安費諾 (APH) 2017 Q1 法說會逐字稿

Hello, and welcome to the first 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, Mr. Craig Lampo.

Sir, you may begin.

Thank you.

Good afternoon.

My name is Craig Lampo, and I'm Amphenol's CFO.

I'm here together with Adam Norwitt, our CEO.

We'd like to welcome everyone to our first quarter conference call.

Our first quarter 2017 results were just released this morning, and I'll provide some financial commentary on the quarter.

And Adam will give an overview of the business and current trends, and then we'll have Q&A.

We may refer in this call 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.

The company closed the first quarter with sales of $1,560,000,000 and diluted EPS of $0.71, exceeding the high end of the company's guidance for sales and EPS by $25 million and $0.04, respectively.

Sales were up 8% in U.S. dollars and 9% in local currencies compared to the first quarter of 2016.

From an organic standpoint, excluding both acquisitions and currencies, sales in the first quarter increased 5%.

And sequentially, sales were down 6% in U.S. dollars, local currency and organically.

Breaking down sales into our 2 segments.

Our cable segment, which comprise 6% of our sales, was up 16% from the first quarter of last year, primarily due to the impact of acquisitions.

The interconnect business, which comprise 94% of our sales, was up 7% in U.S. dollars from last year and was down 6% compared to last quarter.

Adam will comment further on trends by market in a few minutes.

Operating income was $314 million for the first quarter.

Operating margin was 20.1% in the first quarter of '17 compared to the adjusted operating margin of 18.6% in the first quarter of '16 and down 40 basis points from the fourth quarter of '16 operating margin of 20.5%.

From a segment standpoint, in the cable segment, margins were 14.2% in the first quarter compared to 13.3% last year.

The 90 basis point increase over last year reflects leverage on incremental volumes.

In the interconnect segment, margins increased 22.1 -- increased to 22.1% in the first quarter compared to last year at 20.6%, reflecting strong operational performance as well as the higher operating margins at FCI compared to the first quarter of last year.

This excellent performance is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high-performance culture -- high-performance, action-oriented culture in which each individual operating unit is able to appropriately adjust to market conditions and, thereby, maximize both growth and profitability in a challenging market environment.

Due to the careful fostering of such a culture and deployment of these strategies to both existing and acquired companies, our management team continues to achieve industry-leading operating margins and remains fully committed to driving enhanced performance in the future.

Interest expense for the quarter was $19 million compared to $18 million last year, reflecting the impact of higher average debt levels, primarily resulting from the company's stock buyback programs.

The company's effective tax rate was 23.8% for the first quarter of '17 compared to an adjusted effective tax rate of 26.5% for the first quarter of '16.

The tax rate for the first quarter of '17 reflects the inclusion of the full cash tax benefit of option exercises in the tax provision as a result of the new accounting standard related to stock compensation, which was effective for the company January 1, 2017.

I would also note that our guidance reflects an expected effective tax rate for the second quarter of approximately 26% and for the full year of approximately 25% to 26%.

On a GAAP basis, the company's first quarter '16 effective tax rate was 28.75%, which reflects the tax impact of the acquisition-related costs incurred during the first quarter of that year.

Net income was a strong 14% of sales in the first quarter of '17.

On a GAAP basis, diluted EPS grew 42% for the first quarter of '17 to $0.71 from $0.50 in the first quarter of '16, and diluted EPS grew 20% compared to the first quarter of '16 adjusted diluted EPS of $0.59.

Orders for the quarter were $1,599,000,000; an increase of 8% over the first quarter of '16, resulting in a book-to-bill ratio of 1.02:1.

The company continues to be an excellent generator of cash.

Cash flow from operations was $238 million in the quarter or approximately 105% of net income, and the company continues to target and achieve cash flow from operations in excess of net income.

From a working capital standpoint, inventory was $962 million at the end of March.

Accounts receivable was approximately $1.3 billion, and accounts payable was $682 million at the end of the quarter.

Inventory days, day sales outstanding and payable days were 83, 76 and 59 days, respectively, which are all within our normal range.

The cash flow from operations of $238 million, along with net borrowings of $225 million and stock option proceeds of $24 million, were used primarily to purchase approximately 249 million of the company's stock, to fund dividend payments of $49 million, to fund net capital expenditures of $48 million and to fund previously reported acquisitions of approximately $47 million, which resulted in an increase of cash, cash equivalents and short-term investments of approximately $104 million net of translation.

During the quarter, the company repurchased 3.7 million shares at an average price of just under $68.

These repurchases were made under the company's $1 billion 2-year stock repurchase program that was approved in January.

I would also note that the adoption of this new stock compensation standard had the effect of increasing our diluted weighted average shares by approximately 2 million shares.

At March 31, cash and short-term investments were approximately $1.3 billion, the majority of which was held outside of the U.S. Also, at the end of the quarter, the company had issued $1.2 billion under its commercial paper program, and the company's cash and availability under our credit facilities totaled approximately $2 billion.

As previously announced, the company had a successful senior note issuance in which the company issued 3- and 7-year notes aggregating $750 million on April 5, and the company intends to use the proceeds to repay all of its outstanding $375 million senior note, which is due this upcoming September as well as for general corporate purposes.

Prior to the $375 million note maturing, the company used the net proceeds to repay amounts outstanding under its commercial paper program.

After considering the $750 million senior note, the aggregate cash and availability is approximately $2.8 billion.

Total debt at March 31 was approximately $3.2 billion, and net debt is approximately $2 billion.

In the first quarter of '17, EBITDA was approximately $379 million.

From a financial perspective, this was an excellent quarter.

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

Well, thank you very much, Craig, and I'd like to offer my welcome to all of you on the call here today.

It's a pleasure to speak to you all here at the time of our first quarter earnings release.

As is customary, I'm going to first highlight some of our achievements in the first quarter.

I'll then go into a little bit more onto the trends and progress across our served markets.

And then finally, I'll close with some comments on our outlook for the second quarter and the full year, and of course, we'll have time for questions at the end.

With respect to the first quarter, we're very pleased that our results in the quarter were stronger than expected.

