安費諾 (APH) 2017 Q2 法說會逐字稿

Hello, and welcome to the Second Quarter Earnings Conference Call for Amphenol Corporation.

(Operator Instructions) At the request of the company, today's conference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to introduce today's conference hosts, Mr. Craig Lampo and Mr. Adam Norwitt.

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 second quarter 2017 conference call.

Our second quarter 2017 results were released this morning.

I will provide some financial commentary on the quarter, and then Adam will give an overview of the business as well as current trends.

Then we will take questions.

As a reminder, 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 second quarter with record sales, GAAP diluted EPS and adjusted diluted EPS of $1,667,000,000, $0.80 and $0.81, respectively, exceeding the high end of the company's guidance for sales by $47 million, GAAP EPS by $0.08 and adjusted EPS by $0.09.

Sales were up 8% in U.S. dollars and 9% in local currency as compared to the second quarter of last year.

From an organic standpoint, excluding both acquisitions and currency, sales in the second quarter increased a strong 6%.

Sequentially, sales were up 7% in U.S. dollars and 6% in local currency and organically.

Bringing down sales into our 2 segments.

Our cable business, which comprised 6% of our sales, was up 16% from the second quarter of last year, primarily due to the impact of acquisitions as well as organic growth.

The interconnect business, which comprised 94% of our sales, was up 7% in U.S. dollars from last year, driven primarily by organic growth as well as the impact of acquisitions.

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

GAAP operating income and adjusted operating income were $336 million and $340 million, respectively, for the second quarter.

GAAP operating margin was 20.2% in the quarter, and GAAP operating income includes approximately $4 million or $0.01 per share of acquisition-related transaction costs.

Adjusted operating margin was 20.4% in the quarter, which is up a strong 100 basis points compared to 19.4% on a GAAP and adjusted basis in 2016, and was up 30 basis points from the first quarter of this year.

From a segment standpoint.

In the cable segment, margins were 14.9%, which is unchanged compared to the second quarter of last year.

In the interconnect segment, margins increased to 22.3% in the second quarter compared to last year at 21.2%, reflecting the progress made at FCI as well as strong overall operational performance.

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

Interest expense for the quarter was $23 million compared to $18 million last year, reflecting the impact of higher average interest rates resulting from the senior notes issuance earlier in the quarter as well as the higher average debt levels, primarily resulting from the company's stock buyback program.

The company's GAAP and adjusted effective tax rates were approximately 20% for the second quarter of 2017 compared to our guidance for the quarter of approximately 26% and an effective tax rate of 26.5% in the second quarter of last year.

As a result of the 2017 adoption of the new stock-based compensation standard that we discussed last quarter, option exercise activity had the effect of lowering the company's second quarter tax provision by approximately $21 million and increasing the diluted EPS by approximately $0.07.

I would also note that our guidance reflects an expected effective tax rate for the third quarter of approximately 25% and for the full year of approximately 23% to 24%.

Net income was a strong 15% of sales in the quarter.

GAAP and adjusted diluted EPS were $0.80 and $0.81, respectively, in the quarter compared to $0.65 in the second quarter of last year.

Adjusted diluted EPS grew 25% in the quarter compared to the second quarter of last year.

This strong growth was supported by strong operating performance as demonstrated by the company's adjusted operating margin of 20.4%, along with the lower effective tax rate just mentioned.

Orders for the quarter were $1,712,000,000, an 8% increase over the second quarter of last year, resulting in a book-to-bill ratio of 1.03:1.

The company continues to be an excellent generator of cash, and cash flow from operations was $280 million in the quarter or approximately 111% of net income.

The company continues to target and achieve cash flow from operations in excess of net income.

From a working capital standpoint, inventory, accounts receivable and accounts payable were $1.1 billion, $1.4 billion and $770 million, respectively, at the end of the quarter.

And inventory days, days sales outstanding and payable days were 84, 74 and 61 days, respectively, excluding the impact of acquisitions recently closed, which were all within our normal range.

The cash flow from operations of $280 million, along with the $750 million of bond proceeds from the -- in the new senior notes previously mentioned and stock option proceeds of $49 million were used primarily to fund net payments under the commercial paper program of $589 million, to fund acquisitions and purchases of minority interest of $168 million, to purchase approximately 151 million of the company's stock, to fund net capital expenditures of $51 million and to fund dividend payments of $49 million, which resulted in an increase of cash, cash equivalents and short-term investments of approximately $80 million net of translation.

Note that this does not include the amount paid for Telect here in July.

During the quarter, the company repurchased 2 million shares at an average price of approximately $75.

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

To date, the company has repurchased approximately 5.7 million shares or $400 million under the plan.

In addition, as mentioned in the earnings release, the company's Board of Directors has approved a 19% increase in the quarterly dividend on the company's common stock from $0.16 to $0.19 per share, bringing the dividend yield back to approximately 1%.

This increase is effective for payments beginning in October.

At June 30, cash and short-term investments were approximately $1.4 billion, the majority of which is held outside of the U.S. Also, at the end of the quarter, the company has issued $655 million under its commercial paper program, and the company's cash and availability under our credit facilities totaled approximately $2.7 billion.

Total debt at June 30 was approximately $3.4 billion, and net debt is approximately $2 billion.

And the second quarter of '17's EBITDA was approximately $403 million.

From a financial perspective, this was an excellent quarter.

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

Well, thank you very much, Craig, and I'd like to take this opportunity to welcome all of you to our quarterly call here with respect to our second quarter earnings.

I'm going to spend a few moments just to highlight some of the achievements in the second quarter that Craig just detailed.

I'll then discuss the trends and our progress across our various served markets, and then I'll spend a few moments at the end to comment on our outlook for the third quarter and the full year of 2017.

And of course, we'll have time for questions at the end.

