact, if I look at our performance by region, truly in local currency and organically, however you want to look at it, Europe was actually our fastest-growing region in the quarter on a year-over-year basis. So clearly, the Amphenol team is not putting their head in the sand after reading every morning the Financial Times or Le Monde or Der Spiegel or whatever that is going to be. So I think from that standpoint, we are doing outstanding in that space compared to what the overall macro is performing. And I think there's no doubt about it; our strength in industrial and automotive, as well as in commercial air, which is another space where we do have more business in Europe and mobile infrastructure, our teams there have just done an outstanding job at executing on the opportunities at hand and then refocusing the resources towards those places where there is growth opportunity because regardless of what happens in the macro environment, the electronics revolution is continuing without missing a beat. You've just got to find where that is and I think our ongoing strategy of diversification, in particular in the industrial market, the automotive market, I mean these are areas where we're constantly plumbing for new places where technology is taking hold and not trying to take share from others, but trying to enable something that is new. And I think that has been really the recipe that we have followed. In Europe, we follow it obviously on a global basis, but I think the impact of it compared to the macro indicators is certainly magnified in Europe to the positive for Amphenol.

Your next question comes from James Kisner with Jefferies. Please ask your question.

I'm just wondering again about mobile devices. Obviously, there was some very strong demand at some large OEMs recently and perhaps even a surprise in mix shift towards larger phones at one major OEM. I'm just wondering if you could comment on leadtime or supply chain dynamics, mobile devices. Is there any potential for double ordering, tightness in supply chain and perhaps also what are the key puts and takes that we might think about entering into Q1 seasonality? Thanks.

Sure. Let me answer the last part, which is it's too early to say about Q1. I think we're not in a position yet, especially in a market like mobile devices, where visibility is not necessarily the longest in that space. I can't tell you that we have seen ourselves any double ordering or tightening of supply chain. Obviously, we're making certain products, antennas and interconnect products and we certainly ourselves don't have any tightening of our supply chains and we are more than able to satisfy very quickly our customers. And that has been a real hallmark and a benchmark of Amphenol for a long time. Again, I mentioned earlier in the call, last year in the fourth quarter when we had sort of a real unexpected uptick in demand and we were able to do that really flawlessly when our competitors were not. So I think from that standpoint, we are not stretching leadtimes. We are not a bottleneck and to the extent that customers can take more, we will be there to support them with that. Otherwise, what other components are doing relative to that, I can't tell you that I have great visibility on it.

Your next question comes from Amitabh Passi with UBS.

Diana, my first question was for you. I was curious how are you thinking about OpEx into the calendar fourth quarter, particularly now with the integration of Casco?

Sure. I think that you probably saw in the financials in Q3 that we had a good performance in terms of operating costs or SG&A in Q3 and they've now come kind of back down to the level they were at last year at that time. We had some increase in the first quarter when the Advanced Sensors acquisition came in as they were running at a higher level, but I think they've started to manage some of those expenses down. I think as we look into Q4, I would expect kind of a normal Amphenol pattern where we would see less SG&A growth from a percentage standpoint than we would see in sales growth. And I think that the Casco acquisition has a cost structure that I would say more mirrors our own, so I wouldn't expect any significant impact there.

Okay. And it seems like the last couple of quarters you've had an attractive conversion margin of greater than 30%. I'm just wondering do you think that's sustainable over the next couple of quarters, particularly as you continue to integrate and optimize the sensors business or do you think you revert back towards the mid-20%s target? I'm just trying to get some rough sense of how we think about what you're seeing in conversion margins, which has been quite attractive the last couple of quarters.

Sure. I guess I would say two things. One is our long-term goal is still 25% and to your point, we have been doing better than that the last couple of quarters. There have been a number of factors contributing to that. Certainly very good operating execution across the company. I think in this quarter, we'll also start to see some impact as the acquisitions come closer to the average of the company, so we have a lot of good strong contributions going on there. I think that when you look at Q4, the sales volume, as I said when I walked through the guidance in the prepared remarks, the incremental sequential sales growth is really coming from the Casco acquisition with some offset from the foreign currency translation. So as we look there, we wouldn't expect, because of the components of the sales change, for that to be at that high conversion margin level. We would expect more ROS in Q4 to probably be closer to that Q3 level. And as we look into next year and give guidance for next year when we close the fourth quarter, I think we will talk more about what to expect at that point. But I think I can tell you that our 25% conversion margin goal certainly still remains the goal for the management team.

