Amphenol Corporation Q1 2009 Earnings Call Transcript

Apr.17.09 | About: Amphenol Corporation (APH)

Amphenol Corporation (NYSE:APH)

Q1 2009 Earnings Call

April 16, 2009 1:00 pm ET

Executives

Diana Reardon – SVP & CFO

Martin Loeffler – Executive Chairman

Adam Norwitt – CEO

Analysts

Brian White - Collins Stewart LLC

Carter Shoop - Deutsche Bank Securities

Amit Daryanani - RBC Capital Markets

Jim Suva - Citigroup

[Kevin Sirzini] - Legend

Shawn Harrison - Longbow Research

William Stein - Credit Suisse

Matthew Sheerin - Thomas Weisel Partners

Sean Conners – FAS Advisers

Amitabh Passi - UBS

[Semil Debtimar] - Sentinal Asset Management

Jeffrey Beach - Stifel Nicolaus & Company, Inc.

Steven Fox - BAS-ML

Operator

Hello and welcome to the first quarter earnings conference call for Amphenol Corporation. (Operator Instructions)

I would now like to introduce today's conference host, Diana Reardon. Ma'am, you may begin.

Diana Reardon

Thank you. Good afternoon. My name's Diana Reardon and I'm Amphenol's CFO. I'm here together with Martin Loeffler, our Executive Chairman, and Adam Norwitt, our CEO, and we'd like to welcome you all to our first quarter call.

First quarter results were released this morning. I will provide some financial commentary on the quarter and Martin and Adam will given an overview of the business and current trends. We'll then have a question-and-answer session.

The company achieved first quarter results that were in line with the company's guidance. Sales for the quarter were $660 million, down 14% in U.S. dollars and 11% in local currency over the first quarter of 2008. Compared to Q4 2008, sales were down 13% in U.S. dollars. and 12% in local currency. From an organic standpoint, excluding acquisition and currency, sales in Q1 2009 were down 14% compared to sales in the prior year, a very strong performance in a difficult economic environment.

At the end of the quarter the company completed the acquisition of Times Microwave, an industry leader in RF interconnect technology for military aerospace and wireless communications markets. TMS had sales of approximately $108 million in 2008. We're very excited about the potential created by this excellent addition to our RF technology offering.

Breaking down sales into our two major components, our Cable business, which comprised 9% of sales, was down 17% in U.S. dollars and 11% in local currency from last year, reflecting a slowdown in spending in broadband cable television markets resulting from current weak economic conditions and difficult credit markets.

The Interconnect business, which comprised 91% of our sales in the quarter, was down 14% compared to last year. Sales declined significant in the automotive, IT data com, and industrial markets as a result of weak end market demand, while sales in the [mil aero] market declined modestly and sales in the wireless communications market grew, primarily as a result of strength in China-related programs.

This strong performance in a very difficult economic environment reflects the benefit of the company's diversity and the strength of its technology.

Operating income for the quarter was $111 million compared to $150 million last year. Operating margin was 16.8% compared to 19.5% last year. Operating income is net of stock option expense of approximately $4.8 million or 0.7% of sales in Q1 of 2009 compared to $3.2 million and 0.4% of sales in Q1 2008.

From a segment standpoint, in the Cable segment margins were 13.5%, up from 11.8% last year. The margin improvement is a result of the positive impact of lower material costs and, to a lesser extent, operational cost reduction actions, both of which more than offset the impact of lower sales volume in the quarter.

In the Interconnect segment, margins were 19.3% compared to 21.9% last year. The achievement of these strong margins given the current economic environment and reduced volume levels is a significant accomplishment. Our operating units around the world have reacted quickly and appropriately to current demand levels, adjusting all elements of cost.

Overall, we're very pleased with the company's margin achievement of 16.8% in the first quarter. Q1 is typically a more difficult quarter from a factory performance standpoint due to Chinese New Year, and this year, given the significantly lower volume levels, was particularly a challenge. Going forward we believe that the company's entrepreneurial operating structure and culture of cost control will continue to allow us to react in a fast and flexible manner to preserve strong profitability going forward.

Interest expense for the quarter was $9 million compared to $9.9 million last year. The decrease relates primarily to lower average interest rates in the 2009 quarter.

Other expense was $200,000 compared to $500,000 in Q1 2008. Other expense is comprised primarily of bank fees, fees on the company's receivables securitization and interest income.