In the second quarter, we delivered results above the high end of guidance as we established new records in orders, sales and earnings per share, all while continuing to expand our industry-leading operating margins.

As Craig mentioned, revenues increased by 8% in U.S. dollars and 6% organically, reaching that new record of $1,670,000,000.

We're very pleased that our order bookings were strong with a book to bill of 1.03:1, reaching $1,700,000,000 in orders.

And in particular, I think our whole team is proud that our margins continue to increase by a strong 100 basis points over prior year to 20.4%.

And that's just some -- a really excellent achievement by the whole organization.

EPS reached a new record of $0.81, increasing 25% from prior year, and we generated cash as well, with cash flow reaching a very robust $280 million.

Last thing I'll say is that I'm very pleased that just yesterday, our Board of Directors approved a 19% increase in our quarterly dividend to $0.19 per quarter, yet another sign and confirmation of the strength of Amphenol's financial condition.

So I'll just say that I'm very proud of our team.

The Amphenol organization's discipline and agility is clearly reflected in the company's excellent second quarter results.

In the second quarter, our small headquarters acquisition team was extremely busy throughout the last quarter.

And in particular, during the last week or 2 of the quarter and beginning of this quarter, we closed on 3 important and exciting acquisitions that actually involve 5 distinct businesses, collectively with revenues -- annual revenues of approximately $165 million.

First, in late June, we acquired 3 sensor businesses from the U.K.-based defense company, Meggitt PLC.

These 3 outstanding and entrepreneurial operations are based in Spain as well as Maryland and Indiana focused on vibration, position and ultrasonic sensing solutions that are used in the industrial, automotive and military markets.

And collectively, those 3 organizations have sales totaling approximately $75 million.

These companies, which operate as Piher, Wilcoxon and Piezo Technologies or Piezotech, represent an excellent complement to our expanding offering of sensor technologies.

Second, and also in late June, we acquired Intelligente Sensorsysteme, or i2S, a Dresden, Germany-based manufacturer of pressure, temperature and mass airflow sensors for the automotive and industrial markets with annual sales of approximately $45 million.

i2S is an extremely high-technology sensor supplier with a particular strength in harsh-environment pressure sensors that are used in a variety of applications.

With these new sensor acquisitions, I can just say that we're very pleased that we have now made another great step forward in expanding and diversifying our sensor offering.

And that's a road that we've been on for now the better part of 3.5 years.

And we continue to look forward to finding both organic and inorganic ways to expand the company's position in the sensor market.

Finally, in early July, just a few weeks ago, we completed the acquisition of Telect, Inc.

Telect is a Washington state-based manufacturer of power, fiber and copper interconnect systems for data centers with annual sales of approximately $45 million.

In addition to its Washington state facility, Telect also operates a manufacturing operation in Mexico.

We're really pleased Telect, which is a family company that was founded 35 years ago, it has a strong track record of supplying high-technology value-add products with unique service solution for enterprise and service provider data centers.

And the addition of this great business bolsters our already very strong offering of products that support expanding data center applications.

Just want to say that once again, I'm extremely proud of our acquisition team as they have brought on these excellent new additions to the Amphenol family, which gives us just great confidence that our acquisition program will continue to create significant value for the company going into the future.

Now with respect to our trends and progress across our served markets, we remain just very pleased with the breadth and balance of the company's end markets.

We believe that, that balance in particular is a great asset for Amphenol, especially given the ongoing dynamics within the global electronics market.

Turning first to the military market.

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

Sales increased from prior year by a greater-than-expected 17% in U.S. dollars and 18% organically as we recovered from last year's DLA stopped shipment and again realized growth across virtually every segment of the military market.

Our growth in the quarter was strongest in space, ordinance-related, naval, military vehicle and communications applications, but it was truly a very broad-based growth in the military market.

And I would say it was broad-based also geographically.

We're very pleased to see great growth in Europe as well as in North America and other geographies.

Sequentially, our sales in the military market were up by 4%, which was a bit more than we had expected coming into the quarter.

And looking into the third quarter, we expect sales in the military market to be slightly lower on the traditional summer seasonality.

Nonetheless, for the full year 2017, we now expect sales to grow in the high single digits on a year-over-year basis.

We're very encouraged by the company's strength and outlook in the military market.

As the interconnect leader in the military market, our team has positioned us to benefit from expanded spending by militaries around the world on a wide array of new electronic systems, and we look forward to continuing to build on this position of strength into the future.

The commercial aerospace market represented 4% of our sales in the quarter.

And sales were flat to prior year as overall demand for commercial aircraft remained stable while customers were managing their procurement volumes following the recent ramp-ups of new programs that happened over the prior year or 2.

Sequentially, in the second quarter, our sales were down slightly from the first quarter, which was a little bit softer than we had expected coming into the quarter.

Looking into the third quarter, we expect volumes in the commercial air market to increase from these levels as customer demand normalizes.

And for the full year 2017, we continue to expect a mid-single-digit increase from prior year, supported by the acquisition of Phitek completed earlier this year.

Despite our results in the second quarter being a bit lower than we had expected, we remain very encouraged by Amphenol's strong overall position in the commercial aircraft market.

Our high-technology product offering, together with our strategic relationships with airplane manufacturers around the world, positions us to benefit long term from expanded volumes of aircraft in support of the continued global growth of air traffic.

The industrial market represented 20% of our sales in the quarter.

Sales in this market grew by a very robust 19% in U.S. dollars, 21% in local currency and 14% organically, a very strong performance as we benefited from organic growth in instrumentation, factory automation and heavy equipment together with the contributions from our acquisitions completed over the last year.

We'd note that we were very pleased in the quarter to see a return to growth of our sales into the oil and gas market, albeit from currently lower levels.

Sequentially, our sales grew in the industrial market by a stronger-than-expected 15% from the first quarter.

