Amphenol - Q3 2016

Transcript

Operator (participant)

Hello, and welcome to the Q3 Earnings Conference Call for Amphenol Corporation. Following today's presentation, there will be a formal Q&A session. Until then, all lines will remain on the listen-only mode. At the request of our company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. And now, I would like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Craig Lampo (CFO)

Thank you. Good afternoon, everyone. My name is Craig Lampo, and I'm Amphenol's CFO. I'm here together with Adam Norwitt, our CEO. We'd like to welcome everyone to our Q3 Conference Call. Q3 results were released this morning. I will provide some financial commentary on the quarter, and Adam will give an overview of the business and current trends, and then Q&A. We may refer in this call to certain non-GAAP financial measures and may make certain forward-looking statements. Please refer to the relevant disclosures in our press release for further information. The company closed the Q3 with record sales of $1,636 million, GAAP diluted EPS of $0.71, and adjusted diluted EPS of $0.73. Sales were up 12% in U.S. dollars and 13% in local currencies compared to the Q3 of 2015.

From an organic standpoint, excluding both acquisitions and currency, sales in the Q3 increased 2%. Sequentially, sales were up 6% in U.S. dollars and up 5% organically. Breaking down sales into our two segments, our cable business, which comprised 6% of our sales, was up 14% from last year, primarily due to the strength in the broadband market. The interconnect business, which comprised 94% of our sales, was up 12% from last year, primarily driven by the impact of the FCI acquisition as well as organic growth. Adam will comment further on trends by market in a few minutes. GAAP operating income and operating margin was $326 million and 19.9%, respectively. Adjusted operating income increased to $333 million in the quarter, and adjusted operating margin was a new record at 20.3% compared to 20.2% in the Q3 of 2015 and 19.4% in the Q2 of 2016.

The significant 90 basis point sequential improvement in operating margin reflects, in particular, the excellent progress in profitability made by the FCI management team, which they have achieved through the successful combination of their leading technology and the adoption of our strong operating discipline. From a segment standpoint, in the cable segment, margins were 14.9% compared to 12.5% last year. The increase in margins related primarily to the strong operating execution on the additional volume as well as the benefit from the favorable impact of commodities. In the interconnect segment, margins were 22.2% compared to 22.3% last year and 21.2% last quarter. The significant sequential increase in the interconnect operating margins reflects the improvement in the FCI acquisition profitability I just mentioned, as well as good operational execution on the additional volume. We continue to be very pleased with the company's operating margin achievement.

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 challenging market environment. Through the careful fostering of such a culture and the deployment of these strategies, the management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance. The company has recorded acquisition-related transaction costs of approximately $6 million or $0.02 per share during the Q3. Interest expense for this quarter was $18 million compared to $17 million last year, reflecting the impact of higher average debt levels resulting from the company's stock buyback programs.

On a GAAP basis, the company's effective tax rate was 26.9% and 26.5% for the Q3 of 2016 and 2015, respectively. The effective tax rate for the Q3 of 2016 included the effect of the $6 million of acquisition-related transaction expenses incurred, which had the impact of increasing the effective tax rate by 40 basis points. Net income was a strong 14% of sales in the quarter, and on a GAAP basis, diluted EPS was $0.71 and $0.65 for the Q3 of 2016 and 2015, respectively. Adjusted diluted EPS was $0.73 and $0.65 in the Q3 of 2016 and 2015, respectively. Orders for the quarter were a record $1,698 million, an 18% increase over the Q3 of 2015, resulting in a book-to-bill ratio of 1.04 to 1. The company continues to be an excellent generator of cash.

Cash flow from operations was $291 million in the Q3, or approximately 130% of net income. For the nine months, operating cash flow was $729 million, or approximately 124% of net income. The company continues to target cash flow from operations in excess of net income. From a working capital standpoint, inventory was $927 million at the end of the quarter. Inventory days were 75, down four days compared to June. Accounts receivable was approximately $1.3 billion at the end of September. Days Sales Outstanding was 71 days, down approximately two days from June. Accounts payable was $651 million at the end of the quarter, and payable days were 53, down approximately two days compared to June.

The cash flow from operations of $291 million, along with commercial paper borrowings of $128 million and stock option proceeds of $70 million, were used primarily to purchase approximately $121 million of the company's stock, to fund acquisitions of approximately $87 million, to fund net capital expenditures of $47 million, and to fund dividend payments of $43 million, which resulted in an increase in cash, cash equivalents, and short-term investments of approximately $192 million net of translation. During the quarter, the company repurchased two million shares. Approximately 1.5 million shares remain available under the stock repurchase program through January of 2017. As mentioned in the earnings release, the company's board of directors has approved a 14% increase in the quarterly dividend on the company's common stock from $0.14 to $0.16 per share, bringing the dividend yield to approximately 1%. This increase is effective for payments beginning in January.

At September 30th, cash and short-term investments were $1,017 million, the majority of which was held outside of the U.S. At the end of the quarter, the company had issued $982 million under its commercial paper program. The company's cash and availability under our credit facilities totaled approximately $2 billion at the end of the quarter. Total debt at September 30th was approximately $3 billion, and net debt was approximately $2 billion. The Q3 of 2016 EBITDA was approximately $389 million. From a financial perspective, this was an excellent performance. Adam will now provide an overview of the business and current trends.

Adam Norwitt (CEO)

Very good. Thank you very much, Craig. I'd like to add my welcome to all of you here on the phone today. Thank you very much for taking time with us here on a lovely fall afternoon. As Craig mentioned, I'm going to highlight some of our achievements in the Q3. I'll then spend some time to discuss the trends and progress across our diversified served markets. Finally, I'll make a few comments on our outlook for the Q4 and, of course, for the full year of 2016. I think Craig just went through the numbers, but I will just restate here that the Q3 was really an excellent quarter for the company. We established new records in orders, sales, and EPS, all while reaching the highest level of profitability in the company's history.

