Amphenol Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Amphenol Corporation (APH)
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Amphenol (NYSE:APH) Q2 2012 Earnings Call July 18, 2012 1:00 PM ET

Executives

Diana G. Reardon - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

R. Adam Norwitt - Chief Executive Officer, President and Director

Analysts

Jim Suva - Citigroup Inc, Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Shawn M. Harrison - Longbow Research LLC

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Wamsi Mohan - BofA Merrill Lynch, Research Division

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Steven Bryant Fox - Cross Research LLC

Mike Wood - Macquarie Research

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Brian John White - Topeka Capital Markets Inc., Research Division

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Operator

Hello, and welcome to the Second Quarter Earnings Conference Call for Amphenol Corporation. [Operator Instructions] At the request of the company, today's conference is being recorded. 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 G. Reardon

Thank you, and good afternoon. My name is Diana Reardon, and I'm Amphenol's CFO. I'm here together with Adam Norwitt, our CEO, and we'd like to welcome you all to our second quarter call.

Q2 results were released this morning. I will provide some financial commentary on the quarter, and Adam will then give an overview of the business and current trends. We'll then have a question-and-answer session.

The company closed Q2, achieving new records in sales and earnings per share. Sales were $1,061,000,000 and EPS was $0.86, both beating the high end of the company's guidance. Sales were up 4% in U.S. dollars and 6% in local currencies compared to Q2 of 2011. From an organic standpoint, excluding both acquisitions and currency impacts, sales in Q2 2012 were up 2% versus last year. From a sequential perspective, sales were up 8% in U.S. dollars and a strong 7% organically from Q1 of 2012.

Breaking down sales into our 2 major components, our Cable business, which comprised 7% of our sales, was up 2% from last year and up 3% from last quarter. The Interconnect business, which comprised 93% of our sales, was up 4% from last year and 9%, sequentially. Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $206 million compared to a prior year income number of $215 million as reported, and $197 million excluding one-time items. Operating income in 2011 included income of approximately $18 million relating to an adjustment to reduce a previously recorded contingent payment obligation for 2010 U.S.-based acquisition.

Operating margin was 19.4% in Q2, which is up from 18.9% in Q1, a strong sequential conversion margin of approximately 26% from Q1. The Q2 ROS level of 19.4% is equal to the Q2 2011 ROS, excluding the impact of one-time items.

Operating income in both years is net of stock option expense of $8 million in the 2012 quarter and $7 million in the 2011 quarter, about 0.7% of sales for both time periods.

From a segment perspective, in the Cable business, margins were 13.8%, up from 12.8% last year. The margin improvement relates primarily to lower relative material cost. From a sequential standpoint, Cable margins declined from 14.5% in Q1, primarily as a result of a less favorable pricing environment and product mix. In the Interconnect business, margins were 21.6%, equal to last year, and up from 21% last quarter. The Interconnect operating margin improvement from last quarter primarily reflects the positive impacts of higher volume and cost reduction actions. We are very pleased with the company's operating margin achievement in the quarter.

2012 continues to be a more balanced operating environment from a cost inflation and demand perspective. And in that environment, the management team has achieved strong sequential improvement in operating margins, both in Q1 and Q2, and remains fully committed to further margin expansion as business volumes grow. 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 clearly continues to be a very dynamic environment.

Interest expense for the quarter was $15.1 million compared to $11.4 million last year, reflecting higher average debt levels from the company stock buyback program and the higher interest expense associated with the company's January senior note offering.

Other income was $2.6 million, up from $2.1 million, primarily as a result of higher interest income and higher levels of cash and short-term cash investments.

Our effective tax rate in the quarter was 26.8%, compared to approximately the same rate in the second quarter of last year, excluding the impact of one-time items. For the full year 2011, excluding the one-time items, the company's effective tax rate was also 26.8%, and we currently expect a similar rate in 2012.

Net income was approximately 13% of sales in Q2, and EPS grew 9% over last year, excluding one-time items, a very strong performance.

Orders in the quarter were $1,052,000,000 resulting in a book-to-bill ratio of approximately 0.99:1. In addition, in the second quarter, the company completed the acquisition of Deutgen Group, a German manufacturer of high-technology, precision injection-molded components primarily for automotive applications with annual sales of about $25 million.

The company continues to be an excellent generator of cash. Cash flow from operations in the quarter was $127 million. For the 6 months, operating cash flow was $292 million or 109% of net income. The company continues to target cash flow from operations in excess of net income.

From a working capital standpoint, inventory was $675 million at the end of June, up 3% over the March quarter. Inventory days declined 5 days to 83 days and are now comparable with prior year levels and back to the low end of the company's historical range. We're very pleased with the reduction in inventory days in the quarter. Accounts receivable was $840 million and days sales outstanding increased 1 day to 71 days at the end of the quarter. Accounts payable was $432 million and, from a day's perspective, was down 1 day at 53 days from March. Overall, we're very pleased with the company's working capital achievement in the quarter.

The cash flow from operations of $127 million, along with borrowings under the company's revolving credit and receivables facilities of $149 million and proceeds and related tax benefits from option exercises of $18 million, were used primarily for capital expenditures of $32 million, the purchase of 2.1 million shares of the company's stock for $119 million, payments of $82 million related -- relating to acquisitions, including the acquisitions of Nelson-Dunn and Deutgen, dividend payments of $17 million and an increase in cash and cash investments of $37 million in the quarter.

The company has approximately 3 million shares remaining under its 20 million share buyback program that expires in January 2014.

At the end of the quarter, cash and short-term investments were $780 million, the majority of which is held outside of the U.S.

Total debt for the company was $1.5 billion, bringing net debt to approximately $764 million at the end of June. At quarter end, borrowings and availability under the company's revolving credit facility were $348 million and $652 million, respectively. And our leverage and interest coverage ratios remain very strong at 1.6x and 19x, respectively.

EBITDA in the quarter was approximately $249 million. From a financial perspective, this was an excellent quarter.

Adam will now provide an overview of the business and current trends.

R. Adam Norwitt

Well, thank you very much, Diana, and I'd like to add my welcome to all of you here today on the phone. I'm going to spend a few moments to highlight some of our second quarter achievements that Diana just reviewed, then I'll discuss our trends and our progress in our served markets. And then finally, I'll make some comments on our outlook for the third quarter and the full year, leaving time for some questions at the end.

