安費諾 (APH) 2018 Q3 法說會逐字稿

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

(Operator Instructions) At the request of the company, today's conference is also 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, 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 third quarter 2018 conference call.

Our third quarter 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, of course, 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 third quarter with record sales of $2,129,000,000 and with record GAAP and adjusted diluted EPS of $1.01 and $0.99 respectively, exceeding the high end of the company's guidance for sales by approximately $110 million and adjusted diluted EPS by $0.06.

Sales were up 16% in U.S. dollars and up 17% in local currency as compared to the third quarter of 2017.

From an organic standpoint, excluding both acquisitions and currency, sales in the third quarter increased 15%.

Sequentially, sales were up 7% in U.S. dollars and 9% in local currency and organically.

Breaking down sales into our 2 segments.

Our Cable business, which comprise 5% of our sales, was flat in U.S. dollars and up 4% in local currency as compared to the third quarter of last year.

And our Interconnect business, which comprise 95% of our sales, was up 17% in U.S. dollars from last year, driven primarily by organic growth.

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

Operating income was $444 million for the third quarter.

And operating margin was a record 20.9% in the third quarter of 2018, up 40 basis points compared to the third quarter of '17 of 20.5% and up 30 basis points compared to the second quarter of '18 of 20.6%.

From a segment standpoint, in the Cable segment, margins were 13.1%, which is flat compared to the third quarter of 2017.

And in the Interconnect segment, margins were a strong 22.7% in the third quarter of 2018, which is compared to the third quarter of last year at 22.4%.

This is excellent -- 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, 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 dynamic market environment.

Through the 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 $25 million, which is comparable to last year.

The company's adjusted effective tax rate was approximately 25.5% for the third quarter of 2018 compared to 26.5% in the third quarter of 2017.

The adjusted effective tax rate in both periods excludes the excess tax benefit associated with stock option exercises as we have previously discussed.

The company's GAAP effective tax rate for the third quarter of 2018, including the excess tax benefit associated with stock option exercises, was approximately 23.8% compared to 21.8% -- 20% (sic) [21.8%] in the third quarter of 2017.

Adjusted net income was a strong 15% of sales in the third quarter of 2018.

On a GAAP basis, diluted EPS grew 15% in the third quarter this year to $1.01 from $0.88 in the third quarter of last year.

Adjusted diluted EPS, which excludes the excess tax benefit from stock option exercises in both periods, grew 19% to a record $0.99 in the third quarter of this year from $0.83 in the third quarter of 2017, which also excluded certain acquisition-related expenses.

Orders for the quarter were a record $2,120,000,000, a 14% increase over the third quarter of last year, resulting in a book-to-bill ratio of 1:1.

The company continues to be an excellent generator of cash.

Cash flow from operations was $339 million in the quarter or approximately 110% of adjusted net income.

From a working capital standpoint, inventory, accounts receivable and accounts payable were approximately $1.2 billion, $1.7 billion and $1 billion respectively at the end of September.

And inventory days, days sales outstanding and payable days were 78 days, 73 days and 63 days respectively, which were all within our normal range.

The cash flow from operations of $339 million; along with stock option proceeds of $72 million; short-term borrowings of $19 million and cash, cash equivalents and short-term investments on hand of approximately $29 million, net of translation; were used primarily to repay a net amount of $194 million under our commercial paper programs to fund net capital expenditures of $72 million, to fund dividend payments of $69 million, to purchase approximately $35 million of the company's stock and to fund acquisitions of and dividends paid to noncontrolling interests of $11 million.

During the quarter, the company repurchased 400,000 shares of stock at an average price of approximately $87 under the $2 billion, 3-year open-market stock repurchase plan.

At September 30, cash and short-term investments were approximately $1 billion, the majority of which is held outside of the U.S. And at September 30, the company had issued approximately $338 million under its U.S. commercial paper program and approximately $513 million under its euro commercial paper program, for a total outstanding balance under its commercial paper programs of $851 million.

The company's cash and availability under our credit facilities totaled approximately $2.2 billion.

Total debt at the end of the quarter was approximately $3.3 billion, and net debt is approximately $2.2 billion.

In addition, as previously announced, the company had a successful European senior note issuance, in which the company issued a 10-year EUR 500 million note at -- on October 8, which has an all-in effective tax rate of just under 2.1%.

The company will use the proceeds to repay outstanding debt, resulting in an aggregate pro forma balance of approximately $270 million outstanding under its commercial paper programs.

The third quarter 2018 EBITDA was approximately $530 million.

And from a financial perspective, this was an excellent quarter.

I will now turn it over to Adam, who will provide an overview of the business and comment on current trends.

Well, thank you very much, Craig.

And I'd like to offer my welcome to all of you here on the phone today, and we very much appreciate you spending some of your precious time with us.

As Craig mentioned, I'm going to highlight some of our achievements in the quarter.

I'll then spend some time to discuss our trends and progress across our served markets.

And then finally, I'll spend some time to comment on the outlook for the fourth quarter, which is, of course, also the full year of 2018.

With respect to the third quarter, I could just say that I'm very pleased that the company once again reached new records of performance in the third quarter, with sales and earnings both exceeding the high end of our guidance.

Revenues in the quarter increased by a very strong 16% in U.S. dollars and 15% organically to a new record $2,129,000,000.

And for the fourth quarter in a row, we booked a record level of orders, in this case, $2,120,000,000, which represented still a very robust book-to-bill of 1:1.