Your next question comes from Shawn Harrison with Longbow Research. Please ask your question.

The first just being on mobile networks, it looks that the absolute dollar level of sales for this year is probably in line with maybe where you previously guided. It's just the shape of the back half is different. Is that true? And second, within that is it just a pause in spending? Did you see was it more of a pull-ahead, and does this in any way impact your view on 2015 and what could be another good year for the mobile networks business in 2015?

I think you correctly characterize if we think about how we had guided to the mobile infrastructure market going forward, we had said that we would expect the market to be somewhat down in the second half compared to the first half. Our Q3 sales were a little bit higher than expected, and thus I think the fourth quarter is maybe a little bit more of a drop-off than we would have expected coming from the third quarter. But if you look at it, first half to second half based on our outlook, it would be down 1% or 2% in the second half to the first half, which I think on any industry comparable basis is a very, very strong performance. And when we think about the performance this year, we expect still to be up in that market and kind of the mid-20% range. Again, very, very strong performance and much stronger than you see in kind of the OEM reports that are available and I think it compares very favorably on any peer basis. What does that mean, the fourth quarter relative to looking out into next year? We have not given guidance about next year, but I don't think that our change in guidance here would change any degree our outlook long term in the market. We have an outstanding position. I think one thing that has been very favorable for us this year has been that regardless of what spending happens, we have demonstrated this year to our customers that when they need us, we are there for them. With very strong upticks in demand -- you may recall in the second quarter, we had just an outstanding second-quarter sequential growth, somewhere close to I believe 20% quarter-to-quarter and to react so quickly as we were able to do when our customers needed it, that is something that they don't forget going forward. In particular in this market where oftentimes you're not talking about factories, you're talking really about crews in the field waiting for parts. And you don't want to be the guy who is holding those crews up in the field waiting for parts and we have never been and in fact, we've just executed so well in that strong growth this year that whatever happens in the overall spending market, I think our position and our ability to capture more than our fair share of that going forward has been very much confirmed this year and will create a great platform for us in the future.

Okay and then a brief follow-up. It's not part shortages holding anything up right now and then just on Casco, that $0.02 of accretion for the fourth quarter, should we expect that to normalize to maybe like a $0.03 plus range as we head into 2015 per quarter?

I'll answer about -- there was not a parts shortage, if that's what you're asking relative to mobile devices. There's no impact. It's just in the quarter we see somewhat less buildout activity and I'll let Diana talk about Casco.

Sure. I think that the $0.02 in the fourth quarter is within a margin of what we would expect to see in 2015. I think we're not giving guidance for next year yet and we don't ordinarily specifically call out EPS contribution from individual acquisitions. I did it in this case; I thought it would be helpful because we had a lot of moving parts in the guidance. But I don't think the $0.02 would be misrepresentative of the level that we would see next year.

Your next question comes from Sherri Scribner with Deutsche Bank. Please ask your question.

I think that you, or maybe, Adam, you said that growth in the fourth quarter on an organic basis is probably about flat. I wanted to understand if that is more sort of a timing issue. I think you said for the full year you expect to grow revenue about 7% on an organic basis, but wanted to think about your views of organic growth going forward and if you still think you can grow 2X the market?

Sure. Maybe just to say the numbers and then maybe Adam can talk about the growth versus the market, but that flat organic growth I was talking about was the sequential performance between Q3 and Q4. If we look at, on a year-over-year basis, which is what the 7% for the full-year is year-over-year, in the fourth quarter from an organic standpoint is somewhere in the sort of the 3% range and it is somewhat impacted by the fact that while the mobile device market is growing sequentially between Q3 and Q4 on a year-over-year basis, we did have a huge fourth quarter in 2013 for the reasons that Adam already described and so that does have some impact in terms of the year-over-year organic growth discreetly in the fourth quarter.