We're very excited to report record orders, sales and earnings in the second quarter, exceeding the high end of our guidance despite ongoing uncertainties in the global marketplace. Our revenues in the quarter increased 4% from prior year and 8%, sequentially, achieving a new sales record for the company of $1,061,000,000. And as Diana mentioned, orders have also reached a new record of $1,052,000,000, representing a book-to-bill of just under 1:1.

We find it especially rewarding that our intense focus on managing all elements of profitability have led to further expansion of our operating margins to 19.4% return on sales. I'm very proud of the agile entrepreneurial Amphenol organization, all of whom are capitalizing on the opportunities that are being created by the ongoing electronics revolution while at the same time demonstrating the strength and discipline necessary to drive strong operating performance in any economic environment.

In addition, we're very pleased that our successful acquisition program continued in the second quarter. As Diana mentioned, in June, we completed the acquisition of the Deutgen Group, a German-based manufacturer of precision-molded components for the automotive market. This acquisition, with annual sales of approximately $25 million, builds upon our expanded offering of products to the automotive market and in particular, it enhances our capabilities in advanced molding technologies for this important sector. The acquisition is consistent with our ongoing and long-term strategy of acquiring complementary companies with strong management, leading technology and, in particular, an excellent market presence. As we welcome this excellent new team to Amphenol, we remain very confident that our acquisition program will continue to create significant value for Amphenol in the future.

Turning to the trends and our progress in our served markets. I think once again, our results in the second quarter confirmed that Amphenol's end market diversification is a tremendous asset for the company, especially given the widely reported uncertainties in many of the world's economies.

Turning first to the Military market. That market represented 14% of our sales in the quarter. And sales declined by 9% from prior year on continued conservatism by defense customers, driven in particular by the ongoing budget uncertainties in certain western countries. On a sequential basis, sales were up slightly as our new technology solutions offset the impact of an overall moderation in spending. In the third quarter, we expect demand in the military market to show some typical seasonal declines. Nevertheless, while there remains uncertainty in many of the defense budgets in developed economies, we continue to make progress in creating new high-technology solutions for advanced military electronics, and we're especially encouraged to be seeing continued indications of investments in these new electronics by the military.

The Commercial Aerospace market represented 5% of our sales in the quarter, and sales continued to increase strongly from prior year, growing by 14%. Sales were slightly moderated on a sequential basis due to certain inventory adjustments by customers in the Commercial Aero supply chain. There is a significant technology transition that is occurring in the Commercial Aero market. New airplanes are adopting innovative electronic features and are incorporating, in particular, new higher technology interconnect solutions to enhance fuel efficiency and improve passenger experience. This all creates a great opportunity for Amphenol. Looking forward, while we expect normal seasonal moderation in the third quarter, we have a very positive long-term outlook for the Commercial Aero market in the second half of 2012 and beyond.

The Industrial market represented 15% of our sales in the quarter, and sales increased a very strong 17% from prior year and 20%, sequentially, as we benefited from the Nelson-Dunn acquisition, as well as from further strengthening of organic demand in the many diversified segments of our Industrial business. Our ongoing focus on developing new technologies, combined with our acquisition program, has resulted in the Industrial market reaching a new high of 15% of sales in the quarter. We continue to make excellent progress, broadening our interconnect product offering and increasing our penetration of the many exciting growth segments of this market, including, in the second quarter, alternative energy, oil and gas and heavy equipment. Although we expect sales in the industrial market to moderate seasonally in the third quarter, we look forward to continued strong momentum in this important sector.

The Automotive market represented 11% of our sales in the quarter, and sales increased a very strong 35% from prior year and were down slightly on a sequential basis as we had expected. We are benefiting from a continued increase in vehicle production volumes and new electronics applications. Together with the important contributions from our recent automotive acquisition, we have been very successful in our drive to broaden our Automotive product offering, both through our internal technology developments and our continued focus on acquiring complementary companies in this market, including the acquisition in this quarter of Deutgen. We expect demand in the Automotive market to remain stable in the third quarter, and we look forward to further long-term progress as we take more advantage of the ongoing revolution in automotive electronics.

The Mobile Devices market represented 17% of our sales in the quarter. Sales decreased 4% from prior year as increased sales of products into new mobile computing platform was more than offset by reductions in sales of mobile phone-related products due to dynamics in that segment. However, we are very pleased that sales in the Mobile Device market increased sequentially by a strong 13% as we realized the benefits of our strong position with advanced technologies in many new complex devices. We expect in the third quarter to see a significant increase in demand in this market, driven by releases of new products by a diverse array of mobile device makers, who are incorporating our high-technology solutions into their new devices. We're very excited by our strong position in new, smart mobile devices, in particular in mobile computing products, including tablets and laptops, and the potential that these create in the second half of 2012 and beyond.

The Mobile Networks market represented 10% of our sales in the quarter. While sales decreased 12% from prior year on continued conservatism in that segment, we were pleased to see a sequential increase of 11% from first quarter. We're very encouraged to have achieved 2 consecutive quarters of sequential growth in what has been a very challenging wireless equipment market, a clear indication of our strong technology position in next-generation base stations. Although we expect demand to moderate somewhat on a seasonal basis in the third quarter, we look forward to further long-term strength driven by our broad designing positions on new equipment platforms, as well as by our strong presence with wireless operators around the world.

The Information Technology and Data Communications market represented 21% of our sales in the quarter. Sales in this market increased a strong 12% from prior year and 13%, sequentially, with strength driven in particular by products used in servers and networking equipment. We benefited in the second quarter from several releases of next-generation data center equipment, incorporating a broad array of our leading, high-speed and power interconnect technologies. As our customers continue to strive for new levels of equipment performance in order to handle the dramatic expansion of data traffic that they are seeing, our pipeline of new design opportunities with our next-generation products continues to strengthen. We do expect in the third quarter to see a slight reduction in sales as some customers in this market have moderated their short-term outlooks based on an increased level of uncertainty in the marketplace. Nevertheless, we look forward to further long-term gains as our high-technology solutions are increasingly adopted in customers' new systems.

Finally, the Broadband market represented 7% of our sales in the quarter. Sales decreased slightly from prior year, and we're essentially flat on a sequential basis in what is a stable demand but somewhat less favorable pricing environment among cable operators. Nevertheless, we continue to broaden our technology offering with new cable and interconnect products at the same time as we are strengthening our position in international market. We expect demand in the Broadband market to improve slightly in the third quarter, and we look forward to realizing further benefits from our diversification efforts.