Operating margins in the quarter reached a new high, 20.9%.

And this is just a clear demonstration of the strength of the company's operating performance, as Craig so eloquently detailed.

And then finally, we delivered record adjusted EPS of $0.99, growing a very strong 19% from prior year.

I can only say that I'm just extremely proud of the Amphenol team around the world.

I mean, their ability to respond to the many opportunities in the exciting global electronics market, all while driving excellent operating performance, is clearly reflected in the company's strong third quarter results.

Now turning to our progress across our served markets.

I would just comment that our end-market diversity once again was a great asset for the company here in the third quarter.

With no market representing more than 20% of our sales, we remain very pleased by the breadth and balance of our end-market position.

I would just point out that this balance creates great benefits for Amphenol in any economic cycle.

And very importantly, we're also pleased that we realized strong organic growth across nearly all of our end markets here in the third quarter.

So turning first to the military market.

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

And simply put, we had just another great quarter in the military market.

Sales increased from prior year by a better-than-expected 22% in U.S. dollars and 23% organically.

Our growth in military was really broad-based and included aircraft, military vehicle, helicopters, space and communications segments in particular.

And sequentially, our sales rose by 2% in what is typically a seasonally softer summer quarter.

Looking ahead, we expect sales in the fourth quarter to remain essentially at these robust levels.

And for the full year 2018, we now expect to achieve sales growth in the high teens for the military market, a stronger outlook than we had coming into the quarter.

2018 has no doubt been an excellent year so far for our team working in the military market.

They continue to successfully expand our position by driving our broad array of high-technology products across the widest range of military applications.

In addition, I'm very pleased with our team's ability to react to this increased level of demand from our customers, not always an easy task.

And amidst this stronger overall defense spending environment, we look forward to continuing to leverage our high-technology position to drive further outperformance into the future.

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

Sales grew by 9% in U.S. dollars and 10% organically as we benefited from continued growth in jetliner volumes as well as increased content on new airplane platforms.

Sequentially, sales were slightly down from the second quarter on expected seasonality.

Looking to the fourth quarter, we expect sales to increase modestly from these levels.

And for the full year 2018, we continue to expect a low double-digit increase from prior year.

We remain encouraged by our strong performance in the commercial aviation market so far this year and look forward to continued progress going into the future.

Our team working in the com aero market has successfully expanded the company's technology position across a wide array of next-generation commercial aircraft, thereby creating a great long-term opportunity for the company.

The industrial market represented 19% of our sales in the quarter, and sales grew by 12% in U.S. dollars and 10% organically.

And this growth was really driven by expansion in rail mass transit, medical, heavy equipment, battery and entertainment, again quite broad-based.

As we had expected, coming into the quarter, sales were down seasonally from the second quarter, moderating by about 5% sequentially.

And looking into the fourth quarter, while we expect sales to further moderate from these levels, we continue to expect mid-teens sales growth for the full year in the industrial market, a very strong performance.

We remain confident in the long-term strength of our position in the industrial market.

Through our organic product development efforts, together with our ongoing acquisition programs, we've built a very robust and diversified suite of interconnect and sensor products for the widest array of industrial applications.

As electronics continues to transform these industrial applications, we look forward to realizing the benefits of our excellent position in this important market into the future.

Turning to the automotive market.

The automotive market represented 17% of our sales in the quarter.

Sales in the automotive market were just a touch softer than expected, but still grew by a very strong 10% in U.S. dollars and 8% organically.

Sequentially, sales moderated slightly from the second quarter.

They were down by about 4% in U.S. dollars and just about 2% organically on a sequential basis.

Looking into the fourth quarter, while we do expect sales to increase modestly from these levels, for the full year 2018, we now expect sales growth in the mid-teens, which, while strong, is just slightly lower than our prior expectations.

This reflects some small degree of moderation in demand from certain vehicle manufacturers as well as their Tier 1 customers.

Nevertheless, we remain encouraged by the company's strong position in the global automotive market.

Our team around the world continues to expand the company's range of high-technology interconnect products, sensors and antennas for a wide array of applications within vehicles.

These developments, together with our ongoing strategy of acquiring companies that offer complementary technologies, has positioned us strongly for the future as carmakers are integrating advanced electronics into fuel-powered, hybrid and electric vehicles.

In addition, we continue to work aggressively with customers around the world on new advanced technologies.

And these include next-generation emissions and drivetrain systems, autonomous and semiautonomous driving as well as next-generation high-speed data interconnect, just to name a few.

All of this creates a great long-term growth opportunity for Amphenol.

The mobile devices market represented 18% of our sales in the quarter, and our sales performance in mobile devices was much stronger than expected here in the quarter as we were able to execute on increased customer demand for both new and existing programs.

Sales rose by a very strong 30% from prior year, driven by higher sales of products incorporated into smartphones, together with strength and performance related to laptops and wearables.

Sales increased significantly from the second quarter, rising by an impressive 72% sequentially.

I just cannot emphasize enough how our team working in this extraordinarily dynamic mobile devices market was able to quickly ramp up in the face of higher-than-expected requirements from our customers and thereby, once again, demonstrating their outstanding agility and reactivity.

Looking into the fourth quarter, we now expect a modest increase in sales from these currently high levels.

