Hello, and welcome to the Fourth Quarter Earnings Conference Call for Amphenol Corporation. At the request of the company, this conference is being recorded. If anyone has any objections, you may disconnect at this time. I will now introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwitt, our CEO. We would like to welcome you to our fourth quarter 2021 conference call. Our fourth quarter and full year results were released this morning. I will provide some financial commentary, and then Adam will give you an overview of the business as well as current trends. Then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and may make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. In addition, all data discussed during this call will be on a continuing operations basis unless otherwise noted. The company closed the fourth quarter with record sales of $3.027 billion and GAAP and adjusted diluted EPS of $0.72 and $0.70, respectively. We are very proud that the fourth quarter represents the first time in Amphenol's history that we achieved quarterly sales in excess of $3 billion. Fourth quarter sales were up 25% in U.S. dollars and in local currencies and up 18% organically. Compared to the fourth quarter of 2020, the significant sales increase was primarily driven by the robust growth in the IT, data communications, industrial, mobile networks, commercial air, automotive, and broadband markets, including contributions from the company's acquisition program. Sequentially, sales were up 7% in U.S. dollars and organically and 8% in local currencies. For the full year 2021, sales were a record $10.876 billion, which were up 26% in U.S. dollars, 25% in local currencies, and 18% organically compared to 2020. Orders for the quarter were $3.278 billion, which is up 30% compared to the fourth quarter of 2020 and up 9% sequentially, resulting in a strong book-to-bill ratio of 1.08:1. Breaking down fourth quarter sales into our two segments. The Interconnect segment, which comprise 96% of our sales, was up 25% in U.S. dollars, while the Cable segment was up 22% in U.S. dollars. Breaking down full year sales into our two segments, the Interconnect segment was up 27% in U.S. dollars, and the Cable segment was up 21% in U.S. dollars. Adam will comment further on trends by market in a few minutes. GAAP and adjusted operating income was $593 million and $608 million, respectively, in the fourth quarter of 2021 and GAAP operating margin was 19.6%, which decreased by 50 basis points compared to Q4 of 2020 and by 70 basis points relative to the third quarter of 2021. Fourth quarter 2021 GAAP operating income includes $15 million of acquisition-related costs related to the Halo acquisition, which closed during the fourth quarter. Excluding these costs, the fourth quarter 2021 adjusted operating margin was 20.1%, which decreased by 50 basis points compared to the fourth quarter of 2020 and by 20 basis points relative to the third quarter of 2021. The year-over-year decrease was primarily driven by the impact of the more challenging commodity and supply chain environment, together with a slight margin dilution of acquisitions, and these impacts were partially offset by the normal operating leverage on higher sales levels as well as the lower negative cost impacts from the pandemic. On a sequential basis, the slight decrease in adjusted operating margin was due to the continued challenging commodity and supply chain environment, which has not yet been fully offset by pricing and other actions. For the full year 2021, GAAP operating margin was 19.4% and adjusted operating margin was 20%. The 80 basis point increase in adjusted operating margin as compared to 2020 was primarily driven by the normal operating leverage on higher sales volumes as well as the lower negative cost impacts resulting from the pandemic, and these benefits were partially offset by the more challenging commodity and supply chain environment experienced in 2021 as well as the current margin dilutive effect of the acquisitions we made during the year. From a segment standpoint, operating margin in the Interconnect segment was 22.1% in the fourth quarter of 2021, and operating margin in the Cable segment was 2.4%. Our margins in the Cable segment continued to be particularly impacted by the ongoing and significant increase in commodity and logistics costs, which have not yet been offset by pricing actions. Given the dynamic overall cost and supply chain environment, we are very proud of the company's operating performance. Our team's ability to effectively manage through all of these many challenges is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster high-performance, action-oriented culture. The company's GAAP effective tax rate for the fourth quarter was 18.8%, and the adjusted effective tax rate was 23.8%, compared to 21.7% and 24.5% in the fourth quarter of 2020, respectively. The slightly lower adjusted tax rate in the quarter reflected the year-to-date true-up of a full year adjusted effective tax rate from the expected 24.5% to a slightly lower 24.3% as a result of a slightly more favorable mix of income for the full year. For the full year 2021, the company's GAAP effective tax rate was 20.6% and the adjusted effective tax rate was 24.3%, compared to 20.5% and 24.5% in 2020, respectively. In 2022, we expect our adjusted effective tax rate to be approximately 24.5%. GAAP diluted EPS was a record $0.72 in the fourth quarter, an increase of 26% compared to $0.57 in the prior year period, and adjusted diluted EPS was also a record $0.70, an increase of 23% compared to $0.57 in the fourth quarter of 2020. For the full year, GAAP diluted EPS was $2.51, a 28% increase from $1.96 in 2020, and adjusted diluted EPS was $2.48 in 2021, an increase of 33% compared to 2020. This was an excellent result, especially considering the significant cost, supply chain, and other operational challenges the company faced in 2021. Operating cash flow in the fourth quarter was a record $464 million or 106% of adjusted net income. And net of capital spending, our free cash flow was also a record $379 million or 87% of adjusted net income. For the full year, 2021 operating cash flow was $1.524 billion or 98% of adjusted net income. And net of capital spending, our free cash flow for 2021 was $1.167 billion or 75% of adjusted net income. From a working capital standpoint, inventory days, days sales outstanding, and payable days were 80, 71, 56 days, respectively, all of which were within our normal range, and we are especially pleased that our team's focus on all elements of working capital management resulted in a significant reduction of the company's inventory days from the third quarter. During the quarter, the company repurchased 2.1 million shares of common stock at an average price of $81, bringing total repurchases during 2021 to 9.3 million shares or $662 million. When combined with our normal quarterly dividend, total capital returned to shareholders in 2021 was more than $1 billion. Total debt at December 31 was $4.8 billion, and net debt was $3.6 billion. Total liquidity at the end of the quarter was $2.9 billion, which included cash and short-term investments on hand of $1.2 billion, plus availability under our existing credit facilities. For the quarter and full year 2021, GAAP EBITDA was $726 million and $2.6 billion, respectively. And at the end of 2021, our net leverage ratio was 1.4x. Lastly, as noted in the press release, effective January 1, 2022, we have aligned our businesses into three new reportable segments. We will report results for these new segments as well as comparable historical financial data starting in the first quarter of 2022. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Well, thank you very much, Craig, and I'd like to also extend my welcome to all of you here on the phone today. And hopefully, it's not too late for me to wish you and your families all a happy new year. I also want to just express my wishes that everybody here on the call, together with your family, your friends, and your colleagues are all managing to stay safe and healthy, in particular, amidst the Omicron wave that's occurring in many areas of the country. As Craig mentioned, I'm going to highlight some of our fourth quarter and, in particular, our full year achievements. I'll discuss our trends and progress across our served markets, and then I'll make a few comments on our outlook in the first quarter. And of course, we'll have time for Q&A thereafter. With respect to the fourth quarter, we're truly proud to have finished the year with record sales and adjusted earnings per share in the fourth quarter, both of which were significantly above the guidance that we gave just 90 days ago. Sales grew by a very strong 25% in U.S. dollars and in local currencies reaching a new record of $3.27 billion. On an organic basis, our sales increased by 18%, driven in particular by robust growth in the IT datacom, mobile networks, industrial, and automotive end markets. And I'll talk to each of those markets here in a moment. The company booked a record $3.278 billion in orders in the fourth quarter, which represented another strong book-to-bill of 1.08:1. Despite the many operational challenges we and others continue to face, including ongoing cost increases related to commodities, supply chain, and other pressures, our adjusted operating margins in the quarter reached a very strong 20.1%. Adjusted diluted EPS was a new record $0.70 and represented a robust growth of 23% from