We exceeded the high end of our guidance in sales and earnings and delivered what's clearly a robust start to 2017.

As Craig mentioned, our revenues increased by 8% in U.S. dollars and 5% organically, reaching that $1,560,000,000 level.

And we're encouraged in particular that bookings were strong.

Orders were $1.6 billion, and that was a book-to-bill of 1.02:1.

I think one thing we're really proud of is the increase in operating margins in the quarter.

They increased 150 basis points from prior year to 20.1%, and so it's an excellent achievement by the entire organization.

We talked about last year our quarter-over-quarter growth, and we're just really pleased to see this year-over-year improvement in the profitability of FCI, which is reflected in this substantial margin improvement.

And obviously, those earnings convert to cash, and operating cash flow was a very strong $238 million.

So just in summary, I'm just very proud of our team.

And once again, the discipline and the agility of the team is clearly reflected in the company's great start here in 2017.

Turning to our served markets.

I'll just say that we remain very pleased with the breadth and balance of the company's end markets.

And given the ongoing dynamics within the global electronics market, and I'll just say, the global economy at large, this balance across our market remains just a tremendous asset for the company.

Starting out with the military market.

The military market represented 10% of our sales in the quarter.

Sales in this market increased from prior year by a very significant 14% in U.S. dollars and 15% organically as we recovered from last year's DLA stop shipment and also realized growth across virtually every segment of the military market.

Our growth in the quarter was strongest in space, vehicle, communications and ordinance-related applications.

But as I said, we really did see growth across the board in the military market.

Sequentially, our sales were down, as expected, by about 5% from the fourth quarter.

And as we look into the second quarter, we expect sales in the military market to increase slightly from their current levels.

And for the full year 2017, we continue to expect growth in the low to mid-single digits.

I'll just say that we're very encouraged by our robust outlook in the military market and by our strong performance in the quarter.

Our team working in this important market has done just a truly phenomenal job reaffirming our leadership position in the market while capitalizing on the many opportunities to leverage our -- the company's leading technology position on new military electronics, and we look forward to continuing to build on this position of strength as we move into the future.

The commercial aerospace market represented 5% of our sales in the quarter.

Sales were down slightly from prior year as the volumes of helicopter and business jets, in particular, have not yet recovered.

Sequentially, sales were flat with the fourth quarter, which was a bit softer than we had expected coming into the quarter, as overall procurement volumes for commercial aircraft stabilized following recent ramp-ups of new programs.

Looking into the second quarter, we expect a small increase from these levels.

And for the full year 2017, we now expect a mid-single-digit increase from prior year.

Despite the slight moderation in demand in this quarter, I'll just tell you that we remain very encouraged by the company's strong overall position around the world in the commercial air market.

Our team in this market is continuing to broaden the company's range of products in support of the revolution of new electronics in next-generation airplanes, and we look forward to capitalizing on our outstanding technology for many years to come.

The industrial market represented 19% of our sales in the quarter.

Sales in this market grew 9% in U.S. dollars and 11% in local currency, as we benefited from several of our acquisitions completed last year as well as from positive organic performance, in particular in the instrumentation, heavy equipment and factory automation segments.

Our sales in total grew by 4% organically from prior year.

Sequentially, sales in the industrial market were slightly down from the fourth quarter due to typical seasonality.

As we now look into the second quarter, we expect sales to increase from these levels as we capitalize on our broad technological strength across the many various segments of the worldwide industrial market.

And for the full year 2017, we continue to expect sales growth in the low to mid-single digits.

With respect to industrial market, we, like many others, are certainly hopeful that the U.S. and other countries around the world begin to shift spending priorities towards necessary upgrades to infrastructure.

At this point, however, it remains too early to predict whether this will, indeed, happen.

Nevertheless, we're confident that Amphenol is well positioned to capitalize on any such initiative should they materialize.

And in fact, I'll just say that our teams who work in the global industrial market continue to do an outstanding job of broadening our leading range of interconnect, sensor and antenna products to position us to capture opportunities for growth wherever they may arise across the industrial market.

The automotive market represented 19% of our sales in the quarter, and we delivered another strong quarter in the automotive market.

Sales increased by 10% in U.S. dollars, 12% in local currency and 11% organically, with strong growth, really, in all regions.

Sequentially, our automotive sales increased somewhat -- just a slight bit from the fourth quarter but -- which was a bit better than we had expected.

We remain excited by our excellent and growing position in the automotive market.

Our continually expanding range of interconnect products, including discrete connectors and complex interconnect assemblies, as well as our growing array of sensors together with our emerging offering of vehicle antennas, positions us to take advantage of the multitude of opportunities to enable new electronics in cars.

Whether in traditional, fuel-powered, hybrid or electric vehicles, we see carmakers around the world integrating advanced electronics into virtually every function in the automobile, and this creates an outstanding long-term growth opportunity for Amphenol.

Looking into the second quarter, we expect sales in the automotive market to again grow from current levels.

And for the full year 2017, we continue to expect sales growth in the mid- to high single digits.

The mobile devices market represented 10% of our sales in the quarter.

And as we expected coming into the quarter, our sales were down from the fourth quarter by a little bit over 20% sequentially due to the first quarter seasonality.

Compared to prior year, our sales were down by 18% as significantly softer sales of products incorporated into tablets and smartphones were only partially offset by increases related to laptops and wearables.

In the face of this significant downturn in demand, our team once again exercised their incredible agility in reacting to the volatility that's ever present in the mobile devices market.

And meanwhile, we've not slowed our efforts in pursuit of a broad array of new design opportunities on a wide range of mobile devices all while ensuring that regardless of these volume reductions, the company still drives strong financial performance.

As we look into the second quarter, we do expect a strong double-digit sequential increase in our sales as we benefit from new product ramp-ups.

For the full year, however, we still do not expect our sales to grow from 2016 levels.

Regardless of our muted demand outlook for this year, we remain extremely confident that our experienced and agile team has positioned us to benefit and take advantage of any opportunities that may arise in this dynamic mobile devices market.

The mobile networks market represented 9% of our sales in the quarter.