In summary, with respect to the second quarter, I am extremely proud of the Amphenol organization as we continue to execute well in what is very clearly a challenging and dynamic market environment. And in particular, we're very pleased with the company's new records in sales and earnings, as well as the expansion of our already industry-leading margin. Amphenol's superior performance is a direct reflection of our distinct competitive advantages: the company's leading technology, our growing position with customers in the many diverse markets that we serve, our presence around the globe, a lean and flexible cost structure and, most importantly, an agile and entrepreneurial management team that thrives in every economic cycle.

Now turning to our outlook. Based on normal seasonal patterns, as well as current exchange rates, which incorporates the relatively weaker euro, we now expect the following results: For the third quarter, we expect sales in the range of $1,080,000,000 to $1,100,000,000 and earnings per share in the range of $0.87 to $0.90. For the full year 2012, we expect sales in the range of $4,210,000,000 to $4,250,000,000, and EPS in the range of $3.38 to $3.44. For the full year, this represents sales and EPS growth of 7% to 8% and 11% to 13%, respectively. This increase in full year guidance incorporates our strong second quarter results, as well as a positive outlook for the second half, which more than offsets the significant translation impact from the weaker euro. Given the many uncertainties in the global economy, we are very encouraged by the strong outlook in sales and earnings, which reflects, in particular, the value of the diversification of Amphenol.

The ongoing revolution in electronics continued to create many opportunities for our company, and I am confident in the ability of the outstanding Amphenol management team to continue to capitalize on these opportunities to grow our market position and to expand our profitability and thereby, to drive continued superior performance for Amphenol.

Thank you very much. And operator, at this time, we'd be very happy to take any questions if there may be.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Jim Suva from Citi.

Jim Suva - Citigroup Inc, Research Division

Adam and Diana, can you talk a little bit about -- on the M&A side, it looks like your last year acquisitions have been focused on the automotive industry, which traditionally has not been as big of a focus for the company. And I think right now, if my math is correct, it's around 11% at Amphenol. The outlook for this, do you see this growing to be a more material part of Amphenol going forward, like could it eventually be a quarter of the company or something like that? And then in the same vein of Amphenol in automotive, one has to be conscious of many of the other automotive connector and supplier companies don't generate the profitability that Amphenol does, yet you continue to post industry-high profitability. Can you help us understand, is the profitability of automotive below your sector average, at your company average? And why would you be outreaching all those other ones-- competitors?

R. Adam Norwitt

Jim, that is a lot of questions in one, and I'll see if I can remember them well. I think your question started off to, say, we have made some automotive acquisitions. And yes, it's true. We have made several. Obviously, the acquisition of Nelson-Dunn was very different. That was in the Industrial Oil and Gas market, but we're very pleased with the acquisitions that we've made. And if we go back and look at the evolution of our Automotive business, it has been always our strategy, and it is today, to participate in those areas of the automotive market where we can create the value with our customers that thereby allows us to realize the returns that we expect for Amphenol. That strategy has not changed by one iota through these acquisitions. What has changed, though, in that time period is there has been a real revolution of electronics in the car, driving new applications, new functionalities, whereby the Amphenol technology offering allows us to create value for those customers, and thereby, to realize the returns that we expect. And the returns in our Automotive business, we don't talk about what they are by each market, but certainly, they're very strong and we're very proud of those returns. If we look in a car today, a car in my mind has essentially become a host for new electronic features. And whatever those features may be, whether that's onboard electronics in the cockpit, whether that is new engine control, whether that is new transmission control, whether that is hybrid electronic drive that go into cars, what is common with all of these new applications that we're participating in and what is common with the acquisitions that we have made to that end is that these are new functionalities where the interconnect products have a more challenging technology to them and thereby, there is more value to be created with the customers. So this is a very consistent strategy. I think we have made kind of a change in terms of having those more acquisitions, but that is really going along with the fact that we have seen the real explosion of new electronic opportunities in the car, and we have made, also, great gains organically in that market at the same time. So I think this is not a change, Jim. We're very excited about it. Could it be 25% of the company, I think you said. And look, we're very proud of diversification of Amphenol. We don't have any market today that represents 25% of our sales. And I think we look to continue to be a very diverse company. Could Automotive be slightly more than it is today or slightly less? Absolutely. We don't set a sort of a goal for that, but what it will be is that we'll always be focused on those products where we can create value and thereby can realize the returns that we want.

Operator

Our next question comes from Sherri Scribner from Deutsche Bank.

Sherri Scribner - Deutsche Bank AG, Research Division

I just wanted to dig in to your guidance a little bit. At the midpoint, you guided revenue up about 2.7%. And then when we look at the segment commentary, I think from what I was writing down, it looks like you're only expecting the Mobile Devices segment and the Broadband segments to be up, with everything else moderating, I think it was what you used. I just want to make sure I understand that. And also, in terms of the Auto segment, you commented that, that would be stable, but I would expect that to be up with the acquisition. So maybe some detail on the segment guidance as we move into September.

Diana G. Reardon

Sure. I think you're referring specifically to the guidance for Q3. Is that correct?

Sherri Scribner - Deutsche Bank AG, Research Division

Yes, I am. Yes.

Diana G. Reardon

Okay. And I think that the market growth that you described is pretty much right on from a sequential perspective when we look at the growth, as Adam said in the comments that he made. We do expect to see a significant increase in mobile device sales based on the expectation for our participation in a broad range of new programs that we expect to ramp up. We expect for, I'd say, about half of the markets that tend to have a seasonally softer quarter in the summer, the Defense market, Comm Aero, Industrial, Auto, we expect these to be slightly down sequentially and others to be slightly down to flat. From an Automotive perspective, we also have the phenomenon in the quarter, as I think you know, relative to exchange and specifically to the impact of the euro. And so that is a negative from a sequential perspective. That's more pronounced, actually, in the Automotive market and essentially offsets the positive impact of the small acquisition that we made. So that's why Automotive, without the negative impact from the euro, would, to your point with the acquisition, be up sequentially. Does that help?