the prior year, an excellent demonstration of our organization's continued strong execution. And as Craig mentioned, we generated record operating and free cash flow in the quarter of $464 million and $379 million, respectively, both of which are clear reflections of the quality of the company's earnings. Just at the end of this quarter, I'm extremely proud of our team. As these quarter's results once again reflect the discipline and agility of our entrepreneurial organization, who continued to perform very well amidst a very challenging environment. We're also very pleased that in the quarter, we announced on December 1, the acquisition of Halo Technology Limited for a purchase price of approximately $715 million. Halo is a leading provider of active and passive fiber optic interconnect components for the communications infrastructure markets with expected sales this year of approximately $250 million. Halo's product offerings are highly complementary to our existing high-speed and fiber optic Interconnect solutions and represent a significant long-term growth opportunity for Amphenol, in particular with customers in our IT datacom, mobile networks, and broadband markets. We're especially excited that Halo significantly bolsters our position in active fiber optic Interconnect products, which is a technology with truly high-growth potential as customers around the world are upgrading their networks to support the acceleration of high-speed data traffic. Halo is an agile supplier of these important products to a wide variety of customers across these communications infrastructure markets, whose unique technology and service offering enables them to realize strong operating results. I'm just very excited to welcome the highly talented and entrepreneurial Halo team to the Amphenol family and look forward to great things from them in the future. We also announced on December 1, the closing of the sale of the MTS Test & Simulation business to Illinois Tool Works or ITW. We remain extremely pleased with the entirety of the MTS acquisition, which as you all recall, was announced last year in the fourth quarter, meaning 2020. With the disposition of Test & Simulation to ITW, we have now acquired 1 of the leading sensor companies in the industry, further strengthening our broad offering of high-technology sensors. We're very proud of the performance of the MTS sensors team during their first 3 quarters as part of the Amphenol family, and we look forward to them driving outstanding value for many years to come. I remain very confident that our acquisition program will continue to create great value for the company. And in fact, our ability to identify and execute upon acquisitions and then to successfully bring these new companies into Amphenol remains a core competitive advantage for the company. Now turning to the full year of 2021. I can just say it was an extremely successful year for Amphenol despite the many operational and cost challenges that we faced. We expanded our position in the overall market, growing sales by a very strong 26% in U.S. dollars and 18% organically reaching a new sales record of $10.876 billion. I would just note that, in fact, over the past 2 years, both of which have been impacted by the COVID-19 pandemic, we've grown our sales by more than 32% from our 2019 levels, which is a great confirmation of the value of the company's diversification and the agility of our management team in every environment. Our full year 2021 adjusted operating margins reached 20%, which was an increase of 80 basis points from last year from 2020 despite the multiple pressures on margins that we experienced around the world. And this strong level of profitability enabled us to achieve record adjusted diluted earnings per share of $2.48. We generated operating and free cash flow of $1.524 billion and $1.167 billion, respectively, again, excellent confirmations of the company's superior execution and disciplined working capital management. We also put that cash to work with our acquisition program that created great value in 2021 with 7 new companies added to the Amphenol family. MTS Sensors, Halo, Positronic, LCAB, Unlimited Services, CableCon, and Euromicron have collectively expanded our position across a broad array of technologies and markets while bringing outstanding and talented individuals into the Amphenol family and thereby strengthening our organization. We're excited that these acquisitions represent expanded platforms for the company's future performance. In addition, as Craig noted, in 2021, we bought back over 9.3 million shares under our share buyback program and increased our quarterly dividend by 38%, representing a total return of capital to shareholders of just over $1 billion for the year. So while there continues to be a high level of volatility in the overall environment in 2021, as we enter 2022, our agile entrepreneurial management team is confident that we have built further strength from which we can drive superior long-term performance. Now let me turn to the performance of the company across our served markets. And I would just note that we remain very pleased that the company's balanced and broad end market diversification continues to create value for Amphenol, with no single end market representing more than 25% of our sales in 2021, and that market, industrial being really one of our most diversified markets across the segments within industrial. We believe that this diversification mitigates the impact of the volatility of individual end markets while continuing to expose us to the leading technologies wherever they may arise across the electronics industry. Now turning to the military market. Military represented 10% of our sales in the fourth quarter and 11% of our sales for the full year of 2021. Our sales grew from prior year by 6% in U.S. dollars in the fourth quarter as we benefited from acquisitions. On an organic basis, our sales did moderate by about 4% driven by reduced sales related to airframe applications and ground vehicles. Sequentially, our sales increased slightly as we had expected coming into the quarter. For the full year 2021, sales to the military market grew by 13% in U.S. dollars and 4% organically, reflecting our leading market position and strong execution across virtually all segments of the military market, together with the benefits of the MTS Sensors and Positronic acquisitions completed earlier in the year. Looking ahead, we expect sales in the first quarter to increase slightly from these fourth quarter levels, and we continue to be excited by the strength of the company's position in the military market. As militaries around the world continue to accelerate their adoption of next-generation technologies, our industry-leading breadth of high-technology Interconnect and Sensor products positions the company strongly across essentially all major defense programs, and this gives us confidence for our long-term performance. The commercial aerospace market represented 2% of our sales in the fourth quarter and as well for the full year of 2021. Sales in the quarter grew 27% in U.S. dollars and 6% organically as we benefited from the beginnings of a recovery in procurement to support growing aircraft production as well as from the contributions from our recent acquisitions. Sequentially, we're very pleased that our sales grew a robust 15% from the third quarter, which was in line with our expectations coming into the quarter. For the full year, sales declined by 10%, reflecting the significant impact of the ongoing pandemic on travel and aircraft production. Looking into the first quarter, we expect a sequential moderation in sales from these levels. Regardless of the challenges in the commercial aerospace market in both 2020 and 2021, our team working in this market remains very committed to leveraging the company's strong Interconnect and Sensor technology positions across a wide array of aircraft platforms and next-generation systems integrated into those airplanes. As personal and business travel continues to recover from the pandemic-impacted lows, we look forward to benefiting as jet manufacturers expand their production and, in turn, their procurement of our products. The industrial market represented 25% of our sales in the fourth quarter and for the full year, and sales in this market significantly exceeded our expectations coming into the quarter, increasing by a very strong 42% in U.S. dollars and 25% organically from prior year. We experienced robust strength in essentially all segments of the industrial market with particular strength in battery and heavy electric vehicle, transportation, rail mass transit, factory automation, heavy equipment, as well as oil and gas. On a sequential basis, our sales increased by 2%, which was significantly better than our expectation for a sequential moderation, as we saw broad-based strength. For the full year 2021, sales in the industrial market grew by a very strong 46% in U.S. dollars and 27% organically, as we saw again broad-based growth across virtually all market segments of the global industrial market. Looking to the first quarter of 2022, we do expect a sequential moderation in sales from these very strong fourth quarter sales levels. Our outstanding global team working in the industrial market continues to find new opportunities for growth across the many segments of this exciting market. I remain confident that our long-term strategy to expand our high-technology Interconnect, Antenna, and Sensor