And in light of our significant outperformance in the third quarter as well as our more favorable view of the fourth quarter and of course, understanding, as always, the inherent volatility in the mobile devices market, we now expect sales for the full year 2018 to increase by somewhere approximating 30%.

This compares to our prior guidance of mid- to high-teens sales growth as we came out of the second quarter.

Our team working in the mobile devices market continues to just do a fantastic job, expanding our position in this exciting space.

And while the mobile devices market is certainly not predictable, the agility of our team working in mobile devices continues to enable us to drive great success.

Their reactivity in meeting the challenging and ever-changing demands from customers, all while continuing to develop innovative next-generation products and manufacturing processes, has secured our leading position in this important market.

We look forward to continuing to realize the benefits of this position for many years to come.

The mobile networks market represented 8% of our sales in the quarter, and we drove better performance than expected in the third quarter, with sales growing by 12% in U.S. dollars and 15% organically.

Our growth this quarter was, in particular, led by stronger sales to mobile network equipment vendors.

Sequentially, our sales were slightly lower than the second quarter due to the impact of normal seasonality, which we had anticipated.

While we expect some modest reduction in sales from these levels into the fourth quarter, we now expect low double-digit sales growth for the full year 2018, which is a more favorable outlook than we had 90 days ago.

We're encouraged by our performance in the third quarter as well as by our improved full year outlook for the mobile networks market.

And while we do not believe this strength is yet driven by significant investments in 5G networks, our position in the mobile networks market in those next-generation systems continues to strengthen.

Our team remains focused on working to broaden our range of high-technology products sold into both equipment manufacturers and service providers as they prepare for the next generation of mobile network construction.

As we look to the future, we look forward to realizing the benefits of these important efforts.

Information technology and data communications market represented 20% of our sales in the quarter, and our team working in IT datacom really drove excellent and stronger-than-expected performance in this market, with sales growing by 18% in U.S. dollars and 16% organically from prior year as well as 6% sequentially from the prior quarter.

Our growth in the third quarter was broad-based across servers, storage and networking product and was supported by our sales to both equipment manufacturers as well as the new generation of web service providers.

As we look towards the fourth quarter, we expect sales to moderate from these high levels, but nevertheless, we now expect sales for the full year to grow in the low double digits from 2017, which is a more positive outlook than we had anticipated coming out last quarter.

Our position in the IT datacom market is as strong as ever as we've continued to extend our leadership in developing a wide array of next-generation products in high-speed, power and fiber-optics for a broad range of equipment manufacturers and Web service providers around the world.

As customers continue to accelerate data center performance in order to manage what is clearly an explosive growth of online traffic, we remain confident that our high technology offering positions us strongly for the future.

And finally, the broadband communications market represented 5% of our sales in the quarter.

Sales are [eroded] slightly from prior year by about 3% as cable operators continued to moderate their spending.

On a sequential basis, sales were flat to the prior quarter, which was a bit softer than we had expected coming into the third quarter.

For the fourth quarter, we expect a slight decrease in sales from these levels.

And for the full year 2018, we continue to expect that our sales will be approximately at the same level as last year.

Despite our relatively muted outlook for the year, we're still confident in the strength of 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.

So just in summary, and with respect to the third quarter, just simply put, I'm extremely pleased with the company's strong results as the entire Amphenol organization continued to execute extraordinarily well in expanding our market position while strengthening the company's financial performance.

And Amphenol's superior performance is a direct reflection of our distinct competitive advantages: our leading technology; our increasing position with customers across a very broad and diverse range of markets; our worldwide presence; a lean and flexible cost structure; a highly effective acquisition program; and then really, most importantly, it's all on the basis of an agile and entrepreneurial management team.

Now turning to our outlook for the fourth quarter and for the full year.

The overall demand environment no doubt remains strong, but nevertheless, there are uncertainties in the global marketplace and in particular, related to geopolitics and trade.

Assuming no significant changes to the current economic and geopolitical environment and based on constant exchange rates, we now expect for the fourth quarter and full year 2018 the following results.

For the fourth quarter, we expect sales to be in the range of $2,063,000,000 to $2,103,000,000 and adjusted diluted EPS in the range of $0.96 to $0.98.

This represents a sales and adjusted diluted EPS increase versus prior year of 6% to 8% and 12% to 14% respectively.

For the full year 2018, we now expect sales in the range of $8,040,000,000 to $8,080,000,000, together with adjusted diluted EPS in the range of $3.68 to $3.70.

For the full year, this new guidance represents sales and adjusted diluted EPS growth of 15% and 18% to 19% over 2017 levels respectively.

Would also note that this outlook now represents full year organic sales growth of approximately 12%, and that's a significant increase from our prior organic growth guidance of 8% to 9%.

Just in closing, I just want to say that we're encouraged by the company's strong third quarter results as well as our strengthened outlook.

And I'm confident in the ability of our outstanding management team to build upon these great third quarter results by continuing to capitalize on the many opportunities to grow our market position while delivering superior financial performance in 2018 and beyond.

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

(Operator Instructions) Our first question comes from Wamsi Mohan of Bank of America.

This is Ziv Israel filling in for Wamsi.

There have been a lot of concerns about China growth lately.

What have you seen specifically that is either positive or negative around China demand?

Any color there will be helpful.

And if you can put it in context of any prior China weakness you've seen, that would be very helpful.

Well, thank you very much.

Look, I don't think we have seen any notable changes to the demand in Asia or in China.