Sherri Scribner - Deutsche Bank AG, Research Division

That does. Diana, that is helpful. And then -- sorry, if I could just ask about Telecom. You guys are doing very well in the Telecom segment, and I think most of the commentary we've heard from other companies and some of the equipment makers is the telecom segment continues to be very weak. So I just wanted to understand why you guys are doing so much better than the market in that segment.

R. Adam Norwitt

Sure. That's a very good question. I appreciate it. Look, what we call Telecom, we call it IT & Datacom. I think that's the market that you're referring to, and I think we -- our company is doing extremely well in that segment. We grew 12% year-over-year, 13% sequentially, and I don't think you would see that performance from any of the kind of ON customers in that market. Why is that? It's very clear for us. It's coming because of new programs with new technology. We are participating on a very, very broad basis, really across the board with high-speed technologies as these systems have to perform at higher and higher speed to satisfy the demand for things like video on the Internet that's hogging so much bandwidth in the core systems, as well as at the enterprise level. In addition, power has become such a tremendous driver for us, whereby we are creating new power solutions that go on to this IT & Datacom equipment to allow them to have a more efficient power consumption, which is the real sort of other -- the flip side of the data revolution is they're using a lot of power. And so, to the extent that you can create an interconnect solution that enables customers to equip their equipment with a less power-hungry system, that allows you to create value for the customers. It allows you to take broader positions on the new platform, and it allows us in the end to outperform the market. And I think we feel very good about our overall performance. We have a very, very broad position in IT & Datacom, and we are present essentially with all customers in that market to some degree or another. And so it is really not that we are leveraged on just one customer or one program, but rather that we are gaining share with new technology solutions on a very, very broad basis in that market.

Operator

Our next question or comment comes from Shawn Harrison from Longbow Research.

Shawn M. Harrison - Longbow Research LLC

I just wanted to, I guess, follow up on that mobility -- the mobile device strength. Is that -- I wanted to be certain. It sounds like it's across notebooks, tablets and phones. Is that just a third quarter phenomenon? Or is that something where you continue to see strength throughout the -- through the end of the calendar year?

R. Adam Norwitt

No. I think -- first of all, you're correct that, that is really more across the board. It's not on any one platform. It's not with any one customer, by the way. I mean, it's a very broad position that we have on some of these new devices. And it's something that -- it was part of what gave us sort of the confidence to raise our guidance both in the third quarter and for the full year. So that is not just a one-quarter phenomenon, necessarily. And we had strong performance in that market on a sequential basis in the second quarter as well. It was up 13% in the second quarter. We've done a great job of really diversifying ourselves into high-value products. We talked about over the last several quarters -- you may, of course, recall, Shawn, we had a quarter -- fourth quarter last year, where our sales in that market were actually down more than we would have expected and more than we would have liked. Sales in the first quarter were year-over-year down. I think we have never rested here. We've never sort of said, "Well, we're not going to keep the focus on creating new technology solutions for these new products." And I think a lot of those efforts that our team has been expending over the better part of the year, 1.5 years, are really bearing fruit here in the second and even more over in the third and fourth quarters of the year.

Shawn M. Harrison - Longbow Research LLC

Okay. That's great. And then just as a follow-up, great margins this quarter within the Connector business. I guess the guidance implies a little bit more limited margin lift in the back half of the year. Maybe you could talk about maybe the pluses and minuses you're seeing that could lead to some further margin expansion in the next 2 quarters.

Diana G. Reardon

Sure. Look, I mean, I think we have a great track record from a margin perspective. And as you say, we achieved certainly good profitability in Q2. I mean, I think, if we look at the last 2 quarters, and go back to the fourth quarter of 2011, we brought margins up from 18.5% to -- in that quarter to 19.4% here in Q2. And there are certainly a lot of things that contribute to that. Certainly, volume and the operating levers that we're able to produce in the business is the most important part of that. I think that this comes really through the combination of the strong technology focus that Adam talked about but also a continuous drive for low cost. The growth in -- from a volume perspective and our ability to convert that at that 25%-plus range, I think, is the most important aspect for our ability to continue to expand margins. And this growth opportunity for us is very much driven by the diversity in the business. The environment right now is -- certainly, one would not say it is completely bullish across all the markets that we serve, and I think that it's an environment where there's a lot of volatility in demand. This actually seems to have become more the norm. And I think the diversity that we have as a company allows us to find the pockets of opportunity for growth that are out there, like the ones that Adam was just describing. When we then combine that with the entrepreneurial management style we have as a company that really maximizes our profitability, that produces this leverage that, I think, we've seen historically and that clearly we've seen in the last 2 quarters. And we continue to include that 25% conversion margin, that operating leverage, on incremental sales in the guidance that we gave both in Q3 and in Q4. There will be some variation in what those conversion margins are. I think we had a slightly higher conversion margin in Q1 than we had in Q2, but I think we feel very good about the profitability level. We feel good about the fact that the team is still committed to further margin expansion, and that that's reflected in the guidance that we gave. We always try to do better if we can, but I think the 25% conversion margin that we've included is the right guidance, and I think it's the right expectation for the second half of the year.

Operator

Our next question or comment comes from Matt Sheerin from Longbow Research.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

It's Matt Sheerin with Stifel, Nicolaus. Just another follow-up on that mobility question, Adam. It looks like your strategy has evolved a little bit, where you were very strong in smartphones. And my understanding is that, as those products become more commoditized, you're moving upstream into tablets. And then now, you've also mentioned notebooks, where you haven't had a lot of presence outside of the RF antennas. So could you talk about the opportunities in that space, smartphones versus tablets? And then also, the ultrabooks, are they representing the big opportunity in notebooks for you?