In the first quarter the company reduced tax expense by $3.6 million relating to the completion of the audit of certain of the company's prior year tax returns. This resulted in a first quarter 2009 tax rate of 24.1%. When compared to the company's previous guidance for the quarter, this added about $0.02 to earnings per share. Excluding this adjustment, the company's effective tax rate in the quarter was approximately 27.5% compared to 29.1% in the first quarter of 2008. We currently expect a tax rate of about 27.5% in the second quarter of 2009.

At the beginning of the year the company adopted Statement of Financial Accounting Standard No. 160, Non-Controlling Interest. As a result, minority interest expense is no longer reported in other expense but is now reported as a separate line on the income statement below net income. Prior period statements have been restated to reflect this presentation as well. Minority interest expense was $2.6 million and $1.7 million for the first quarter of 2009 and first quarter of 2008, respectively.

Net income in the quarter was $74 million, approximately 11% of sales, a very strong performance on any industry comparative basis. Diluted earnings per share in the quarter was $0.43, down 20% from last year.

Orders in the quarter were $635 million, a book-to-bill ratio of approximately 0.96 to 1. The lower book-to-bill ratio in the quarter reflects lower order levels primarily in the IT, data communications and industrial-related markets resulting from the previously described broad economic slowdown.

The company continues to be an excellent generator of cash. Cash flow from operations was $143 million in Q1, of which $6 million related to the sale of additional receivables under the company's receivables securitization program in the quarter. Cash flow from operations, cash and short-term investments on hand of approximately $64 million, and $86 million in borrowings under the company's revolving credit facility were used for $17 million in capital expenditures, $261 million in acquisition-related expenditures relating primarily to the acquisition of Times Microwave and payments relating to prior acquisitions, and $5 million in dividend payments.

In addition to its strong operating cash flow and cash investments of approximately $151 million at the end of the quarter, the company has additional liquidity in the form of availability under its revolving credit facility. The company's $1 billion revolving credit facility is provided by a bank group and expires in 2011. Availability under the facility was $137 million at the end of the quarter. The company continues to have more than sufficient liquidity to meet its needs. Borrowings under the facility were $861 million at the end of March, of which $650 million are swap to fixed rates through December of '09 and July of '10. The remaining borrowings are at a spread over LIBOR.

The company also has a $100 million receivables securitization program under which $91 million in receivables were sold at the end of March.

From a balance sheet perspective, accounts receivable was down 11% from the end of the year, primarily reflecting the impact of lower sales levels partially offset by the impact of acquisitions in the quarter. Days sales outstanding, including the impact of acquisitions, were 72 days at the end of March, the same as they were at the December year end.

Inventory decreased 6% from Q4 levels. Excluding acquisitions impact, the inventory reduction was about 10%; however, inventory days increased to 93 days at the end of the quarter from 88 days at the end of December. While we're pleased to have reduced inventory by 10% in the quarter, we have more work to do in this area and the company will continue to focus on further inventory reductions in Q2 as adjustments to production activity continue in response to lower demand levels.

Acquisition-related liabilities were reduced by $102 million in the quarter from $120 million at year end to $18 million at the end of the quarter as payments were made for contingent, performance-based obligations on prior acquisitions. Other long-term assets increased to $101 million at the end of the quarter from $81 million at the end of the year. The increase relates primarily to intangible assets recorded in conjunction with the acquisition of TMS.

In accordance with the company's adoption of Statement of Financial Accounting Standards 160 at the beginning of the year, minority interest is no longer reports in other liabilities but is now reported as a separate line on the balance sheet as part of equity called non-controlling interests. Prior period statements have been restated to reflect this presentation as well and the minority interest liability was approximately $19 million at both the end of Q1 and the end of last year.

Our debt balance at the end of the quarter was $871 million compared to $786 million at the end of December. The increase in debt relates primarily to funding a portion of the acquisition completed in the quarter.

And the company's leverage and interest coverage ratios remain very strong at 1.3 times and 17 times, respectively.

EBITDA in the quarter, including a full quarter for the acquisitions completed in Q1, was approximately $145 million.

From a financial perspective, we are extremely pleased with the strength of the company's execution in what continues to be a difficult environment.

Adam and Martin will now provide an overview of the business.

Martin Loeffler

Thank you very much, Diana. Before Adam is going to give you more details of the first quarter results and an outlook of the second quarter of 2009, I'd like just to highlight the basic strategies that Amphenol has been pursuing over the last two decades to achieve strong results in economic slow periods.

The first strategy that Amphenol pursues starts long before an economic downturn really begins. It consists of establishing strong competitive advantage and strength to retain a very lean and highly profitable organization. We do this usually through diversification in products markets and geographies, establishing low-cost manufacturing and the like. This clearly has been accomplished by Amphenol in the past upturn and has made Amphenol clearly very resilient not only in this cycle but in previous cycles when we experienced slowdowns in demand.