We have a very broad business on a global basis, and we have a very broad and localized business as well in China.

We have always prided ourselves on being a true local participant in the market.

And that is part and parcel to the way that we're organized, that whether that is in North America, in Europe, in India, in China, wherever, we rely on local teams of entrepreneurial managers to run our business, and that's really part of the real essence of the Amphenol culture.

And how that manifests itself in places like China is just in a very positive fashion, in that our team really is seen by Chinese customers, by global customers as being not only a stable team, but one who truly understands the local market and can work on a level playing field with anybody else, including those local participants.

If we look across the various markets, I would say that there haven't been anything notable in China.

We haven't seen any notable slowdowns.

There are always, in any given year, ups and downs.

But we haven't seen anything that is markedly different than in other years.

Our next question comes from Craig Hettenbach of Morgan Stanley.

Adam, so just in some of the more cyclical markets, be it industrial, automotive, you did point out that things slowed or weakened a little bit.

Anything there in terms of just customers reacting to kind of slow growth or inventory?

Anything on autos and industrial you can point out?

Yes.

Well, I think autos and industrial, I wouldn't group them, Craig, necessarily into just one category.

I think we came into the year with a certain outlook on industrial, and we're still standing behind that outlook.

We still see that market as a kind of a mid-teen growth market for the year, and I think our team's just done a really wonderful job in that space.

I think automotive, I did point out that we've seen just really a slight change to the negative in terms of the outlook from customers.

I mean, this has been broadly reported.

I don't think we're going to say anything different than what has been broadly talked about.

But this is just a general reflection of a little bit of reduction in demand outlook as we head in the second half and as we head, in particular, into the fourth quarter.

When we look at our performance in automotive, I would say that on a regional basis, we've been a bit stronger in North America and Asia, maybe a little bit weaker in Europe.

I don't think that, that is much different than also a lot of the broad reporting about the overall trends in the market.

But what is just really important from our perspective, you can have always volumes going up and volumes going down and demands for volumes going up and down for a wide variety of reasons.

And again, I think you all know many of those reasons.

But what is critical for us is there is not a change in that adoption and the pace of adoption of electronics into cars and into industrial equipment.

We continue to see just an incredible array of opportunities to really expand our position irregardless of the overall trends to expand our position long-term by working with our customers on a very broad basis to enable new technologies.

And in the industrial market, that's really with interconnect and sensors; in the automotive market, it's interconnect and sensors and antennas.

And I think all of those trends that we and our company and others in the industry have benefited for such a long time, it's not that those trends are changing whatsoever.

Now I'm not going to be the one to try to give a prognosis about what volumes are going to be beyond here in the fourth quarter.

There's lots of people who are much more expert than I am to do that.

But what we clearly continue to see is the long-term trend of the adoption of electronics, the enhanced electronic functionality, new applications, new systems.

That trend is certainly not changing or slowing down by any token.

Got it.

Appreciate all the color there.

And then as my follow-up, for mobile devices, I know there's a lot of attention placed on one particular customer, but just given the strength that you're seeing as I look at the mobile device market and particularly, China smartphones, the high-end capabilities you're seeing today in those phones, can you give any context in terms of the significance of that in terms of the high end of the market kind of broadening out?

And is that something that might be helping you?

Yes.

I mean, it's a really good point.

And I have talked for many, many years about this market under the context of the fact that we are choosy in this market in such as that we will participate where there is really technology being embedded in the hardware of the mobile devices.

And that's been a topic for, I think, the whole decade that I have been CEO of this company, which is our mobile device is eventually just kind of empty hosts for software.

And we have always said that we will participate in those mobile devices where our technology, our capabilities really have value for the customer, and that will come when there's really a premium put on the hardware.

And I think what you are seeing on a broad basis around the world is that the phone manufacturers, the service providers, they all know that you cannot just sell these sort of commoditized empty hosts for software and have any differentiating capability.

You've got to have features in the phones.

You've got to have features in the tablets.

You've got to have features in the laptops and the wearables and all those various things that are mobile devices.

And those features have very complex requirements.

They require an incredible degree of precision.

They require an incredible capability, both in design and manufacturing.

And so when we see our team really driving the success that they have here, I think it is exactly in line with our long-term expectations that hardware will continue to have real meaning to the proposition that phone manufacturers and operators make to their customers.

And so whether that's in China or whether that's in other places around the world, I think you do see lots of attempts at differentiating through the hardware, through the functionality of the devices, and we're there to support that in every place possible.

And so I think that underlying trend of hardware, there's, no doubt about it, still a very positive trend for the company.

Look, all that being said, and I said it in my prepared remarks and I will say it always until I'm blue in the face, it's a volatile market.

And it's one where you've got to be extraordinarily agile and reactive to the demand requirements of your customer.

And if you can do that consistently, be reactive, be supportive when they need you, and if you can do that with enabling capabilities and technologies, then you have a pretty good long-term position in this space.

And I think that's been our recipe so far and will continue to be our recipe going forward.

Our next question comes from Shawn Harrison of Longbow Research.

Two questions.

First, just on the mobile networks business, continuing to see some strength there.

Was there any regional dynamics of stronger trends in the third quarter and now for the year relative to where you were 90 days ago?

And then second, it's my topic du jour as of late, the lack of M&A activity in terms of just spend relative to your free cash flow.

It lagged in 2017 and you're lagging 2018 here year-to-date.