R. Adam Norwitt

No. This is a very fine question, Matt. I appreciate it. No doubt about it. When we talk about mobile devices, we are certainly -- our view of what a mobile device is, has evolved. And I think that evolution is very natural given all the product transformations that have happened over, really, the last 48 months, 24 months, whatever you want to say. We still have a very strong presence in smartphones, but we are also very deliberate about making sure that we participate in those products where we can create value. And I know I've said that several times on the call, so I must sound like a broken record. But there's no question that there have been some devices that have been released, whether it's just not the appreciation of the value for the products that we would make and thus, we don't want to participate. Conversely, we have never had a very strong position on computers, which evolved into laptops. But over the recent time period, those devices have converged more to become more mobile devices. I know myself. I am on my laptop in the car, and it is essentially almost like a phone. I mean, you use Skype on it and it becomes essentially a phone that sits on your lap. And as those devices have become more embedded with more functionalities, as the ultrabooks have come along and bridged between traditional laptops and tablets -- and who knows what's going to come next? I mean, what do you call a device, which is the surface that gets the nod? Is that a tablet? Is it an ultrabook? What is it? I mean -- so I think that there is a real combining of a lot of different functionalities with one thing in common, and that is that these devices are mobile. They're connected to mobile networks. They're connected to wireless networks somewhere. You can transport them with you. And wherever we see the opportunity to enable those devices to have a greater functionality, either through the antenna technology, either through our interconnect technology, through some of the other componentry that we supply into those products, we're going to capitalize upon that. And I think the team is not fixated on just one customer. That's one thing that's very, very important. Our team of engineers and sales individuals and the factories, they are focused on ferreting out every opportunity in that industry because the one strategy that we have not changed is we're not in the business of picking which is going to be the winner. We're in the business of maximizing our content on attractive platforms and then letting, in the end, the marketplace to decide what the winner is going to be. And if we've done a good job of getting our position, then we'll win with whatever that winner may be. And so I think it's a very exciting market for us. It has been an exciting market for us, 17% of our sales in the quarter, and we look forward to strong momentum there going forward.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And just a quick follow-up, Diana. What percentage of your Auto business now is in Europe?

Diana G. Reardon

I can't give you an exact percentage, but somewhere -- probably a little less than 2/3 or so, but it would be in that range.

Operator

Our next question or comment comes from Wamsi Mohan from Bank of America.

Wamsi Mohan - BofA Merrill Lynch, Research Division

When you look at the midpoint of guidance both for the third quarter and for the full year, it implies a flat sequential 3Q versus 4Q. And I'm just wondering, is that because you're seeing something in particular that will drive below normal seasonality? Is there something like a pull-in effect that you saw in 3Q in mobile devices last year or something similar to that? Or is it just lack of visibility for now?

Diana G. Reardon

Yes. I think that from a sequential standpoint, there is a slight difference between the 2 quarters, but to your point, not much. I think this is what we see when we look at a very detailed forecast level, what the 2 quarters look like. We -- I think as Adam said, we expect to see a significant ramp-up in the mobile device market in Q3 here in the near term. And I think that, that is driving some of the sequential dynamics between Q2 and Q3. We don't expect a same step function when we look between Q3 and Q4. So I think that this is based on what we expect the sales to look like based on the details, the view of all of the markets that we've done. At this point, when we get closer, we'll see what the quarter looks like at that point in time, but we wouldn't expect the same type of significant sequential uptick in the mobile device market in Q4 that we're seeing in Q3. And I think that has some impact with the comparison.

R. Adam Norwitt

It is not a pull-in though. I mean, I think, you're referring, Wamsi, to a year ago where we saw that kind of significant pull-in of demand from the fourth quarter to the third quarter. That's not what we anticipate. I think the guidance does not anticipate a down fourth quarter. But let's not forget, there is a lot of uncertainty in the world today, and I think this is very prudent guidance given the level of uncertainty that is in many markets, and certainly, in many geographies around the world.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Okay. Adam, that is specifically what I was referring to. So I appreciate the color there. And then, Diana, perhaps you could address how the pricing environment is. I mean, copper and gold are down both quarter-on-quarter, but gold is still up year-on-year. Is this environment in which you're still able to increase prices?

Diana G. Reardon

Yes, I think the pricing dynamics, as you know, Wamsi, vary a lot from a market-to-market perspective. And I think they continue pretty much to track the pricing dynamics that one would see in a related equipment that we sell into. So I think in the communications-related markets, those prices, certainly, still trend down. And I think that what we have seen in 2012 -- so I think we see a better balance between the movements in prices and the movements in cost structure, which, as you know, in 2011 was very much out of balance and this puts a particularly strong pressure on margin. So I wouldn't say that it's an easier pricing environment. I would just say that it's a pricing environment that's more rational given what we see happening from an input cost perspective. But as you know, the market is a very dynamic one and seems to be choppy, to take a word from a demand perspective, depending on which market you will look at. And that always has some impact on pricing dynamics as well. But I think that we're able to manage pretty well through the environment as long as cost and price are in balance. And I think that's how we would describe -- how 2012 looks to us as we sit here today.

Operator

Our next question is from Craig Hettenbach from Goldman Sachs.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Adam, a number of times that the macro environment has come up on this call, so I'm just curious if you can contrast kind of what you're seeing this summer versus last summer. Anything from kind of order patterns or customer conversations would be helpful.

R. Adam Norwitt

Craig, look, I have to sort of plunge the depths of my memory to think back on what it was last year. I think last year, when we really saw a shift within the third quarter, when there are all of these sort of government-driven, around the world uncertainties that came, the debt ceiling debate, the Europe and Greece sort of first materializing on the scene, what we see now is kind of a general hesitancy. I think people see the market. People read the papers. I was in Europe recently and I can tell you, you don't even want to read the papers in the morning when you're in Europe. At the end of the day though, our customers are in the business that we are in, which is creating new electronics for their customers. And I think we continue to see just a tremendous, tremendous pace of innovation that is happening. And I talked about that in the IT market, where the pace of innovation is something that we've been able to capitalize on very much. The same is true in the mobile devices market. And the same, arguably, is true across the board in all of our markets. So we haven't heard any customers today coming out and sort of singing doom-and-gloom songs here. Rather, there is just a general unease about what is going to happen. I think people don't have confidence in governments anymore to solve the problem. They're not sure where markets are headed. And at the end of the day, that creates that level of unease. At the same time, they're making a product that customers are thirsting for. I mean, take wireless infrastructure. I mean, this is a classic market where there is a clear demand by the end consumer to have upgrades in technology. I mean, you just can't go anywhere in the world today and be satisfied as a customer with a mobile device. The customers all know that. The operators know that. The smart ones are driving upgrades at a significant pace. Others are taking a little bit more of a wait-and-see attitude. I think we've seen that market expand a couple of quarters in a row, and that's a good sign, but it's just indicative of the type of general hesitancy that is there. At end of the day for Amphenol, we're not running the company based on microeconomic trends and forecasts and headlines in the Wall Street Journal. We're running the company based on what we see with our customers on new programs, new technologies and driving the execution and reacting to whatever the macro environment will bring our way.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. As a follow-up on the Commercial Aerospace side, the adjustment in inventory. Would you characterize that as a pause here? And if you can kind of just talk through your expectations once you get through that.