And Sherri, relative to our target and history, long history of outperforming the market and really growing at 2 times the market, we continue to have a great degree of conviction around our ability to do that and we believe not only do we have the ability, but we've really built the platform to do that going forward. Ultimately what is the market growing, that we'll only be able to assess when the dust has settled on 2014. But I think this year our performance is really outstanding given this guidance that we have and we continue to look forward to pursuing and achieving on that 2 times the market goal going forward.

And then, Diana, you gave some detail on the impact of the stronger dollar relative to foreign currencies in the fourth quarter and just wanted to understand how much will that continue into 2015 and is it sort of the same magnitude as the fourth quarter? Thanks.

Sure. When we would look at 2015, if rates stay roughly where they are, we would expect it could be something like a 1% year-over-year drag from a translation perspective if that helps.

Your next question comes from William Stein with SunTrust. Please ask your question.

One question and one follow-up, first, I want to just ask a follow-up on the wireless infrastructure business. There has been pretty widespread understanding that there have been some component shortages, not from Amphenol, but in the RF power amp area that have caused some other companies to have kind of inconsistent results in this market. So I'm wondering if you see this as more of a pause in buildout by the carriers or is this an inventory adjustment by the equipment vendors and then I had a balance sheet question as well.

It's very true. I think in the first half of the year, there were these component shortages and you correctly point out I mean what we hear also related to RF power amps in particular. I don't know whether there were others, but the RF power amp was certainly something that was widely discussed in the industry. And I think we talked about last quarter and even before that, because of that, we probably would have anticipated this year the second half to be even more down compared to the first half. But they were not able, many of our customers, to truly get the build rates of the base stations up because they didn't have these -- they were missing these components. And I think, from that perspective, that's one of the factors that allows -- in our second half, we're down only really by about 1% or 1.5% compared to the first half. Otherwise that could have been a more significant falloff in demand as there really was quite a wave of buildout happening that was intended at least to happen in the first half. None of those -- I have not heard recently that those component shortages are continuing. I think there's a relatively normal degree of demand. Whether there was double ordering of those components or whatnot, I mean we're not close enough to really judge. Now one thing to understand is we're shipping -- some portion of our business in mobile infrastructure goes to OEMs, but another portion and really a roughly equal size goes direct to service providers. And so when we're selling to service providers, you don't really have inventory corrections per se. That's much more in a real, almost just-in-time delivery where they say we're going to have a crew there in a week and we need your parts there also on that same week. And from that standpoint, you don't get those inventory bubbles that you can get more related to a traditional OEM manufacturing process.

And the follow-up, maybe, Diana, for you, capital expenditures as a percent of revenue has been a bit elevated and it was again this quarter and I'm wondering if that's related to Sidney. I thought that that had been already kind of resolved and built out. Maybe there's something else going on. Thank you.

Sure. Actually you're correct; it has been higher for the last few quarters. And in this third quarter, there was the last of the spending relating to the project that you mentioned where we were building a new facility to replace the flood-damaged one from a couple years back. So we have been spending more at 4% of sales over the last few quarters in order to accommodate that additional spending. We would expect the spending to come down in the fourth quarter to a more normal level and would expect the same as we move into 2015 and that normal level would be somewhere in the 3%, 3.5% of sales range.

Your next question comes from Jim Suva with Citi. Please ask your question.

Adam and Diana, to you and your team there at Amphenol. When we look at your recent acquisitions, I think it's fair to say they're kind of going as an extension, so to speak, beyond your traditional cable and connector business when we start talking about sensors and all this. And then when we did some work looking at the industry of sensors, it actually looks like sensors are more profitable than traditional connectors. So is it fair to say that there is a chance that these recent acquisitions could actually be accretive to your companywide margins and if not, maybe is there something wrong with my logic or what I see in the sensor industry versus connectors?