Is there anything that's pressuring the activity other than just pure timing?

Yes.

Well, thanks very much, Shawn.

I mean, with respect to mobile networks, as you heard, we had a very strong quarter in mobile networks.

I would say that the strength that we saw was more North America- and Asia-related, and Europe was not so strong in wireless.

So it wasn't necessarily regionally balanced.

It was balanced across Asia and North America, but not so balanced across Europe.

But that is maybe not necessarily surprising given the overall trends in that space.

But we were just really happy with how that came out.

We hadn't expected coming into the quarter -- I think coming into the year, in fact, when we started out this year, we didn't have such a favorable view of the mobile networks market.

And I think our team's just done an outstanding job of capitalizing on opportunities that have presented themselves to us while also doing the really hard work of making sure that we're well positioned for the future and in particular, for the future, whether -- whatever that next generation is, 5G or otherwise.

And so that's -- I think the team has done just a really outstanding job here on really a global basis.

Now relative to M&A, I've said it many times, I mean, we cannot control the timing of M&A.

We continue to work very hard, and we have an outstanding pipeline of M&A.

But the fact that we didn't close any deals in the quarter should not be at all an indication of any change in appetite or change in strategy, change of approach or change of opportunity.

I would argue that 2017, we had a pretty good year in M&A.

We bought quite a number of really good companies, understanding that as a percent of free cash flow, it was maybe a little bit lower than the prior year.

But in the prior year, we made the largest acquisition in the history of the company.

So I wouldn't read anything long-term into that, and we continue to have a strong pipeline for M&A.

And I will say that we continue to have just a very, very compelling proposition to those companies who really want to join and be a part of something great, to be a part of an organization that is extraordinarily hospitable to them as entrepreneurs, to be a part of a company that has just extraordinarily -- extraordinary breadth and reach from a customer and geographical and technology perspective.

It's a very, very compelling proposition for companies when they're deciding to whom do they want to sell and where do they want their company to end up.

We're not going to win every deal, as we've said all along.

We're going to remain very disciplined on price regardless of environment.

And we've said that when interest rates were low, we'll say that as interest rates go up.

We've said that when stock valuations were high, when stock valuations were low.

We've been very consistent about that, that we take a long-term approach to acquisitions in a way where we say we're going to get to know them very, very well.

We're going to buy companies on the basis of great people, great product and great position.

We're going to be very patient through those processes.

And when we buy them, they're going to be ours for life.

And that's a very, very important principle, and I think it's been a consistently successful principle in our acquisition program.

Our next question comes from Mark Delaney of Goldman Sachs.

I have 2. First question is on tariffs.

And Adam, you spoke about tariffs last quarter and some of the steps Amphenol was taking to avoid or mitigate those issues.

So I was hoping you can provide an update on that topic, both to what extent Amphenol has seen any direct impact on its own financials from tariffs and whether you think tariffs are having an impact at all on customer order patterns or demand.

Yes.

Well, no question, Mark.

Appreciate that tariffs continue to be a thing.

Unfortunately, it is what it is.

I would just say that what I discussed last quarter in terms of our approach and our methodology to dealing with tariffs has not changed.

And let me just remind everybody about that.

I mean, first and foremost, tariffs are just a thing that happened.

It's not something over which we have control.

While we try to lend our voice very passionately to the debate about whether or not there should be tariffs, they are what they are.

And so the question then is how do you react to those tariffs?

And what we have done in our company, not surprisingly given our organization and how we choose to operate this company, is we have not taken a one-size-fits-all approach to dealing with the tariffs.

We have really pushed down that decision-making to those -- to the general managers around the world who are implicated, who have to deal with those tariffs.

And then those who operate at that level are the best equipped to know the logistics, the manufacturing processes, the supply chain, how those products are made, where they're shipped to, who are the customers and ultimately, who are the competitors, and thereby make wise and real-time decisions about the measures that one can take to mitigate.

And there are really countless measures that one can take in this event, whether that is changing the location of manufacturing, changing where value is created, changing how things are flowing into what countries or of course, adjusting price, which we do with a heavy heart to our customers, but which you must do sometimes.

And I think that the combination of those very operation part number-by-part number specific initiatives has ultimately resulted in the third quarter, when we had quite a lot of tariffs that we had to deal with, in the company really not having any meaningful impact from those tariffs.

And I think when you see, ultimately, the operating margins of the company, 20.9%, and that is also a reflection of the fact that these tariffs did not have any meaningful damage to our financial position.

Now there's new tariffs every day.

There's more tariffs to deal with here in the fourth quarter, and I'm sure there will be more next year.

And one day, hopefully, this whole thing will get resolved.

But right now, we're managing it because it is what it is.

And so as we move forward, if there are new tariffs, if there are new levels of tariffs, I'm confident that our team is going to work extremely hard in that same methodology, ultimately to make sure that Amphenol as a corporation is not harmed by what I consider relatively misguided policies.

That's helpful.

And a follow-up question on the IT datacom market, which has been reporting stronger results than the company had anticipated at the start of the year.

Can you help deconstruct that a bit more between the piece for hyperscale and the piece tied to more traditional OEMs?

And I'm curious if hyperscale is now a big enough portion that you can help us better understand what percentage of the IT datacom business is tied to hyperscale at this point.

Yes.

Well, I don't have a number for you in terms of what percentage it is.

But it has continued to grow at a faster pace than the rest.