The second major approach relates to retaining strong profitability and cash flow. Our agile organization and our very entrepreneurial management style allows us to quickly, swiftly and decisively adjust our cost levels across the company to much lower demand levels, and we absorb the costs usually without any restructuring charges in the normal course of business. We did so in Q4 and again in Q1.

This strong profitability and cash flow has allowed us to continue in this economic down cycle to continue to invest in new technologies for our customers and to continue our acquisition program.

The third approach that Amphenol is pursuing in such times is to quickly align the resources with the pockets of opportunities that still continue to exist even in a slow demand cycle. Adam is going to refer to several of these pockets of opportunities that we have been taking advantage of in the first quarter of this year. This usually and in the past has allowed us to gain position during these downturns and we are right now on the path, with the results of Q4, with the results and strong results in Q1, to again gain position during this downturn, emerge faster from the economic slowdown and as a stronger company. So we're very confident in our future outlook.

With this, I ask Adam to continue with his comments on the first quarter and the outlook.

Adam Norwitt

Thank you very much, Martin, and thank you, Diana, for your overview. I also want to extend my welcome to all of you on the phone today. As Martin mentioned, I will emphasize some of the highlights from our first quarter in 2009, then I'll discuss the trends and the progress in our served markets, and then finally we'll provide some commentary on our outlook for the second quarter of 2009.

Diana reviewed the specifics of the first quarter, but I'd like to provide just several highlights. The first quarter was a very difficult quarter in many respects, but considering the economic environment, we are very pleased with our achievements in the quarter. As Diana mentioned, sales were down 14%, with reductions in most markets partially offset by stronger performance in the military aerospace and especially the mobile communications market, and specifically stronger performance in Asia.

Profitability and cash flow remained strong in the first quarter despite the significant volume reductions that we experienced in the first quarter following equally significant volume reductions in the fourth quarter. We are very pleased with our industry leading operating margins of 16.8%. This 16.8% is truly a reflection of the strength of our agile organization and the entrepreneurial management team, a management team who is truly energized by the challenges that we see ahead of us.

We are also very pleased that the financial strength that we created enabled us to complete another significant acquisition in the quarter, the acquisition of Times Microwave. We completed this acquisition in late first quarter, and the company expands our presence in two very important markets for us, both the military aerospace as well as the mobile network markets, where Times Microwave is a technology leader with annual sales of approximately $108 million.

Times is a leading supplier of high frequency RF connector cable and cable assembly products to the military aerospace market as well as having a strong position in RF interconnect products for high-growth segments of the mobile networks market. This acquisition is consistent with our long-term strategy across all of our acquisitions. It has excellent capabilities, strong technology, a complementary business, it's accretive financially, and most importantly, it has a strong and stable management team upon whom we can rely. We are very excited about the growth and the profit expansion potential that Times Microwave has now as a part of Amphenol.

Now I'd like to discuss the trends and the progress that we saw in our served markets in the quarter. Despite a very significant overall market decline, the strength of our technology and our consistent strategy of diversification have continued to benefit Amphenol.

The military aerospace market represented 22% of our sales in the quarter, which was a decrease of 3% from the prior year. We are optimistic that our broad program participation in the military aerospace market will drive performance despite widely reported shifts in U.S. defense funding priorities. We're excited about the addition of TMS, which I already mentioned, which augments our already industry lending position in this military aerospace market. While we see that distributors and certain OEM customers have changed their buying patterns, thereby impacting demand, and we have experienced some delays in commercial air-related procurement, the long-term outlook for this market remains strong for Amphenol as the industry leader.

The industrial market represented for Amphenol 11% of our sales in the quarter. Sales decreased 28% from prior year. We experienced a broad moderation of demand in many segments of the industrial market tied directly to the general economic slowdown that we've seen on a global basis. We continued to make progress in certain expanding areas of the industrial markets, which include alternative energy, rail mass transit and other important segments. Although the overall industrial market continues to be impacted and we expect it to continue to be impacted by the general economic slowdown, we anticipate that these growth segments that we build on will continue to build momentum for us in the future.

The automotive market represented for Amphenol 5% of our sales in the quarter and sales declined a very significant 46% from prior year. The near-term outlook is for continued lower vehicle production levels; however, we continue to be encouraged by the longer-term outlook in this market due to increased electronics in cars and, most importantly, our increasing position in new hybrid platforms. While we do believe that vehicle production volumes may have reached bottom, it's very difficult to predict when normalized demand patterns will return to this industry, which certainly has experienced severe challenges.