And as expected, sales were down slightly from prior year as operators paused their investments in new wireless systems.

Sequentially, sales declined by 7%, again, as we had expected from the fourth quarter.

We have recently seen some wireless operators moderate their spending outlooks in the near term.

And accordingly, while we expect sales in the second quarter to increase a bit from first quarter levels, we do now expect the low to mid-single-digit decline in sales in the mobile networks market for the full year 2017.

Despite this somewhat more modest outlook, we remain confident in the company's strong position across the mobile networks market.

We continue to build out our leading portfolio of interconnect products and antennas while expanding our partnerships with OEMs and service providers around the world.

In addition, we are encouraged by several new discussions of new network investments that are planned in the coming years, and we look forward to taking advantage of those.

With the acceleration of video and data traffic that's going through mobile networks, together with increasing demands by consumers for better coverage, Amphenol is well positioned to capitalize on any growth in spending that may occur in this important market.

The information technology and data communications market represented 22% of our sales in the quarter, and we had another outstanding quarter in IT datacom.

Our sales increased by a greater-than-expected 25% in U.S. dollars, which included a very strong 21% organic growth.

Sequentially, sales were down by a bit less than expected, just 5%, due to the normal seasonality that we see in the first quarter in this market.

I just want to say that our team working in the IT datacom market has simply done an outstanding job leveraging our next-generation products to take advantage of growth opportunities across this very important market.

In particular, we're very pleased that our industry-leading, high-speed and power product portfolio is being adopted by OEMs as well as cloud service providers as they upgrade their networks to deal with the continued rapid expansion of data traffic.

As we look into the second quarter, we expect sales to stay at these robust levels.

And for the full year 2017, we now expect sales growth in the mid- to high single digits for the IT datacom market.

The broadband market represented 6% of our sales in the quarter, and sales increased from prior year by 11%, driven by the benefits, in particular, from the All Systems Broadband acquisition that we made at the end of last year.

Sequentially, sales were a bit softer than we had expected and were flat to prior quarter.

For the second quarter, we expect sales to increase from these levels.

And for the full year, we continue to expect low double-digit growth, supported by the All Systems Broadband acquisition as well as by our organic efforts to expand with customers around the world.

We're very pleased with our position in the broadband market, and we look forward to realizing the benefits of our expanded product offering in support of customers who are delivering data, video and voice to consumers and businesses around the world.

We remain mindful that in the broadband market, there's always the potential for further consolidation among operators around the world.

And sometimes, that consolidation can result in pauses in capital investment.

But nevertheless, as we look into 2017, we are optimistic for a positive spending environment this year and beyond.

So just in summary, I want to say that we're extremely pleased with the company's strong start to 2017.

And while the global market environment remains uncertain, the Amphenol organization is executing extraordinarily well in expanding our market position while strengthening the company's financial performance.

Our superior performance is a direct reflection of the company's distinct competitive advantages: Our leading technology, our increasing position with customers across a diverse array of markets, our worldwide presence, a lean and flexible cost structure, a highly effective acquisition program, and all underpinned with our agile, entrepreneurial management team.

Now turning to our outlook and based on a continuation of the current uncertain economic environment and assuming constant exchange rates, we now expect in the second quarter and for the full year 2017 the following results.

For the second quarter, we expect sales in the range of $1,580,000,000 to $1,620,000,000 and earnings per share in the range of $0.70 to $0.72, respectively.

This represents a sales and diluted EPS increase versus prior year of 2% to 5% and 8% to 11%.

For the full year 2017, we expect sales in the range of $6,405,000,000 to $6,525,000,000 and EPS in the range of $2.91 to $2.97.

For the full year, this represents sales and adjusted diluted EPS growth of 2% to 4% and 7% to 9%, respectively, over 2016 levels.

On an organic basis, this represents full year sales growth of 1% to 3%.

We're very encouraged by the company's strong guidance and robust start to 2017, and I remain extremely confident in the ability of Amphenol's outstanding management team to build upon this robust start by continuing to capitalize on the many opportunities to grow our market position and at the same time, deliver strong financial performance in 2017 and beyond.

And with that, operator, it'd be our pleasure to take whatever questions there may be.

(Operator Instructions) And our first question comes from the line of Wamsi Mohan of Bank of America Merrill Lynch.

Adam, I was wondering -- given some of the changes that we're seeing in the political landscape -- in light of that -- would you say that you're perceiving that there might be a larger opportunity here from a military, aerospace end-market demand trend.

And secondarily, on the industrial side, we're hearing of a level of restock that is occurring within the channel.

I was wondering if you could comment if you've seen any trends that would support or negate that view.

Well, thank you very much, Wamsi.

Look, I am not going to be the one to guess which way political winds are blowing.

I would be surprised if we're the #1 story of today, though.

Apparently, there's lots of other announcements to come out.

With respect to military/aerospace, I had been talking, as you know very well, Wamsi, for quite some time about a trend that we have been seeing in the military market -- I think in the geopolitical environment overall -- which is that we believe that there is a transition from a more tactical military stance to a more strategic military stance, whereby the spending priorities of the U.S., which have been much more towards dealing with this sort of unseen enemies and unseen priorities, which is a very tactical responsive thing, have seemed to migrate more and more towards a more strategic imperative.

And as we've said all along, as this more strategic imperative takes over in the military market, whether that be with new enemies or resurgent enemies that our country or our allies may have, that, that ultimately, we believe, leads to more investments in technology.

And at the end of the day, the technological developments in the military are some of the things that can truly have an impact on these strategic priorities.

And we just remain very, very well positioned for that.

We are -- we continue to be the leader in military interconnect products.

We continue to be a true partner for our customers as they seek to develop new enabling technologies.

And I think the results that we saw this quarter and frankly, even last year despite having had the DLA issue a year ago, we remained having last year strong organic growth in the military market, and we expect the same this year.

What the long-term opportunity will be, that's very hard for me to predict here and now.

But what I can tell you is regardless of what it will be, Amphenol will be there in support of the technological requirements of militaries around the world.

As it relates to industrial market and whether there's a restocking that is occurring there, I wouldn't tell you that we have necessarily seen tangible evidence of restocking per se.

