Amphenol - Q2 2013

Transcript

Operator (participant)

Hello, and welcome to the second quarter earnings conference call for Amphenol Corporation. Following today's presentation, there will be a formal question-and-answer session. To ask your question, simply press Star, then one. Until then, all lines will remain in listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Ms. Diana Reardon. Ma'am, you may begin.

Diana Reardon (CFO)

Thank you. Good afternoon. My name is Diana Reardon, I'm Amphenol's CFO. I'm here together with Adam Norwitt, our CEO, and we'd like to welcome you all to our second quarter call. Q2 results were released this morning. I'll 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 second quarter with sales of $1.136 billion and EPS of $0.95, meeting the high end of our guidance and achieving a new EPS record. Sales were up 7% in both US dollars and local currencies compared to Q2 of 2012. From an organic standpoint, excluding both acquisitions and currency effects, sales in Q2, 2013 were up 3% versus last year.

Sequentially, sales were up 5%, both in US dollars and organically from Q1. Breaking down sales into our two major components, our cable business, which comprised 8% of our sales in the quarter, was up 19% from last year as a result of a 2012 acquisition. The interconnect business, which comprised 92% of our sales, was up 6% from last year as a result of both increased demand and prior year acquisitions. Adam will comment further on trends by market in a few minutes. Operating income was $224 million in Q2. Operating margin was 19.7%, up from 19.4% last year and from 19.2% last quarter. A very good conversion margin on incremental sales of over 24% from last year and over 30% from last quarter.

From a segment standpoint, in the cable segment, margins were 13.8% and comparable to prior year levels. In the interconnect business, margins were 22%, up from 21.6% last year. The year-over-year interconnect operating margin improvement primarily reflects the positive impacts of higher volume and cost reduction actions. We're very pleased with the company's operating margin achievement of 19.7%, and we continue to believe that the company's entrepreneurial operating structure and culture of cost control allows us to react in a fast and flexible manner, thereby constantly adjusting the business to maximize profitability in what continues to be a very dynamic environment. Through the deployment of these strategies, the management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance.

Interest expense for the quarter was $15.6 million, compared to $15.1 million last year, reflecting higher average debt levels from the company's stock buyback program. Other income was $3 million, up from $2.6 million last year, primarily as a result of higher interest income on higher levels of cash and short-term cash investments. The company's effective tax rate was approximately 26.8% in the quarter, the same as last year. For the full year 2013, excluding the effect of one-time items, we currently expect a tax rate of approximately 26.3%, compared to a full-year effective tax rate of 26.6% in the year 2012. Net income in the quarter was approximately 14% of sales, and earnings per share increased 10% to $0.95 from $0.86 last year, a strong performance.

Orders for the quarter were $1.177 billion, resulting in a book-to-bill ratio in Q2 of approximately 1.04 to 1. The company continues to be an excellent generator of cash. Cash flow from operations was a strong $180 million in Q2, or approximately 117% of net income, and the company continues to target and achieve cash flow from operations in excess of net income. The company had strong working capital performance in the quarter. Inventory declined 1% from March and was down 5 days to 81 days at the end of June. Accounts receivable was $906 million at the end of June, and days sales outstanding declined 2 days to 71 days.

Accounts payable stood at $447 million at the end of June, and from a days perspective, was also down 2 days from last quarter. Cash flow from operations of $180 million, along with option exercise proceeds of $41 million, and borrowings under the company's revolving credit facility of $95 million, were used primarily for net capital expenditures of $36 million in the quarter, the purchase of 1.2 million shares of the company's stock for $96 million, the acquisition of DC Electronics for $44 million, dividend payments of $17 million, and an increase in cash and cash investments of $121 million in the quarter. At the end of June, the company had approximately 7.5 million shares remaining under its stock repurchase program, which expires in January 2015.

At the end of June, cash and short-term investments were $1.143 billion, the majority of which is held outside the US, and debt at the end of June was $1.783 billion, leaving net debt at approximately $640 million at the end of the quarter. Borrowings and availability under our revolving credit facility were $594 million and $406 million at the end of June, respectively. The company's leverage and interest coverage ratios remain very strong at 1.7 and 17x, and EBITDA in the quarter was $273 million. On July 1st, the company amended and extended its revolving credit facility, increasing the size of the facility to $1.5 billion, extending the maturity date two years to July 2018, and lowering certain fees.

The company's current availability under the amended facility is approximately $906 million. In addition, in the end of the quarter, the company's board of directors has approved an increase in the quarterly dividend on the company's common stock from $0.105 to $0.20 per share, increasing the yield to about 1%. The increase is effective for payments beginning in October. From a financial perspective, this was an excellent performance. Before I turn the call over to Adam, I'd like to make a few comments relative to the assumption included in our guidance. The midpoint of our sales guidance has been revised down from $4.618 billion to $4.515 billion, a reduction of approximately $100 million, or 2%.

This reduction relates to a change in our expectation for demand in the wireless device market from a mid-single-digit growth in our prior guidance to a decline of just under 10% in our current guidance. This is partially offset by a contribution from the recent acquisition of about $20 million. Our previous guidance anticipated for the mobile device market, a significant increase in demand in the H2 of 2013, relating both to new product introductions and higher production forecast for certain mobile computing platforms, some of which were introduced to the market in late 2012. Current customer forecasts indicate lower demand levels than previously expected in the H2 of 2013, resulting in minimal lift in demand in the H2 over H1 levels.