R. Adam Norwitt

Yes. I think it's actually pretty normal. The way the Commercial Aero market works is they do these sort of step function increases in either new platforms or production rates. And those tend to happen early on in the year. And it's not abnormal that when there is kind of a ramp-up, and you recall we saw a significant ramp-up in the first quarter. We saw some in the fourth quarter. It's not uncommon for the hundreds of companies that are involved in that supply chain to not get it perfect as they go through the sort of annual ramp-ups that are happening. I mean, there's no doubt about it that the plane volume that we're seeing or that our customers are creating today are up significantly. I mean, if you take just the 2 largest, their volumes of airplanes are up 14%, 15% in what they're producing and delivering on a year-over-year basis. But a lot of that tends to happen really -- at the end of the year. They set their production plan. They ramp up the supply chain. And then sometimes, there is a kind of a flex and a little bit of like an accordion effect on the supply chain when they do that ramp-up and then it normalizes over time. So this is -- that sequential performance to us is not at all a concern. We view that, that strong year-over-year performance, which is something that we expect to continue throughout the year, is really indicative of both the increase in unit volumes that we're seeing together with our broader position that comes on the new platform. And that's something that we continue to look forward to. We have not really seen a lot of the new airplanes being produced in significant volumes yet, and I think that's something still to come at some point. When they all start being made exactly, when the delays and the kinks are worked out, that remains to be seen, but we feel very good about that market and our position in the market going forward.

Operator

Our next question or comment comes from Amit Daryanani from RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Just maybe I want to start off with the OpEx side of the equation. Things are obviously pretty good this quarter, $120 million OpEx up. How should we think about OpEx run rate going forward? And do you still have some of the cost savings from the restructuring you did late in 2011 that still need to be realized?

Diana G. Reardon

Sure. I think that by OpEx, you're referring to what we call SG&A. And I think that this is an area that, certainly, we got a lot of operating leverage on in the quarter. We're back down to about 12.1% of sales, which is essentially where we were in the middle 2 quarters of last year. We do, really, a very good job of managing all levels of cost, and we focus on SG&A cost as much as we do on manufacturing cost. We target SG&A or OpEx to grow about half the rate of sales, all else being the same. In some quarters, we hit that and in some quarters, we don't. But I think that we do still have some leverage that we will see as we move through the second half of the year on both, in SG&A and on the gross margin line, as we look to work -- to hit those 25% incremental conversion operating income margins that we have as a target and that we've reflected in the guidance for the Q3 and then Q4 time frames.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Perfect. And if I could just follow up. Adam, if you just talk about the handset side. I realize you guys are obviously expecting some strong sequential growth due to ramp in Q3. Could you maybe just talk about how do you have comfort at this point that this could not be a replication of what happened in the back half of 2011, where you had a really strong Q3 but it resulted in a bit of a vacuum in Q4. Are you more diversified on a product or customer basis that gives you more comfort that, that doesn't happen again?

R. Adam Norwitt

Amit, I think the simple answer is, we are more diversified in new products. I think the market is more diversified in new products. I think we're a good reflection on the market. If you just take an honest look at things, there is a more diverse market of smart mobile devices today than there was a year ago. And clearly, we're present really on a broad basis there. I think that if we look last year, there was that expectation of a very significant ramp-up coming into the fourth quarter, which then didn't materialize. We don't see those expectations today. So if I go back to a year ago, July 17, July 18, I think I've said many times to several of you on the phone that our customers, at that point, were extraordinarily bullish towards the fourth quarter and were ramping their supply chains in anticipation of the tremendous, tremendous fourth quarter 2011. We don't see that today. I think customers are very balanced in their view of the trends in their business from the third quarter to the fourth quarter. And thus, they are not over-accelerating their supply chains and their procurement activities, which led to some of what we saw last year. And so from that perspective -- look, anything can happen, obviously. But I think the kind of data points that we see, the conversations that we have with customers, lead me to be a little bit more comfortable that you're not getting that overspending of demand, which then could lead to a falloff like we saw last year.

Operator

Our next question or comment comes from Steven Fox from Cross Research.

Steven Bryant Fox - Cross Research LLC

I had 2 questions, please. First, on the Broadband business slowing down. Looked like you were starting to get some momentum there and now you're talking about some price pressures. Can you provide a little more color around what's going on there and sort of your outlook maybe 4 to 6 -- over the next 4 to 6 quarters for that business? And then secondly, Diana, if you just happen to have organic growth for Industrial and Automotive handy, that'd be helpful.

R. Adam Norwitt

Sure. Well, let me just talk about Broadband for a second here, Steve. I think we have had good momentum there. Look, that market does go in cycles to some extent. I think that what we have seen is we would have expected the pricing environment in that market to be supportive of further margin expansion based on the competitive environment, and that's what we did not see. And so when we talk about less favorable pricing environment in the quarter, as I've always said, we are going to follow any price increase from the market leader. And that just was not forthcoming here when we would have expected that one would have taken the opportunity with the material environment that was more normalized to keep realizing the margins that you could realize. And so that's really to that extent. As we look forward in that market, I mean, there are clearly a lot of dynamics in the market, whether that is Broadband over Cable, whether that is in the Satellite market, whether that is in -- over Telecom. I mean, there are just tremendous, different array of ways that people are getting broadband into their house today. We capitalize on all of those. And so all that we care about really going forward is, are -- is there further adoption of high-speed, next-generation broadband into the home? And that's something where we think there clearly is that consistent trend that would support our participation in the market. What is the criteria? The criteria is that you're able to support those new technologies with a strong product offering. And that's why the focus of our team in that market has been very, very consistent: innovation, innovation, innovation. Getting the right products that can support those new demands that are coming from customers in that market. Whatever their end means, whether that is hybrid fiber coax, whether that is twisted pair, whether that is satellite, whatever, we want to be there to support the technologies that are there. And because of that and because we're not just betting on one MSO to be successful, or on one satellite operator to be successful, we feel that if we can have a strong technology solution for that market, there is great opportunity for growth in the future. I think with respect to the organic growth rate, I don't know. Diana, do you want to comment?

Diana G. Reardon

Sure, in Industrial, as you know, this would be the year-over-year organic growth rate. Industrial is low double digit and Automotive, mid single digit.