The broadband market represented for us 10% of our sales in the quarter. Sales decreased 15% from prior year, with more significant reductions in overseas markets than we experienced in North America. As expected, demand was also seasonally slower in the first quarter from the fourth quarter. We still continue to see that credit availability affects certain customer buying patterns. Nevertheless, we expect demand levels in the broadband market to show seasonal improvement in the second quarter.

The information technology and data communications market represented for us 19% of our sales in the quarter. Sales decreased 31% from the prior year due to reductions in IT investment across carriers as well as enterprise networks in addition to continued inventory reductions across the supply chain. We see further slowing of demand in several segments of the IT market; however, we remain excited with the new program wins that we continue to achieve with key customers through our industry leading offering of a complete interconnect technology architecture. This complete architecture prepares us well for the future, as high speeds and other demanding requirements from our customers create new opportunities for Amphenol.

The mobile networks market represented 17% of our sales in the quarter. Sales increased a very strong 18% over the prior year. We benefited from continuing demand in site installations, especially in emerging markets, as well as from our broad presence on high volume and next generation base station equipment platforms.

We're especially encouraged by the strong demand that we experienced in the quarter related to the build out of third generation 3G networks in China, where we have an extensive participation across all of the 3G technology platforms. While we anticipate some seasonal moderation of demand in the second quarter, we are encouraged by continuing momentum in both next generation equipment as well as in these important emerging markets.

The mobile devices market represented 16% of our sales in the quarter and sales in that market grew slightly over the prior year. Our growth of innovative new products was offset by reductions in end demand, as well as by certain inventory adjustments by operators as well as OEMs. But we continue to be very well positioned with our leading technologies across an industry leading broad customer and phone model base. We do expect stronger demand in the second quarter as customers adjust to currently low inventory levels and as demand related to the release of the 3G networks in China materializes.

In summary with respect to the first quarter, we are very proud of our organization an Amphenol as we have continued to execute well and outperform the industry while generating significantly strong profitability in an extremely challenging demand environment. In such a challenging environment, Amphenol's distinct competitive advantages continue to serve us well. Our leading technology, our increasing position with customers in diverse markets, our worldwide presence, the lean and flexible cost structure, and very importantly, our dynamic, entrepreneurial management team. While forecasting market conditions remains challenging, we are confident in the ability of our organization to meet the challenges and to take advantage of the continuing opportunities that we see in front of us.

Now, some words relative to the outlook. Considering the uncertain economic environment, we will continue to provide guidance only for one quarter. Based on stable exchange rates, we expect in the second quarter of 2009 the following results: We expect sales to be in the range of $660 million to $675 million and we expect earnings per share in the range of $0.41 to $0.43.

In summary, we are very confident in Amphenol's future as our organization continues to take the necessarily action to preserve strong profitability and to position ourselves to capitalize on the many current opportunities to expand our market position.

Thank you very much and at this time, Operator, we will take any questions that you have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian White - Collins Stewart LLC.

Brian White - Collins Stewart LLC

If you could talk a little bit more about the acquisition and maybe when it closed exactly. Was it some time late in March?

Adam Norwitt

The acquisition closed in late March.

Brian White - Collins Stewart LLC

And in terms of - I'm not clear exactly - what market does this get you into that you're not into today?

Adam Norwitt

Well, I think Times Microwave has a very complementary product position with us. Certainly, they are on programs that we are also on in the military aerospace market, but in a very complementary fashion. They have the industry leading RF interconnect assemblies, which are a value add product in addition to the connector and the cable that goes along with it. They have a very strong position in airframes, where we have traditionally been very strong on the modules and the avionics platforms. And so together it puts us in a very, very strong position across the entire - in the aircraft example, across the entire aircraft portfolio.

And on the telecom side, Times Microwave has a strong position especially in indoor coverage solutions, which is certainly a growing market in the wireless infrastructure market and one where we have participated, but this certainly augments our participation there.

Operator

Your next question comes from Carter Shoop - Deutsche Bank Securities.

Carter Shoop - Deutsche Bank Securities

First, on the 141R, I thought we were going to disclose what the transaction-related costs were in the quarter from acquisitions. Are we not going to do that?

Diana Reardon

Well, we did have some costs in the quarter. We didn't think they were significant enough to disclose as a separate line item, but if you were to look at the segment schedule and look at the headquarters line, you see some increase in expenses there compared to last year and I would say that that increase relates to those expenses.

Carter Shoop - Deutsche Bank Securities

And then in regards to the company's ability and desire and capacity for acquisitions on the immediate term basis, obviously we've levered up a little bit here for the acquisition. Do you think that we're going to take a few quarters to digest this sizing acquisition or do you feel that the overall management bandwidth and capacity on the balance sheet is sufficient for future acquisitions here in the next couple of quarters?