Looking into the third quarter, we expect the normal seasonal moderation of sales.

For the full year 2017, however, we now expect a mid-teen sales increase on a year-over-year basis as we benefit from strengthening organic growth together with the contributions from several of our new sensor acquisitions.

We're very encouraged by the strength and the outlook in the industrial market.

I would just reiterate that our ongoing efforts towards broadening our offering of interconnect, sensor and antenna products has positioned us strongly across the many segments of the global industrial market, and we look forward to realizing the long-term benefits from this approach into the future.

The automotive market represented 19% of our sales in the quarter, and automotive was again a very strong contributor in the second quarter.

Sales increased by a higher-than-expected 13% in U.S. dollars, 15% in local currencies and 13% organically, with strong growth actually in all regions.

Sequentially, our automotive sales increased by 6% from the first quarter.

Looking into the third quarter, we expect our sales to increase from these levels, driven primarily by the additions of Piher and i2S in what is normally a seasonally softer quarter.

And for the full year, we now expect sales growth in the low teens, with the contributions from these acquisitions together with an incrementally stronger outlook for our organic growth in the automotive market.

We remain excited by the company's excellent position in the automotive market.

Our continually expanding range of interconnect, sensor and antenna products positions us to take advantage of the multitude of opportunities to enable new electronics in cars.

Whether that be in traditional, fuel-powered, hybrid or electric vehicles, we see carmakers around the world integrating advanced electronics into virtually every function in the automobile.

This creates an outstanding long-term growth opportunity for the company.

The mobile devices market represented 11% of our sales in the quarter, and our sales in mobile devices fell by a bit more-than-expected 20% compared to prior year as modest increases in sales of products incorporated into laptops were more than offset by softer sales related to tablets and smartphones.

Sequentially, our sales did increase by 13% from the first quarter.

Now looking into the third quarter, we expect a quite significant increase in sales, nearly 40% sequentially from second quarter levels, as we participate in several new product ramp-ups.

For the full year, however, on the basis of the latest outlooks from our customers, we do now expect sales to decline in the mid- to high single digits on a year-over-year basis.

Regardless of this more muted demand outlook for 2017, I remain extremely confident that our experienced and agile team who works in the mobile devices market has positioned us to benefit from any opportunities that may arise in this dynamic market.

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

Our sales were down from prior year by about 3% as increased sales to equipment manufacturers were more than offset by reductions in demand from mobile network operators.

And that was driven by pauses in their investments in new wireless systems.

Sequentially, sales were flat to the first quarter.

I would say that going into the third quarter, we now expect sales to improve modestly from these levels.

But nevertheless, we've yet to see our wireless operator customers meaningfully improve their spending outlooks for the remainder of this year.

Accordingly, we continue to expect the low to mid-single-digit decline in sales for the full year 2017, consistent with what we talked about last quarter.

Despite this year's pause in demand, I would just tell you that Amphenol's position in the mobile networks market remains very strong.

We continue to work with equipment manufacturers and operators around the world to enable their next-generation networks with our broad array of interconnect and antenna products.

In particular, we're working with a wide array of customers as they prepare for the coming adoption of 5G as well as other next-generation networks.

And that creates an encouraging long-term potential for the company.

The IT and data communications market represented 21% of our sales in the quarter.

And I'm very pleased that our team working in the IT market drove another excellent quarter as sales increased by a greater-than-expected 15% in U.S. dollars and 12% organically.

Sequentially, our sales increased by about 3% from the first quarter.

Our sales were strongest in networking-related applications, but we did also realize growth in both servers and storage.

And in addition, our team continued to accelerate momentum with cloud service providers, really this next -- new generation of IT hardware consumers.

And we remain very pleased with our progress with these new customers who continue to invest in next-generation systems to enable the explosive growth of cloud computing.

Now with the addition of Telect, we have again broadened our position in the data center, an exciting area of growth potential for Amphenol.

Looking into the third quarter, we expect sales to moderate slightly from these levels.

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

I remain very proud of our team working in this market, and they have done just a fabulous job of successfully expanding our industry-leading range of high-speed and power products while ensuring that we support the broadest range of customers around the world.

And then finally, the broadband communication market represented 6% of our sales in the quarter.

Sales in this market increased from prior year by 10%, driven by the benefit from the All Systems Broadband acquisition that we made at the end of last year.

Organically, our sales were slightly down as cable operators moderated their overall capital spending.

Sequentially, sales increased by a strong 10% from prior quarter, which was encouraging here in the second quarter.

For the third quarter, we expect our sales to remain at these levels.

And for the full year, we do continue to expect low double-digit growth, driven in particular by the impact of acquisitions completed over the recent year.

It's important to understand that the broadband industry continues to experience consolidation among the operators that work in that industry.

And that consolidation can certainly cause pauses in the capital investment cycles of our customers.

Nevertheless, with our continually broadening product offering, we look forward to taking advantage of any opportunities to expand our market position with cable operators around the world in 2017 and beyond.

So just in summary, with respect to the second quarter, I'd just reaffirm that I'm just extremely pleased with the company's excellent results here in the quarter.

We delivered strong organic performance, executed on 3 acquisitions of 5 distinct businesses, increased our dividend by 19% and continue to return substantial capital to shareholders through our stock buyback program.

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.

And that performance is a direct reflection of Amphenol's distinct competitive advantages: our leading technology; our increasing position with customers across our diversified markets; a worldwide presence; a lean and flexible cost structure; a highly effective acquisition program; and most importantly, an agile entrepreneurial management team.

So turning to the outlook for the third quarter and the full year.

And based on the continuation of the current uncertain economic environment and also assuming constant exchange rates, we now expect the following results.

For the third quarter, we expect sales in the range of $1,700,000,000 to $1,740,000,000 and earnings per share in the range of $0.77 to $0.79.