I think we're pleased with the performance in our distribution channel.

But as you know, distribution represents for us somewhat less than 15% of our overall sales.

So we may not be necessarily the best bellwether to determine whether or not there is, in fact, such a restocking.

The industrial market, for us, performed very well in the quarter, and I think I called out in my remarks some of those areas of strength that we saw.

In particular, areas like that factory automation, heavy equipment, instrumentation.

We saw also strength in places like medical, even in an area like the marine market.

And one thing I would point out in industrial, even if we've had for a couple of years this downturn in oil and gas, which has put significant pressure on overall industrial sales, we were very pleased this quarter for the first quarter in many to see a sequential increase in our oil and gas sales.

And I don't know that that's a restocking at a distribution level, but at least it's a sign that maybe one can smell a bottom there.

For our next question, this comes from the line of Mark Delaney.

First question is on the mobile devices market.

Adam, you talked about some product launches helping sales to increase double digit sequentially in the June quarter.

Can you comment on what sorts of applications?

Is that tablets or something else that is driving the pickup in the June quarter on mobile devices?

And then as you think about the full year, can you just help characterize what your expectations are for Amphenol to be able to participate in sort of flagship product launches for smartphones later this year?

And if that does come to fruition, what would that mean relative to your full year guidance in mobile devices?

Sure.

I'm not going to comment in specific programs or product launches.

I'll tell you that we work in a broad array of different products in the mobile devices market.

And as we look into the second quarter, I think we see also a broad array of different products, which -- where we start to see the launch cycles happening.

In terms of flagship products, again, I'm not going to comment specifically on that, but we have a good position across customers in the mobile devices market.

At the same time, we have embedded into the guidance that we see -- and we continue to see -- this year to be a flat year in mobile devices, all what we know about the product launches that we're involved in at this stage.

It's a very volatile market.

I just would reemphasize that predicting ultimately what products get released at what times and what -- and which products sell to which consumers at which volume, this remains a task that is far beyond our expertise.

And what we continue to do with that business and the way that we continue to manage that business is to be ready regardless.

And the readiness that our team exhibits is both on the downside and the upside.

And I think we've seen that this quarter, the ability to flex the organization; to not sacrifice the work that we're doing with customers to design in our products regardless of the fact that we saw a significant sequential and a year-over-year reduction in our sales; and all along the way, clearly, to preserve operating performance else, we wouldn't be having the overall margins that we have in the company.

And similarly, should there be an opportunity for upside, if it comes, and it's typically a very unpredictable fashion, I can tell you that our team will be ready to capitalize on that to the full extent of the level of the opportunity.

Yes, that's helpful.

And then for a follow-up question, talk a bit on the capital allocation of the company.

The company's operated in a sort of a 0.5 to 1.5 turns of net debt-to-EBITDA leverage ratio recently.

You talked about the new senior note financing and doing some more on the buybacks.

Can you just talk about your leverage tolerance?

And as you think about potential M&A, would you be willing to increase the leverage ratios versus where the company has operated at in the last several years?

Sure, Mark.

I think with regards to the company's capital deployment, this really hasn't changed over the years.

And we continue to have a consistent and flexible and balanced approach to this, where we have about -- long term -- about half of our capital will be deployed to share -- returned to shareholders about -- regarding the dividends and our share repurchase program that we announced earlier this year as a continuation of that.

We did repurchase 3.7 million shares in the quarter.

Certainly, that varies from quarter to quarter depending on cash needs and whatnot.

But we feel certainly very good about that and very good about that deployment.

In terms of our leverage ratio, I would tell you that we're very happy, right?

We have been in the kind of 0.5 to 1.5, roughly 1, 1.3 I think we ended the quarter in this period.

The company continues to generate a significant amount of cash.

And I think what I would tell you is that if I were to look upon what we would be willing to go to from a -- if an M&A seemed to come about that we want to do, I would say maybe 2, 2.5 range would be something we would be comfortable with certainly the thought in mind that we have a very prudent approach to that and we certainly value our investment-grade rating, so we wouldn't do anything to damage that.

But I think 2.5 would be something that I would be -- we would be comfortable with.

So I think that we're very comfortable with the cap.

The company continues to generate a significant amount of cash flow.

And certainly, we've continued to do that in the first quarter this year.

For our next question, this comes from the line of Amit Daryanani of RBC Capital Markets.

A couple of questions from me as well.

I guess, Adam, maybe to start with, the IT datacom market, I think the second quarter in a row you guys have had 20% plus organic growth here.

I don't think IT spend is going anywhere close to that.

So can you just talk about what is driving this trend for you guys?

And importantly, can you sustain this kind of growth potentially throughout 2017, because your compares really don't get difficult until the December quarter, I think.

Yes, thanks very much, Amit.

Yes, we're very pleased with the performance over the course of the last 2 quarters in the IT datacom market.

I mean, in fact, if you look at what we did last year, we grew 11% organically for the year.

You're correct.

We grew -- I think it was close to 29% organically in the fourth quarter, and we just grew 21% organically in this quarter.

Are we going to keep growing at that rate?

Well, I don't think I have necessarily guided to that level.

I think I mentioned that we expect for the IT datacom market to grow this year in the mid- to high single digits, which is actually a little bit higher than we had expected coming into the year.

We remain very attentive and ready to capitalize on whatever opportunities will come our way.

Ultimately, our outperformance has come really from 2 aspects: one is just a breadth of high-technology, leading-edge products, and that was enhanced so much through the FCI acquisition; a breadth of products that become really a one-stop shop for customers when they need their equipment to perform better.

And I think that, that technology that we offer in the IT datacom market is really second to none.

When you think about the range of products in high-speed to power products and the whole array of things that are used in IT datacom, ultimately that go into servers and storage systems and networking appliances and data centers and all the equipment associated with ultimately powering the Internet -- is where our products are ending up.

So I think that's one very important aspect.

And I think the second has been just the ability of our team in working in the IT datacom market to quickly pivot to where the opportunities are, and this is not a new concept.

I have spoken about it many times.

