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Amphenol Corp
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Hello and welcome to the First Quarter Earnings Conference Call for Amphenol Corporation. Following today's presentation, there will be a formal question-and-answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time.
I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.
Thank you. Good afternoon, 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 first quarter 2018 conference call. Our first quarter 2018 results were released this good morning and I'll provide you some financial commentary on the quarter and then Adam will give an overview of the business as well as current trends. Then we will take questions.
As a reminder, we may refer in this call to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information.
The company closed the first quarter with sales of $1.867 billion and with GAAP and adjusted diluted EPS of $0.84 and $0.83, respectively, exceeding the high end of the company's guidance for sales by approximately $47 million and adjusted diluted EPS by $0.03. Sales were up 20% in U.S. dollars and up 16% in local currency as compared to the first quarter of 2017. From an organic standpoint, excluding both acquisitions and currency, sales in the first quarter increased a very strong 12%. Sequentially, sales were down 4% in U.S. dollars, 5% in local currency and 6% organically.
Breaking down sales into our two segments, our Cable business, which comprised 5% of our sales, was flat compared to the first quarter of last year. The Interconnect business, which comprised 95% of our sales, was up 21% in U.S. dollars from last year driven primarily by organic growth as well as the impact of acquisitions. Adam will comment further on trends by market in a few minutes.
Operating income was $377 million for the first quarter and operating margin was a strong 20.2% in the first quarter of 2018, up 10 basis points compared to the first quarter of 2017 of 20.1% and down 30 basis points compared to the fourth quarter of 2017 of 20.5%. From a segment standpoint, in the Cable segment, margins were 11.7%, which is down compared to the first quarter of 2017 at 14.2% primarily driven by an increase in certain commodity costs.
In the Interconnect segment, margins were a strong 22.1% in the first quarter of 2018, which is flat compared to the first quarter of last year. This excellent performance is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high performance 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. Due to careful fostering of such a culture and the deployment of these strategies to both existing and acquired companies, our management team has achieved industry-leading operating margins and remains fully committed to driving enhanced performance in the future.
Interest expense for the quarter was $25 million compared to $19 million last year, reflecting the impact of higher average interest rates as well as higher average debt levels primarily resulting from the company's stock buyback program. The company's adjusted effective tax rate was approximately 25.5% for the first quarter of 2018, compared to 26.5% in the first quarter of 2017. The adjusted effective tax rate in both periods excludes the excess tax benefit associated with the stock option exercises as we discussed during last quarter's earnings call.
The company's GAAP effective tax rate for the first quarter of 2018, including the excess tax benefit associated with the stock option exercises, was approximately 24.4% compared to 23.8% in the first quarter of 2017.
Adjusted net income was a strong 14% of sales in the first quarter of 2018 and on a GAAP basis, diluted EPS grew 18% in first quarter of 2018 to $0.84 from $0.71 in the first quarter of 2017. Adjusted diluted EPS, which excludes the excess tax benefit from stock option exercises in both periods, grew 20% to $0.83 in the first quarter of 2018 from $0.69 in the first quarter of 2017.
Orders for the quarter were a new record $2.17 billion, a 26% increase over the first quarter of 2017, resulting in a very strong book-to-bill ratio of 1.08:1. The company continues to be an excellent generator of cash. Cash flow from operations was $130 million in the first quarter, which included a payment of approximately $81 million to fully fund our U.S. pension plan. Excluding this payment, cash flow from operations was $211 million or approximately 80% of net income.
From a working capital standpoint, inventory, accounts receivable and accounts payable were approximately $1.2 billion, $1.5 billion and $798 million respectively at the end of March. And inventory days, days sales outstanding and payable days, excluding the impact of acquisitions, were 84, 74 and 57 days respectively, which were up slightly from 12/31 of 2017, but all within our normal range.