In comparing demand to prior year levels, we now see lower demand from new product launches, as well as some impact of a further acceleration in the shift in mobile computing products towards Wi-Fi only enabled devices. Our guidance also reflects a reduction in our 2013 full-year effective tax rate from 26.8% to 26.3%. This compares to a full-year tax rate in 2012 of 26.6%. We anticipate the rate reduction will be effective in the third quarter and have therefore reflected the lower rate in our guidance.

The adjustment to sales and the adjustment to the tax rate result in a change in the midpoint, for 2013 EPS guidance from $3.81 to $3.76 for 2013, a reduction of about 1.5%. Adam will now provide an overview of the business and current trends.

Adam Norwitt (CEO)

Well, thank you very much, Diana, and I'd like to add my welcome to all of you on the phone today. As Diana mentioned, I'm going to highlight some of our achievements in the second quarter and then discuss the trends and progress that we've had in our served markets. Finally, I'll make a few comments on our outlook for the third quarter and the full year, and then we'll have time at the end for questions and answers. With respect to the second quarter, we achieved record earnings per share at the high end of our guidance, with revenues increasing a strong 7% from prior year and 5% sequentially. We're very pleased with these results, especially given the significant market uncertainties that are still present in the global economy.

Diana mentioned, orders reached $1.177 billion, representing a book-to-bill of 1.04 to 1, and supporting our higher expected sales levels in the H2. Profitability was also strong in the quarter as we generated higher than normal sequential conversion margins, leading to a further expansion of our industry-leading operating margins to 19.7%. I continue to be very proud of our agile, entrepreneurial organization as we continue to capitalize on the many opportunities that are created by the electronics revolution, and continue, most importantly, to demonstrate the discipline and drive necessary to drive strong operating performance for the company. We're also very pleased that in the quarter, we've made further progress in our acquisition program with the addition of DC Electronics at the end of June.

DC Electronics is a US-based manufacturer of harsh environment interconnect assemblies for the industrial market, with annual sales of approximately $40 million. This excellent acquisition builds upon our leading offering of high technology interconnect products to the many diverse segments of the industrial market, including, in particular, the heavy equipment, medical, and semiconductor test areas. Very importantly, this acquisition is also consistent with our long-standing strategy to find and acquire complementary companies with strong management, leading technology, and excellent market presence. And as we welcome this outstanding new team to Amphenol, we remain very confident and committed that our acquisition program will continue to create significant value for the company in the future.

Turning to the trends and progress in our served markets, I just want to say first that our market diversity remains a significant asset for the company, and the Amphenol management team continues to devote tremendous efforts towards our ongoing market, customer, application, and product diversification. Turning to the individual markets, the military market represented 13% of our sales in the quarter. Sales in this market were down slightly from both prior year and prior quarter, as growth in airframe, communications, and ordnance-related applications was offset by an overall reduced demand environment in other segments of the military market. We continue to see significant conservatism in the purchasing behavior of defense equipment makers, due largely to budgetary restrictions in many countries. Nevertheless, there continues to be a very high level of design activity ...

Targeted at creating new electronic functionalities in military equipment, combined with continued growth opportunities in developing geographies. We expect demand in the military market to remain at or slightly below these levels in the third quarter. Nevertheless, we believe our technology leadership and broad program participation positions us to benefit long-term from the expanding adoption of electronics in military hardware. The commercial aviation market represented 6% of our sales in the quarter. Sales in this market increased a very strong 23% from prior year, and 4% sequentially, on increased jetliner production, as well as due to our expanded content on new airplane platforms. We continue to expand our participation in these next-generation airliners, which are requiring ever-higher technology solutions to enhance fuel efficiency, drive better performance, and improve overall passenger experience.

In fact, we have a stronger position across this range of applications than ever before, as our new interconnect technologies are resolving a wide variety of challenges that are faced by customers designing and building these next-generation platforms. While we would normally expect a seasonal moderation of demand in the third quarter, we actually expect sales to increase in the next quarter, and we continue to have a very positive outlook for the commercial air market in 2013 and beyond. The diversified industrial market represented 13% of our sales in the quarter. Sales decreased approximately 6% from prior year, as growth in factory automation, heavy equipment, medical, and rail mass transit was offset by reduced demand from customers in the energy-related segments. Sales did increase 5% sequentially, with growth in virtually all of our segments.

We believe that this second quarter moderation of demand in the energy-related products represents only a pause in activity, and we continue to look forward to strong momentum in that important segment in which we have an expansive and truly leading position. Overall, we expect the industrial market to strengthen in the third quarter from these levels as we benefit from the new acquisition of DC Electronics and as we continue to make excellent progress broadening our technology offering while increasing our penetration of the many exciting growth areas of this industrial market. The automotive market represented 12% of our sales in the quarter.

Sales in the automotive market increased a very strong 20% from prior year and 7% sequentially, as we participated strongly in the increase in production volumes of vehicles, which are incorporating a wide variety of new electronics, while also realizing further benefits from our unique new design wins. We're excited to see the results of our continued expansion into new high-technology automotive applications, which has been really the result of our several acquisitions completed over the last two years, together with our long-term efforts at internal product development. We see automakers continuing to incorporate electronics into new and expanding areas of performance management, fuel efficiency, and passenger infotainment, all of which serve to create excellent growth opportunities for Amphenol.