R. Adam Norwitt

Which is a very strong performance in the environment.

Operator

Our next question or comment comes from Mike Wood from Macquarie.

Mike Wood - Macquarie Research

With the mobile devices' significant sequential increase that you'd mentioned, is that based on orders that are in your backlog or reflected in that 0.99 book-to-bill? Or do you also have some more visibility with like a request for price or certain platforms that are coming? And how long would that visibility last for you?

R. Adam Norwitt

That market is not necessarily a market where you get 16-week or 12-week or even 8-week lead times on orders. You work on programs that get released into the marketplace. And obviously, customers need to build a supply chain pipeline to support the ramp-up of new programs. And so it's a much more sort of a rich interaction with the customers to understand the volumes that are going to come. It's not here comes -- it's not just one data point or one order or one forecast from a customer. It's a very, very comprehensive approach to being involved in the program with the customer, knowing the timing and knowing the volumes that they have. Obviously, programs get delayed. Programs get accelerated. Some are successful. Some are not successful. And we have a significant amount of experience dealing with the various dynamics that come in those new programs. We're always going to apply some degree of caution to that in terms of how we invest in ourselves, how we proceed with the ramp-ups and obviously, how we incorporate that into our outlook for the company.

Operator

Our next question or comment comes from Mike Wherley from Janney Capital Markets.

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

I was just wondering if you could give us any commentary on the trends, month-to-month, through the quarter and into July in China and the U.S.

R. Adam Norwitt

Well, I think we have not seen anything abnormal in those trends. I think if we look overall for the company it was a relatively normal quarter in terms of how the months progress. The last month of the quarter tends to be a little bit stronger, there are some vacations in certain places in May. So I think there was nothing abnormal that we would comment on relative to China, U.S. or for that matter, Europe through -- in the course of how the quarter proceeded.

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

And since the quarter ended, any comments on July?

R. Adam Norwitt

No, nothing abnormal for the guidance that we have given today.

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Okay. And the other question I just had was on M&A. Are there any targets that you might consider that are bigger than what you've done historically, like in the $300 million to $400 million range? Or are you just a lot more comfortable with things that are like $200 million or less?

R. Adam Norwitt

Look, I think we've said consistently for many years that size is not a criteria for Amphenol as it relates to acquisitions. Our criteria for acquisitions is we want, number one, good people; we want, number two, very strong technology and complementary technology; we want, number three, a complementary market position that's really additive to Amphenol and expands the breadth of our offering in one or more of the many markets that we serve. To that extent, there are plenty of larger companies that are out there that would be attractive acquisitions. And I think we're very fortunate to have a financial condition that really sets no limits on size. And our mindset also sets no limits on size. What we wouldn't do is just do one big acquisition for the sake of adding sales to the company. That's not the strategy of acquisitions, but we'd be very excited to proceed with an acquisition to the extent that it were for sale of a company that really satisfies those other criteria that we consistently talk about and emphasize.

Operator

Our next question or comment is from Amitabh Passi from UBS.

Amitabh Passi - UBS Investment Bank, Research Division

I have 2 questions, if I may. Diana, first question for you, just on gross margins. I think they were flat sequentially, slightly down year-over-year despite sales being up. How do we think about the leverage in the model? Is it mainly coming through OpEx? Or is there further room to maybe expand gross margins? And then, Adam, just for you, on your mobile infrastructure end market, I think you said it was up 11% sequentially. Some of the large OEMs, their commentary has been less than inspirational. So I was just wondering was the upside on the antenna side, base station side? If you could maybe just provide some color there.

Diana G. Reardon

Sure, maybe I'll start with the first question, and I think this was a question relative to the components of our ROS expansion. And you rightly point out that the gross margin expansion, as a discrete line on the P&L, has been less part of the operating income expansion in this quarter. And I think that, that certainly is true. I guess what I would say, Amitabh, is we really manage the business to maximize and expand the operating profit. And we believe this is really a necessary approach to make sure that all of the costs on the P&L get equal attention by operating management. This has been our consistent approach for decades, and we feel that this is the right approach to expand operating income return. We have a really diversified product and market footprint, and that results in some products and markets having higher gross margins and higher SG&A and some have lower gross margins and lower SG&A. And sometimes, you have an impact from translation if rates move around, the acquisitions that we do can also sometimes have an impact relative to how their cost structure is. And so from our perspective, ROS expansion is the goal and as is this 25%-plus conversion margin on incremental sales. And that is something that we have achieved and that is something that we do have still incorporated in guidance for Q3 and Q4. I think if we talk specifically about the rest of the year, I think we probably will see some contribution to operating margin expansion from both gross margin and SG&A in the second half of the year. But from our standpoint by us, a management team, what we really care about is whether the ROS is expanding, not what specifically the gross margin or SG&A does. We work to maximize the bottom line. It's a very simple approach. It's a straightforward one. And we think based on our experience, it's very effective in expanding margins.

R. Adam Norwitt

Amitabh, with respect to your second question on wireless infrastructure, I think you used the phrase, "less than inspiring" in terms of their comments over the last couple of days. I would describe the market has been less than inspiring over the last 5 or 6 quarters. I mean, that has been certainly a challenging market. We are very pleased to have had that growth in the quarter, sequentially 11% up over the quarter. And I think your question was, is that coming from different sales than just to OEMs? The fact of the matter is that we had strong performance on both sides of the business, even slightly stronger on the equipment side with the OEMs on a sequential basis. And I think that comes from just a strong position that we've gotten on new base station platforms. There has been a real technology transformation that's been going on in that market for the better part of 2 years now as the equipment manufacturers have migrated to these lower cost, more modular base stations. I think that has had a negative result on them because they're selling their products a heck of a lot cheaper than they ever were before. It also had, to some extent, a negative impact on the content of interconnect products as you go from a big box, the size of a refrigerator, to something that is not all that much bigger than a server today in a base station. Obviously, there is a different level of interconnect. However, what we have seen is as those new base stations get more ruggedized because they're putting them up on tops of towers, they're putting them on tops of buildings, that the new interconnect requirements that are being required now for that new technology has allowed us to gain further position with our customers and start to see the kind of fruits of those designing labors coming through this quarter and last quarter, with now 2 sequential quarters of growth. Our Antenna business continues to be a very strong business. We have a leading position with some very strong customers around the world. Obviously, the operators' spending cycles -- they come and they go. I mean, you look today, China and India is not the kind of frothy market that it once was. The U.S. is not a bad market. Europe is -- there's a lot of uncertainty. And you probably read the release today from one of the players in that space that says that in Europe, there is some macro uncertainty that's driving different spending patterns. Our strategy there is not to bet on a region. It's not to pick one of the equipment manufacturers as our only horse to ride. It's to try to have a broad position across all the operators that we can and across all the equipment makers that we can with a broad array of product offering in RF products, in fiber optics, in high power, high speed. And so with that broad power -- product offering that we have, we're able to capitalize, to some extent, better as these new products take hold and even if those new products are these lower-priced products that don't necessarily help the sales of our customers.