These achievements are particularly significant given the ongoing uncertainties that are still present in the worldwide economy. Revenue has increased by a strong 12% in U.S. dollars and 2% organically, reaching the new record of $1,636 million. And I think Craig mentioned that we booked a record orders, nearly $1.7 billion, $1,698 million in orders, which represented a very strong book-to-bill of 1.04 to 1. We're particularly proud of our operating margins in the quarter, which reached the all-time high of 20.3%, up 90 basis points from the Q2. As Craig alluded to, this margin expansion resulted from excellent operational execution, including continued progress in improving the performance of FCI. Given this faster-than-expected margin expansion by the FCI team, we now expect the FCI acquisition to contribute $0.18 to our 2016 earnings per share. This compares to our prior outlook of $0.15 for the accretion this year.

I can just tell you that we find it especially gratifying to see the benefits of the Amphenol management culture so clearly demonstrated in the performance of our new acquisitions. Craig also mentioned our operating cash flow, which was a very robust $291 million, and that's just a clear sign of the continued quality of the company's earnings. That has then been reflected with our board of directors approving a 14% increase in the company's dividend effective in the Q1. I'll just say how proud I am of the Amphenol team. Once again, this organization's entrepreneurial agility has enabled the company to achieve strong performance amidst an uncertain and a very dynamic worldwide economy. Our financial strength in the quarter also enabled us to make further progress in our acquisition program as we recently brought two new companies into the Amphenol family.

All Systems Broadband, which we closed at the end of September, is a U.S.-based provider of high-technology value-add copper and fiber optic interconnect solutions, in particular for the broadband market. All Systems has annual sales of approximately $40 million. This company is a leader in particular for both consumer premises as well as important central office applications in support of high-speed data and video delivery for the broadband market, and it's really an exciting growth area for the company. SGX Sensortech, which closed at the beginning of October, is a Switzerland-based supplier of air quality sensors with annual sales of approximately $15 million. SGX, which manufactures at its facility in Poland, is a provider of really high-technology air quality sensors that are used in both the automotive and the industrial markets.

It's a real pleasure, really, to welcome these outstanding new teams to Amphenol, our fourth and fifth acquisitions of the year. Going forward, we remain very confident that our acquisition program will continue to create great value for the company. It is really our ability to identify and execute upon acquisition opportunities while successfully bringing these new companies into Amphenol that remains a core competitive advantage for the company. Turning to our progress across our various served markets, I just want to point out that in the Q3, we continue to have an extremely balanced and diversified end market exposure with no single market representing more than 21% of our sales. I tell you, this diversification is truly a valuable asset for Amphenol, especially in these very dynamic times.

The military market represented 9% of our sales in the quarter, and sales increased from prior year by 6%, driven by growth in naval, space, airframe, and communications applications. I just say that this is really robust performance given the overall military spending environment as this was all organic growth. Sequentially, our sales increased by 7% as we began to recover from the Defense Logistics Agency's stop shipment order that we've discussed over the last couple of quarters. We are, in fact, very proud of the outstanding work of our military aerospace team, who has managed the recovery from the DLA stop ship so well. We're really fortunate, actually, to have forged outstanding long-term relationships with both our military customers as well as our distribution partners and have truly appreciated their patience and close collaboration during this challenging time.

In fact, our customers and partners have been extremely pleased with the agility and reactivity of our aerospace team, and it just again reaffirms our reputation as the leader in this important market. Looking to the Q4, we expect our sales to again increase from these levels, and we continue to anticipate modest growth for the full year of 2016, and that's even with the impact from the DLA issue. Our long-term leadership position in the military market remains very strong as we continue to have the broadest range of high-technology products designed into virtually all defense equipment. We look forward to building upon this position of strength into the future. The commercial aerospace market represented 5% of our sales in the quarter.

Sales grew by a strong 7% in US dollars and 9% in local currencies from prior year as we realized stronger sales of our products designed into new airplane platforms. As we had expected, sales were up moderately from the Q2. Looking ahead, we anticipate a modest increase in sales in the Q4, and for the full year of 2016, we continue to expect sales to be flat to modestly up as the impact from the DLA issue, together with lower expected demand for helicopters and business jets, offsets the positive impact that we've seen from growing production volumes of new airplane platforms. I'll just tell you that we remain very encouraged by the long-term opportunity in the commercial air market.

With our strong technology position with airplane manufacturers around the world, together with the proliferation of electronics on and the increasing volumes of new aircraft platforms, we're very confident for the long term in this exciting market. The industrial market represented 17% of our sales in the quarter. Sales in this market grew by a very strong 22% from prior year. This growth was driven by contributions from the FCI and Auxel acquisitions, as well as by growth in the hybrid bus and truck, battery, heavy equipment, and instrumentation segments, which were in part offset by slower sales in oil and gas and rail mass transit. Organically, our sales in the quarter increased by 2%. Sequentially, sales grew slightly as contributions from Auxel were offset by a normal seasonal moderation of sales that we would typically see in the Q3.

For the Q4, we anticipate sales in the industrial market to grow moderately from these levels, and we continue to expect very strong sales growth in the industrial market for the full year as we benefit from the contributions of FCI and Auxel, together with organic growth from a range of exciting segments within the industrial market. We're continuing to build upon our successful diversified industrial business as we expand our high-technology interconnect sensor and antenna products across a broad array of industrial customers around the globe. The automotive market represented 17% of our sales in the quarter. Sales increased by 11% in U.S. dollars and 9% organically as we made continued progress in penetrating new interconnect and sensor applications in both traditional and hybrid electric vehicles and also accelerated our sales in Asia.

Sales were up slightly from prior quarter on typical summer seasonality in the U.S. and Europe. Looking to the Q4, we expect our sales to grow from these levels, and for the full year of 2016, we remain confident to achieve continued strong growth in the automotive market. We continue to be excited by our long-term prospects in the automotive market as we are still making excellent progress in designing our broadened range of interconnect sensors and antennas into new electronic systems incorporated into a wide array of vehicle platforms. The acquisition of SGX, while relatively small, builds out our sensor product line for air quality applications, an important growth area for the automotive industry. We look forward to realizing the benefits of our strengthened position for many years to come. The mobile devices market represented 16% of our sales in the quarter.