We expect sales in the automotive market to remain essentially at these levels in the third quarter, as our continued progress on new platforms offsets what would otherwise be traditional summertime seasonality, and we look forward to continued long-term progress in this very exciting market. The mobile devices market represented 17% of our sales. Sales increased 4% from prior year, as lower sales of products incorporated into mobile computing devices was offset by slightly higher sales onto new smartphones and some Ultrabooks. Sales declined slightly from Q1 levels, as overall customer demand did not reach the levels that we had expected. While our mobile device customers had previously anticipated a significant increase in demand in the second half of this year, current customer forecasts indicate lower than expected demand levels and thus a minimal increase in our sales for the H2 compared to the H1.

Diana has already mentioned several of the near-term dynamics that we're seeing in this market. While these factors are certainly having a significant impact on our 2013 growth, we continue to see good long-term future growth opportunities for Amphenol due to our very strong and diversified technology position in this important, and no doubt, extremely dynamic end market. The mobile networks market represented 11% of our sales in the quarter. Sales in that market increased a very robust 12% from prior year and 9% sequentially, primarily due to stronger sales of our broad array of interconnect and antenna products for cell site installations. We're very encouraged to have now realized 3 consecutive quarters of year-over-year growth in the mobile infrastructure market, as operators in many geographies have increased their spending on LTE and other next-generation networks.

More importantly, our team has been very successful at expanding and upgrading our range of high-technology products for the mobile networks market, with the result that we are now better positioned than ever before with a diverse set of wireless OEMs and operators around the globe. Although we expect sales in the third quarter to moderate seasonally on a typical pause in build-out activities, we expect a further ramp-up of activities later in the year as operators continue to upgrade their networks and add more capacity. And accordingly, we now expect to achieve growth in this market for the full year of 2013, something that we haven't seen for a couple of years. The information technology and data communications market represented 20% of our sales in the quarter.

Sales increased 6% from prior year, led by growth in our products incorporated into servers, but with strength as well in storage-related products. Sequentially, our sales increased a greater-than-expected 15%, as we gained further momentum with an array of our high-technology new products, most notably our leading-edge suite of high-speed products. As our customers are continuing to strive for new levels of equipment performance in order to handle a dramatic expansion of data traffic, our pipeline of new design opportunities with our next-generation high-speed products continues to strengthen. We are working intensively with many customers to help them design their new systems that can handle the big data revolution, together with the tremendous expansion of video traffic that they're facing, all while at the same time reducing power consumption of those devices.

We expect demand to remain at these higher levels in the third quarter, and we continue to have a positive long-term outlook for the IT datacom market. The broadband communications market represented 8% of our sales in the quarter. Sales increased a very strong 24% from prior year, as we benefited further from last year's acquisition of Holland Electronics. Sales increased 7% from the prior quarter on increased demand from both domestic and international cable operators. We continue to be very encouraged to see the emerging benefits of our product and customer diversification, which, when combined with the Holland acquisition, have enabled us to grow our range of broadband customers while offering a more complete interconnect product offering. Despite some enhanced price competition that we're seeing in bulk cable, we are seeing further opportunities to sell a more diversified portfolio of products to our cable television, satellite, and telco customers.

We expect a slight increase in sales in the third quarter, and we look forward to continued positive momentum in the broadband market. So in summary, with respect to the second quarter, I'm extremely proud of the Amphenol organization as we continue to execute well in what is no doubt a very challenging and dynamic market environment. Our superior performance is a direct reflection of the company's distinct competitive advantages, our leading technology, our growing and broad position with customers across a diverse range of marketplaces, our presence around the globe, a lean and very flexible cost structure, and most importantly, an agile, entrepreneurial management team who react quickly to whatever changes arise in the marketplace. Now, turning to our outlook. As we've mentioned, there continue to be significant market uncertainties in the global economy, in particular, within the mobile devices market, with which both Diana and I highlighted earlier.

Accordingly, and based on constant exchange rates and normal seasonal patterns, we now expect for the third quarter and for the full year of 2013, the following results: We expect sales in the range of $1.120 billion to $1.145 billion and $4.490 billion to $4.540 billion, respectively. And we expect earnings per share in the range of $0.95 to $0.98 and $3.73 to $3.79, respectively. For the full year, this outlook represents sales and earnings per share growth of 5%-6% and 7%-9%, respectively. While these expected full-year sales levels are certainly lower than our prior guidance, we are very pleased to have an outlook that reflects both a step-up in sales in the H2, as well as a strong continuation of our industry-leading profitability.

We continue to see tremendous opportunities for Amphenol as a result of the ongoing revolution in electronics, and I remain extremely confident in the ability of our outstanding management team to continue to capitalize on these opportunities, to grow our market's position, and to expand our profitability, and thereby, to drive continued superior performance for Amphenol. With that, operator, we'd be very happy to take any questions that there may be.

Operator (participant)

Thank you. Our first question comes from Amit Daryanani from RBC Capital Markets. Your line's open.

Amit Daryanani (Equity Analyst)

Yep, thanks. Good afternoon, guys. Just a question and a follow-up for me. You know, when I think about the reduction of the 2013 forecast of about $120 million, on an organic basis, just want to make sure it's all, the entire $120 million softness is coming from the wireless devices segment, or is it more broad-based? And maybe you could just talk about organic trends, excluding wireless devices. Do you think that's gotten better over the last 90 days from your perspective, or more of a steady state?

Adam Norwitt (CEO)

Yeah, Amit, thank you very much for the question. Yeah, indeed, that, that number that you quoted, the $120 million organically, it is really all a credit to the wireless devices market. We would normally see, you know, a very significant step-up in the H2, and that's just not what we see today, based on all what Diana and I have said. Relative to the organic trends in the other markets, we don't see any dramatic changes in those organic trends. I think I mentioned, you know, relative to each of the markets, what we're seeing going forward, and we feel that our, our position in all those markets is extremely strong, and we see continued potential across all those markets.