So when we see these results, I think that really is a great testament to our people following the opportunity, and not just resting under one's heels going to the same customers that you've been going to for decades and decades, but rather quickly steering and pivoting towards those customers where the real opportunity is.

And that is not an easy task.

It is something that we demand of our people and that our people demand of themselves.

But it's certainly not easy-going -- to change what you have been doing and to say, "I'm going to start knocking on the door of someone new, I'm going to understand a whole new market, I'm going to understand a whole new way of doing business with those customers," which is entirely different from maybe what you were doing in the past.

And I just give a lot of credit to our team for the flexibility and agility -- words that I use frequently to describe Amphenol, Amphenolians, of really reacting to where that opportunity is and then taking advantage of that very first thing I mentioned, which is the breadth of the technologies.

And ultimately, if you can get the right product to the people who want to get it, at the right time -- it's not a bad way to win in business.

That's extremely helpful.

And I guess, Craig, if I could just follow up on some of the changes in stock option that's resulted in numbers moving around a little bit.

Is it fair to think, at least on the tax line, the tax rate is still really 26.5%, but these discrete things have lowered by about 100 basis points for the year?

And then the share count creep-up, was that just a one-off thing in the March quarter true-up thing?

Or does that happen throughout the year as well?

Sure.

So with regards to the share -- sorry, the tax rate, I would tell you that there's obviously a lot of things that impact the tax rate over the course of time.

And as Adam referenced before, we're kind of sitting here in a day that we're -- I think some tax reform things may be coming out.

And certainly, who knows what's going to happen with the tax rate for all companies going forward.

But I would tell you that the primary impact, certainly, in this quarter and in our outlook for the full year is the impact of this adoption in terms of putting into our guidance some impact of that.

So in regards to the share count, I would tell you that the increase of 2 million shares that I referenced is something that's kind of a permanent increase that happened in the quarter.

It really relates to how the amount of shares that you could buy back, as it relates to the options exercised, in this -- called the Treasury stock method, is effectively calculated.

And what it does essentially is increase the share count as it relates to that.

So for us, it had the impact of increasing it by 2 million shares, which you can effectively model in for going forward on a -- from a comparability perspective.

For our next question, this comes from the line of Sherri Scribner from Deutsche Bank.

You guys are seeing very high operating margins; above the 20% range.

And typically, 20%, 20.5% is really the high point for you.

But if I look at the full year guidance, it suggests that operating margins will be at least 20.5%, which suggests an improvement in operating margins in the second half of the year versus the first half of the year.

Can you give us a little bit of detail about what's driving that?

And do you still see the same contribution margin for your business going forward?

Sure.

Thanks, Sherri.

Yes, I think we're actually very proud, certainly, of our operating performance in the first quarter at 20.1%.

A 40 basis point reduction on a 6% decrease in sales is something that we're certainly proud of, but I wouldn't say it's out of the normal range of our conversion on kind of a down -- from a down -- decline in sales.

We -- it's [been] converted around 27% on a decline.

We've talked about on -- over the long term that 25% conversion margin is kind of our targeted conversion margin from an organic perspective.

And I think if you look sequentially, and in our guidance, what you'd find is that we're guiding to a little bit higher than that, but not so dramatically higher than that, that I would tell you that there's any change in terms of our long-term strategy with that 25% conversion margin.

It does vary from year to year and quarter to quarter, but I think that's still something that we target long term.

And more recently, we've done a good job, I think, of executing operationally to do just a little bit better than that.

So certainly, we're very proud of that, and I would say that there would be a higher ROS in the second half just due to those increased sales levels that would essentially convert at that higher conversion margin.

Okay great, that's helpful.

And then can you maybe give a little detail on what you're seeing from a currency perspective?

GE saw a little bit of a benefit versus their prior expectations from FX this morning when they reported.

We've sort of heard mixed messages on FX from other companies.

Maybe you could give us some detail on how much FX impacted your changing guidance.

Sure.

So the first -- when we gave guidance in January, I think the biggest kind of 2 currencies that changed -- certainly, the euro changed a bit, but not dramatically since we gave guidance in January.

And actually, the renminbi came down a bit.

So I would tell you that from a full year perspective versus our prior guidance, there really wasn't so much of a benefit.

There was a slight benefit, but we're talking a negligible amount at -- so I wouldn't necessarily -- we didn't call it out and wouldn't call it out as anything of significance for the year.

I'm not sure what other people guided to in terms of what rates they were using.

But for us, that's what I would talk about.

For our next question, this comes from the line of Matt Sheerin, Stifel.

So Adam, just wanted to get a little bit more color on the automotive market.

You gave a fairly robust guidance for the year in mid- to high single digits.

That does imply, though, a bit of a deceleration in the back half, but still strong growth.

And it looks like above some of your competitors.

And of course, we're running into tough comps in the back half with China.

But you did talk about growth drivers across not just your interconnect products, but sensors and antennas.

So what's your general outlook not just for the market, but in terms of your content growth opportunity?

Well, thank you very much, Matt.

No, look, the auto market has, for us, been a really great driver over a number of years, and that's no different here in the first quarter.

We're just really pleased to see this double-digit organic growth, a continuation of the trend that we've seen for a number of years.

I think your math is right.

That if we're growing 11% organically and then I guide to mid- to high single-digits, that would arithmetically imply that there's some slightly lower growth in the second half.

And as usual, we're guiding really to what we see today.

We don't -- maybe a little bit differently than other companies -- we don't necessarily look at overall vehicle unit volumes and extrapolate from that into our own business.

We think about the opportunities that we're pursuing with our customers and what our customers are telling us about those opportunities.

And oftentimes, that really is not tied to vehicle volumes, but more by the implementation of new systems in cars.

And I can just tell you that as Craig and I travel around the world and we visit with our operations working in the automotive market, as I visit customers who are participating in that market, just the unbelievable array of new functionalities that are being adopted into cars, and that's -- a lot of people talk about well, electric cars or hybrid cars, diesels.

There's all this parsing of different categories of cars.

But I think about it a little bit differently.

Just all cars are getting more electronics no matter what, and that's just a seeming one way ratchet upwards.