Adam Norwitt

Yes, Carter. Thanks for the question. I think as always we manage our acquisition pipeline with a real long-term eye. We don't have at any given moment a desire or a target to close something in a quarter. We will continue to drive the pipeline that we have and, to the extent that some of those materialize, we believe we certainly have the capacity, whether it be organizational or from a financial standpoint, to execute on those.

Operator

Your next question comes from Amit Daryanani - RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

I have two quick questions for you all. One, could you just talk about in a given deal, are we expecting it to be accretive in '09? And could you just talk about the margin profile of TMS versus Amphenol's interconnect business?

Adam Norwitt

I think, as you know, we always have a standard that we look for deals that are accretive in the first quarter and we certainly completed this acquisition pursuant to those standards, so we wouldn't expect anything different. And I think TMS has a margin profile which is not so different from our own.

Amit Daryanani - RBC Capital Markets

And then if we could just look at the mil aero segment, could you talk about how much of the business is military versus commercial? You talked about changing auto patterns and patterns of sales for you guys. Just want do you expect to see in that segment over the next one to two quarters in the military and the commercial side?

Adam Norwitt

Well, I think as we've said in the past, the military represents somewhere between two-thirds and three-quarters of the segment and commercial is the rest. What we said relative to order pattern is that we have seen customers be more conservative in how they place orders. Whether that comes from credit concerns or budgetary concerns or otherwise, that is more difficult to pin down.

I think we feel that regardless of what happens we have a very strong position across the military platforms. Whichever program comes and goes, we tend to have a strong position on those programs as the market leader. And so we feel comfortable and confident that regardless of where the funding goes that we will still have a strong position in that market.

Operator

Your next question comes from Jim Suva - Citigroup.

Jim Suva - Citigroup

Adam and Diana, can you talk a little bit about the underutilization charges, about when you that will be resolved? It seems like in Q2 there'll still be some more absorption. Granted the overall economy's not strong, but when do you expect to see the company not see those underutilization charges? I believe you had a work force reduction of about 17% to 19% in Q1 and how shall we think about the underutilization?

Diana Reardon

I think if you're referring to the fact that volume levels are lower and we're working through inventory reductions as well as and the fact that that put some additional pressure on absorbing some of the more fixed costs in the factory, I think that those certainly are things that you deal with when you have the sort of economic environment that we're experiencing now. But I think that our profitability levels have shown that we manage quite well through that, and I wouldn't want to conclude that there was a significant sort of one-time charge that's inherent in those margin levels. I think the fact that we've been able to achieve the margin levels that we have shows that our fixed cost structure is relatively low.

We do continue to target 25% conversion margin on incremental sales at the operating income line and this is harder to reach in some quarters than others. We had a negative conversion margin that was about 30% some odd in the first quarter and so you have so impacts I think there. But I think overall we're very well able to manage our cost structure to be able to achieve the margins that you've seen in the first quarter.

Jim Suva - Citigroup

And maybe as a quick follow up, not referring to one-time charges but more as a run rate basis, when do you think your inventory levels will kind of be lined up with kind of the utilization where we could expect to see maybe not some incremental pressure on margins to where then, should the macro environment improve, would we be looking after the June quarter that things are more well and equilibrium aligned to improvement on the top line would really flow through?

Diana Reardon

You know, I think that we made some progress on inventory in the first quarter. We have certainly a way to go to get back down to days that are in the low 80s. We are expecting to make further progress in Q2. I think when we close that quarter it'll be more clear to us what demand will look like in the second half of the year. I think it's a little bit hard to say at this point as we sit here where inventory levels and demand levels will head in the second half of 2009.

Operator

Your next question comes from [Kevin Sirzini] - Legend.

Kevin Sirzini - Legend

I have a question on your guidance, top line guidance. With the book-to-bill at below 1, you're kind of implying a little bit of a sequential pickup and I guess that kind of foots with I'm wondering about the order patterns in especially your IT, industrial and automotive businesses regarding lead times and how customers are ordering and also pricing patterns.

Adam Norwitt

I think you correctly surmise - and I think I mentioned earlier - that we have certainly seen customers be more cautious about placing large and long lead time orders and so certainly we see that there are some compressed lead times and that's how that foots, as you say it, from the order rate in Q1 to the revenues in the fourth quarter. We also have some significant businesses where there are very short lead times. There's portions of our business which operate on quite short lead times where that book-to-bill is not the greatest indicator on a quarter to quarter basis.