Amit Daryanani (Equity Analyst)

Fair enough. And then if I could maybe just follow up, you know, in the devices market, it sounds like your issues may be more tablet-centric when you talk about Wi-Fi devices versus 3G and 4G devices, I assume. You know, is the issue more related to one customer, or is it fairly broad-based across, you know, the multiple customers you guys have there? And is there any program losses or anything that you walked away from that makes the back half guidance come lower?

Adam Norwitt (CEO)

Thank you very much for that question. I mean, let me just first reflect on our strategy, which is a very consistent strategy in that market. We have always said, and I have always said, that that is a market where we will participate when there is value, and we continue to operate that same way. We have very high technology products, and we operate in really the high technology part of that marketplace. So as we've seen the shifts, which certainly are shifts that came a little bit faster than we expected towards these Wi-Fi only devices, those no doubt is more a tablet-related phenomenon where we have participated in a wide range of tablets. It is not a single customer phenomenon, far from it, but at the same time, you know, we don't participate necessarily in the low end of the market.

When you look at the dynamics in that market, you know, there has been more growth related to smaller form factor tablets, white box-related tablets, you know, these kind of no-name products, where by virtue of the price that those products are sold, naturally, the content available in those products is less. I think this dynamic also with Wi-Fi and 3G is, you know, a dynamic that is related also to the fact that Wi-Fi networks become more prevalent. People are replacing, you know, their desktop computers, sometimes with a tablet, where they don't really need that 3G functionality. That being said, there is always a demand and will be continually a demand for products that have that functionality that we can offer with our high technology products. We see tremendous opportunities still for the future.

We believe we have good growth potential in that market for the future as we look forward to it. It is a market that has always changed, and we have seen always change in that market, short life cycles, you know, new consumer preferences. What we are so proud of in that market is that we have an organization who is extremely nimble. You look at that, you look at the margins that we have as a total company, you look at the confirmation that we have of those margins going forward. You know, this is not a question where that change has a kind of cataclysmic impact on the performance of Amphenol.

Rather, our organization is out there hunting with all customers in the market where there is the value for us with our high technology antenna products, our interconnect products, our mechanism products, wherever they, whatever they may be, and we continue to see good opportunities there. The fact is, you know, this is something that is happening this year. It is what it is in many respects, but we believe there is strong potential going forward in that marketplace.

Operator (participant)

And our next question comes from Vamsi Mohan from Bank of America Merrill Lynch. Your line's open.

Wamsi Mohan (Senior Equity Research Analyst)

Yes, thank you. Good afternoon. Adam, we've seen organic growth rates moderate across the industry. Arguably, you guys have done a better job than others, but are we hitting some level of technology maturation such that the organic growth rates over the next five years are gonna be significantly different, maybe mid-single digit versus the double digit over the past decade? Thanks.

Adam Norwitt (CEO)

Yeah, Vamsi, thank you very much for the question. I mean, look, let me just say this. We continue to believe Amphenol has a strong, strong position in this market, and we continue to target growth far in excess of the market, and we believe that we have done that and will continue to do that. So global economy is continuing to be a very uncertain environment. Do I believe that that is an environment that is going to perpetuate over the long term? Personally, I don't, but I am not an economist. I'm not here to prognosticate about the next five years. What I will tell you is that we continue to see a tremendous array of opportunities for electronics. And to what extent does the overall economy, you know, drive spending patterns, whether with operators, with enterprises, with governments, whatever?

You know, that is a different question. But relative to the expansion of electronics in all of the markets that we serve, we certainly do not believe that that kind of, you know, recent lower growth macro environment is one that should continue or would necessarily continue. We see a lot of opportunities, Vamsi, for that. The fact is, when you have all the uncertainties in the world today, you know, discussions about Europe, discussions about America, whatever, you know, I think that has impacted a lot of the buying patterns, whether that is operators, whether that is enterprises, governments, and whatnot, but I believe that there is still tremendous pent-up demand. I mean, look only at the IT market, where data rates are expanding so dramatically.

You know, you hear numbers 50%-60% increase on the annual basis of the amount of data that is coursing through that network. Well, meanwhile, IT budgets are up, you know, 1%-2%, and it's rare to find an, an IT hardware OEM that is growing. And, you know, there are recent results that have confirmed that. Well, we are growing in that market, and we're growing in that market because we have new technologies that are allowing our customers to continue to make more with less, allow them to process more data through the, through systems with the same cost, allow them to reduce their operating expenses because of lower power consumption. And I think so long as we can continue to have that focus, which we have across the company on driving enabling technologies, we will be able to drive superior growth for the company.

Wamsi Mohan (Senior Equity Research Analyst)

Thanks, Adam. As a quick follow-up, what percentage of revenues within mobile devices come from tablets versus Ultrabooks? Thank you.

Diana Reardon (CFO)

Yeah, I don't think we would give a specific percentage, Vamsi. I think that, you know, that the, from a tablet perspective, it's certainly an important part of the market, and still our phones and, you know, those would be bigger probably than the Ultrabooks would be, but that's probably about as much detail as we would like to give.

Operator (participant)

Our next question comes from Jim Suva with Citigroup. Your line's open.