offerings, both organically as well as through complementary acquisitions, has positioned us to capitalize on the many revolutions happening across the industrial electronics market. We look forward to realizing the benefits of this strategy for many years to come. The automotive market represented 19% of our sales in the fourth quarter and 20% for the full year 2021. Sales in automotive were actually much stronger than we had anticipated coming into the quarter, with revenue growing by a very strong 18% in U.S. dollars and 16% organically versus prior year, and this was driven particularly by the strength of our sales in the hybrid and electric vehicle applications as well as our sales to customers in Asia. Sequentially, our automotive sales increased by a very strong 10%, well above our prior expectations for a high single-digit decline, as we saw strong demand from customers in anticipation of improving production volumes in the first quarter. For the full year 2021, our sales to the automotive market increased by a strong 47% in U.S. dollars and 41% organically, reflecting the continued recovery of the automotive market, as well as our expanded position in next-generation electronics integrated into cars, including, in particular, electric and hybrid drivetrains. Looking into the first quarter, we expect a high single-digit sequential moderation in sales from these very lofty levels that we achieved in the fourth quarter. I remain extremely proud of our team working in the automotive market, who has demonstrated an incredible degree of agility and resiliency in both driving a significant recovery from the reduced sales levels in 2020, while also expertly navigating the myriad of supply chain challenges that struck the entire automotive industry during the course of this year. We look forward to benefiting from their efforts long into the future. The mobile devices market represented 14% of our sales in the fourth quarter and 12% of our sales for the full year of 2021. Our sales to mobile device customers declined from prior year by 5% in U.S. dollars and 6% organically as declines in products incorporated into smartphones more than offset the growth that we did realize in wearable devices, laptops, and tablets. Sequentially, our sales increased by a better-than-expected 14%, driven by higher sales to smartphones and wearable devices. For the full year 2021, sales in the mobile devices market increased by 4% in U.S. dollars and 2% organically as we benefited from growth in our products used in laptops and wearables, offset in part by a moderation of sales related to smartphones and tablets, which, as you will recall, were particularly strong during 2020 with all of the work from home and study from home dynamics that were there early on in the pandemic. Looking into the first quarter, we anticipate a typical seasonal sequential decline of approximately 35%. While mobile devices will always remain one of our most volatile markets, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2022 and beyond. Our leading array of antennas, interconnect products, and mechanisms continue to enable a broad range of next-generation mobile devices, which positions us well for the long term. The mobile networks market represented 5% of our sales in the quarter and for the full year. And we're very pleased that sales in mobile networks increased from prior year by a very strong 36% in U.S. dollars and 28% organically. And this was with growth, particularly from our sales to mobile network operators in support of their next-generation 5G network buildouts. Sequentially, our sales increased by a higher-than-expected 7%. For the full year 2021, our sales to the mobile networks market grew by 12% from prior year and 7% organically. Looking into the first quarter of 2022, we do expect sales to moderate from these very strong levels. Our team continues to work aggressively to realize the benefits of our long-term efforts at expanding our position in next-generation 5G equipment and networks around the world. As customers continue to ramp up their investments into these advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers. The information technology and data communications market represented 22% of our sales in the fourth quarter and 21% of our sales for the full year. Sales in the fourth quarter in IT Datacom were much stronger than expected, rising by 53% in U.S. dollars and 49% organically from prior year as we benefited from broad-based demand for our industry-leading high-speed power and fiber optics solutions. While we saw strength really across server, networking, and storage applications, we experienced especially robust growth from web service providers and other data center operators in the quarter. Sequentially, our sales grew by 10%, which was significantly higher than our expectations, which had been coming into the quarter of a slight decline. We do believe our sales growth benefited from some modest pull-in of demand from the first quarter as customers prepared for potential supply chain issues related to the Chinese New Year. For the full year 2021, our sales to the IT datacom market grew by a very strong 26% in U.S. dollars and 24% organically as we continue to benefit from our strong technology solutions and leading position across a broad array of applications. Again, sales to web service providers were a significant contributor to our full year growth in 2021. Looking ahead, we do expect a high single-digit moderation in the first quarter, reflecting the very robust demand in the fourth quarter. Nevertheless, we're excited by our strengthened technology position, especially with the addition of Halo's active and passive fiber optic interconnect products. I remain encouraged by the company's outstanding position in the global IT datacom market. Our OEM and service provider customers continue to drive their equipment and networks to ever higher levels of performance in order to manage the continued dramatic increases in demand for bandwidth and processor power. We look forward to realizing the benefits of our leading position for many years to come. And finally, the broadband market represented 3% of our sales in the quarter and 4% for the full year. Sales increased by 14% in U.S. dollars and 2% organically from prior year as we benefited from increased spending by cable operators as well as the contributions from our recent acquisitions. On a sequential basis, sales grew by a better-than-expected 10%. For the full year 2021, sales to the broadband market grew by 9% in U.S. dollars and 1% organically. Looking ahead, we expect sales to increase in the low double digits from these levels as we benefit from the addition of Halo's product sales into the broadband market. We remain encouraged by the company's position with broadband customers, and we look forward to continuing to support our service provider customers around the world, all of whom are working to increase their bandwidth to support the expansion of high-speed data applications to both homes and businesses. Now turning to our outlook. The current market environment, no doubt, remains highly uncertain with significant continuing supply chain and inflationary challenges as well as the impact of the ongoing pandemic assuming that conditions do not meaningfully worsen and also assuming constant exchange rates. For the first quarter, we expect sales in the range of $2.690 billion to $2.750 billion as well as adjusted diluted EPS in the range of $0.59 to $0.61. This guidance represents very strong sales growth over the prior year of 13% to 16% as well as adjusted diluted EPS growth of 13% to 17% compared to the first quarter of last year. Finally, I just want to note, as we described in our press release, effective January 1 of this year, we have aligned our business units into 3 newly formed divisions: Harsh Environment Solutions, Communication Solutions, and Interconnect and Sensor Systems. This new alignment will allow us to further scale our business beyond the $10 billion sales level that we crossed last year. Very importantly, this alignment further strengthens our unique and strong Amphenolian culture of entrepreneurship, while reinforcing the accountability of our 130 general managers around the world. We look forward to providing more detail — financial detail about these reportable segments at the time of our April earnings release. I come away from this quarter still so confident in the ability of our outstanding management team to adapt to the continued challenges in the marketplace and to capitalize on the many future opportunities to grow our market position and expand our profitability. In addition, our entire organization remains committed to delivering long-term sustainable value, all while prioritizing the continued safety and health of each of our employees around the world. And most importantly, I'd just like to close by taking this opportunity to once again thank the entire Amphenol team. In particular, I'd like to extend my thanks to all of our factory workers around the world. While many of us have been able to work from home on occasion during these last two pandemic-impacted years, I'm just so inspired by the dedication of our factory workers who never worked a single day at home, and it was just phenomenal to see. The results that we saw in the fourth quarter really are a great credit to their and our entire Amphenol organization's dedication. And with that, operator, we'd be very happy to take any questions that you may have.