Relative to pricing, which you mentioned, we stay very much on top of pricing. We're always sensitive in an environment like this that others may be aggressive or hungry for business, which is why we take proactive measures early on in our company which we started even last year to get our cost line in a good position so that we can be ready if need be from a pricing standpoint, whether that be with raw material reductions or vendor reductions or our own overhead factory costs.

So we will be very sensitive and we'll manage pricing in a very disciplined fashion as we move forward because that's certainly an area that you watch carefully in times like this.

Kevin Sirzini - Legend

Now, are you seeing aggressive pricing in your end markets out there?

Adam Norwitt

I wouldn't say that we could draw any across-the-board conclusions right now. There are certainly some pockets where you see a hungry competitor or two. There are others where customers are really having a flight to quality, and by quality what I mean is because of the severity of the credit situation we have many customers who say do I want that extra nickel today or do I rather have a supplier that will be with me for the next decade and beyond? And I think we have seen many of our significant customers gravitate more to us in this environment as they see that our financial strength is one which they can depend upon for many, many years to come regardless of the cycle.

And so I think that moderates a little bit, but still we would not be surprised to see some coming out with pricing that reflects a little bit more hunger than we would have seen last year.

Operator

Your next question comes from Shawn Harrison - Longbow Research.

Shawn Harrison - Longbow Research

I just wanted to get back to the comment on raw materials. I'm wondering if you've seen any inflationary pressure yet come to you given the spike we've seen in copper off the bottom as well as kind of the slight spike in aluminum prices as well, and kind of maybe what you see that impacting margins in the second quarter as well as the third quarter, if there's any impact at all.

Adam Norwitt

I think what we see is that there is a lag always with these. We're not just buying copper from a mine, so we're buying stuff that is somehow converted or finished by others. And so it's not that we see these little upticks and downticks reflected in our P&L on a monthly basis. Certainly, the trend has been on a year-over-year basis, a positive trend in certain raw materials, not all. Clearly, gold has not been a positive and we worked very hard across our organization from an engineering standpoint and a sourcing standpoint to offset the impact of what have been pretty significant increases in gold over the long term that haven't abated so much. I mean, they have come down $100, but it's not to the level that you would have liked to see gold.

I think whether they are little blips or they're long-term trends is hard to identify at this stage. We continue to work very closely with our suppliers to drive cost reductions regardless of whether there is kind of a one-time blip in copper.

Shawn Harrison - Longbow Research

And then my follow up question is in regards to inventory. You've mentioned your own inventory, looking to continue to work that down, but maybe if you could speak on whether you're still seeing a disconnect between the sell in of your product to the direct customer, to distribution, versus the sell through of that actual product. Did that narrow significantly in the first quarter and is it kind of almost at equilibrium here in the early part of the second quarter?

Adam Norwitt

I think it really depends on the customer and the channel. I think if we look at distribution, where we have a little bit more - not total - visibility on their inventory position, certainly some of those have come down and so you have seen, as you would describe it, the sell through rate may be a little bit better than their buy in rate.

I think relative to OEMs and some of the contract manufacturers that we deal with, it's kind of all over the map. Some maybe down and some may be up, but I wouldn't draw any general conclusions at this stage on all of those.

Operator

Your next question comes from William Stein - Credit Suisse.

William Stein - Credit Suisse

First, were there any other acquisitions in the quarter, maybe a completion of something you already had a majority stake in or anything like that?

Adam Norwitt

Well, thank you very much. We had also in the quarter a small acquisition of what was effectively a sales channel for TCS that had been a part of TCS in Japan in some years past, and we acquired that sales channel, which has some limited value add capacity. It's not material to the total results of the company, but we did complete that also in the quarter.

William Stein - Credit Suisse

So that was previously consolidated and minority interest was backed out or am I wrong on that?

Diana Reardon

No. This was a company that we did not own that we bought in the first quarter. But as Adam said, it was primarily a sales channel and quite small.

If you're trying to reconcile the number that's on the cash flow from an acquisition standpoint, we did have payments relating to crude acquisition obligations that were on the balance sheet at the end of December that related to performance-based payments on acquisitions we closed in prior years, and that liability came to about $105 million or something like that in the quarter.

William Stein - Credit Suisse

A follow up related to that, I think there's been an accounting change where there's a change in the way the earnouts are accounted for. Is that correct, Diana?

Diana Reardon

That's correct. I think I talked about that on the last call. The accounting rules have changed and in essence, if there were contingent payment obligations in the future with acquisitions that were completed subsequent to the beginning of 2009, changes in those earnout obligations would essentially go through the income statement as opposed to in the past when they would be adjusted against goodwill in purchase accounting.