Jim Suva (Equity Analyst)

Thank you. And, hey, guys, it's good to hear from you. When we start thinking about, you know, you made a couple of changes here with, you're now increasing your dividend, and I think it's been about a year and a half since you did that. Your cash level is at all-time high cash levels. You extended your line of credit. You know, is Amphenol kinda thinking about potentially digesting some larger acquisitions? Or it seems like acquisitions to date have been a little bit slower than normal, but yet you're kinda increasing your dividend. So I wonder if there's something to be inferred upon that signal as far as capital deployment, or how should we think about capital deployment for Amphenol?

Adam Norwitt (CEO)

Well, Jim, let me just say, relative to the question on the acquisition program, we continue to have a very, very strong focus on this acquisition program. We believe that there are opportunities, and we, you know, whether those are large or small, we don't, we don't confine ourselves to those. I think to say that the acquisition program has slowed down, I mean, we had five acquisitions last year. It's true, Q1, we did not. We did announce a fine acquisition this quarter, and we continue to have a very robust pipeline. You should not read anything extra into that dividend increase, except that we have always talked that we wanted to have our dividend roughly at a 1% level, and this brings it, you know, right up to that level.

There's nothing more that should be read into that, except that our traditional balanced approach to capital management and to return to shareholders is something that we continue to have a lot of conviction to. It has no other read. We continue to believe the company has a strong growth potential. We continue to believe that there are excellent acquisitions to be had, and we continue to approach that in a very balanced fashion.

Jim Suva (Equity Analyst)

Okay. As a quick follow-up regarding the size, Adam and Diana, of potential acquisitions, you know, Amphenol is a much larger company than, say, five years ago, and your shareholders are very appreciative of that. Does that mean that the acquisition sizes need to, you know, you need to open up the eyes a little bit bigger, acquisitions or more frequent? Or traditionally, it's kind of been one-third organic acquisition growth and two-thirds organic growth. I'm just wondering if any of that changes or how we should think of it.

Adam Norwitt (CEO)

Again, I don't think, Jim, that this is a categorical change, but obviously, the mathematics of the fact that we are, you know, a roughly $4.5 billion company, means that to add a third of our growth, which is still the number that we believe is an appropriate one for the company, means you either have to buy more smaller deals or do bigger deals. And I think I would expect over long term that there would be some combination of that. You know, last year, with the five acquisitions, that was a very substantial addition to Amphenol on an inorganic basis of five excellent companies in five unique markets, and really, not only supported our acquisition program, but supported our technology development and supported our diversification initiatives in the company. We continue to look at our acquisition program in that very same way.

We will be very aggressive in the hunt for acquisitions. We will also be, as we always have been, very prudent in prices that we pay and in our kind of testing of are those companies that we want to acquire. And ultimately, you know, the criteria that we have for acquisitions has not changed. We look for companies with excellent technology, with excellent people in whom, you know, we can really put confidence and which are complementary to the company. And that really has nothing to do with size. We will acquire small companies, and we will acquire big companies. And we continue to believe that the industry, the interconnect industry and, you know, all the related areas to that, create still tremendous opportunities of those companies to arise. We have great relationships with many, many, many companies around the world.

And, you know, as we drive and incubate that pipeline, it will have good results for us in the future. Obviously, the timing is something that we have never been able to control, and it's something that we will not be able to control. But the fact that our company has positioned itself as really, in this industry, the acquirer of choice, puts us in a very strong and competitive position when there is competition for acquisitions. We may not pay ultimately the highest price, but we are a very compelling home for companies when they're looking to have a significant change, like a sale of the company.

Operator (participant)

Our next question comes from Matt Sheerin with Stifel. Your line is open.

Matt Sheerin (Senior Equity Research Analyst)

Yes, thanks, and good afternoon. Just another question, Adam, if I can, on the wireless commentary. I know that you've talked in the past about the opportunities in ultrabooks, and is it your sense that that's kind of stalled here with the PC upgrade cycle, and that's just being pushed out? And then as a follow-up, on the Wi-Fi commentary, is your content in those devices because, I guess, the more commoditization of those components in those products, is it just less, and that's why that shift is hurting you?

Adam Norwitt (CEO)

Sure. No, thank you very much, Matt, for the question. I mean, we, we have not seen necessarily a big drop-off in the Ultrabooks. I think we continue to see, you know, new devices come out and new technologies be embedded in them. So I wouldn't say that there is necessarily a huge change in that. Relative to the Wi-Fi content comment, it's actually quite simple. The comparison between a 3G or a multi-networked device and a Wi-Fi-only device is very simply that you have fewer content, in particular with the antennas and the various interconnect that are related to the antennas. And so you go from, you know, potentially having upwards of five signal paths on a device that has 3G, LTE, multi-frequency, to a single signal path with a Wi-Fi. And that is just very simple.

It's not necessarily that it is just commoditized. You can have high-technology Wi-Fi antennas, but you're going to have fewer of them. And I think it's a pretty straightforward how that evolution has happened.

Matt Sheerin (Senior Equity Research Analyst)

Okay, that's helpful. Diana, just a quick question on the gross margin. You had really strong gross margin in the quarter relative to the last few quarters. Was that a combination of higher volumes and mix? And did you also see benefits from the declining raw materials like gold and copper?

Diana Reardon (CFO)

Sure. You know, I think we felt very good about the profitability we achieved in Q2, both at the gross margin and at the operating income margin level. And I think that you know, it it's always hard to pinpoint, Matt, exactly you know, each point that sort of adds up to the margin improvement we achieved. Certainly, higher volume and good operational execution are two very important factors. But I would say that, particularly in certain parts of the business where you know, we do have higher metal use, I would say that there probably is you know, some impact coming from the fact that that those commodities in particular are certainly at a better place than they were in the past.