This represents a sales and adjusted diluted EPS increase versus prior year of 4% to 6% and 5% to 8%, respectively.

For the full year 2017, we expect sales in the range of $6,620,000,000 to $6,700,000,000 and adjusted diluted EPS in the range of $3.06 to $3.10.

And again, for the full year, this represents a sales and adjusted diluted EPS growth of 5% to 7% and 13% to 14%, respectively, over 2016 levels.

On an organic basis, our full year guidance now represents an outlook of full year sales growth of 2% to 4%.

We're very encouraged by the company's robust performance in the first half of 2017 and here in the second quarter as well as our strength and outlook for the remainder of the year.

And I'm confident in the ability of our outstanding management team to build upon these results by continuing to capitalize on the many opportunities to grow our market position and deliver strong financial performance in 2017 and beyond.

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

(Operator Instructions) Our first question comes from Amit Daryanani of RBC Capital Markets.

I have a question and a follow-up for you guys.

I guess, to start off with, on the automotive segment.

I guess, Adam, there's been a lot of concerns around cycle and the slowdown of that marketplace.

I think you guys actually took up your full year forecast from high single digit last quarter to the low teens.

Just maybe help me understand how much of that uptick was organic versus M&A.

And just broadly, what are you seeing in the automotive market?

Yes.

Well, thank you very much, Amit.

I think we had a very strong quarter in the automotive market, and we're really pleased with the progress that we've made there.

And I mentioned actually in my prepared remarks that one thing that we're pleased in particular is to see strong performance really organically in all regions around the world.

And I think it's a testament to just the continued proliferation of electronics and our ability to capture maybe a little bit more than our fair share of some of those electronic applications.

With respect to our guidance, I would tell you that there was a component of strength organically as well as the contributions from the acquisitions.

And I think -- let's call it roughly balanced between the 2 of them in terms of the increase in our guidance.

Perfect.

And if I could just follow up on mobile devices.

Based on what you guys are seeing for 2017, it would mark, I think, the second year in a row now that revenues are is going to decline in that segment.

I'm curious, how do you see this segment structurally as you go forward?

Is it something that's going to decline and just manage and maximize free cash flow?

Or is there something unique that you think has driven declines of fairly healthy magnitudes for 2 years in a row now?

Yes.

No, look, I mean, we're not happy to now have that outlook that it will be down 2 years in a row.

But at the same time, we don't put the baby out with the bathwater.

I mean, we have had a fabulous position.

We continue to have a fabulous position in the mobile devices market.

And that is not a market where we just say, "Well, we're going to just maximize the cash flow." We continue to approach that market the same way that we have always done, which is to make sure that we're creating high technology-enabling products for our customers across the variety of applications that encompass mobile devices.

And we will continue to do so without any hesitation.

The reality is it's a very dynamic market.

We have said that in the past.

I think there's no question.

We were down last year, the year before.

It was one of our fastest-growing markets.

And this year, it appears that it will be down again.

I mean, without getting ahead of my skis on talking about what it may be in the future, it's hard to do that when we are not even able to do so, so effectively within this 12-month period.

I can tell you that we don't back away from that market.

We don't consider to exit it.

We don't consider to just milk it for cash.

We continue to support our customers in that market with a wide array of interconnect, antenna, mechanical products, with the full knowledge that always, you will see new things in the market where ultimately, the premium put on the hardware will allow us to realize great performance in a market despite whatever near-term challenges that there may be.

So we're very committed to the market, Amit.

Our next question comes from Mark Delaney of Goldman Sachs.

The first question is a follow-up on the mobile devices market.

I'm not looking for any quantitative view.

But are there any technical changes that you're aware of that you think could be future opportunities for more content gains, things like 4.5 or 5G and what that may mean for your opportunity in antennas and connectors?

Sure.

I mean, there are -- the thing about mobile devices is there are always technical changes all the time.

So we see every year new innovations as well as old innovations going away.

And some of those are favorable, and some of those are not favorable for us.

And it's our job to make sure that we're in the forefront with our customers, giving them new solutions to help them enable that.

As it relates to 5G, there's no doubt about it that 5G has a total new architecture potentially because it's not yet finalized, but potentially, in terms of how signals are transmitted from the infrastructure to the devices.

And I can just tell you that we're really working in the forefront of those efforts with customers on both sides, whether that be in the mobile networks market or in the mobile devices market, to ensure that we're presenting them solutions that can really deal with those very, very challenging aspects of what that would be ultimately at 5G.

And I think the fact that we have that very broad, in particular, RF expertise, radio frequency, whether that be on interconnect or antennas, is something that is looked upon very favorably by our customers across really both of those markets.

And I know you asked about mobile devices, but you really can't talk about 5G without talking about the holistic system between the networks and the devices.

And we're very -- I think we're in a very good position given that we have a strong position across both of those divides, if you will.

So what the technical changes ultimately will be?

That, I have a hard time to tell you because I can tell you, a lot of those decisions have not yet been made by customers.

But our team is there at the table with customers on both sides, working to ensure that we're well represented.

That's helpful.

And a follow-up question on the 3 deals that you announced this quarter.

Can you help us understand where the profitability levels are for margins?

And how much to full year EPS the 3 deals are contributing?

Yes.

I think these companies all operate -- I think it is the case, all of them operate below the company average.

And you can think about them in terms of sort of low-teens EBITDA, high-ish single-digit operating margins.

And I don't know that we're splitting out exactly what the accretion is, but it's only half a year right now.

So I wouldn't expect -- it's not significant accretion.

I don't know, Craig...

No, it isn't significant.

And I think as I would think about this, as we've done with all our acquisitions at the lower profitability levels, we certainly are committed to work over time to improve the profitability of these businesses.

These are great businesses.