Our first question is from Amit Daryanani with Evercore. You may go ahead.

Thanks for taking my questions. I guess, Adam, as I think about the demand vectors that you're seeing, there's obviously some worry out there that you might be overshipping versus end demand in some big rate. If I think about 24% growth in December, your guide is implying a very healthy 14%, 15% growth in March. I think your compare is actually difficult. I'd love to get any perspective you have in terms of the growth that you're seeing, if it's truly end demand or do you think there's a bit of an inventory build happening at the customer level and then maybe as a way to think about this in terms of your growth vectors direct versus the channel, that would be helpful, too.

Yes. Well, thanks so much, Amit, and happy New Year. Look, we don't have perfect visibility into, as you know, our OEM customers and their warehouses and how much inventory they're holding. But there's no doubt about it that across the electronics industry, and I guess, across really all industries, customers have probably gotten a little more gun-shy because of supply chain challenges. At the same time, I can tell you there's robust demand. And I think if you take a market like the automotive industry, as one example, try to go out and buy a car today, it's not an easy thing. I know Craig went out and recently bought a car, and he shared with me that there was nothing to buy. The choices that one has when one is willing and ready to go out and buy something is just not there still today. And so whether there is a mismatch of components that ultimately is creating difficulty for our end customers to ship things and that can create some challenges across their supply chain, that may very well be. But the end demand by end consumers for things like cars, for things like semiconductors, for things like high-speed data this end demand still seems relatively robust. As it relates to the channel, as you know very well, distribution represents for us. I think this year, it was about 17 or so percent of our sales, which was a little tick up from years past, and it was 15%, 16%. And we saw very strong demand from distribution through the course of the year. And I wouldn't say that we've seen any inventory build. To the contrary, I would say that probably inventories are a little bit lighter inside distribution, reflecting the strength of the pull-through of demand. What does that mean here going into the first quarter? No doubt about it. There remains a lot of volatility. There remain a lot of supply chain challenges. But I'm sure that whatever comes along, our team is going to be very agile and nimble to jump on any opportunities to ship products like we were in the fourth quarter.