By the same token, you know, certain parts of the business where plastics is more important, you know, particularly on the cable part of the business, where we actually didn't see, you know, margin improvements because we've, you know, there we've got some cost trends that are going in the other direction. But on balance, I think there we were able to achieve, you know, the strongest conversion margins we've seen in a number of quarters, and I think that there was some impact that we do see there from the better cost environment.

Operator (participant)

Our next question comes from Amitabh Passi with UBS. The line's open.

Amitabh Passi (Senior Technology Equity Research Analyst)

Hi. Thank you, Amitabh from UBS. Hey, Adam, just wanted to follow up on mobile devices. You spoke quite a bit on tablets. Just wondering, can you just update us on the dynamics you're seeing in the smartphone market? Is that a market that's simply become too competitive, for you guys? Just any update, because we are hearing of, you know, new product introductions later this year and going into next.

Adam Norwitt (CEO)

Sure. No, thank you, Amitabh, for the question. Mobile devices, as we have said in the past, we continue to have a strong mobile device business. It has not been, for us, the contributor of the growth in the recent kind of year or two, but it doesn't mean we still don't have a strong business in that market. We participate in that market, again, consistent with our overall strategy on mobile devices, in those areas where there is a value placed on the technology. And I will tell you that we continue to see that. And in fact, you know, as you mentioned, there are devices which, you know, there's so many devices being released by companies that were not even necessarily thought of in the past as, you know, the big marquee players.

You're seeing a real range of smartphones being developed, and some of those have, in fact, some new technology requirements in them, you know, whether they're thinner, whether they're LTE, whatever, where, you know, there can be opportunities for us to participate and to realize the value that we have. So I think that, you know, on that basis, we will continue to devote resources to that market. It's significant for us, and we will continue to participate to the extent that there is real engineering technology value in the products. And personally, I think there will be still a great deal, a great range of products where there is that premium put on technology.

Amitabh Passi (Senior Technology Equity Research Analyst)

And then maybe just as a, as a follow-up. On the mobile infrastructure market, you talked about strength in North America. Are there any other geographies that you're starting to see show some incremental life? We're also starting to hear some rumblings about a potential big build in China later this year. Would love to get your updated thoughts.

Adam Norwitt (CEO)

Sure. No, thank you very much. Obviously, I mentioned in my early remarks that we are very pleased in the wireless infrastructure market to see, you know, the third consecutive quarter of growth, and actually this quarter, double-digit growth, that was both on a sequential as well as on a year-over-year basis. I think that North America has clearly been a strength, and you see that in some of the earnings that were just released this morning from some of the OEMs in that segment.

Relative to where strength is going to come from, I believe that you can see in the later half of the year, and particularly towards the end of the year, towards the fourth quarter, you know, some potential for a build-out or an acceleration of a build-out, in particular in China. And again, I am never going to bet on the timing of a Chinese wireless build-out. The Chinese operators tend to be very shrewd about how they time that. We should all not forget that, you know, Q1 2009 was a very opportune time to buy base station equipment, and that was when they chose to build the first phase of the 3G network. So I wouldn't say that you can kind of take it to the bank that they are going to have this big build-out in the later part of the year.

But on the contrary, or by the same token, we have heard from customers that there is a lot of talk, and there is a lot of talk that, you know, some of these operators in China may indeed be preparing for that, that there may be some significance to the build. I think, you know, how that build is going to go, who the, who the equipment manufacturers are going to participate, or what equipment manufacturers are going to participate at, at what, what allocations, that all remains to be seen. But what is clear is that we have positioned ourselves very well.

I think some of the growth that we have seen here in the recent couple of quarters, this is clearly not market-based growth, but rather it has been the result of efforts that we've been making over the last couple of years to both position ourselves on this new generation of base stations on the integrated equipment, but also, very importantly, to position ourselves with operators on the full suite of interconnect and antenna products that we can offer. And so to the extent that that, you know, spending cycle accelerates or continues in the latter half of the year, we would be hopeful to have a good participation in that.

Operator (participant)

Our next question comes from Mark Delaney with Goldman Sachs. Your line's open.

Mark Delaney (Analyst)

Great. Thanks very much for taking the question. Adam, I was hoping you could help me understand a little bit better your outlook for flattish revenue growth sequentially in the third quarter, with the fact that your orders increased by about 5% quarter-over-quarter, and the book-to-bill was 1.04.

Diana Reardon (CFO)

Sure. Maybe I can just give you some information on the orders in Q2, and then Adam can comment on the markets if you'd like to do that. I think that the business, just, the first thing is that, you know, our book-to-bill and bookings in the prior quarter isn't necessarily indicative of sales in the next quarter, given the nature of how customers and markets place orders these days. The vast majority of orders in the communications-related markets are more forecast-sharing type arrangements and hub pulls and this type of thing. But that being said, I think that the order level that we achieved in the second quarter certainly was strong.

It was up about 5%, I think, on a sequential basis, up about 12% on a year-over-year basis. And for us to have a 1.04-to-1 book-to-bill ratio in Q2 certainly is stronger than what we would typically experience from a seasonality perspective. A lot of those orders and that strength related to some of the non-communications related markets that are performing quite well on a year-over-year basis, markets like the automotive market, the commercial air market. In addition to that, we saw some good demand for certain value-added products in some of the installation markets that tend to have longer lead times.