But I would tell you, still, it's smaller by some significance to our sales to equipment manufacturers.

I think we've seen very broad-based growth in the IT datacom market.

In particular, here in the third quarter, we saw really growth across all the different types of products.

So whether that's storage, server, networking, I mean, those were all very strong double-digit growth in the quarter.

And I wouldn't say that there was really a concentration of that into one or another type of customer, one or another region, very, very broad-based.

And why is that?

I mean, we certainly see, as I alluded to in my prepared remarks, that the degree of technology advantage that we have developed over a number of years, and that included both acquisitions that we made, our own organic product development, the breadth of product offering that we have and the depth of that offering, all the products across the price performance curve allows us and enables us to really be a strong and really a leading partner with our customers regardless of whether they are making a carrier class router on one side or a blade server, a rack server on the other side and everything in between.

And so it's the strength of that product technology, together with the breadth of what we're able to offer those customers, that has ultimately allowed us to have that more balanced and broad-based strength in the IT datacom market.

I think we feel very good about that position because it comes really at a time when the demands put on IT hardware on a global basis continue to accelerate.

Just you can't pick up a paper lately without seeing some new innovation, some new development that is generating amounts of data that you can't even imagine.

I think I saw a story this week about this new sort of deep space telescope, which apparently is going to generate, in a year, as much data as the whole Internet today occupies.

And when you think about this sort of exponential growth of data that is being created and things like that, things like autonomous driving, things like video on the Internet and high-definition video, and I think the matching of our unique and proprietary technology, together with that accelerated data traffic, is ultimately the story that results in these results.

Our next question comes from Matt Sheerin of Stifel.

Adam, you've done a good job by answering questions here and giving good color.

One follow-up, just regarding your comments on the telecom and mobile network area, where you talked about strength in really the non-5G areas, and there's a lot of talk about ramping in the back half of next year into 2020 in terms of ramps.

How are you seeing that play out and in terms of how you're positioned specifically with technology and customers?

Yes.

Well, thanks very much, Matt.

Look, I don't -- I can't give you a timing of ramp of 5G, but what I can tell you is that our position's very strong.

I mean, our team has been working for a number of years to make sure that our products are designed in on next-generation systems in the broadest sense possible.

And if you think back about what is 5G from an equipment and a performance perspective, 5G is all about speed and latency.

And to get really the levels of speeds and the reductions in latency that are being really targeted from a 5G, and to do that all at frequency sets that are much higher than current networks are operating, which thereby requires much more density, I mean, that's a lot of technology that gets embedded into these products.

And the interconnect products that are used in those systems, that are being designed into those systems, just in certain cases, have real step function performance requirements.

And so I give a lot of credit to our organization, our engineers around the world, who have worked with customers to make sure that our products are really front and center as they go through those design considerations.

And look, while you don't have a "5G" in the IT datacom space that we were just talking about with Mark's question, it's a very similar dynamic, that you have to have really that leading product and that leading suite of products such that customers can rely upon your products to help their systems perform at these extremely high levels that everybody is hoping to achieve with 5G.

When the timing is going to be, and I can tell you we're involved in a lot of buildouts in systems and products where there may be what's called 5G-ready, does that mean they are performing in 5G networks, probably not.

But we already see customers producing equipment that is forwards-compatible for 5G and things like that.

So as usual, in these generational changes in mobile networks, there's a long lead up, there's a lot of test and validation, design work.

And then the building out of that system, I think, starts to go slowly, and eventually, you'll have that -- have some meaning to the overall spending environment.

But when that's going to be is a little bit hard for us to predict.

Our next question comes from Amit Daryanani of RBC Capital Markets.

I have 2 questions as well, guys.

I guess, first one, Adam, nice to see the upside you guys have on mobile devices.

I think you said it was up 70%-plus sequentially in September.

When you think about what drove the upside versus what you guys thought it would be 90 days ago, do you think it's more driven by the fact that others that were involved in the same components couldn't execute the way they were supposed to, which I think has happened in the past?

Or was it that end demand was just better in the products you're involved in?

Yes.

I think, in this case, the demand was better and our ability to execute on the demand was a bit better than we had anticipated.

I mean, if you just think about the mechanics and logistics of in a 90-day period, having an increase in sales of 70% in a market which is not so small on an absolute basis, I mean, there's a lot of hard work involved.

And I just cannot credit enough our organization, who really made that happen.

I mean, and when we say make it happen in Amphenol, that has the real meaning to the people inside the Amphenol organization.

And they really made it happen here.

I mean, whether that is getting the production lines in place, getting the right people in place, getting the factories set up, I mean, all the things that are required.

And this is a team where this is not their first rodeo either as you know very well, Amit.

I mean, this -- we're used to having these significant increases.

But it doesn't make them any easier.

It just makes you maybe a little bit more confident in hindsight that you can do it again when it comes around.

But again, the simple answer to your question, I think, this was probably less us having to bail people out, like we've done in the past, and more the volumes being a little bit better and our ability to execute on those volumes being a little bit better on a broad basis.

Got it.

That's helpful.

And if I could follow-up, you guys obviously are seeing a broad-based trend in September.

It sounds like they're going to continue in December.

I heard your comments around tariffs.

I'm just wondering where tariffs is supposed to go to 25% on Jan 1 for a lot of products.

Is your response in tone going to be any different at 10% tariff or 25% tariff?