Operator

Our next question or comment comes from Brian White from Topeka.

Brian John White - Topeka Capital Markets Inc., Research Division

Adam, on the mobile device market in the third quarter, do you feel like you're gaining share? Or is this just a reflection of the marketplace?

R. Adam Norwitt

Well, I think I would say we're gaining share. I wouldn't expect that the market is going 30%. But gaining share in that market, it's hard to say. What does that mean, gaining share, because we're designing totally new products into totally new products. And so to that extent, is that gaining share? Is that not gaining share? Certainly, we're gaining position in the broader marketplace. Is it coming out of one person's hide or someone else's hide? I think that's harder to quantify. It's a new thing. And so to the extent that we're making some new antenna or some new interconnect or some new mechanical thing that goes on to these devices, that is kind of a new business that is not coming out of someone else's hands or teeth here. And so typically, when one says, "Are you gaining shares?" that means someone else is losing and you're winning. I think in this case, we're winning as the new technology evolves. And that's something that is -- that's been a real focus for us. This is not a market where you want to get into just kind of share battle because the pricing dynamics in the market where you get into share battles, those are not -- there is not going to be any winner in the end for that. The way to win is with new technologies and with a strong and very dynamic, speedy support of these new product ramps. And I think that's one area where we have worked for the better part of the decade, to build an organization that is highly responsive, really turning on a moment's notice, turning new samples, turning new designs for customers, doing what it takes on a 24 hour a day clock to make sure that our customers can release their products on time and thereby, they come back to you when they need another new technology and they have another new device going forward. It's hard to say what device it's going to be, actually, in the future. I mean, we talked about how we view that market more broadly today than we did 2 years ago. Who knows if, in 2 years, whether there is going to be some other new thing that's out there that's going to be called a mobile device? But what I can tell you is, to the extent that there is value for our products to be on it, we're going to work darn hard to make sure that we're present.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay, great. And just a follow-up, book-to-bill ratio, as I remember, was 1.05 March quarter, 0.99 in the June quarter. Just how do we think about that? It looks like the biggest decline since June quarter '08. How do we think about that in the marketplace?

Diana G. Reardon

I think, Brian, that the book-to-bill ratio in the first quarter was probably a little bit on the high side, higher than what we ordinarily would see if you look back historically. I think a 0.99:1 book-to-bill ratio in Q2 is not such an unusual phenomenon for us. So I would say that more -- that the Q1 book-to-bill ratio was probably more on the high side, which makes that comparison maybe look a little funny when you look at the 2 quarters together. But Q2, in terms of our order levels, we feel good about where they are. We feel that the book-to-bill ratio makes sense relative to the guidance that we've given and so forth. As you know, some of our markets are more book-to-bill in the same quarter, and that can have an impact on what that ratio looks like.

Operator

Our next question comes from Tony Kure from KeyBanc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Just a couple of quick ones here. You mentioned the strength in the datacom markets into the second quarter and then it seems like with the expectation going forward, there's a pretty material shift in sentiment. Was there some sort of turning event or some sort of time period where you saw a definite shift in more caution out of your datacom customers?

R. Adam Norwitt

I wouldn't say that there is sort one turning point. I think that there's kind of been a general evolution of the sentiment. And again, I wouldn't describe that as horribly negative. It's not that we're saying that market is going to be down double digits in the third quarter. I think there is some degree of caution in the third quarter with respect to the end sales of their product. I think that in addition, there's many new products that are coming on board and to the extent they're sort of seeing are they selling or not selling, and that's something that happens also at the time of new product releases with customers. So I don't think there was a moment where everybody said they're kind of freaked out, and said it's all going bad. It's not at all. I think the reason why I made those comments is typically, that market would be potentially up in the third quarter compared to the second quarter. We don't necessarily see that this quarter. We see it more sort of slightly down to flattish. And thereby, that implies to us that there is some conservatism and some uncertainty in that marketplace, but this is not -- no cataclysm here.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay. That color is helpful. And then, Diana, I think you mentioned there was, helping out the margins, there were some more cost reductions. I know it's a normal part of the business in the second quarter but maybe -- you could maybe scale those for us and how they -- how the second quarter cost reductions may have compared to the size of the cost reductions, I think, you had in the first quarter or even if you annualize them versus 2011. I guess just maybe scale, how big the cost reductions were relative to prior periods.

Diana G. Reardon

Yes, I'm not sure that I could give you a quantification on a consolidated basis of exactly how those would compare. I think that we -- every quarter and every month, each of the operating management team works to really minimize the entire cost structure, whether we're talking about manufacturing or SG&A-related cost. And I think that is an important part of where that operating leverage in the business comes from. So it's really the combination of the volume. And that volume then creates opportunity if you do a really strong job of cost control to get that margin expansion that you've seen us achieve in the last 2 quarters, in Q1 and Q2, and the further margin expansion that we have included in the guidance in the second half of the year. I think that the management team is certainly, I would say, working as hard as they ever have been to create sufficient cost reduction opportunities to keep that margin expansion going. And certainly, I wouldn't say that this is the easiest environment that we're in right now, but certainly, the team is up to the challenge and are very excited to continue to grow margin as we grow the top line here in Q3. So that's about as much of a quantification as I can give you.

Operator

And I'm currently showing no further questions or comments at this time.

R. Adam Norwitt

Very good. Well, we'd like to express our thanks to all of you for the time today, and I'd like to also take this opportunity to wish you all a pleasant summer. I hope you each get the opportunity to take a little bit of rest from your busy schedules. And we look forward to hearing your voices again here in the fall. Thank you all very much, and have a pleasant day.

Diana G. Reardon

Thank you.

Operator

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

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