Operator

Your next question comes from Matthew Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

Adam, you commented earlier about the competitive environment and mentioned that some of your weaker competitors are perhaps at a disadvantage because of credit, but are you seeing market share opportunities, either short term or long term, because of the competitive environment and because of the credit crisis that we're in?

Adam Norwitt

I think we discussed it also last quarter and we continue to see this quarter that, as I described, there is this kind of flight to quality. And a flight to quality certainly opens up the opportunity for us if we execute on it, which is something we're quite focused on, to expand our market position.

And so whether that is market share - sometimes you think of similar part number sold by two suppliers. Really where we have great opportunity is to expand our long-term position with customers in all of our markets because they now see Amphenol as a true strong pillar in the industry, one who will be around for many, many years, who has the greatest breadth of technologies and products to offer, as well as a management team who is at this stage truly energized, out in front of the customers, excited about the opportunity, not demoralized by a downturn that you read about every day in the Wall Street Journal.

Matthew Sheerin - Thomas Weisel Partners

And my follow up just is in regard to your cost structure. You gave relatively flat guidance if you back out the acquisition. And the EPS guidance is also flat, which implies that expenses and margins are about where they were in March. Are we to assume then that you're pretty much done with the heavy lifting in terms of cost cutting and going to keep your footprint, if you will, where it is right now until you see signs that things are either getting worse or better?

Adam Norwitt

I think, first of all, we don't really look at it as a footprint. Our organization is every day adjusting their resources and adjusting our costs in light of the market that we see. And so this is why in the fourth quarter of last year we took a very significant and proactive measure across the company - not a top-down measure at all, but one really that was taken across the company - which resulted in a headcount reduction in the fourth quarter of 17% on a revenue reduction of 13% sequentially, which put us in a cost position that allowed us to really enjoy the margins that we did enjoy and achieve in the first quarter.

I think I would never say that the work is done. It is an ongoing effort to adjust our costs and our team will continue to adjust those costs as appropriate and as we see the market changing. And the market is - it is not that there is a static second quarter that we have a perfect picture of. We'll see how it goes forward and we'll adjust our costs accordingly as need be.

Operator

Your next question comes from Sean Conners – FAS Advisers.

Sean Conners – FAS Advisers

Just kind of a follow up on that last question. From a restructuring or a layoff standpoint, have all of the employees that were going to be laid off, have they now been laid off or are there still some to take place in Q2?

And then the second quarter is just could you maybe give us an update real quick from a CapEx standpoint what your expectations are for the year?

Adam Norwitt

Relative to your first question, Sean, we don't have necessarily a practice of announcing restructuring and then letting the people find out, you know, first read about it and then hear about it. Normally, they hear about it at the time that the position is eliminated and then later on we may or may not report about that. It's part of the normal course of operating for Amphenol.

And so I wouldn't say that we have any announced restructurings which still have to come. In the fourth quarter all of this was accomplished and the people were gone and there were some additional also in the first quarter, but there's nothing that is still sort of announced and pending to execute upon.

Diana Reardon

From a CapEx standpoint, from an historical standpoint, we've spent between 2% and 4% of sales depending upon the particular quarter and depending upon sales trends. I think we spent about 2.5% in the first quarter of sales and I would expect our CapEx spending to probably stay at about that level given no significant change in top line expectations.

Operator

Your next question comes from Amitabh Passi - UBS.

Amitabh Passi - UBS

Diana, the first one was for you, just a couple of clarifications. Why were debt expense and share count lower sequentially quarter-over-quarter?

Diana Reardon

Interest expense was lower because the interest rates have continued to come down. The unhedged portion of our borrowings are at LIBOR rates and those rates are extremely low right now.

And the share count has a number of elements that are included in it, one of which is the dilutive impact of options, which move sort of in conjunction with the share price - the lower the share price, the less dilutive the assumed exercise of options are for the fully diluted share count.

Amitabh Passi - UBS

And then is it fair to assume that you've suspending your share buyback program for the time being?

Diana Reardon

I think that every quarter, as we've said in the past, we look at what opportunities we see from an acquisition standpoint. And the acquisition program in our minds is the most important and number one priority from a use of cash and use of liquidity standpoint because it's the option that provides the best long-term growth potential for the company. And in the first quarter, as you see, we completed what we consider to be a pretty important acquisition for the company. I think what happens in future quarters will depend upon the demands that we see out there relative to acquisitions that we may do in the future.

Operator

Your next question comes from [Semil Debtimar] - Sentinal Asset Management.