It's great technologies and certainly great management teams.

And we feel very comfortable that over a period of time, that we'll be able to get them up to the profitability levels that we would expect and then drive even additional accretion from that.

Absolutely.

Our next question comes from Sherri Scribner of Deutsche Bank.

It seems like you had some comments in the press release on the conference call that the demand environment is sort of mixed.

And it seems like if we look at the more traditional industrial segments and GDP-exposed segments, those are -- appear to be improving and were a bit stronger for you.

But the traditional IT segments continue to see some challenges and obviously transitions to different types of business models like the cloud model.

Is that a fair assessment of the business?

And is that sort of what you're seeing as we move into the back half of the year?

Yes.

I mean, I haven't thought about it that way, but I guess, it's not an unreasonable assessment because if you look at the markets where we really outperformed in the quarter, it was, indeed, military, industrial, automotive in particular.

I guess, IT datacom, we had very strong performance so I don't know that it's a completely true statement to say that it's the more traditional GDP-led industries as opposed to the technology industries because I think we are really outperforming in IT datacom through capitalizing on that shift to the cloud.

But no doubt about it, military, industrial, automotive, all very, very strong organic growth.

But what I would also reiterate is this is not just a rising tide.

I mean, you look at our growth in military, yes, there was some component of that, that came from a recovery from the DLA.

But our growth, even without that, was very, very strong in the quarter.

And I don't think you have seen, for example, military budgets growing high single digits on a global basis.

And similarly with industrial, we grew 14% in the quarter.

Very, very strong performance organically, 19% in U.S. dollars.

And again, I don't know that GDP is necessarily growing at those rates.

Our team has just done a fabulous job in the industrial market, positioning us in areas that we have not necessarily been as present before.

And one of the ways we've done that is by capitalizing on many of the acquisitions that we've done.

At that time we acquired FCI, FCI was not known actually as "an industrial company." But we were very excited at the time that we acquired with FCI a tremendous range of industrial products, in particular related to embedded computing.

And so when we see growth in places like instrumentation, factory automation in particular, which were 2 of the fastest-growing segments within the industrial market for us, there is some portion of that which is actually organic growth of some of those FCI products that we would not have had in the past.

And I think that's a really great benefit that we start to see from having that broader range of products in industrial.

And I think I had talked already about automotive.

And you have an automotive market which is maybe, in units, flat or, some even say, slightly down on a year-over-year basis.

And we grew in that market organically by 13%.

So I don't know that that's again just a GDP trend.

That's super-helpful, Adam.

And then can I just ask, there's been a lot of commentary about component shortages and some component issues.

You didn't really talk about it in the call.

But can you talk through any issues that you're seeing and if it had any impact on any of your end markets or any of your ability to deliver products?

Thank you very much.

I mean, we hear some rumblings about this.

I hear more of it related to the distribution channel and extending lead times for things like passive components.

I can't tell you that we have seen anything material related to shortages that would affect our ability to service our customers.

I think even when there is the slightest sniff of that, I can tell you that our team jumps into action to make sure that we're supporting customers in whatever they want and whatever they need.

And nor have we heard anything material about our customers reducing their procurement of our product because of other shortages.

That, I have not seen in any real meaningful way over the course of the last quarter.

But I certainly hear in the distribution channel, in particular, that there are some extending lead times on things that are unrelated necessarily to the interconnect world.

Our next question comes from Shawn Harrison of Longbow Research.

Two questions.

Going back to mobile devices.

Is the dynamic this year being down a function of you walking away from business where the pricing was competitive and competitors decided to undercut you this year?

Or was there something in the design change year-over-year with these smartphones where maybe you missed that?

I -- it sounds like a little bit of both, but I wonder if you could provide any clarity on that.

Then I have a follow-up.

Sure.

I mean, I think -- I would love to tell you that there's a silver bullet here, but there is not.

It's a very dynamic market.

So all the things that you mentioned can happen to you or you can -- there can be also just overall shifts in volumes and dynamics and -- or you don't win everything as it comes along.

What I can tell you is there's some combination of all of the above that would represent that.

I think we've talked about one, in particular, dynamic, which is that the tablet market continues to be a significant drag on the overall volumes in the market in particular because tablets do have much more significant content and content potential than you would have in a just traditional smartphone.

And I think the overall global units of tablets continue to fall.

And so I think that's more in the category of just the overall market being down.

And then you have design changes.

You have differences of technology.

You have pricing pressure.

You have all of the above.

So I'm not trying to cop out here, Shawn, but I would just tell you that there is not just one driver of that new expectation that we have for the year.

Okay.

That's fair.

And then on the mobile networks business, Adam.

I think you made the comment that the operators haven't stepped up the spending yet.

Was -- did you have an expectation, be it in any region of the world, where you would see an acceleration into the back half of the year and that's falling short?

Or is it just more of they haven't spent and they're not going to spend?

Yes.

I think it's more of the latter.

I mean, we haven't changed our outlook for this market.

I think we continue to have an outlook which is similar to what I talked about last quarter.

So it's not that we had anticipated something to come.

Now I'm an optimistic guy.

So I always love to hope that maybe we will be proven wrong on our outlook and it will be a little bit better than we had expected.

And I don't think that seems to be in the cards here.

This is a market where, as you know very well, I mean, you follow that market so closely, that goes in waves.

And those waves get impacted by a couple of dynamics.

One of those dynamics is the generational shift in the products.

And I think we are this year a little bit in that interstitial period between generations.

The second is that you get the sort of corporate uncertainty that can strike the market, either someone wants to be sold, someone wants to be bought, companies come together, companies don't come together.

And inevitably, when that happens, especially with service providers, and we see that here and in the broadband market, they tend not to overspend, let's say, on capital at a time when their corporate future is not fully gelled and understood internally or externally.