So those order levels really relate more to shipments that customers would be expecting in the fourth quarter, and really do support the step-up that we see from a demand perspective when we look at our expectation for fourth quarter sales. So you know, there is no question that it is a positive that we saw such strong demand in the quarter. You know, we're glad to see those markets performing at a high level from a bookings expectation, and you know, that gives us good confidence in the step-up in sales that we see in Q4. But Q3 really from a sequential standpoint, we know we'll have kind of those normal seasonal soft points in some of the markets like defense, industrial, automotive and so on.

And so we won't see that sequential uptick until we move into Q4. I don't know, Adam, if you want to add to that.

Adam Norwitt (CEO)

Yeah, I mean, the only, the only other thing that I would add is that you should also look at that in the context that, you know, normally we would have in the H2, starting in the third quarter, some step up in the mobile devices market, where there is not a relationship quarter to quarter in bookings. It books when it ships, and, you know, that doesn't necessarily have a book-to-bill relationship.

So where, you know, we would normally expect some step up, you know, related to that, and we don't have that, I think, you know, this positive book-to-bill, as Diana mentioned, is really a good reflection of those longer lead time segments that we have, and it's very supportive of what is still a H2 step up in overall demand for the company from sort of low to mid-single digits, based on our current guidance from H1 to H2.

Mark Delaney (Analyst)

That's very helpful. Thank you. And then, Diana, I understand you made some comments on the margin strength in the quarter. When you look out for the rest of the year or longer term, I mean, do you think there's more room for your margins to move higher?

Diana Reardon (CFO)

Yeah, I think that the guidance at this point reflects, you know, year-over-year conversion margin that's very, very close to our, you know, 25% goal. And so, I think that we, you know, during 2013, we expect to see a margin expansion. We achieved margin expansion in 2012. So you know, we still do see that potential to achieve the higher conversion margin, you know, in those quarters where we're seeing incremental, you know, sales growth. So in Q3, you know, I wouldn't necessarily expect to see margin expansion, but Q4, you know, would.

Operator (participant)

Our next question comes from Shawn Harrison with Longbow Research.

Shawn Harrison (Analyst)

Hi, good afternoon. Two questions.

Adam Norwitt (CEO)

Good afternoon, Shawn.

Shawn Harrison (Analyst)

Hi, Adam. Just first off, on, on commodities being down so much, do you think you've realized kind of the full benefit of deflation, or would you see more of a tailwind into the third and fourth quarters? And then second, as I was listening to the call, you know, obviously, the mobile devices are down, but it seems as if I was listening correctly, the infrastructure, your IT datacom, maybe your auto and your aerospace forecast, those from customers actually picked up for the H2 relative to maybe earlier expectations. If you could just provide some clarification on that aspect, too.

Diana Reardon (CFO)

Sure. I think on the first question, you know, from a margin perspective, I think when there was a question earlier asked about the, you know, the strong margin performance in Q2, and I think, you know, we said that, you know, there are many things that certainly go into margin, both cost and price dynamics, volume and so on. But I think that we, you know, have probably seen some impact in our Q2 operating income performance, you know, from that better balance between cost and price. I think, you know, it's always a little bit hard to predict exactly where all of those dynamics are going to go when you look out. I think we've given good guidance on profitability.

I think the year-over-year conversion margin, as I said, is very close to our 25% goal, and we'll achieve margin expansion. That's what we see as we look at things today, you know, what the ultimate impact will be from commodity trends, you know, really depends very much on where demand goes, where pricing dynamics go, and so on. So I don't think at this point, we would be comfortable, you know, talking about further margin expansion than we already have in the guidance that we've given.

But, you know, I think as we've said to these questions in the past, you can be certainly sure that the management team will, you know, do the utmost to be able to keep and capture any such benefits that would present themselves as we look through the balance of that pricing and cost profile going forward.

Adam Norwitt (CEO)

Yeah, and I think, Shawn, relative to your second point about, you know, these markets, do we feel incrementally more positive about a few of these markets? You mentioned first, aerospace, and I would say that we do feel a little bit incrementally more positive about aerospace. Normally, we would expect the commercial air market to be down seasonally, but, you know, they tend to have shutdowns. That tends to obviously have some European component to it. And at this point, we would see that, you know, there would be actually a slight uptick in sales in the third quarter in the commercial aviation market. We're just doing a great job in that market. I mean, in the second quarter, up 23%. We feel that, you know, they'll have still strong double-digit year-over-year growth in the third quarter and for the full year.

You know, it is obviously helped by the volumes, and I think this last quarter, if you look at the order backlog and the orders for the major players in that commercial aviation market, you know, they're booking orders at a tremendous rate right now. But in addition to that, we continue to gain presence on new platforms. As these new planes are being designed and developed, you know, it's no secret to anybody that there are a lot of challenges that the airplane manufacturers are facing. They're putting new materials into these planes. They're trying to get new features embedded into these planes, and a lot of the times, they are really pushing the envelope in terms of embedding these new technologies into planes.

And we have had, you know, in some instances, customers come to us, you know, on the basis of a schedule that normally should have been something was designed in years ago, and they come to us say, "Hey, we have that new challenge. Is that something that you can help us with?" And so our engineering team is extremely busy still working with those companies as they seek to embed all these new technologies into the plane. I think that, combined with the volumes, is something that makes us feel incrementally more positive about the commercial aviation market. You mentioned also wireless infrastructure, and I think I spoke about that earlier. I would say that, yes, we feel a little bit more incrementally positive on that market.