The next question is from Matt Sheerin with Stifel. You may go ahead.

Yes, thank you. And good afternoon. Adam, I just wanted to talk about the upside that you saw across several end markets at a time when a lot of your peers are even missing numbers or talking about big revenue opportunities that they missed as a result. And I'm wondering whether Amphenol's unique operating model, when you've got many operating units running on their own, does that put you at an advantage in a market like this? And then just as a follow-up, regarding your inventory reduction, are you expecting to build in some markets because of their supply chain issues?

Well, Matt, thank you very much. I mean this is a question that, as you know, is very close to my heart. The simple answer to your question is yes, we do believe that our unique operating model creates a competitive advantage in the marketplace because of the agility, reactivity, and flexibility that it instills at every level of the company. I mentioned in my prepared remarks that we have taken this step effective January 1 of creating the three operating divisions of the company. The purpose of this is to ensure the long-term scalability of that unique operating model, making sure that every one of our 130 general managers around the world has reports to somebody who has the bandwidth to support them in every way that we need to drive collaboration, to stimulate them to exceed beyond levels that they ever thought they could do and that is really the magic of the Amphenol operating model. When I joined the company 23 years ago, we were just some general managers reporting to our then CEO, Martin Loffler. And when we were about to reach $2 billion in sales, we created the first concept of a grouping of those general managers, again, to ensure the appropriate span of control, the appropriate attention, and the stimulation of all of the value that comes from inside the company. And that group model, we eventually became seven operating groups. As we have evolved, it became very clear that to continue fostering that unique operating model, we needed to create more operating groups, and I can't have 12 of them reporting to me, and that's why we create now this concept of the divisions. But at the end of the day, all of our jobs is to enable those 130 general managers around the world because that is ultimately what makes this company special. And why we're able to succeed in really good times and bad and, in particular, in volatile times like today. In terms of inventory, I mean I think we're very proud of the work of our team and actually reducing our inventory in the fourth quarter, even with a 7% sequential increase in sales and bringing our inventory days basically to a normal level at the end of the year in a time period where there's so much supply chain chaos. You can imagine in the first quarter that maybe days would go up with the sequential sales that we have guided. But this is a phenomenal reflection of the fact that these 130 general managers, they're not just responsible for sales. They're not just responsible for gross margin. They're responsible for the entirety of their businesses. Every line item of the P&L, every line item of the cash flow, every line item of the balance sheet, and that allows them to really perform in challenging times like today.

Our next question is from Samik Chatterjee with JPMorgan. You may go ahead.

Thank you for taking my question. I'm looking back at your usual practice of providing guidance on full year expectations. Could you explain why you have chosen not to provide a full year guide this time? Additionally, I'd appreciate your thoughts on the sustainability of the growth rate you experienced in the first quarter for the remainder of the year, as well as any insights on margins. This would really help us understand how to approach the year ahead.

I mean, look, very simply put, we remain in a once-in-a-century global pandemic. I know we here live in Connecticut, where we've just gone through the Omicron wave. That Omicron wave is probably going to other places around the world, including places in which we manufacture products, and it doesn't seem prudent at this point to try to get out ahead of our skis on guessing a pandemic is going to strike and could potentially impact our customers anywhere in the world. In such an environment, we don't think it's prudent to give guidance beyond the quarter that we've given, and that includes guidance on margins, on sales by market, and all the other aspects.

The next question is from Will Stein with Truist Securities. You may go ahead.

Thank you for taking my question. Congratulations on the solid results and outlook. I want to ask about the new segments and operating structure you mentioned. Adam, a few years back, you indicated that there might be a need to add a new layer of management, and we are seeing that now. My question relates to how this will compare with the current organization, specifically regarding the existing end markets. Will we continue to have the same end market disclosures during the earnings call? Will these align with the new segments for forecasting purposes, or are they separate revenue categories? Additionally, from a management standpoint, could you clarify whether each end market has its own business leader, or is the end market discussion primarily for our understanding and analysis rather than a reflection of internal management? Apologies for the multiple questions, and thank you.

Well, number one, you have a memory like a steel trap as always. And #2, I think you essentially answered your question in certain ways here. Look, we organized our company not by market. And so our 130 general managers are each responsible for a certain distinct type of product across the extraordinary array of products that we see in the interconnect, as we define broadly interconnect products from connectors to value-add cable assemblies, printed circuit assemblies to sensors, to antennas and just the tens and tens and tens of thousands of different types of products that we make. Ultimately, because our general managers are responsible for manufacturing and design and quality and everything, it is really a product focus that each of them have. And as you know, we've talked for many years that one of our strategies that has been so successful is the way that we diversify the company. We design products maybe initially for a customer in a certain market, but then we work very aggressively and collaboratively across the company to proliferate that product across all markets that we can see. So an example is high-speed products. Originally, high-speed products were developed for IT applications, for things like core routers and the like. But as high-speed data starts to proliferate into other areas, for example, a fighter jet. Now our team in high speed would work collaboratively with the team who is maybe more focused in the defense market to make sure that we're creating the broadest product offering for those customers. And so what that ends up meaning is that many of our general managers work across multiple markets. Some of them are focused, some are not, depending on the type of product. At the end of the day, the divisions that we now will report as reportable segments, they will each sell into multiple of our markets and the markets won't map to the divisions, as it were. However, we'll provide disclosure on what markets are in which division, but you're going to end up finding that most of our markets are serviced by all three of those divisions.

Yes. And we'll continue to guide by end market as we have done historically. We will not be guiding by division, but we will be giving similar to we give today, financial information, revenue income information at the segment level. But nothing will change from a guidance perspective in terms of how we talk about guidance.