And I think that those 2 dynamics seem this year to both be the case.

But looking into the coming years, I would just tell you that everything that we hear from our customers is there's a lot of potential with next-generation networks.

The traffic that is coursing through these networks continues to increase on an exponential basis.

The requirements around coverage, around latency, around power consumption, all the things that are so critical to the strong functioning of a network, those do not abate in their importance in the eyes of both our operator and our OEM customers.

And thus, there continues to be tremendous ongoing work to develop enabling solutions for next generation.

And our team is very much engaged in that.

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

Adam, your first half 2017 organic growth that you reported is higher than your full year guidance of 2% to 4%.

So for second half, can you talk about where the deceleration is coming from?

Or were there any pull-forward issues, especially given that the comps actually get a lot easier in 3Q on an organic basis?

And I have a follow-up.

Yes.

I mean, I don't -- I think I've given already our outlook for all of the markets here in the third quarter and the fourth quarter, and I don't know that it would be so helpful for me to go one by one.

But I would say on a year-over-year basis, probably the biggest change between first half and second half is IT datacom market where we had an outstanding second half last year.

You may recall, we grew in the second half last year in IT datacom, in the third quarter by 19% organically and in the fourth quarter by 27% organically.

And we certainly don't have that same expectation here in the second half for that market, which is actually today, our largest market by a hair here; it's 21% of sales.

So I think that's probably the market that has the -- just to the calculation that you're looking at, probably the largest impact.

Okay.

And can you talk a little bit about the geographical footprint for Meggitt and i2S?

Seems like they're both like European based.

And is it pretty -- are the sales pretty concentrated currently in Europe?

And do you see an opportunity to scale?

And can you also comment on sort of the i2S sensors if those are primarily high-pressure sensors and what applications they are best positioned in?

Sure.

So obviously, i2S is based in Dresden.

So you can assume correctly that they have predominance of European.

The 3 companies that we acquired from Meggitt, one of them is based in Europe, and the other 2 are based here in North America.

So I would actually say that they are probably a little bit more North America-centric in its totality than Europe-centric.

And i2S, indeed, has just an outstanding position in a broad array of pressure sensors, maybe a little bit tilting towards higher pressure but, in particular, really harsh environments.

So the sensors that can operate at extremely high temperature as well as pressure and not have a degradation in the performance and the function in accurately reflecting the pressure even in a very harsh environment.

And that's what's quite special about i2S and their capabilities in that area.

And you can see those applications in automotive and industrial both equally actually.

Our next question comes from William Stein of SunTrust.

Great.

More on the recent M&A.

These deals seem slightly more slanted towards -- or maybe a lot more slanted toward sensors than the overall portfolio, and we know this is a sort of multiyear thing.

You started 3 years ago.

Should we think about the pipeline of deals continuing to lean more towards sensor products than connectors or antennas?

No.

I wouldn't necessarily think about that.

I've said in the past, Will, that we can't control the timing of acquisitions.

I mean, we do our best, and we're very quick and lean and responsive with our small team here.

But ultimately, it comes down to the decision of a seller to sell and when they're going to do so.

And it just so happened, in this case, that there was this sort of coalesce of companies that came together here at roughly the same time within a couple weeks of each other.

But I think I did say 3.5 years ago at the time that we made our first significant sensor acquisition, which was the Advanced Sensors Business from GE, that we saw that as an outstanding platform for both organic and M&A-driven growth for the long term for Amphenol; and that it was a market that we felt was very similar to the connector market circa 15, 20 years ago.

And if you remember, the way that I thought about that, and I continue to think about it, the connector market used to be a market where there were very few large players.

There were a lot of small moms-and-pops and small to midsized companies.

And then there were a range of companies that were also owned by conglomerates.

And over time, the conglomerates came to the realization that owning a component company of that type was not necessarily in their best interest, and they couldn't really maximize the value and performance of those companies.

And the moms-and-pops came to the realization that in order to grow and get really beyond the glass ceiling that strikes those small companies, that it also made sense to be a part of a larger enterprise.

And I think what we've seen here is all of those dynamics playing out in what was a relatively short time period.

Here, you have a wonderful company, Meggitt, I mean, just an outstanding company that we're very proud to do business with here, who came to the conclusion that this was not the component that fit into their business strategy, and they came to a very rational conclusion about that.

And at the same time, here is a sort of entrepreneurially start-up company that -- in the case of i2S where the founder is still the general manager as part of Amphenol.

And so it's sort of both ends of that spectrum that I talked about back when we acquired the Advanced Sensors Business of GE.

And we would expect that same dynamic to continue to have potential for new acquisitions going into the future.

But what I wouldn't assume is that we are really tilting our acquisition focus or our acquisition resources just toward sensors and to the expense of interconnect.

We still see fabulous opportunities in the interconnect market organically and through M&A.

And we will continue to pursue those with the full force and the full level of energy that we have always done in the past.

Appreciate that.

One quick follow-up if I can.

We didn't have a specific expectation for the timing of the dividend increase that you delivered today.

And you mentioned yield.

I think most companies tend to sort of think about this from a capital allocation perspective as a payout ratio, a percentage of earnings or cash flow.

And that metric seems to hover around 20% historically.

Is that how we should think about capital allocation between dividend, buyback and M&A that the dividend should continue to pace around 20% of earnings?

Yes.

Thanks, Will.

That's a great question.

As we -- I think I start with as we've said in the past, our capital deployment kind of strategy over time is to have about half of our free cash flow as a return of capital to shareholders.

And as you know, that's kind of a cross between our dividend program and our share repurchase program.

We have been and we'll continue to be committed to our dividend program at this 1% yield.

We think that's an appropriate yield.

And as you point out, that has turned out to be roughly 20% or so of our free cash flow.

I think we think about it really more in the 50% return of capital.