Sales were down, as expected, by 22% from prior year on reduced sales into all categories of mobile devices, with the notable exception of wearables. Sequentially, our sales rose by a strong 17% from the Q2. Looking into the Q4, we expect a mid-teen sales decline, and we continue to expect full year sales in the mobile devices market to decline by more than 10% from 2015. Regardless of this still challenging outlook for 2016, we remain extremely confident that our highly reactive and agile organization will continue to secure a strong position in the mobile devices market by capitalizing on our excellent technology positions across a wide range of next-generation mobile computing platforms. The mobile networks market represented 9% of our sales in the quarter. Sales in this market grew by a very strong 20% in US dollars and 4% organically.

This was a bit stronger than expected as we again benefited from the contributions of FCI, together with stronger sales of antennas and interconnect products to network operators, particularly in Europe. Our sales moderated slightly from the Q2. Looking into the Q4, we anticipate a further moderation of sales due to typical year-end seasonality. Nevertheless, we continue to expect to achieve low to mid-single-digit organic growth for the full year of 2016, which, together with the very strong contributions from the FCI acquisition, will result in an excellent growth year for the mobile networks market. Our strong performance in this market in 2016 is really a direct reflection of our team's unwavering drive to promote our leading technology interconnect and antenna products to OEMs as well as service providers around the world, and that's regardless of the normal ebbs and flows of wireless capital spending.

The information technology and data communications market represented 21% of our sales in the quarter. Our performance in IT datacom was much stronger than expected in the Q3. The sales grew 55% in U.S. dollars and a very strong 19% organically. This excellent performance was driven by contributions from FCI and Custom Cable, as well as by robust organic growth in server, storage, and networking applications. And in particular, we accelerated our progress in selling into next-generation web service providers. Sales increased a very robust 14% in U.S. dollars and 11% organically from the Q2. Looking ahead into the Q4, we now expect a modest increase of sales from these higher levels.

Given our much stronger than expected performance in the Q3, we now expect for the full year growth of more than 40%, which reflects the contributions of the FCI and Custom Cable acquisitions as well as approximately 10% organic growth. I'll just say that our team focused on the important IT datacom market is clearly doing an outstanding job of positioning Amphenol as the leader with a broad range of customers with the widest array of high-technology products. We continue to support our traditional and next-generation customers in their ongoing quest to upgrade their equipment to handle the continued dramatic increases in data traffic.

The broadband market represented 6% of our sales in the quarter, and we're very pleased that our sales increased from prior year by a stronger than expected 10% in U.S. dollars and 8% organically as broadband operators continue to expand their network build-out activities to enable better network performance. Sales in this market were slightly down on a sequential basis. For the Q4, we expect an increase of sales with the addition of All Systems Broadband, and we now expect to achieve low double-digit growth in the broadband market for the full year of 2016. With the acquisition of ASB, we now have a broader offering of products used in both consumer premises as well as in the service provider head-end systems, including importantly an array of value-add fiber optic solutions.

That newly expanded range of interconnect and cable products, together with our excellent position with broadband operators around the world, positions us very well for the long term. So just in summary, I want to say that we're extremely proud of the company's outstanding record results here in the Q3 of 2016. While the global market environment remains uncertain, the Amphenol organization is executing extremely well through our consistent dual-prong strategy of driving organic growth while pursuing complementary acquisitions, and that strategy is enabling us to expand our market position while also strengthening the company's financial performance. And ultimately, the company's superior performance is really a direct reflection of our distinct competitive advantages: our leading technology, our increasing position with customers in diverse markets around the world, a lean and flexible cost structure, a highly effective acquisition program, as well as, most importantly, an agile entrepreneurial management team.

Now turning to the outlook for the Q4 and the full year, and based on a continuation of the current global economic environment as well as assuming constant exchange rates, we now expect the following results. For the Q4, we expect sales in the range of $1,585 million-$1,625 million and earnings per share in the range of $0.71-$0.73, respectively. This represents a sales and EPS increase versus prior year of 11%-13% and 13%-16%, respectively. For the full year of 2016, we expect sales in the range of $6,220 million-$6,260 million and adjusted EPS in the range of $2.68-$2.70. For the full year, this represents sales and adjusted EPS growth of 12% and 10%-11%, respectively, over 2015 levels.

We're really encouraged by the company's strengthened outlook now for 2016, and we all look forward to driving further success going forward despite the many dynamics in the global economy. I remain truly confident in the ability of Amphenol's outstanding management team to build upon these robust results and to continue to capitalize on the many opportunities to both grow our market position and expand our profitability in 2016 and beyond. Thank you very much, and Operator, at this time, we'd be happy to take any questions.

Operator (participant)

Thank you. Our first question comes from Jim Suva, sorry, at SunTrust. Your line is now open.

Speaker 13

Yes, thank you. Adam, your operating margins were clearly outstanding here. Are we in an era where you can see that the de minimis price declines that you've historically seen in this connector industry actually stop and ASPs start to potentially rise, driving further margin upside? Because companies might be willing to pay for the high-performance connectivity that is needed to keep things from blowing up, as all of us have heard about. Or is there a natural ceiling here to margins other than the fact that you're trying to balance revenue growth?

Adam Norwitt (CEO)

Yeah, well, thank you very much, William. First, on your question on pricing, I wouldn't say that there is a new world order on pricing. I mean, this continues to be a very, very competitive market, a very competitive industry.

That's natural in an environment where you see commodity prices relatively lower and you see overall economic growth being relatively muted, and that's typically not an environment where you see a truly favorable pricing environment. So no doubt about it, our teams continue to do battle with competition. At the same time, as we've always said, if we can create value for our customers through technology, through service, through quality, through appropriate reactivity to their requirements for delivery and otherwise, well, then our customers will always pay us a reasonable and a fair price. And I think that's something that when we look across the company, our team is just doing an outstanding job of executing on all of those fronts. So it doesn't mean that there is some new pricing dynamic.

I think what it means is that we're executing our way to those new higher levels of margins, and we're really proud of those margins. Ultimately, margins is just a very simple calculation, as I always say, of price minus cost, and embedded in that is all those things that we talk about. Now, ultimately, what is the natural profitability of the business? I mean, we know what the profitability of the business was here in the Q3. We achieved 20.3% operating margins. Is the natural profitability higher or lower than that? I don't know that that's something we have ever talked about. We always do talk about the fact, though, that as the company grows, we seek to drive conversion margins at a level that will allow us to achieve margin expansion. We have continued to have a focus on those 25% conversion margins.