And we're not going to change the transparency that we give to all of you with all of our end markets.

The next question is from Mark Delaney with Goldman Sachs. You may go ahead.

Yes, good afternoon and thanks very much for taking the question. I was hoping you could talk a bit about how to think through conversion margins at the EBIT level going forward. Very understandably, you mentioned a few headwinds in terms of M&A and supply chain that impacted the fourth quarter on a year-over-year basis. So I'm curious if you should think it's possible you have better than typical conversion margins this year as you have more opportunity to offset some of those challenges and some maybe above the historical conversion margin levels for 2022? Thank you.

Yes. Thanks, Mark. No doubt. I mean I just wanted to start with just saying that we really are actually proud of kind of what we achieved here for the full year 2021 and for the fourth quarter being at 20.1% and 20% for the full year amidst a really challenging year from a cost and supply chain perspective. The team really did a, I think, outstanding job navigating that as the year really continued to progressively get worse regarding just the underlying costs that the organization was seeing and to be able to navigate that through pricing and other actions. I think that the team did a pretty outstanding job of doing that, which has ultimately resulted in the results we have today. As we look into the first quarter, implied in our guidance, I know we don't per se talk about or guide to specific EBIT numbers. But our implied guidance would reflect some level of progress made in the first quarter in regards to pricing and other actions. You could see that really in the sequential conversion, typically on a lower revenue level, especially going from Q4 to Q1, where we have high single-digit, 10% sequential reduction in revenue. We would see typically kind of high 20s, even 30% kind of negative conversions. In this implied guide, there's closer to kind of mid-20s sequential conversion. That's even including some negative impact from a conversion perspective related to Halo in regard to bringing them around to our company average. However, I think that from that perspective, we are seeing some positive momentum as we move into the first quarter. And I don't think I'll talk past the first quarter at this point. Obviously, the team continues to work hard at improving the bottom line and kind of we'll see what happens with the underlying environment as well. But I am confident, as we saw in 2021, that the team has done a good job, and we'll continue to do, I think, a very good job of navigating this very difficult environment.

The next question is from Wamsi Mohan with Bank of America. You may go ahead.

Yes, thank you. Adam, Craig, you both mentioned commodity and logistics costs several times. And you noted that you're taking ongoing price actions. When do you expect these actions to fully offset? I guess, Craig mentioned partly in 1Q, you are making progress. But if these costs stayed relatively fixed, let's say, given the price action that you've taken across your portfolio, when should we think that you would be able to mitigate the entire amount? And secondarily, would you say that these pricing actions that you've taken are broad-based across the entire portfolio? Are there areas like auto, which typically take longer to have price discussions and price increases filtered through sort of behind the curve? And maybe if you could just characterize, Adam, like what percent of the portfolio maybe have seen price increases? Thank you.

Thanks, Wamsi. I think in regards to when our pricing actions could fully offset, I mean, this is kind of a theoretical question because it's difficult to say ultimately what's going to happen to the underlying environment. I think to assume that the underlying environment is going to stay exactly where it is today is a little bit unrealistic. So whether or not it gets better or gets worse. But I could tell you that, again, as I mentioned a minute ago that the team is doing, I think, a good job, and we are starting to see progress here in the first quarter. So I'm not really sure I can tell you exactly when that would be. But I would tell you that we are confident that based on some of the progress we're starting to make here in the first quarter that we're starting to make some headway on it, given the current environment. However, we're sitting here again in continuing pandemic, continuing into economic environment that's a bit uncertain. For me to try to predict when we're going to completely offset the current cost environment is just not something that I guess we're prepared to do.

In relation to our pricing strategy, every customer, market, region, and situation is unique. Pricing is more of an art than a science, and all 130 of our general managers are keenly aware of this. We recognize that in some markets, it’s simpler to increase prices, such as in distribution where a price list can be announced. In other areas, like those with longer-term contracts or where customers aren’t used to price adjustments, it’s much more difficult. Educating customers and being transparent is essential to help them see the reasoning behind price changes, especially considering our strong commitment to supporting them. We've been there for our customers during the pandemic and the supply chain crisis, which should help us in asking them to share in costs. Our markets vary widely in their pricing cycles; some are short-cycle with little to no price changes, while others take longer. I can’t provide a percentage of where we’ve been successful with pricing since we don’t have a system that can easily generate that information. However, I believe we’re seeing increasing success, as Craig mentioned. This task is challenging and ultimately rests with our general managers, who understand cost increases and negotiate with customers directly. I’m optimistic that we will make significant progress this year, although completely offsetting the current cost environment is a complex issue that’s hard to predict.

The next question is from Nick Todorov with Longbow Research. You may go ahead.

Thanks. I appreciate it. Good afternoon, guys. Sorry, another pricing question maybe for Craig. Craig, is there a way to break for us the headwind from supply chain versus M&A in 2021, because 2021 was pretty busy for you from an M&A perspective?

Yes. I would say that if you look at our kind of overall conversion for 2021, it was probably actually pretty close to what our target is on an organic basis. We had some benefit from some pandemic costs offset by some supply chain-related costs. The difference that is related to our acquisitions, which did bring with them at least currently a lower operating margin, which over time, we believe that we should be able to get up to the company average. So I think that's the way to think about it. Again, we're very proud of the ability to really actually, Adam alluded to our 2-year increase in revenue through a pandemic in the supply chain, we called it crisis and of over 32%. The reality is, actually, our EPS, our earnings actually increased by slightly higher than that. So I think that typically, we want to have a slightly higher EPS increase. Given that we've done a good job of kind of offsetting some of these costs, I think ultimately, we were able to really continue to increase our earnings over that 2-year period at a rate that's slightly under what we would have hoped from an organic perspective, but actually very respectable considering all the costs that existed over the last couple of years.

The next question is from Steven Fox with Fox Advisors. You may go ahead.