And then importantly, why do you think customers are not double-ordering at this point?

If I know cost [connectors] goes up by 25%, I might be better off buying more today versus waiting for Jan 1. And do you think that creates a risk for a bit of a vacuum in the first half of '19?

Yes.

Well, there's a lot in that.

But let's just be a little specific about what tariffs and when.

As you know, there have been 3 lists of tariffs.

There was what was called List 1, List 2 and then List 3. And if you look at the products that are in those, in List 1, there was a product line called connectors.

So -- and that was already at 25%.

So Lists 1 and 2 were at 25%.

It was List 3 that has the sort of step 1 at 10% and then the second step at 25%.

Are customers kind of hoarding or overbuying in that instance?

We haven't seen that necessarily.

Could there be some on the margins?

I suppose there could be some, but that's also constrained by just the ability to support those demands, and there -- it's not that you have infinite capacity to support that pull-in of demand.

Obviously, we'll do whatever we can with our customers.

And also, bear in mind that the tariffs are due when the product moves into the U.S., which is not always necessarily when you sell it to the customer.

And so that dynamic that you described is just not as clear.

And we haven't seen any real clear indications of that pulling forward.

I think the bigger question around tariffs, and that's one that I'm really not well equipped to answer, is what ultimately is the effect of these tariffs?

Where does it resolve?

Does that ultimately have any macro economical effects?

Does it have other effects?

Those are all things that are probably above my pay grade to think about or at least to make a forecast about.

But I think how we deal with the 10%, how we deal with the 25% of that List 3, it's going to be the same way we've dealt with the tariffs that have come so far.

I mean, we've had significant products that have been susceptible to those tariffs.

Again, all -- not forgetting about the fact that, by and large, the vast majority of what we make, we make and sell in the same region.

And that's part of the strategy that we've always taken of being localized to our customers.

And so we're not talking about an enormous proportion of our business here, far, far from that.

But there is some that we have to deal with, and I think we've dealt with it well so far.

And our team will continue to fight like heck to do so regardless of what tariff levels come.

Our next question comes from Deepa Raghavan of Wells Fargo Securities.

Two quick questions from me.

One is automotive risk.

It looks like the organic growth came in a point or 2 below your expectations.

Just curious how much of that was market versus content coming in softer versus expectations.

And what's your comfort with continuing your strong high single-digit content growth performance if the weakness continues well into next year?

Yes.

Well, I mean, 1 to 2 points organic.

I guess it's kind of hard for me to say is that market or content.

But as I said earlier, we don't see any signs of content slowing down.

I mean, far from it.

We continue to see new electronic systems being adopted into cars.

So I guess, without knowing exactly what the drivers of the 1 or 2 points of organic change, I would say that it's probably the market.

And I think I had said earlier that we continue to see -- have a very favorable view long-term towards the continued expansion of electronic content in cars around the world.

And what the market will be, what the total value or total units of cars is going to be, that's much harder for us to predict, but I think we still feel comfortable that content is going to continue to grow.

Got it.

My follow-up is on semiconductor supply chain.

Are you seeing any impacts from this well-broadcasted passive shortages, either directly or indirectly?

And generally, has that headwind abated?

Has that accelerated?

I mean, just curious.

I mean, it's something that seems to have hit a lot of companies this quarter.

Yes.

Well, thank you.

No, I think we've talked about that for a couple of quarters.

And it's a well reported -- as you correctly point out, it's a very well-reported discussion about, in particular, passives and I guess, some semiconductors.

We have not seen any meaningful impact on the demand of our customers due to these shortages that are so widely reported.

I think we're still performing very strongly on an absolute basis.

Our growth has probably accelerated over the course of the year, and I think that that's a sign that it -- there hasn't been any real meaningful impact.

Have our people spent a little bit more time because there are some of these passives and other assorted components that we, once in a while, buy for some of our more advanced products, sure.

We -- our sourcing team around the world is working maybe a little bit of overtime to make sure that we don't have any impact on our supply to customers.

But the sort of ancillary question of are customers buying less from us in general because they can't get the matching components, while, there may be an odd anecdote about that.

I can't say that that's had any meaningful impact to the performance.

Got it.

If I can sneak just one more in, sorry.

Your performance no way indicates that end markets have lost momentum broadly.

But my question is, what is the sentiment at your customer base that are buying your products?

Has that moderated versus 90 days ago?

I mean, obviously, that's a big deviation from the weak market sentiment we're seeing.

I mean, just curious what your thoughts are there, and I will pass it on.

Yes.

Well, thank you.

Look, I don't think I would say anything different about the sentiment than is reflected in our guidance here for the fourth quarter, which I think continues to be a very strong guidance.

I think our customers continue to be very positive, at least the ones that I have interfaced with, and I visit lots of customers on a very frequent basis.

I think our customers are continuing to look for us to do the same thing that we've done, in many cases, which is to deliver to them enabling technologies that help them to get their systems to operate at higher levels.

We've talked about that with IT, with mobile networks.

But the same is true in military, where we've done a fantastic job to both produce and design advanced technology products, but also to satisfy a level of demand that probably that industry hasn't seen for quite some time.

We talked about that in automotive as well, where customers, while there's been some slight moderation in the overall demand, that demand for new technologies has really not changed.

So -- and I could go through the markets, all of them, and all reflect on the fact that I think our customers are very positive about the future.

Our customers are very thirsty for next-generation technologies.