I think it's very true. I mean we have been, over the last essentially three years, we've now made 11 acquisitions and of those, two of them have a sensor component. One was the Advanced Sensors business that we acquired close to a year ago, which was exclusively sensors and then we acquired here Casco, which has a sensor productline, as well as their interconnect productline. I think the sensor market is for us one that we feel very good about because of its wonderful leverage that you can get between the sensor and the interconnect product, combined with its great diversification. Much as we love so much the diversification of the interconnect market, we feel the same way about the diversification within the sensor market. Now are sensors by definition more profitable than connectors? I wouldn't necessarily say that. I think there have been examples in the sensor industry of some who make more money and some who make less. I think when we acquired the Advanced Sensors business, we did talk about the fact that, at the time we acquired it, that company was operating at a level that was meaningfully below our corporate average and that we certainly had the aspiration and the goal to bring it up to our corporate average over time. Is there something empirically different about sensors that means you can make more money than connectors? I don't know that that is true, but I do know that there's certainly at least the equal opportunity to make great returns in the sensor market because, at the end of the day, we're able to make our fabulous returns into the interconnect market by enabling the technologies of our customers, by creating for them something that ultimately makes their system perform better, either have a better performance, be able to sell more of them, get a better marketshare, whatever they can do with their end equipment. And I think sensors have very much the same property to them. You embed technology in the sensors and that is either with the sensing element or very interestingly you embed the technology in the packaging of the interconnect. And by embedding that technology, which creates value for the end customer, you're thereby able to charge a price that allows you to make a fair return on that business. And so to that standpoint, we certainly feel that the sensor market has at least as good of an opportunity to make the returns that we like to make and we'll see over time whether it's better than we think.

And a quick follow-up for Diana. Diana, for currency changes, is it mostly like the euro or the yen or what particular denomination should we be most mindful of because someday down the road, I'm sure currencies will change a little bit again?

Sure. The euro would be the biggest one that would have an impact on us. Others have some impact as well, but they are smaller.

Your next question comes from Mike Wood with Macquarie. Please ask your question.

In terms of going back to automotive. 21% organic growth is very impressive and significant outgrowth. You've called out some synergies from Advanced Sensors. My understanding of the automotive business, there's typically very long leadtimes to get on programs before you actually get those synergies. Can you talk about how you're getting them so quickly and with Casco, would that be the similar type of immediate synergies?

Thank you very much. I think, again, we're very pleased with this 21% organic growth. I don't think I attributed that growth necessarily to these so-called synergies between the sensors and the connectors. Even if we have actually started to see some early opportunities a little bit even quicker than we expected them to leverage a connector in a sense or in a single application, but clearly that's not the main driver or even a significant driver of the 21% growth. The 21% growth is really coming from new applications in the car and when we look at these applications -- again, I mentioned a few -- emissions, telematics, drivetrain control, things like antilock braking. Essentially where ever you see in a car new electronic functionality that maybe was not there in the past, those are the type of systems that are really creating this outsized growth for us. So again, this is not us just capturing a marketshare from an incumbent on something that is there already; it is us working long term, and this is over many, many years of effort to work to design in on new applications, as you correctly point out, over a relatively long cycle time and you see those new programs and those new functionalities and those new feature sets in the car starting to roll out. And I think the one thing that I would say is that the automakers around the world, they have clearly woken up to the fact that electronics helps them make money, number one and sell more cars, number two. And so I think that cycle of implementation of electronics into cars -- if anything, that cycle is compressing to a shorter cycle than the traditional sort of platform cycles that you see in the automotive industry. You have really what I would almost call mid-platform upgrades that happen on things like lighting systems and infotainment systems and otherwise, new things like LEDs in the car and all of that. I think these are all the areas where our team is heavily focused both in the short and the long term to make sure that we're participating at more than our fair share of those applications.

Great. And just to be thorough, the only area I don't think we discussed is just the decline recently into metals like silver and gold to a lesser extent. Can you comment on what you'd expect to happen on the pricing erosion side going forward?