Thanks. Good afternoon. I guess I was just wondering, respectfully, looking at the last few quarters, the company has sort of looked for a moderation in industrial and IT datacom, and it's continued to perform a lot better than you guys were thinking, and now you're sort of calling for the same thing again. Stepping back and looking at the past versus going forward, is there anything different in your thinking now that you're seeing in the markets or just still trying to be conservative and any other risks you would point out that maybe we should appreciate? Thanks.

Thank you, Steven, and good afternoon. I appreciate the question. We approach each quarter with a recognition of the uncertainty and volatility in the environment, and we strive to provide the best insights based on feedback from our customers and our observations in the supply chain and operations. We have surpassed expectations in industrial and IT datacom, and the performance last quarter was a pleasant surprise, marking a significant achievement in the fourth quarter. While the outperformance may be slightly less in the third quarter, it remains strong. I won't commit to outperforming our guidance for the first quarter in IT datacom and industrial at this moment. However, our team is highly motivated and dedicated to making things happen, focusing on being available for our customers when they need support, especially when others cannot assist them. This period has allowed us to strengthen our relationships with customers, which we couldn't do before this crisis. When we receive urgent requests from customers, our general managers respond with heightened energy, seeing this as an opportunity to build long-term strength and create lasting value. Regarding the first quarter, we are providing our best guidance based on current conditions in this uncertain environment. Nonetheless, the Amphenol team is committed to pursuing every opportunity for potential growth.

The next question is from Luke Junk with Baird. You may go ahead.

Good afternoon. I had a bigger picture question this afternoon, Adam. If Amphenol becomes a larger company with sales, of course, exceeding $10 billion for the first time this year, does it alter your approach to M&A at all, either in terms of the companies that you're targeting or your ability to integrate deals of all sizes? And I suppose the new segment structure could also play into this. Specifically, you've done two fairly large deals now in an 8-month window in the form of MTS and Halo. Does it say something about the future direction of the company, or am I just reading too much into your recent deals?

No, Luke, that's a great question. When we consider scaling the company, we focus on every aspect, especially on preserving and evolving our unique operating culture while scaling the company within that framework. That's our primary goal. Additionally, all other aspects need to scale as well, including our M&A strategy. I find it fascinating that over my nearly 25 years with this company, starting as an M&A intern at Amphenol, I have been heavily involved in our M&A program since 1998. We have consistently stated that we expect acquisitions to represent about one-third of our growth in the long term, which has held true from when we were a company with less than $900 million in revenue to now, close to $11 billion. Notably, over the last two years, we experienced around a 32% growth despite challenges, with our organic growth exceeding 20%. This indicates that even during the pandemic and with our company's size, acquisitions have consistently accounted for one-third of our growth. The method is quite simple: as the company expands, we either need to pursue more acquisitions of similar size or larger ones. We've accomplished both. Our acquisition of MTS, our first public company, and the recent acquisition of Halo are significant moves, and we have also strategically pursued smaller, enabling acquisitions like Positronic, LCAP, Euromicron, CableCon, and Unlimited Services. We plan to continue making acquisitions of all sizes. With our new division alignment, we have expanded the types of deals we can pursue. This restructuring creates additional capacity in our leadership team, allowing them to focus more on collaboration, customer engagement, and acquisitions. With the scale of our divisions, integrating a $50 million company is straightforward, and we could similarly integrate a billion-dollar company if the right opportunity arises. The potential scale of acquisitions available to us is practically limitless. The opportunities and resources we have to ensure successful integration of these acquisitions have also grown with this new alignment. We see no reason why M&A won't continue to be a driver for us, especially in a market that remains highly fragmented.

The next question is from Christopher Snyder with UBS. You may go ahead.

Thank you. I just wanted to follow-up on the previous commentary on M&A strategy. So as the range of acquisitions widens and maybe the average size pushes higher to achieve that 1/3 growth coming from M&A target, is there any impact on the multiples that the company is willing to pay or maybe has to pay to go after these larger acquisitions? Are there any increased challenges or difficulties integrating these larger businesses into the broader Amphenol? Thank you.

Thanks so much, Chris. Look, simply put, I don't think it does have an impact on the multiple. I will just tell you that you take the MTS acquisition, as an example, and we announced just last quarter that we closed on the disposition of the Test & Simulation business. The net multiple that we ended up paying for one of the most precious assets in the industry of some of the highest technology sensors there is, was not a double-digit multiple when all was said and done. I think that is a real testament to our ability to navigate a very challenging and very complex acquisition process, our first-ever public company, our first-ever concurrent disposition of an asset. In the end, we got a phenomenal organization with some of the best technology in the industry, amazing people, and we do that in a first single-digit multiple. That is a confirmation of the fact that big does not necessarily equal more expensive. In terms of the integration, we are never going to relax on the very simple principles that we have always applied to acquisitions, large and small. We look for three things when we look for acquisitions: we look for great people with great products and a great position. That first criteria, the great people, is for us the true litmus test of whether we will or will not buy a company. If it does not have those great people, we walk away every day of the week. By having those great people, that means that there are people that we can rely upon as we bring them into our organization, especially as it's newly aligned, and we let them go do their thing. All we do is we open doors for them for new opportunities that can only come by being part of a company as broad, global, and as strong as Amphenol. We think if anything else, if anything, as we have grown, as we've scaled the company, it's added momentum to really what has been a flywheel effect of our acquisition program over many years.

The next question is from Joseph Spak with RBC Capital Markets. You may go ahead.

Thanks. I wanted to focus on your automotive business for a second. You outperformed production by an incredible 40% this year. I was wondering if you could maybe distill that down into how much you think of that came from mix and some of the broader trends in automotive versus share gains? Maybe recenter us for what a — obviously, that's not sustainable at that level, but what's a more reasonable go-forward not in any given period, but over time, sort of outgrowth over the coming years, given the trends you see in that segment?