And when you couple that with the strong execution with our acquisitions, and in particular with FCI, you get ultimately the performance that we saw this quarter.

Speaker 13

Thanks, Adam.

Adam Norwitt (CEO)

Thank you very much.

Operator (participant)

And our next question comes from Jim Suva, Citibank. Your line is now open.

Jim Suva (Managing Director, Corporate Finance Executive)

Thanks very much. A strategy question for Adam, and then maybe a finance question for Craig. Adam, on the strategy question, FCI, you commented is progressing and integrating better than expected, which is a good thing. The size of that, if I remember right, unless my math is wrong, was the all-time biggest acquisition Amphenol has ever done. And if that's true and it's progressing well, does that give you more confidence that maybe bigger acquisitions are kind of the way to go, or how should we think about that?

And then the finance question for Craig is the coaxial business is hitting some pretty good operating profitability. I know it's due to volumes, but also copper and aluminum prices have been favorable. Are those margins pretty sustainable, or is there a point where the customer starts asking to pay copper and aluminum has come lower, therefore they want to give some price back, or is that already built into the results that we're seeing of the improvement in profitability? Thank you, guys, and congratulations.

Adam Norwitt (CEO)

Thanks very much, Jim. Maybe I'll let Craig address the cable margins, and I'll come back to the strategy question.

Craig Lampo (CFO)

Sure, Jim. I think, yeah, certainly we're very pleased with the growth and resulting profitability of the cable segment. I mean, as we mentioned in our prepared remarks, the margin improved from the 14.9% from 12.5% last year.

Last quarter, we were also at 14.9%, I believe, in the cable segment. This 2.4-point increase from last year does really reflect a strong operating execution on the additional volume of the team. I mean, the segment grew 14% over last year, driven primarily by the broadband market. I mean, the team's really done a nice job to diversify this business into higher margin products, which we certainly think has helped the profitability in this business, and they've been able to maintain a strong pricing discipline. Certainly, there's still pricing pressures within this business as there is with all our businesses, but they've certainly been able to do a good job of changing a bit of the mix in this business to try to increase it.

But I will note, and I think you mentioned, that there has been certainly a favorable impact on commodities, and I would say if there was some significant change in the commodity pricing, that we'd certainly have an impact on this particular business, which is a little bit more sensitive to commodities than even our interconnect business might be. So whether or not this is the norm going forward, it's tough to say with this commodity environment we're in here today, but certainly they've done a great job, and we expect that this is certainly a new benchmark for them to build from.

Adam Norwitt (CEO)

Absolutely. And just with respect to your question on strategy and specifically our appetite for bigger acquisitions, if we just recall back, and those like you, Jim, who have followed the company for a long time will know, our criteria for acquisitions has actually been very consistent for a long time. First and foremost, we think about the people, and we look for people who are strong entrepreneurs who have great management talent because we don't have an organization necessarily that has lots of people sitting on the bench waiting to go run these acquisitions. So number one is the people. Number two is always the technology. We look for companies with really leading-edge, valuable technology that can allow their customers to drive better products ultimately and then thereby allow us to make better returns.

We also look for complementary market positions, and I think in the case of FCI, we had all three of those. What has never been our criteria for acquisitions and continues not to be is size. Now, I will say, it's no doubt about it, FCI was, in fact, the biggest acquisition that we've made in the history of the company, and we're very pleased so far with the results of that. Does that drive in us a greater level of confidence about making bigger acquisitions? I don't know that it changes our level of confidence.

We had already a pretty good confidence in the model, but I would say that it reconfirms that we believe that the acquisition strength of Amphenol, the program of Amphenol, and the competency that we have is really a wonderful strength for the company, and it's a real pillar of the value that we create in addition to all the other things that we do to drive organic growth in the company. So it certainly does not take away from the confidence, and if the right company came along at whatever size, we would be willing to look at that as long as it fit with those other criteria that we cling so importantly to.

Jim Suva (Managing Director, Corporate Finance Executive)

Thank you for the details.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

And our next question comes from Sherri Scribner from Deutsche Bank. Your line is now open.

Sherri Scribner (Senior Equity Research Analyst, Technology Hardware and Supply Chain)

Hi, thank you, Adam. I was hoping you could give us some commentary on your thoughts on the macro environment specific to the connector market. I mean, if you look at your quarter, you had an excellent quarter, but organic growth was only about 2%. Clearly, the mobile devices declines are a significant drag on the growth, but you guys are doing a great job on the IT data side in automotive. So wanted to get your sense about what is the overall demand trend that you're seeing, and do you think that improves next year, or are we still going to be in a relatively muted environment? Thanks.

Adam Norwitt (CEO)

Thank you very much, Sherri. I mean, look, I'm not an expert on the overall macro environment. I will tell you that I don't believe that the macro environment has largely changed this year. It remains a relatively muted and uncertain, both geopolitically and economically.

I think that if you look at just the various companies in the world that at least are public in the various markets that we serve, there's clearly not an overall trend of improvement. If you look at our company, though, in the Q3, and you pointed it out very astutely here, Sherri, if you take the mobile devices, which is no doubt about it a significant decline on a year-over-year basis, if you exclude that, we grew by more than 7% organically in the quarter. And that is really a testament to the diversification of the company. Now, you go back to last year, our mobile devices business was up 13%, and other parts of the business were not growing at that rate. And I think what you see is the consistency of the performance in light of the diversification of the business. It's true.

This quarter, we had just fabulous performance from IT datacom, up 19% organically, 55% growth with the benefits of FCI and Custom Cable. And I think that that's just a fabulous performance. But also, let's not forget that IT datacom has had a few tough years. We've done maybe a bit better than the market, but if you look last year, we grew just 2% in IT datacom, while maybe the overall market was down. Our team, despite that 2%, continued to drive aggressively with customers to expand our position, to develop the new and appropriate products, to pivot towards where the growth opportunities and the potential growth opportunities could be, and we were able to realize the benefits of that here in the Q3, and we expect to be able to do so for the total year 2016.