If there are short-term swings in demand, that is what it is, I think, for some of them.

Our next question comes from Jim Suva of Citigroup.

Adam and Craig, any comments on what you see for inventory levels, whether it be distribution, your customers, across the supply chain because we got to think that giving the tariffs as well as uncertainty and very strong or longer-than-normal lead times, one has to wonder about excess inventory or double bookings and will that show itself in a positive manner now and catch up to us?

Or simply are your lead times smaller than, say, maybe semiconductor companies that have a longer lead time?

Thanks very much, Jim.

I mean, as I've said before, we don't have perfect visibility into the warehouses of our customers.

We do see the inventory levels of a good degree of our distribution channel, and I think their inventories seem healthy, nothing really notable in our distributors.

Look, with all the things that you very astutely pointed out, things like tariffs and the various lead times and double bookings and all of that, I think a lot of those things are much more related to these passives and semiconductors that Deepa alluded to.

Remember that our industry is a different industry, and our -- the way we run our company is, once again, a little bit different.

It's not a capital-intensive industry.

And certainly, the way that we run Amphenol is not in a capital-intensive fashion.

Our ability to react and to adjust to changes in demand, be those on the upside, which is a bit more fun, but also on the downside, is really a reflection of that agility that we have from a manufacturing perspective.

And owing to that agility, we're able to keep our lead times relatively stable.

There are some anecdotes that, once in a while, where lead times will go out, and I think we've maybe seen a little bit of lead time stretch in the military market with the extraordinary increase in demand there.

But by and large, the way that we operate and the way that the interconnect industry operates is very different from the semiconductor and the passives industry.

And thus, I think you see a healthier supply chain behavior in -- with respect to those things that you mentioned, like double booking and others.

Our last question in queue comes from Joe Giordano of Cowen.

This is Tristan in for Joe.

I was wondering how lean are your operations at this point in the cycle in terms of capacity and utilization rates.

And if you have anything you would like to highlight on -- in terms of CapEx spending going forward.

Yes.

Well, I would just say that we always operate in a very efficient fashion.

I think I just -- when we just talked with Jim about inventory levels, I mentioned that from a capital spending, that it's not a capital-intensive business.

The way that we operate our factories is a fast and flexible fashion.

So from that perspective, we're always operating lean.

And that's part and parcel to the Amphenol culture.

It's not that we try to get ahead of things and build huge capacities and then wait for the orders to come, and nor do we, when times are good, burst at the seams and can't support our customers.

So we try always to scale our operational infrastructure to the demands of the customers regardless of what cycle we're in.

And I think when you look over a long time period at the performance of the company, especially during volatile economic times, you'll see that, that reflects exactly that principle ultimately in the numbers.

And the only thing, I guess, I would add on that is as you see this year, we have had a little bit higher end of our range from a capital spending perspective.

I mean, we have had pretty high levels of growth organically over the first 3 quarters and certainly guided for the year here.

And in those years, where we do have a more significant growth, we certainly do spend a little bit more on capital, but again, just typically within that kind of 2% to 4%, and this year, we'll be a little bit higher on -- up into that range.

But again, that just is driving that -- this high level of growth that we have right now.

Okay.

And then, Adam, based on the -- your comments about China and tariffs, I guess, do you feel likely to do M&A there in China even with the current situation?

Yes.

I think I would answer it even more broadly, which is we don't do M&A.

We don't hunt for potential new family members in Amphenol in a way that is trying to chase the market, a hot market or run away from the market that has maybe lost favor in the electronics industry.

We take a very, very long-term view towards acquisitions.

Our criteria for acquisitions remains very consistent.

I alluded to it earlier, we look for great people, we look for great products, or in other words, technology, and we look for a fantastic market position.

And sometimes, we'll make acquisitions when it's perceived to be the right time, and sometimes, we'll make acquisitions when it's not perceived to be the right time.

And that's all part and parcel of a strategy that says we're buying these companies for the long term, which is really for a permanent basis.

We believe in Amphenol, that when we make these acquisitions, we're getting married for life to those companies and to those organizations.

And so whether you buy that in 1 quarter, when that's the right place to be or in another quarter where it's not as much of the right place to be, that for us is less important.

So if the right company comes along, fabulous entrepreneurs, great products, great market position and that happens to be in China or that happens to be in a market space that is not necessarily the hottest space of the moment, we're not going to shy away from that.

And along with that, I will tell you, regardless, we're always going to be reasonable in terms of our valuation and disciplined in terms of the process of the acquisition.

And I think that approach, which is really an approach that is agnostic to short-term variations in market trends and environments, is one that has served us very well over the long term.

Now if there are governmental impediments that are put in place, very significant governmental impediments that are put in place, obviously, we're not blind to that and we would be very sensitive to that because any company that we buy, we want to make sure that there are not structural impediments to success.

But I don't think we see that in any geography today that -- of any significance.

And speakers, we show no further questions in queue at this time.

Well, that's very nice.

And again, thank you all very much, and we truly appreciate your time today and your interest in the company.

And I wish you all a very enjoyable fall season, and that we look forward to seeing you just at the beginning of 2019.

Thank you all very much.

Thank you.

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

As a reminder as well, today's call was recorded.

You can access the replay by dialing in the toll-free number (888) 568-0771 as well with the toll number, (203) 369-3482 and provide a passcode of 7183.

Thank you again, and have a nice day.