And so the job of our team that's working in the automotive market is to make sure that they can harness our technological capabilities, which have broadened very significantly over the recent, really, half decade, and ensure that we are participating and gaining more than our fair share of those new electronic systems that are being put into cars.

That's easy for me to say.

There's a lot of hard work that's behind that from our people, really, in the field designing the products and executing on those new systems.

But there's just no doubt about it, that the number of systems being put into cars is expanding regardless of the category of the car and regardless of the overall unit volumes in the car.

I think we did talk last year at the end of the year about some strength that we had seen, in particular at year-end in Asia, and I think we weren't the only company to talk about that.

We're very pleased, actually, this quarter that our growth was quite balanced.

I think we saw a little bit stronger performance in Europe, but I'd say just a little bit stronger.

And the other 2 regions were also growing in a very robust fashion.

And I think as we look out over the course of the year, we would expect to see maybe that same balance, and that does compare to at the end of last year, where it was a little more levered towards Asia growth towards the end of the year.

And again, is that because of subsidies or because of whatever?

I can't tell you that we're close enough to the various government policies to know whether those subsidies are going to continue or not continue.

But at the end of the day, it is about us gaining more position on a broader array of electronic systems that are being implemented on a broader array of cars.

It is just amazing.

I mean, I went car shopping not so long ago, and I feel like I need to take my teenage son with me to car shop because he knows how to work the computers now better than I do.

I guess it's a sign of me getting old.

So that is what it is.

But these cars are just unbelievable data centers on wheels now, where that didn't use to be the case.

And I think that's a great opportunity for Amphenol, and it's a great opportunity for our industry and one that we fully expect to take full advantage of going forward.

For our next question, this comes from the line of Jim Suva of Citi.

A clarification question, and then a more detailed follow-up.

The clarification question is when you mentioned the stock number on -- diluted outstanding share number that went up, you mentioned that was a permanent step-up.

What you meant -- and going forward, did you mean that every single quarter, we should expect that step-up?

Or are you just saying from this level continuing on?

I wasn't sure if you meant it continues to keep stepping up every quarter.

And then my follow-up question was more about your year.

I think you said organic growth rate of 1% to 3%?

And I think this quarter, organic rate was about 5%.

Help me bridge the difference between the big deceleration or if I got my math wrong.

So Jim, thanks for the question.

And to clarify, it is a onetime step-up that stays consistent going forward.

And with respect to the organic growth question, Jim, I think we talked a lot about this at our last quarter's call, that we see what we see at the beginning of the year, we work in a very volatile -- we work in a market that has its level of volatility to it, in particular in certain of our markets, and we believe that given the array of markets that we're in, that this is a very prudent but also a very strong guidance.

Now again, doing the same arithmetic that you're doing, if we grow 5% organically in the first quarter, that would imply that there must be another quarter that's below that 1% to 3% level.

And I think, again, the arithmetic is correct there.

But no doubt about it, it doesn't change our view of the year that we continue to see this as a year where we can grow organically at 1% to 3%, but where our team will remain singularly fixated on capitalizing on any opportunities that there may be to do better than that.

And I think we did better than that here in the first quarter.

And we're very pleased that we started the year strong.

We came into the quarter with an expectation not to get to that 5% organic growth, and we did.

And we're going to keep fighting our way to do that as much as we can.

For our next question, this comes from the line of Shawn Harrison from Longbow Research.

A 2-parter on mobile, if I may.

One on devices, one on the infrastructure business.

First, on infrastructure, Adam.

Maybe if you could describe where -- maybe which region you've seen the pullback in activity.

And then second on the device business, are you're walking away from any content opportunities?

Are you pulling out of any devices beyond kind of just what you've seen in some of the tablet and smartphone weakness out there?

Yes.

Thanks very much, Shawn.

I think with your first question on infrastructure, I think in the quarter -- in the first quarter -- Europe performed a bit better than Asia and North America, and I think that we would expect in our guidance for that to be the case.

And I think we've seen a little bit -- probably more North America in terms of some of the expectations pulling back.

Again, these are not huge numbers.

As I said, I think we came into last quarter thinking it's going to be flat, and now we think it's maybe single -- low single-digit, low to mid-single digit down.

So that's not an enormous change in our outlook.

But it's a little change, and we wanted to share that with everybody.

We're going to stay very mindful.

It's a market where the predictions are not as easy to make in wireless infrastructure because the capital spending sometimes happens without necessarily so much warning to suppliers and to everybody.

And so we're just going to continue doing what we've always done in that market, and that's to make sure that we're positioning ourselves with our broad range of interconnect and antenna products across OEMs and operators, across every region where we can participate.

And in our experience, the better job we do of doing that, the more able we are to capitalize on the spending when it does come.

And I think we have a very strong position here.

We had a great year last year in mobile networks; a year where we didn't necessarily anticipate it coming in, and where ultimately, we grew 9% organically and 24% last year with the impact of the acquisitions; in particular FCI.

And so as we approach that market right now, we're going to stay very mindful of any opportunities that will come our way, and we've got a great set of people and a great set of products to pursue in that area.

As it relates to mobile devices, we don't adopt a strategy -- really in any of our business from "walking away" from business.

That's not been our approach.

But as you know, our consistent approach in mobile devices is to participate where we add value for our customers.

And so that comes just naturally, where when customers decide that there's not a value embedded in the product that you sell, then we may not participate, because we won't be able to make the returns that we would otherwise make from the new round of things.

But we're never walking away from existing platforms or we're never sort of discontinuing products or discontinuing customer relationships.

Again, that's just not the way that we approach this high-speed and high-volatility market that there is.

As we think about the guidance that we have here, I think I mentioned we saw in the first quarter, in particular, weaker performance in tablets.

That's not a new phenomenon.

It's something that we'd been talking about for the better part of the last 3, 4 quarters, and we would expect that to continue.

There just seems to be a material and systematic consumer shift away from tablets and towards other devices, either bigger handsets or smaller laptops.

And the prospects of tablets to me, at least, don't seem to be as terrific as they once were, and for us -- it is what it is.

We're going to continue to design in our products.