But is that a reflection of an improving IT datacom market, or rather a reflection of our team really ferreting out where the growth is in an otherwise muted environment? I personally believe it's more of the latter than the former.

Sherri Scribner (Senior Equity Research Analyst, Technology Hardware and Supply Chain)

Thank you.

Adam Norwitt (CEO)

Thanks so much, Sherri.

Operator (participant)

And our next question comes from Shawn Harrison from Longbow Research. Your line is now open.

Shawn Harrison (Senior Research Analyst in Electronics Manufacturing Services)

Hi. Afternoon, everybody. Good afternoon. I guess two questions, if I may. When looking at the mobile device business, it looked like maybe just demand was pulled forward into the Q3, but your full year view didn't change whatsoever. And maybe if you could just clarify whether I'm correct in that assessment. And then second, just looking at FCI and accretion stepping up once again, is the revenue profile of FCI improving, or is the final kind of end target margin assumption of FCI heading up now that you've had it under your belt now for, I don't know, the better part of 10 months?

Adam Norwitt (CEO)

Yeah. So on your first question, I don't think there was a real meaningful pull forward. We did maybe just a hair better in the Q3 than we had anticipated. I think we'd guided to a bit more than 10%. We ended up with 17%. It was plus or minus. But for the full year, we continued to see it as expected. So was there a slight pull forward? I mean, really, ever so slight.

The strength that we saw in the Q3 was really predominantly from IT datacom and then followed by mobile networks and broadband. We continue to have a similar view of the mobile devices market this year. We've talked about that quite a bit over the last, in particular, the last call. We continue to have our team poised in case there are opportunities that come about, and sometimes those opportunities do come about. But you never know. It's an incredibly difficult market to forecast and an incredibly dynamic market, but we remain with a very, very strong position with customers across the board. Relative to your question on FCI, just very simply, the revenue has been really at the expectations that we came into the year with.

The improvement in the performance of FCI from an accretion perspective has really improved operating performance, and the team has just done an outstanding job, really beyond our expectations. Maybe not beyond our best wishes, but certainly beyond our expectations coming into the year, and they continue to drive the company to a level of performance that I think none of them really thought would have seen in such a quick fashion. And so we really commend them. Just done a fabulous, fabulous job.

Operator (participant)

And our next question comes from Amit Daryanani from RBC Capital Markets. Your line is now open.

Amit Daryanani (Research Analyst in IT Hardware and Semiconductor Sectors)

Perfect. Thanks, Adam. Good afternoon, guys. I guess two questions for me. One, on FCI, if I run the math correctly, I think you guys are implying about 15% or so up margins for core FCI at this point, which is still below your corporate averages. Could you just talk about, do you see room for further accretion provided FCI gets in line to your corporate average margins? And if you feel generous, we'd love to get a timeline on that.

Adam Norwitt (CEO)

Yeah. I don't know, Amit, whether you're referring to full year or the quarter. I mean, FCI has gotten pretty darn close right now in the course of these, now our Q3. And so they're operating, they've gotten there faster than we would have expected to our corporate average. But I don't know if you're referring with the 15 cents to the full year. As I said, we now see $0.18 of accretion with FCI compared to the $0.15 we saw before, and we are very pleased with where they are today. And I think from now, we have a really strong business and a platform to go forward with.

Amit Daryanani (Research Analyst in IT Hardware and Semiconductor Sectors)

Got it. I was thinking of it on an annual basis, but you might be right. It might be on the quarterly numbers already. I guess then, Adam, on the IT DataCom side, you're seeing some very impressive growth here, which I think what most other data center companies are talking about. Could you just talk about the sustainability of these trends? And is there a way to think about how much of the segment today is probably levered to hyperscale customers versus the traditional enterprise customers you've had?

Adam Norwitt (CEO)

Yeah. I mean, the sustainability, I think all the markets that we're in are very dynamic, and IT DataCom is clearly one of those. So are there going to be ups and downs in that market over the coming years? I would bet that there would be ups and downs.

But I think what's clear in this quarter is that we have positioned ourselves with the acquisition of FCI as well as with our organic initiatives to broaden our product offering and to deepen the technology that we offer to customers. We have positioned ourselves as the clear leader in this space. There's no doubt about it. And so as we go to customers who are all struggling to deal with these increases in data rates, demanding customers, the new dynamics that come with the web scale players and cloud computing and everything that is entailed with that, we become really the first phone call. And I think that that's a wonderful place to be in.

Regardless of the ups and downs that may come in overall IT spending, we want to be the leader, and we want to be the first phone call, and we want to be the partner for next-generation designs. That's what we have really become here. In terms of the web scale providers, I couldn't quote for you a number which tells you how much it is as a percent of the total, but I will tell you it's a really big part of why we're growing at such a fast pace. Is it all the growth? No, certainly not. There are also some really interesting companies that are growing around the world in that space, but it's clearly growing at a much faster pace than our overall IT market, and it's starting to be a meaningful part of our business.

And our team has just done an outstanding job to accommodate and to pivot towards these new web scale companies, which are not always the easiest companies to do business with.

Operator (participant)

And our next question comes from Mark Delaney from Goldman Sachs. Your line is now open.

Mark Delaney (Managing Director in Technology, Consumer Discretionary, and Industrials)

Yes. Good afternoon, and thanks very much for taking the questions, and congratulations on the nice report. First question is on mobile devices. So, Adam, I think you guided down double digits for this year, obviously coming off of a strong 2015. And I think, if I recall correctly, last year benefited from some of the test equipment sales and mobile devices that were maybe a little bit more one-time in nature and set it up for a harder comp for 2016 in mobile devices. As you look into 2017 in mobile devices, is there anything, obviously subject to how the market would grow, but anything that would make you think you could grow above or below what units would do in that market, either in terms of content, market share, or pricing?