I commented already on the fact that, you know, we would hope to see some uptick, especially later in the fourth quarter. And then automotive market is another one where we just feel very good about the strength. I think we will see, you know, some sort of seasonal flat to slightly down performance. You know, in, in other years, you could have in the automotive market, you know, a seasonal decline in kind of the, you know, mid-single digits in, in the third quarter. And, you know, we, we would be hopeful that maybe it would be a little bit less than that here because of our, our increasing position and because the volumes in that market are, are doing very well. So I think those, those markets in particular, we would feel a little bit incrementally more positive about.

Shawn Harrison (Analyst)

Thank you, Adam.

Adam Norwitt (CEO)

Thank you, Shawn.

Operator (participant)

Our next question comes from Michael Wood with Macquarie. Your line's open.

Michael Wood (Investment Director)

Thanks. Yeah, can you talk about your visibility on the upcoming product introductions in mobile devices and smart computing, and how this impacts that mix that you were talking about between lower end and the value-added products that Amphenol provides?

Adam Norwitt (CEO)

Sure. No, Michael, thanks very much for the question. Obviously, I'm not gonna talk about specific programs. We have very strong NDAs in place with all of our customers on that. But what we have seen is there were certain new products, and this was not confined to one customer. I mean, there were several customers, where there were new product launches end of last year, early this year, which didn't really realize the volume potential that the customers had originally expected, and that they had expected really throughout the year. Relative to the new programs, we certainly are participating in a lot of new programs. I think if you look in particular at the tablet market, there is a lot of growth in overall units in the tablet market.

But where that growth is tends to be in the smaller tablets and tends to be at the lower end of the market, where, you know, you're talking about ASPs of, you know, $180-$200 instead of $500-$600. And, you know, as the overall products that are being released and, and driving growth have lower value to them, there is sometimes an inherent value that, a value opportunity to us that is less. And so at the same time, we also are participating in high technology releases that are happening during the course of, you know, the third and the fourth quarter.

Net net in that market, you know, that change that we've talked about earlier in the call, combined with the new programs that we're on, not necessarily having the volumes that were originally expected of them, you know, that results in the guidance that we have given here.

Michael Wood (Investment Director)

Okay. And also on the factory automation strength you'd called out, can you talk about any specific regions or pockets of strength there? A lot of the factory automation industrial companies haven't been reporting growth there.

Adam Norwitt (CEO)

You know, it's factory automation is, you know, an important part of our diversified industrial business. I think where we've seen the strength is not necessarily confined to one or another region. There is a lot of automation happening, of course, in China, where you see, you know, labor costs going up and companies like us, of course, reacting by putting in place semi and full automation in certain cases. But you see also automation being related to the auto industry. And, you know, we have a tremendous array of products that go into very, you know, heavy-duty factory automation that's used in auto plant upgrades, new model upgrades, and we have certainly seen some strength there.

And then, you know, the general European, which is really a German factory automation world, you know, we have also seen some strength in that area as well. So I think it's a very broad, I wouldn't draw a specific regional conclusion about it. The only thing that I would say specific to Amphenol is that we continue to expand our product offering here. And so, you know, I wouldn't necessarily say that we are a clear read-through to the whole factory automation world. We have a position that is a growing position, where we are really expanding the range of technologies, both interconnect components as well as value-add assemblies, whereby we can have a stronger position in that market going forward.

Operator (participant)

Our last question comes from Steven Fox with Cross Research. Your line's open.

Steven Fox (Senior Equity Analyst)

Hi, thanks. I'll keep it brief. But just to summarize some of the puts and takes on the wireless market, can you talk about how much is related just to sort of how the product mix has shifted away from you versus end demand, which is the greater factor? And is there anything, Adam, that you guys are doing in terms of changing your strategy into that marketplace to maybe capture more of the TAM? Or is it sort of, you just have to find your right niches going forward? Thanks.

Adam Norwitt (CEO)

Yep. Well, thank you very much, Steve. Look, I think it's very clear that what has driven this change in our guidance, as I've explained, you know, during the call, is a real change in the nature of some of the products that we're working on, whereby there is this kind of, I would almost call it a one-time shift in the content opportunity on certain of those devices. We think that that is not necessarily, you know, a shift that's going to continue and continue and continue. It seems to be something that is, you know, a kind of a more than expected, more dramatic than expected, one-time shift there.

Relative to end demand, as I mentioned, the tablet market overall is growing, the opportunity in certain of these products, you know, that has created that change in demand. Our strategy does not change. We're not going to chase after low-margin products. We're not going to, you know, chase after, you know, products where there's not the opportunity for us to inject technology. We believe that there is still an outstanding opportunity going forward for us to find, you know, places in the market, broad places in the market, not just niches, but broad places in the market, where our technology can serve ultimately the purpose of helping our customers sell more of their products.

And when you can do that, ultimately, you can make the value that we want to make as a company and the, and the margins, and ultimately, you can have growth in the business. And we still have a strong conviction that that opportunity is still ahead of us.

Steven Fox (Senior Equity Analyst)

Great. Thank you very much.

Adam Norwitt (CEO)

Thank you, Steve. Appreciate it. Well, if there's no further questions at this time, once again, we appreciate all of your interest in the company and your attention, and I hope that you all have an excellent summer. Thank you very much.

Diana Reardon (CFO)

Thank you.

Operator (participant)

Thank you for attending today's conference.