And so I would think about it as that 1% of yield.

And it just turns out mathematically to kind of turn into that 20% of free cash flow, with the rest being kind of share repurchases.

This year, year-to-date, we've kind of been a little bit above that just because of -- we have renewed our share repurchase program.

We've done roughly $400 million of share repurchases, 5.7 million shares, so far this year.

Any quarter could be different in regards to that depending on market prices of the stock and different cash needs.

But I would say that the way to think about it is really the 50% going to return to capital and consistently staying at roughly that 1% yield for dividends, which, at this point, based on our cash flow, is you're right around 20%.

But that's not necessarily our target per se.

Our next question comes from Craig Hettenbach of Morgan Stanley.

Just a question on sensors.

Given the 2 tuck-ins as well as the sensor business you already have in place, Adam, can you just touch on just kind of maybe the breadth of the portfolio and where you think you're strong at this stage in the sensor market?

Yes.

No, I would tell you that our portfolio is broader today than it was prior to having completed these acquisitions for sure.

I don't mean to be funny about that.

We have actually now really an excellent broad portfolio.

If you think about sensors from really 2 dynamics, one is the type of sensor, and the second is the markets in which those sensors are sold.

Today, we have an offering that encompasses pressure, temperature, gas and moisture position now, which is a new type of sensing for us; vibration, which is a new type of sensing for us; as well as a range of other mass airflow and areas like that.

And in addition, we're selling those sensors now in the automotive market, which we have been from the very beginning.

And across a number of segments in the industrial market, areas like medical and heavy equipment and building automation, what you would maybe even think of as kind of traditional Internet of Things applications, now having also in the military market, which we're very pleased about.

That's an area that we have been very eager to continue to make progress in, given our overall strength in that market.

And we continue to see other opportunities in the sensor market.

As we build that breadth of product portfolio on a global basis, we see further opportunities to expand into the markets where we already have great strength through our other product offerings.

And we'll continue to pursue that relentlessly.

Got it.

And then just as a follow-up in the industrial space end market.

Any context between -- it feels like the cyclical environment is a little bit better, but also there are some secular tailwinds, be it factory automation.

Could you kind of give some color around kind of what you see is driving all with better organic growth in industrial?

Yes.

I think I spoke a little bit about that to Sherri's question.

But I would just reaffirm that we saw great performance in instrumentation, factory automation.

And I think those are areas that are consistent with the trend that you mentioned, which is there is this sort of ongoing and, even some would say, accelerating drive towards automation and creating sort of smart factories and all what's entailed with that.

We were very pleased to see great growth in heavy equipment.

And I mentioned, albeit from a low base, that we have now started to see a growth in the oil and gas market.

And I don't want to be the one to pick the bottom on that market, for sure.

But we actually had very strong growth in the oil and gas market from those lower levels in the quarter.

We saw continued strong growth in medical, which has been an excellent market for us now for a few years running.

And I think that medical market is related not just to interconnect but also to sensors, as we described.

It's just -- the industrial market, the overall trend that you see, and it's a long and sort of cumbersome word to say, but the electronification of applications that otherwise would have been hydraulic, mechanical or even didn't exist in the past is something that we see accelerating with customers really across that market, whether that be in a high-speed train or in a hay baler on a farm.

You just see more and more electronics being proliferated into heavy industrial applications.

And that's something that I think our company is very well positioned to take advantage of.

Our next question comes from Steven Fox of Cross Research.

Just 2 questions for me.

First off, just to be totally clear, you mentioned how you beat the high end of your guidance range by $47 million.

If you dissected that beat, can you just maybe you rank what was the biggest contributors to the upside?

And why?

And then I had a quick follow-up.

Yes.

It was almost virtually all organic.

I mean, I don't know like...

What -- I guess, I was trying to understand which markets, Adam.

Oh, which markets.

Yes.

I think if I go back to what I was talking about: Military was clearly one; industrial was another; automotive was one; IT datacom.

I think those are the 4 markets where -- which represented the vast majority of that beat.

Great.

That's helpful.

And then just in terms of acquisitions and maybe the differences between this one and others in the past, does -- given the size of the businesses, the slope of the improvements that you can make, would we expect to see it pretty quickly, like within 12 months?

Or how would you expect sort of to get these businesses up to sort of typical Amphenol margins?

Yes.

I think we don't pin down an exact date.

I think what we do when we make an acquisition, the first thing we do is we sit with the management team and we ask them, what are those areas that you have never been able to approach?

What customers?

What type of cost-reduction opportunities have you not been able to pursue given your size or your position or your ownership or otherwise?

And that's really step 1. And oftentimes, the first step is, "Hey, I would have loved to go to that customer, but they never took my call," or "I would have loved to go to that customer, but there was a bit of a conflict between that customer and my parent entity," or something like that.

And so those are usually some low-hanging opportunities that we take.

And then what we do with the management team is we say, "Look, we can show you many examples of Amphenol organizations who joined at one point through acquisition, had a certain level of performance and ultimately achieved a higher level of performance at or above the company average." And we introduce them to some of those people who have gone through the very, very same experience that, that management team is about to embark upon, and they learn a lot from that.

I mean, sometimes we'll have them go on a little tour to meet some of those organizations.

And then ultimately, how they make that road map to improve comes back to the management that is in place running those individual businesses.

And the time line can be very different depending on the nature of the business, the type of business that they're in, where they're manufacturing, the ease with which things can be changed if necessary, the geography that they're in.

Those all affect the timing.

But what I can say is that our track record here is not a bad one.

If I look at the progress we made with FCI, if I look at the progress that we've made with others big and small, I mean, ultimately, I think we have a very, very good hit rate of bringing those companies over a certain time period to the Amphenol average or above.

And that's the mission for all of those companies that have just joined us today.