From a pricing erosion standpoint, I think that we put the guidance together based on the costs that we see at the particular time. I think as we've talked before, we do certainly a great job from an operating management standpoint to maximize overall profitability in the company and that's the combination of managing sales price and then managing cost and from a cost perspective, the current environment is certainly better relative to the trends in commodities than what we've seen in a few of the prior years, but we certainly wouldn't expect any particular windfall from any specific metal. The company uses a lot of different metals, a lot of different plastics and I think does a very good job of really getting the most bang for the buck from a profitability perspective. And I think you've seen two really strong quarters of excellent conversion margin here during 2014. We hit 19.9% ROS in the quarter and so we're really very pleased with the profitability performance of the company and the team is very committed as we look out into the future to continuing to work towards a 25% conversion margin goal and certainly good procurement practices is part of that, but there are many different factors that go into achieving that kind of profitability at the end of the day.

Your next question comes from Mark Delaney with Goldman Sachs. Please ask your question.

I was hoping you could help me understand the reason for the softness in the networking portion of your IT segment and then how we should think about that as we go into 2015.

Thank you very much. I think -- I talked about the fact that in the IT datacom market, there is clearly a lot of dislocation happening and change happening in that market. And I'm sure you know as well as I do some of the macro factors that are happening there, the rise of data centers and web service providers, the challenges that many companies are facing in other markets, including places, for example, like China where, for a wide range of call them political considerations, certain legacy suppliers are having more trouble to sell in particular their core networking equipment into those spaces. And so for whatever reason it is, I think there has clearly been some moderation of the sales of these networking equipment. But, look, at the end of the day, that is not going to be a perpetual situation because those are the equipment, this networking equipment and the IT, which is really forming the backbone of the Internet and the data rates that are going, that we see, the expansion of data rates that we see in our server and our storage business and that we see in particular with these new LTE and 3G networks that are being built up over the course of -- in the wireless market, these things are creating tremendous end demand for data that ultimately is going to flow through these core networks and through the switches and the routers and all of those things that drive the core networks. And ultimately will create let me just call it more of a pent-up demand for that equipment. It actually reminds me somewhat of -- for a number of years, we saw, in the mobile infrastructure market, not great spending trends and over that time, there was that pent-up demand…

I appreciate the context there. For a follow-up question, I'm hoping you can help me think about the capital allocation strategy going forward. This year, the company has done some larger acquisitions in GE, Advanced Sensors, in Casco. You also stepped up the buyback a little bit this quarter and did the nice job buying back 3 million shares. Should we expect going forward that the company is planning to be a little bit more aggressive on the capital allocation strategy there in terms of the size of the potential companies you may tuck in or the way you're thinking about doing the buyback or is this just you had a couple of larger deals that came to fruition as you executed upon those?

Look, I think the company has had a very consistent strategy for many years relative to the deployment of the financial strength and the prioritization there clearly is towards the acquisition program, which we believe provides the company with the best long-term return both from a growth and profitability perspective. We do also though feel that a balance is important and I think whether or not you look at the last five years, you look at this year, you look at last year, I think what you see is really quite some balance if you would look at the free cash flow of the company with about half going back to shareholders in various forms and the other half being deployed towards the acquisition program. I think as Adam has said on many occasions, the size of the acquisitions is not really the important criteria as far as we're concerned; it's much more about the fit from a technology standpoint, about the strength of the management team, about the potential that we see for both top and bottom-line growth. So we would certainly, if there was an appropriate acquisition that fit all of those criteria that was bigger, that would be something that we would prioritize that financial strength towards because, as I said before, we do feel as a management team that that's what makes the most sense for the company. So I think what you'll see us continue to do as we look into the future is to continue to have a balanced approach, but certainly to err on the side of funding the acquisition program as those opportunities present themselves.

Thank you. At this time, I'll turn the call back over to the speakers.

Well, thank you very much and I'd like to thank all of you for spending some time with us today on what is here in New England a blustery fall day and we certainly appreciate all of your attention and I hope it's not too early as we will not speak to you until next year to wish all of you a great holiday season and a successful fourth quarter. Thank you again and we'll talk to you in January.

Thank you.

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