Adam Norwitt (CEO)

Yeah. I wouldn't point to anything with 2017. This is a hard market to forecast in one quarter. And to start to talk about what 2017 would be for mobile devices, I'd be pretty far out ahead of my skis on that one. What I do know is that we have a very broad position. We've continued to broaden that position this year despite being down. And I think that we go into next year from a position of strength. So what does that end up being? We'll hopefully be able to tell you with some degree of certainty coming into January.

Mark Delaney (Managing Director in Technology, Consumer Discretionary, and Industrials)

That's helpful. And then follow-up question on mobile networks. Q2 in a row, you guys have done well in that segment. Obviously, one of the big equipment OEMs negatively pre-announced and talked about some weakness. Do you think there's a disconnect there that you guys can sustain and maybe just kind of help us understand why you're maybe doing better than the European telco equipment company? And maybe if you're coming off of a low base or it's increased capacity builds. But any sort of thoughts on why you're doing a little bit better would be helpful.

Adam Norwitt (CEO)

Yeah. Look, I mean, I'm not the expert on why certain companies are doing better or worse. I know that why we did better in the quarter, in particular, is we saw really stronger growth in our business in support directly of service providers.

We've talked about, for a number of years, the changing nature of the mobile networks market, where our business used to be really an OEM-focused business, and really everything that we sold into the mobile networks market was really via those OEMs. I think the dynamics in the market, the architecture of the system, the real makeup of the market has changed to a pretty big extent, whereby service providers are now directly interacting with companies like us, where we're providing a broader range of products, including everything from antennas to a broad range of interconnect products, and whereby we are not just rising and falling with the fate of necessarily the OEMs. We continue to have a very strong position with the OEMs, and we continue to support them really very closely and as partners that they are.

But we have as well transitioned to having that direct interface with certain operators around the world. When you work directly with operators, it's also not necessarily for the faint of heart because this is a much more volatile business. I think that we have had to, and our team has very successfully made that transition. We've really had to become more agile and more reactive because of the much quicker dynamics that come when you're putting crews out in the field and putting towers up on relatively moments' notice. We saw particularly strength in mobile networks in Europe and in the service provider this last quarter. Is that going to continue? We had a similar picture, I guess, in the Q2. What's that going to be in the Q4 going forward? I would expect it would change, but how is it going to change?

What's the nature of that change going to be? I think it's a little too early to tell at this point.

Mark Delaney (Managing Director in Technology, Consumer Discretionary, and Industrials)

Thank you.

Adam Norwitt (CEO)

Thanks so much, Mark.

Operator (participant)

And our next question comes from Mike Wood from Macquarie. Your line is now open.

Michael Wood (Associate Director)

Hi. Thanks for all the commentary already. I just wanted to follow up on two end markets. First, on that network data and IT where you're seeing the better-than-expected results that you called out. I'm just curious on your thoughts. When I think about the weak macro environment that you speak about, these I typically think about markets typically being more CapEx-reliant or more confidence-driven. And I appreciate your thoughts that you'd said a lot of this is Amphenol-specific, but I'm also seeing it across other companies exposed to that end market. So, just get your thoughts in terms of are we now seeing a reinvestment after years of just underinvesting in that, or can you just speak about your thoughts there?

Adam Norwitt (CEO)

Sure. I think you're correct. IT is in part, at least, a CapEx-driven market. I guess as it transitions more and more towards cloud and service provider, it becomes even more of a CapEx-driven market. I think there's no question that the demand on the network has never faltered whatsoever. And that's even over a few years of much more challenging market environments. But what has not changed is the end-user demand. The data traffic, the video traffic going over IP networks, you name it, that is all expanding really at continuing at an accelerating pace.

So you do develop, in certain points, pent-up demand, pent-up demand similar to what we have seen in years past in the mobile networks market. I think we've even alluded to the fact that we believe in the IT market there is some pent-up demand. But then the question comes, and that's the company-specific question. Have you positioned yourself or repositioned yourself to take advantage of where that pent-up demand is going to come from? I think that had one remained with just traditional customers, that pent-up demand would not be satisfied through those same channels. You could find yourself really continuing to have a business that was in a more stable, almost languishing environment.

And I think our team, to their credit, has truly pivoted, has truly pivoted towards where the demand and where the pent-up demand was building and where the real demand was coming. And thereby, we see that as a real relative strength of Amphenol in that market. I haven't seen, and I don't think we've all seen yet, all of the results that are coming in this area. There have been a few results that have been announced, and I think those are some ups and some downs. When all is said and done, maybe we will see that this is a more broad market environment. But is that going to be a 19% organic growth? That I would guess we would not see on a broad basis.

Michael Wood (Associate Director)

Great. And then switching gears onto auto, I think 9% organic. I believe you reported 4% organic growth last quarter. Just curious what's driving that step up in organic growth. Thank you.

Adam Norwitt (CEO)

Yeah. Thanks very much. No, I think the automotive business for us did really well this quarter. We're very pleased with the broad basis of that. As I mentioned, we grew 9% organically. We saw particular strength in Asia. I mentioned that in my prepared remarks. We've both made acquisitions and put a lot of focus in Asia on working with global and local companies in Asia, in particular in a place like China, to make sure that we're positioned in what is really the world's now largest car market. I think we're seeing some of the fruits of those labors. That was a very strong performance for us there. If you look at our overall business today, it is roughly almost even across the various regions.

Europe's maybe a bit more, and then Asia and North America are roughly the same size. But that's a big change for the company. If we go back 7, 8 years, Europe would have been 2/3 of our business, and then the rest would have been North America and just a smidgen in Asia. And today, you see a real balanced automotive business. And I think that's both a representation of the market opportunity having changed, but also of our organization having embraced that market opportunity. Specifically, what applications, what types of products? I can tell you that we've seen in our organic growth really across the board, across many applications. When we think about the automotive market, we don't think of that in terms of a unit of car market. We think of that more in terms of a unit of systems in the car market.

While you may have in the world 90, 92, 93 million cars being built, we think of that as some multiple of that in terms of how many electronic systems are being built in those cars. The total number of electronic systems, which ultimately leads to the opportunity for Amphenol, has been growing at a wonderful pace. Then it rests on us to say, "What can we capture through technology such that we can get even a little bit more than our fair share of that?" That's the building blocks ultimately of this 9% organic growth. By the way, a continued positive outlook into next quarter. The Q4, we still believe that there's a little bit of growth on a sequential basis, which is not always the case in the Q4. So I think we have good momentum in our auto business sitting here where we are.