We're going to continue to work with customers across every aspect of that.

And I think the success that we've had in an area like wearables, where we actually did grow in wearables quite significantly on a year-over-year basis, which was certainly nowhere near enough to offset the downturn in tablets and some that we saw in handsets, but it's just a great recognition of the fact that our team is quickly tacking towards where there's opportunity and where there's value that can be embedded in those products.

And that's how we're going to continue to approach the market.

We're not walking away from anything.

We're not changing our strategy.

We have a very consistent approach, and it's an approach that serves us very well through thick and thin.

And we've had years where we have been flat.

We've had years where we've been up, and we've had years where we've been down.

And I think that's second nature to the type of market that you're dealing with in mobile devices.

And so we're still very committed to the market.

We're very committed to investing in the products in the market and with the customers in that market, and we'll be a partner for our customers everywhere where our technology can make a difference in their products.

For our next question, this comes from the line of William Stein of SunTrust.

I wanted to address one of the earlier comments about somewhat higher-than-typical conversion margins in the back half of the year based on the guidance, and I wonder if that's being helped by mix or specifically by your sensor business?

Or is this something else going on?

And is this drop-through higher level of incremental margins sort of permanent change in the model?

Sure, Will.

I would tell you that there's nothing specific that we would call out.

Certainly, this isn't a market mix.

We're converting into the second half on higher volumes, not so much differently than we did on our organic sales kind of last year.

And I think we've just been operating -- executing well from an operational perspective over the last year or so, a little bit -- maybe better in certain areas.

But I would tell you that there's a whole bunch of different factors that go into being able to convert at these levels, and we're talking 25% versus 30%.

We're not talking significant changes in this conversion.

So I would tell you that longer term, as I mentioned to Sherri, that I wouldn't think about this as a permanent change that we're going to continue to convert at these, really, 30% or so margins going forward on higher sales.

But certainly, there's some quarters where we will convert at these higher levels.

And I'm sure depending on the environment that we're in -- whether or not the commodity environments have an impact or different pricing environments have an impact or whatnot -- there could be certain periods where we convert lower than that 25%.

But I think the team has done a great job of balancing the factors in the environment that they're in at the moment and has been able to convert at a little bit higher level than, really, our long-term goal.

And certainly, we're very proud of that accomplishment.

Appreciate that.

One follow-up, if I can.

It seems like this hasn't been the theme through earnings.

But intra-quarter, we were getting signals from distribution that it sounded like there were some shortages and stretching lead times.

And there was at least one well-known semiconductor company that issues letters periodically, and they did that this quarter.

I'm wondering if you saw that in any of your end markets or businesses this quarter, sort of accelerating demand that caused shortages or, for that matter, in complementary products like passives that might have limited your customers' interest to take product because of availability of the complementary products.

Yes.

Well, I mean, we've heard and probably read the same things that you have read.

I can tell you that we haven't seen shortages in our industry per se, and I haven't seen any, at least, tangible indication of shortages driving our customers to not procure as much of our product as they otherwise would have intended.

But we have certainly heard about some stretching lead times.

I think where I've heard it most acutely has been in areas like memory and NAND and DRAMs and things like that.

And we're, of course, mindful of that.

I know we have a lot of customers -- and I can sometimes tell by -- where our procurement friends are spending their time as to what is running short at any given time.

And just on the basis of where I've seen some people spending their time, I guess that would indicate that some of those rumors of things like memory shortages and otherwise may, in fact, be true.

But I have yet to see, again, an instance where these shortages are doing anything in terms of limiting demand by our customers.

Certainly, I've heard a lot about pricing, and there's a lot of discussion in the industry around pricing of certain semiconductors and the frustration that many of the OEMs are having around those pricings, the price increases that they're seeing.

But has -- this has not translated as far as we can see into any changes in the demand for our products in terms of their complementary position on various systems of our customers.

For our next question, this comes from the line of Steven Fox of Cross Research.

Just real quickly, Adam, you mentioned antennas again this time with industrial.

I was just curious if you could talk about what kind of applications you're now expanding into with the industrial antennas, and then I had a quick follow-up.

Sure.

Look, we're really proud of our antenna business overall.

We started out as an antenna manufacturer in mobile devices and phones at its earliest day, and we're coming close, I guess, to nearly being 2 decades as an antenna supplier.

So it's hard to call it a new business for us anymore.

But over the years, our team who works in antennas, whether that was in the device side or on the infrastructure side -- where we've also been present for nearly 1.5 decades -- our team has done the classic Amphenol thing, and that is look to diversify the business.

From where you start out, you take that technology and you try to diversify it.

And I think industrial, automotive and other areas have been just a real great opportunity to start to build some businesses around antennas.

So in industrial, we're working in areas like police and safety.

We're working in shipborne applications.

We're very active in things like what's called, I guess, broadly the industrial Internet of Things and what is a little bit of a well-worn cliché.

But ultimately, it talks about increasing the connected -- the connectivity or the connected capabilities of industrial equipment overall.

And in order to increase that connected capability, one typically has to have an antenna, one typically has to have some interconnect products and one typically has to have some sensors.

And I think our presence as a designer and a manufacturer and a provider of all 3 of those very complementary products -- which we all consider ultimately interconnect -- is really putting us in a very strong position for that whole IoT or IIoT revolution that is there.

So we're going to continue to invest heavily in our antenna business.

I mentioned as well that we're starting to see some better progress in automotive antennas as automotive antennas get more complicated and as they require more knowledge to support things like autonomous driving and 5G technology.

These are all areas where we see a greater opportunity for that entire radio frequency interconnect system that includes connectors, cable assemblies, cable, antennas and all that goes in amidst that whole system.

And it's something we're going to continue to drive as a real leader in this industry.

Great, that's really helpful.

And then just really quickly, capital spending for this year, I was curious if you can give us a range and whether your comfort level with your current footprint, whether you might be considering expanding anywhere in particular.

Yes.

From a capital spending perspective, it really hasn't changed.

I think our range is kind of 2% to 4%, and we've done kind of within that range over the longer term.

I think last year, maybe around 3%, plus or minus a couple 10 basis points or so.