Semil Debtimar - Sentinal Asset Management

I had a question on the inventories. You talked about inventories were up about 5 days. Was that sequential or on a year-to-year basis? And where do you think the sales will have to go in order to bring down your inventories to low 80s?

Diana Reardon

The inventories were up sequentially in terms of days, I think from about 88 days or so to about 93 or so this quarter. I think that we expect to bring inventory days down in the second quarter given the guidance that we've provided for sales.

Semil Debtimar - Sentinal Asset Management

So you mean to say around $670 million in sales will bring your inventory days back to about the low 80s?

Diana Reardon

No, I don't think we've given a specific inventory day target. I think we said that we're continuing to work to reduce inventory. And sales is not the only element of inventory reduction; it also is influenced by how much you procure, how much you produce, and so forth.

Operator

Your next question comes from Jeffrey Beach - Stifel Nicolaus & Company, Inc.

Jeffrey Beach - Stifel Nicolaus & Company, Inc.

This question might be for Martin, but could you compare the current period with the 2001-2002 time period, specifically? There's a lot of fear that this recession when it's over is going to be deeper than the last couple of recessions and I just wondered if you could make some comments about how this current recession is shaping up.

Martin Loeffler

Well, that's a very broad question in the sense that if I had 12 economists around the table we probably would get 12 different answers, so I answer mine own.

I think what is important for us at Amphenol is, as we deal with the downturn, we don't know how long it will take. It has definitely a different shape in terms of its origin and so forth than the one in 2000, 2001, 2002. But clearly what we have done is essentially the same approach as at that time - adjust quick, stay focused on the market, retain strong profitability. And I think applying the same strategy we've seen a good path forward for us. We have seen a significant reduction in Q4 in demand and adjusted quickly, kept the profitability.

And I think to say now whether the second half will rebound or not is not yet visible to us. But it is a very good sign for us to see that the second quarter clearly is already somewhat leveling out and not has an outlook of a further decline that we have seen between Q4 and Q1. So I think from that standpoint, it may even be shorter than the period that we have seen, even if comparisons for the year will remain very, very difficult because we obviously had in 2008 very strong increases in sales and profitability also throughout the third quarter. So the comparisons will remain somewhat difficult.

But from a sequential standpoint, I think it's good news that you have two quarters down and the third quarter already shows a more stabilizing situation. So that is very encouraging compared to the 2001 - 2002 period.

Operator

Your next question comes from Steven Fox - BAS-ML.

Steven Fox - BAS-ML

Just one other question on the Times acquisition. Could you talk about how complementary it is from a manufacturing standpoint? How specifically do you have to integrate it into your existing operations?

Adam Norwitt

As you know, when we do acquisitions, our strategy is not one to just integrate companies and look for sort of optimizing of factories. Certainly Times has a lot of complementary processes that we have - they have a factory here in Wallingford and in addition they have a factory in China - and we understand the processes and we certainly can be helpful to each other on making improvements. In addition we see good opportunities from a sourcing standpoint with the company. I wouldn't say that we look at all towards any consolidation or optimization from that standpoint.

It's a very complementary company really in all respects, when we look from a market standpoint, from a managerial standpoint, a technology standpoint, as well as from a manufacturing standpoint.

Operator

Your next question comes from Carter Shoop - Deutsche Bank Securities.

Carter Shoop - Deutsche Bank Securities

Just a quick question and then a clarification. I was surprised that the PP&E didn't go up a little more following the acquisition. Do you expect depreciation and amortization to be roughly equivalent to where it was in 1Q the second quarter?

And then the clarification is did you say the tax rate for 2Q is 27.5?

Diana Reardon

Yes, I said the tax rate was 27.5%, which would be about the same as it was in the first quarter without the adjustment that we booked.

We will have a little bit of an increase in amortization primarily as a result of the intangibles that we recorded when we did the purchase accounting for the TMS acquisition which relates to customer relationships and technology, the type of things that you value in purchase accounting, but I wouldn't expect it would be that significant from a quarterly perspective.

We would take just one more question if there is one.

Operator

Your last question comes from Amit Daryanani - RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Diana, just a quick question for you. Could you just talk about the revolver? I think the limit is $1 billion with a $250 million accordion. Do you think you can get the accordion extended if you need it at this point?

Diana Reardon

Given the terms of this agreement are extremely favorable compared to what the current market environment would allow us to obtain, so I would not think that the exercising of the accordion is anything that anybody should count on.

Adam Norwitt

Very good. Well, thank you all very much for sharing your time with us. We appreciate your interest in the company and wish you all a very happy rest of the week and a happy second quarter.

Operator

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

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