And our next question comes from Steven Fox from Cross Research. Your line is now open.

Steven Fox (Senior Equity Analyst in Technology Supply Chain, Storage Industry, and Auto Technology Services)

Thanks. Good afternoon. Just firstly, again, on the auto demand in China, how much, when you look year-over-year, was related to sort of tax incentives that are ongoing right now in the region versus you expanding your customer base? And if there's any sort of new product categories or systems areas that you maybe have expanded into with Chinese OEMs in the last year, any examples there would be helpful too. And then I had a quick follow-up. Thanks.

Adam Norwitt (CEO)

Sure, Steve. I honestly wouldn't be able to quote you what's the tax incentive base and what's the market base. We're still small in China and in Asia in general.

The huge market, our position in overall automotive is still relatively small, and our position in Asian automotive is relatively even smaller. So I think we're able to grow, and I think we have grown not necessarily because of certain tax incentives or otherwise, but I think we're expanding our position with customers. In terms of what specific applications we've done really well in hybrid electric vehicles, we've done really well in lighting applications where we made a fabulous acquisition early last year, and that company is doing really well. Made really great progress in emissions-related systems, transmissions, you name it. There's a whole kind of list of a wide range of applications where we're participating and seeing still growth opportunities in Asia.

Steven Fox (Senior Equity Analyst in Technology Supply Chain, Storage Industry, and Auto Technology Services)

Great. That's helpful. Then just on the industrial markets, not asking you to comment on the macro at all. Actually, just curious, as you look out maybe a little longer term without putting numbers around, say, the next few quarters, which of the sub-markets in industrial do you feel like you sort of have the best head of steam in terms of your order book based on your wins going forward?

Adam Norwitt (CEO)

Yeah. I mean, it's a bit of a tough question. We have seen a lot of volatility across the segments in the industrial market, and it's a great credit to the diversification that we're still able to drive performance because when you look at something like oil and gas, which continues to be a negative for us, albeit at a much smaller level, is that going to turn around? I'm not going to be the first one to predict the turnaround of oil and gas.

I think we've had really strong momentum in battery applications and really heavy vehicles, and I think we would expect that to have still some legs to it. We've done really well in places like in heavy equipment, which is maybe a little bit contrary to the broader market environment. We've seen great progress in areas in heavy equipment, things like diesel engines, things like the transition of mechanical and hydraulic to electronics. So I think those we've done very well in. We feel good about our medical business, even if the medical business didn't necessarily grow so substantially in the quarter. We've made just great progress in medical over the course of the year, and we feel really good about that. I think the others, there's big segments here like factory automation and instrumentation.

Our team has just done a fabulous job of positioning a broader set of products in those areas such that we can get more involved in things like robots and more involved in things like factory control systems. I think that those have good opportunities for the future as well.

Steven Fox (Senior Equity Analyst in Technology Supply Chain, Storage Industry, and Auto Technology Services)

Great. Thank you. Sounds like you love all your children equally.

Adam Norwitt (CEO)

I do, Steve.

Steven Fox (Senior Equity Analyst in Technology Supply Chain, Storage Industry, and Auto Technology Services)

All right. Thanks very much.

Operator (participant)

Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is now open.

Craig Hettenbach (Executive HCIT Analyst)

Yes. Thank you. Maybe a different twist on kind of a macro question. Just given the subdued environment, certainly the Book-to-Bill 1.04 to 1 stands out as very healthy. So anything you're seeing, even if it's the slightest change in terms of customer behavior or anything of note kind of by geography that's driving a little bit healthier bookings?

Adam Norwitt (CEO)

Yeah. I don't know that I would point to any specifics either by geography or type of customer. I think our team is really focused on taking orders off the street. There's an aggressiveness with the company where we know that you can't ship anything if you don't have an order. Getting those orders requires you to develop the new product, to get the design-ins with the customers, and ultimately then that leads finally to the sales. I think we had a very strong book-to-bill, which is encouraging. Some of our business is on a very short book-to-bill cycle. You take the mobile business. That's a business where you book and ship really almost at the same time. We have other businesses like military where you have a little bit longer cycle. I think we had here good bookings.

We had actually pretty good bookings in the IT datacom market, not surprisingly given our performance there. I think that the trend from bookings to me, the fact that we had that strong book-to-bill is encouraging for the very long term, and it's encouraging for the fact that our customers are willing to commit to us on the new products and with the new technologies that we give them. But I don't read a macro inflection point necessarily because of those bookings if that's what your question is.

Craig Hettenbach (Executive HCIT Analyst)

Understood. I appreciate your call there. As a follow-up in the automotive space, given your positioning or increasing positioning connectors and some exposure on the sensor front as well, do you see a path towards kind of integrated-type products, or do you see it kind of developing on a more discrete basis. How is your view of kind of how you might position automotive intermediate to longer term?

Adam Norwitt (CEO)

Yeah. Look, we have across the company always had a focus on selling, in addition to components, value-add solutions. And that is not a new strategy for the company. This is actually a strategy that we have had as a bedrock of Amphenol for a long, long time. It's really selling application-specific value-add interconnect solutions to customers where the underlying basis of that may very well be a very highly designed component, but where in fact the value-add solution becomes the highly integrated and designed-in component for the customer. When we acquired the sensor business of GE, and that's now almost three years ago, we talked a lot about the fact that we felt that long-term that would create an opportunity for having integrated sensor and interconnect solutions for customers.

I can tell you that we have seen that, and we have started to see that, and we've started to see some positive momentum coming out of that. But it's not a new thing for us to go to a customer in automotive or industrial or any of our markets and work with them to propose a comprehensive interconnect solution for their product. On one hand, the customers really want it because they're all under pressure to accelerate their design process, to do more with less, in many ways reducing their own R&D spending such that they don't have to spec each of those little products.