Well, thanks so much, Joe, and I hadn't actually done the math because we don't follow so much what is production and what is not production. I mean we care about the applications that these next-generation technology applications. But no doubt about it, our team did a phenomenal job this year and particularly capitalizing on new applications. I would just point to something like the electrification trend where we just had fabulous growth in electrified applications, really outperforming and taking more than our fair share of the opportunities in that space. That's always been our long-term strategy in automotive. We're not trying to take business out of the pockets of those who have it already. That's not a great approach in automotive. Rather, we look for the sort of technological innovations and those new adoptions of electronics, and then we aggressively pursue those with our agile entrepreneurial team. I think that that's been really successful here in this year. If I look over the course of kind of the last, call it, 13 years since I've been CEO, which really goes back to the low watermark of our automotive business, we have consistently outperformed in automotive by a very significant margin, kind of year-in and year-out. What does that mean in terms of a go-forward outperformance? I've never put numbers on this, but we would certainly expect that our team would be able to continue to outperform overall units. What that translates into for content versus share versus new applications, I'll let you — who is a much bigger expert in this market than me kind of sets out those numbers. But we clearly believe that we can continue to outperform.

Our next question is from Jim Suva with Citigroup. You may go ahead.

Thank you very much. As we wrap it up, a lot of my questions have been answered. I just want to ask 1 about the new segment reporting and kind of your ERP system. Your company has been very well known as being very lean and mean and good controls and folding in everything. So I was just wondering, I assume this doesn't mean like a new ERP system, it doesn't mean a lot more layers of management. Earlier in the call, you mentioned layers of management, or somebody mentioned that. I'm not sure that's what you meant as opposed to just more oversight in communication. But can you talk to us about the ERP system because you've done a lot of M&A. Now you're talking about new reporting and sometimes people wonder about risk there. But I view it as just providing us more information and not more cost and not a new ERP system. If you could clarify that would be great. Thank you.

Jim, it's a fabulous question, and we do appreciate it. The answer is a very hard no. I mean we run 130 ERP systems around the company. Each of our general managers is responsible for their own ERP systems. Craig has a fabulous and very simple off-the-shelf consolidation software that works over the web. The fact that we now align those businesses into divisions does not change our computer system whatsoever. Yes, I think it was — I believe, Will, who asked the question and alluded to the concept of a layer. We have appointed three new presidents of these divisions, which is technically a layer, but it's not a layer of bureaucracy, like you would see in many organizations. In terms of the cost of doing this, it's nothing at all; it's a very marginal incremental investment because the staff at this division is effectively a head of the division with the financial controller by his or her side. So this is not building infrastructure and building layers and bureaucracy. Far from it, it's just creating the bandwidth across our leadership team across what is now 12 group general managers in those three divisions, whereby the 130 general managers can be enabled. We can drive them, we can set aggressive goals, work with them on solving problems when they're small enough to solve, and capitalize on opportunities when they're small enough and early enough to capitalize and to capture. That's been the Amphenol style ever since I was a General Manager just reported to the CEO. But as we've grown, you cannot just have 130 people reporting to one; that doesn't work. You lose the benefit of being part of a broader Amphenol, and then become just a holding company. That's not what we are. We're not at all a holding company. In fact, there is close interaction, close collaboration, synthesis across those 130 entrepreneurial general managers. We have a term for it; we call it a collaborative entrepreneur, and that's really when we say an Amphenolian, that’s really what we mean. This is not at all creating new computer systems, new layers, new costs. Rather, it's enabling and ensuring the scalability of our unique entrepreneurial structure for many, many years to come as we pass $10 billion here in sales.

The next question is from David Kelley with Jefferies. You may go ahead.

Good afternoon, Adam and Craig. Thanks for squeezing me in. I was hoping to get some color on recent gross margin trends in light of some of the unique moving parts, inflation, and supply chain. You've also done several acquisitions. And then longer-term, you've been at 32% historically. Is that the right way to think about core gross margins for the core business?

Yes. Thanks, David. Gross margin is always kind of sometimes a difficult thing to specifically look at with our business. Over time, maybe the trending of it is more applicable. But certainly, in any quarters, it's kind of difficult just because of our markets to bring them with them different gross margins and also different operating expense levels. That’s why we really just don't look at gross margins or measure ourselves based on the gross margin level. We really look at kind of an operating margin level. I think what you kind of need to look at is ultimately that operating margin, and that’s trending over time. And certainly, over the last 10 years, we've had a strong performance and growth of that operating margin level, and that's what you kind of need to focus on. I think 10, 20, or even 50 basis points, even 100 basis point movement in our gross margin isn't necessarily unexpected, given strength in maybe a mobile device market or industrial market, which brings very different gross margins or a Sensor business tends to have higher gross margins and higher SG&A. I really just wouldn't so much focus. We do tend to get these questions quite a bit, but it's really the operating margins that ultimately we measure ourselves on. We drive our performance on, and ultimately, I think you should probably focus more on.

And our last question comes from Joe Giordano with Cowen. You may go ahead.

Hey guys, thanks for squeezing me in here. I wanted to touch on the orders. I mean, I think everyone understands that there's a pretty good underlying demand across a lot of these markets. But there does seem to be not just with your results, but others like a scrambling to order stuff in this fourth quarter. Like as you think about the underlying demand and what the orders look like right now, like entering January, do you feel like book-to-bill goes below 1 at some point over the next couple of quarters? I know we're not doing full-year guidance, but just can you kind of compare orders to underlying demand?

Yes. I think, Joe, it's hard for us to give a prognosis on what our book-to-bill is going to be. We had a very strong book-to-bill in the year. We finished with a strong book-to-bill. It's clear that our customers want to give us orders. What that book-to-bill will be going forward is really hard to predict. Operator, I think if that's all of our questions. I'd like to just extend my appreciation to everybody on the phone here for spending your precious time with us. I wish you all the best as you start the year, and most importantly, I just hope that all of you are able to stay safe and healthy, and we look forward to hearing from you again in just 90 days. Thanks so much, and Happy New Year again.

Thank you, everybody. Bye-bye.

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