But -- so I think the 2% to 4% range is the way I would think about our capital spending, which, again, is consistent with historic spending.

Yes.

And relative to our footprint, Steve, I would just say we're always looking at expanding or changing or moving or doing something with our footprint.

You know very well as you followed the company for so many years that we take an approach in our manufacturing footprint of really preserving, as much as we can, flexibility in that footprint by trying as best as we can to have leases of the building, by not having huge kind of centralized facilities and thereby, having the ability to be able to move factories when we need to move them for whatever reason possible.

And over the years, we've moved production for lots of reasons: to reduce cost, to accommodate customer needs, to deal with changes in regulation, to deal with changes in the cost of freight, to deal with currency -- you name it.

There's a whole range of things that can come at you as a manufacturing company.

And the better that we can preserve the manufacturing flexibility within Amphenol, the more rapidly we can adapt and actually take advantage of changes when they come our way.

And so are we looking to expand our footprint?

I think in the last quarter, we have certainly opened a few new facilities, and we've probably moved 1 or 2 at the same time.

We have a lot of facilities around the world.

You can see it in our 10-K.

I think we're somewhere around north of 200 facilities worldwide.

And there's always some movement going somewhere in preparation or anticipation or in reaction to some change that's coming in our marketplace.

For our next question, this comes from the line of Craig Hettenbach of Morgan Stanley.

Adam, now that you're more than a year into the FCI acquisition, can you talk about just maybe any unexpected positive surprises or how that business has kind of layered in versus initial expectations and -- whether it be synergies on the OpEx front, revenue, et cetera?

Yes.

Well, thank you very much, Craig.

I think we've just been pleasantly -- surprised is maybe the wrong word, but let's just say we've been very satisfied and very pleased with the performance of FCI on a very, very broad basis.

And I could keep you all on the phone here for quite a while talking about the various aspects of why that is.

But just starting from the top, the financial performance has been outstanding.

We talked at the end of last year at our last earnings call how ultimately we were able to realize an accretion of $0.19 a share, and we came into the year thinking it was going to be $0.12.

So that alone, from a financial performance, was outstanding.

They increased the margins.

And I say they, meaning the FCI team, who really has done the work here.

They increased the margins of the business quite significantly, bringing them really into the level of where Amphenol operations like to perform.

We saw just a great embrace of the Amphenol culture by the people, and I'm just so proud to have all the people from FCI who just on, day 1, they flipped the switch and they said, "We want to be part of this Amphenol." And that has worked out extremely well for us and for them in addition.

I think the response of customers and ultimately, the presence that we've gained with customers has probably surpassed my early expectations.

You frequently come into an acquisition like this with some dreams and aspirations in terms of, well, we can expand our presence with customers in this or that area, and that will take some time, and it usually doesn't happen overnight.

I think here, our commitment to the markets where FCI participates; markets like the IT datacom market; markets like the embedded computing market in industrial; markets like the mobile networks market, us making that very significant commitment to being a leader -- a broad leader for customers in those markets has been received very well and rewarded very well.

And we had the question earlier with respect to the organic growth in the IT datacom market that Amit asked earlier in the call, and I would tell you that I think a part of our organic strength has, in fact, been related to the presence of FCI and the broad reception that we've gotten from customers in there.

And I think the last thing I'd point to is the distribution channel.

We talked about that early on when we made the acquisition of FCI, and the response from our distributors has just been outstanding.

And I think that we now sit in a stronger position vis-à-vis our distributors than we did prior to acquiring FCI.

And I give the FCI team, again, a lot of credit for knowing how to work with distributors maybe even a little bit of a different way than we had in the past.

And that has really helped our company overall.

So look, I add it all up, and we're just very pleased with the acquisition.

And I don't even refer to it any longer as an acquisition.

As far as I'm concerned, FCI feels like they've been part of our company for decades.

For our next question, this comes from the line of Joe Giordano of Cowen and Company.

This is Tristan in for Joe.

Adam, I think you mentioned the opportunity for new mobile networks going forward in your prepared remarks.

I was wondering if you're exposed to the upcoming First Responder Network that was awarded a few weeks ago.

And if that's the case, then could you try to frame the opportunity for us in terms of magnitude and timing?

Well, thank you very much, Tristan.

I think we have exposure to a lot of different networks.

And I think that would include the one that you mentioned here; which I think is referred to as FirstNet in the marketplace.

What the magnitude of that is going to be, what the magnitude of that for us is going to be -- I think it's too early to tell.

But we're always encouraged whenever we see kind of a new overlay network being built.

That has traditionally been a very good thing for us.

I think our team really jumps on those opportunities well in advance even of their announcement; to make sure that we're present with customers really around the world, who are doing new things with their networks.

And with something like a FirstNet, again, I think it's still a little early to tell what that ultimately was going to work out to be.

But you can imagine, whenever you have a new overlay network like that, there's not just a network being built, but there's devices, there's subsystems, there's a whole ecosystem that gets built around something like that.

And I think ultimately, when you have new electronics ecosystems being built, that's a good thing for our company.

And then if I can just add a quick one on datacom -- and congrats on your strong results there -- I was wondering if you could break down your expectation by region and if you see -- if you're seeing any inventory build in any of the regions.

No.

I think on region, I don't think there's anything really interesting to report on the regional aspects of our datacom business.

It's very hard to say, because a lot of datacom equipment is all built in Asia, and so we don't ultimately know where that equipment ends up.

And so a regional review of it is actually not the most interesting or germane to talk about in the business.

I -- in terms of inventory and IT datacom, we haven't seen any significant signs of inventory builds.

I don't think we've seen across all of our markets any abnormalities, let me say, with inventory across datacom or really, any of our markets.

For our last question, this comes from the line of Brian White of Drexel.

Well, it appears that maybe Brian is not with us here.

I think that is the last question.

And we very much appreciate everybody's time here and your attention at Amphenol, and we look forward to speaking with you all here in another 90 days or so.

Thanks very much, and best wishes to you all for a successful spring.

Thank you.

Bye-bye.

Thank you for attending today's conference.

Have a nice day.