In addition, it gives them a sense that they have ultimately what I've called before that one throat to choke, where rather than patchworking together something, a solution, they can come to a company like Amphenol, and we can sell them really a complete interconnect solution, and they can feel the comfort that one company stands behind that whole solution from a quality perspective, from a cost reduction perspective, from a delivery perspective. All the things that matter to those customers, it gives them essentially the single throat to choke. And I think that the customers like that. It makes their life a lot easier. It makes it easier for them to design the products, and ultimately it makes it easier for them to sleep well at night knowing that they're going to be able to ship their products on a timely basis with the right quality.

So I think that it's not a new strategy, but it continues to be a core part of our strategy in automotive and in our other markets.

Craig Hettenbach (Executive HCIT Analyst)

Great. Thanks, Adam.

Adam Norwitt (CEO)

Thanks very much.

Operator (participant)

And our next question comes from Brian White from Drexel. Your line is now open.

Brian White (Senior Equity Research Analyst)

Hey, Adam. I'm hoping you can update us a little bit on what you're seeing in the sensor market and some of the growth trends relative to Amphenol at large.

Adam Norwitt (CEO)

Yeah. We are really pleased with the sensor market. I tell you that organically, sensors are probably growing a bit better than our overall organic growth rate, and I think that's a real good thing.

We came into the sensor market never with the statement that it will be a faster growing space or a more profitable space, but we think it always has the potential to be at least as good as the rest of Amphenol. And I'd say that we were right about that sense. We see the sensor market as a truly diversified space. And so there are pockets in the sensors which are in some areas which aren't doing as well, and there are pockets in areas that are doing better. And that's a little bit of microcosm of all of Amphenol. You will remember, Brian, at the time we acquired the GE Advanced Sensors business, for us, one of the most compelling things for that company was its diversification.

The fact that it operated in industrial and within industrial, it operated across a number of different sub-segments of the industrial market as well as operating in the automotive market. And we're really pleased that we have that diversified company because it's getting us also a picture of what the sensor demands are in those markets so that we can then think about ourselves our sensor strategy. And when we talk about the acquisition that we made the quarter, it's a small acquisition, SGX, but there's no question that we saw in our activities in sensors a real trend towards this requirement for air quality sensing applications, both in automotive and in industrial applications. And so when we found the right company, we were very eager to bring them into the Amphenol family to round out and to strengthen our technology position in sensors.

So I think in a nutshell, we feel really good about it. I think it's performing better than the average across the company and continues to have great potential for us long-term.

Brian White (Senior Equity Research Analyst)

And Adam, what's the takeaway on telecom infrastructure in China? Obviously, at large for the company, it did well in the quarter. How did China perform?

Adam Norwitt (CEO)

Yeah. China did okay. I think that the and China and Asia in general, we don't in our numbers necessarily split those out. As I mentioned earlier, in mobile networks, we saw the strongest growth in Europe. And in fact, I will say the vast majority of our growth in mobile networks organically came in Europe, especially in our service provider direct-to-service provider business. And I would say in Asia, it was relatively flattish on a year-over-year basis and in addition on a quarter-over-quarter basis.

Obviously, our total mobile networks market grew very strongly in the quarter, in particular with the contributions from FCI. We have a lot of strength in Asia that FCI has brought us. And so we have just an outstanding position in Asia, and Asia is a really large part of our mobile networks market, but it was not necessarily the growth driver organically in the Q3.

Brian White (Senior Equity Research Analyst)

Great. Thanks.

Adam Norwitt (CEO)

Thank you.

Operator (participant)

And our last question comes from William Stein from SunTrust. Your line is now open.

William Stein (Managing Director covering Technology Stock)

Great. Thanks for squeezing me in. Adam, congratulations on a very strong quarter and a great outlook. I just have one small question in the industrial end market. You seem to continue to be doing reasonably well in that end market. We're getting more, I should say, muted or cautious data points from some of the industrial OEMs. Do we ascribe that to Amphenol's typical stronger ability to find the growth, or do you think perhaps we just haven't seen the whole picture in that end market yet? And as we get more data points, perhaps it won't look as problematic?

Adam Norwitt (CEO)

Yeah. Again, industrial is a really big market. I think Steven Fox said earlier, "Do I love all of my children equally?" And I do indeed. The industrial market for Amphenol, as I mentioned earlier with Steve's question, it's a really broad market. We have a lot of position in a lot of different sub-segments. I don't know that we are always the best canary in the coal mine for whether that is a positive or a negative trend in the overall industrial market. What I know is that our team is pretty good at ferreting out these opportunities as they may come.

You don't think of an industrial team as being agile. It's almost by definition the opposite. You think of industrial as being the sort of staid, stable kind of an organization, slow life cycles, long design cycles, all of that. But I'll tell you, our industrial team is a pretty dynamic group of people. And so when they see things like oil and gas being down for now, and it's running on the end of its second year of really tough performance, they don't just sit back and take their medicine. They go out and they look for new opportunities to find growth wherever they may be. And I think the overall industrial market, if you think about just the biggest trend that is existing in broad industrial, it is this electronification of systems that previously would have been hydraulic or mechanical or nonexistent in their functionality.

And I think that we see that really across all of the segments that we're in. And then it's a question of just making sure that you have the right solutions, whether that be a discrete connector, a discrete sensor, an antenna, an integrated interconnect solution, an integrated sensor and connector solution, whatever it may be. You have to really make sure that you're tailoring your approach to that customer and you're really knowing the customer and knowing the market. It's a very marketing-intensive business, actually, the industrial space, because there's just so many potential customers across these dozens and dozens of sub-segments. And staying on top of that and pivoting towards where the right segments are, that's really important.

I know there are big industrial kind of giants in the industry, and they may have certain trends at one time or another, but I don't believe that we're necessarily a proxy for those trends.

William Stein (Managing Director covering Technology Stock)

Great. Thank you.

Adam Norwitt (CEO)

Thanks, Will.

Operator (participant)

We show no questions at this time.

Adam Norwitt (CEO)

That's great. Well, listen, we really appreciate everybody's time this afternoon, and we wish you all a pleasant conclusion here to 2016. And I can't believe to say it, but we'll see you all in 2017. Thanks very much for all your time today. Thank you.

Operator (participant)

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