And in fact, as I mentioned earlier, all of these acquisitions, I call them 5 companies, but it's really 3 acquisitions, they all come join Amphenol with a lower level of operating profitability than we have in the company.

So -- and I think all the management teams have embraced that opportunity and that potential.

Our next question comes from Jim Suva of Citi.

A quick clarification question, then kind of a strategic question.

The clarification question was on the Q&A earlier.

You had mentioned that on the questions about the mobility about kind of what happened.

Was it a few missed designs, a little bit more pricing, some less connector content in future phones you kind of said it was a combination of all the above?

Did you really mean all of the above?

Or did you mean like all of the above except more content per phone?

Because it seems like there's still more content going in per mobile phone.

That's just kind of the clarification question.

Or maybe we've reached a saturation point where there's less connectors going into the phone, and I'm just not sure.

And then the strategy question is, the M&A has been very robust for you guys, especially this quarter, which is great.

Are you at a point now where you just need to sit back -- not sit back -- or focus your efforts on integrating them?

Or are you still out harvesting and hunting more acquisition targets and have more room to guide just even beyond the flurry that came in this quarter?

Well, thank you very much, Jim.

I think what I mentioned on mobility is that there's different content on every different platform.

And one area in particular that we've seen in the past where content has declined, and we talked about that in the past, is on a place like a tablet where tablets went from being very multi-networks like 3G capable to being just WiFi.

And I think that's a dynamic we've talked about over the years where actually, content did not go up in that case.

So it's not necessarily true that always, content goes up in every iteration of a mobile device.

What is true is that every iteration is different.

And so sometimes there's more, and sometimes there's less.

Sometimes there's different.

There's different formats of things.

But I don't think one can make just a blanket statement that it's either all going up or all going down.

With respect to M&A, it's very true.

It was a very active quarter for us, and it's been actually a very active year so far for the company.

But the way that we are organized is not that we then have to sort of sit back, take our breath and integrate or chew on those companies to digest them because, as you know very well, we don't do that here at headquarters.

We have -- I have 8 operating groups around the world, and we've got multiple teams who are working with those organizations.

And in fact, they're doing it.

It is the companies that joined Amphenol with their existent management teams, all of whom have embraced the opportunity of being part of Amphenol and the potential that comes along with that.

They are the ones actually doing the "integrating," which, by the way, is a word I don't necessarily like to use because we don't integrate them per se.

We're enabling them.

We're giving them opportunities to achieve in areas that they otherwise may not have been able to do as stand-alone companies.

And that does not actually take, for example, resources from us here at headquarters with our small acquisition team to -- in order to do that.

It takes the ongoing communication between my group executives with the general managers and their respective teams who are really doing ultimately the job.

I think if we had an integration organization, for example, at headquarters, which we don't, and that integration organization was too busy, then you could find yourself in that situation that you described, whereby there was just not the bandwidth to keep doing acquisitions.

We don't have that issue.

So we have really limitless band list -- bandwidth to continue to pursue acquisitions and to execute upon them when the opportunities present themselves.

Now does that mean we're going to make further acquisitions here in the third quarter or fourth quarter, the second half?

That, I cannot tell you.

I can tell you that we have a very robust pipeline.

But I can't tell you when ultimately those companies are going to sign on the dotted line and agree to be purchased by Amphenol.

And -- but we'll do our best to make sure that we continue to have those -- do acquisitions.

And we have confidence that over the long term, the acquisition program will continue to be a great wellspring of new talent, new technology and new growth potential for the company.

Our final question comes from Joseph Giordano of Cowen and Company.

I wanted to ask about like the guidance bridge from where you were to where you are today.

So the quarter was like an $0.08 beat to the high end.

And then the tax -- the 200 basis points or so in tax, that's over a $0.05.

And then you get about $0.11 or so to the EPS range, increasing with, like, a point of organic.

So it seems like there's an offset somewhere even if we consider the M&A as like a -- as a 0 for this year.

I'm just kind of -- where is it on the margin that we have to think about that?

It just -- I'm -- it seems like I'm missing a piece of it there.

Sure, Joe.

I think the way to think about it from a bottom line perspective is there are just a few pieces to that.

One of them would be the option exercise impact that I mentioned.

And honestly, that's really just the $0.07 that I did mention in my script.

That's really the difference from a guidance perspective for the full year.

We're not adding any additional assumption for that other than what we had already included in our guidance, which is some small portion in the second half.

In addition to that, certainly, we have the acquisition impact.

We talked about that being in the single digits from an operating margin perspective.

So from an EPS perspective, that's really not adding all that much.

It is accretive, but it's not adding a significant amount.

Plus it's only a half of a year.

And then after that, you have kind of your organic and FX impact.

The organic impact really is the majority of that or pretty much almost all of that really relates to kind of our beat here in the second quarter.

And then there's some incremental related to foreign exchange as well, which added -- we don't necessarily define that, but some small amount as well.

But those are the pieces that effectively add up to our guidance from last time to the $2.97 on the high end to where we are now at $3.10.

Doesn't the beat and the tax alone get you, like, higher than that number?

No, it shouldn't.

I'm not sure what math you're doing but...

Speakers, we show no further questions in queue.

Okay.

Well, very good.

Thank you all again for your attention and focus here today.

And I hope it's a good opportunity to wish you all a good completion to the summer.

And I do hope that you all get a chance to spend a little bit of time with your families here before the summer is out.

And we look forward to speaking to all of you here in just about 90 days.

Thanks so much, and best wishes.

Thank you, Mr. Lampo and Mr. Norwitt.

To all participants, the replay of today's conference will be accessible in the next 24 hours until August 26, 2017.

To listen to the replay, you may dial the toll free number (866) 373-9220 or you may call the toll number (203) 369-0279.

The replay passcode will be 7183.

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