The company continues to target cash flow from operations in excess of net income and we expect a typically strong cash flow for the full year of 2018. At March 31st, cash and short-term investments were approximately $1 billion compared to $1.8 billion at December 31st of 2017. The decrease in cash, cash equivalents and short-term investments was primarily driven by the company's use of cash that was enabled by the repatriation of foreign cash, which began in the first quarter of 2018 under the new Tax Act.
The vast majority of the company's current cash balance is held outside the U.S. and we expect to continue repatriating additional cash throughout 2018. The company will continue to assess opportunities to deploy its capital consistent with our overall capital allocation strategy. We believe that the ability to freely move earnings under the new territorial system will provide additional support for the company's long-term capital allocation strategy, which focuses on achieving a balance between organic business development, acquisition growth and shareholder returns, including dividend and share buybacks.
The cash flow from operations of $130 million, stock option proceeds of $21 million and cash and cash equivalents and short-term investments of approximately $729 million were used primarily to purchase approximately $382 million of the company's stock, to repay $306 million under the commercial paper program, to fund acquisitions of $100 million, to fund dividend payments of $58 million and to fund net capital expenditures of $54 million. During the quarter, the company repurchased 4.2 million shares of stock at an average price of $90, bringing total repurchase under the plan since its inception in January of 2017 to approximately 12.6 million shares.
This quarter's repurchases completed are $1 billion open-market stock repurchase plan, and as mentioned in today's earnings release, the company's board of directors has approved a new three-year open-market repurchase plan for the purchase of up to $2 billion of the company's common stock as well as a 21% increase in the quarterly dividend on the company's common stock from $0.19 to $0.23 per share. This increase brings our dividend yield back to approximately 1% and is effective for payments beginning in July.
At the end of the quarter, the company had issued approximately $870 million under its commercial paper program and the company's cash and availability under our credit facility totaled approximately $2.2 billion. Total debt at March 31st was approximately $3.2 billion and net debt is approximately $2.2 billion. The first quarter 2018 EBITDA was approximately $449 million. 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 welcome to all of you to our first quarter earnings call. Pleasure to have you all here.
As Craig mentioned, I'm going to highlight some of our achievements in the quarter. I'll then go into a discussion on the trends as well as our progress across our diversified served markets. Then finally I'll make a few comments on our outlook for the second quarter and full year and, of course, we'll reserve time at the end for questions.
Now with respect to the first quarter, I can just say that we're very pleased with the company's extremely strong start to 2018 as we're today reporting results that were stronger than we had expected, with both sales and earnings exceeding the high end of our guidance. Revenues in the quarter increased by a very strong 20% in U.S. dollars and 12% organically, reaching $1.867 billion as Craig highlighted. And just want to highlight again that we booked record orders in the quarter, more than $2 billion, second quarter in a row, exceeding that $2 billion level. And those orders grew 26% from prior year and represented a very robust book-to-bill of 1.08:1.
Operating margins were again strong in the quarter reaching 20.2% and this again demonstrates the strength of the company's overall operating performance. Very pleased that our board of directors just yesterday approved two significant measures aimed at continuing our strong return of capital to shareholders with both the $2 billion three-year stock repurchase program as well as the 21% increase in the dividend that Craig detailed. Just want to say that with this excellent start to 2018, I'm once again extremely proud of the entire Amphenol global organization, a team of people whose agility and superior execution are clearly reflected in the company's strong results in the first quarter.
Now, getting to the trends in our served markets, and just want to reflect that here as we finish the first quarter, we remain very pleased with the breadth and balance of our exposure across these many markets in the electronics industry. And once again in the quarter, no market represented more than 20% of our sales. We continue to believe that that balance is a true asset for the company in any economic cycle in particular given the many dynamics that are always present in the electronics industry.
The military market in the quarter represented 10% of our sales. Sales increased from prior year by a better-than-expected 20% in U.S. dollars and a very strong 18% organically, as we once again drove growth across virtually every segment of the military market. Our performance in the quarter was strong as in ordnance, military, aviation, space, communications as well as vehicle applications. On a sequential basis, sales were stronger than expected rising 3% from the fourth quarter.
Just want to say I'm extremely proud of our team that's working in this important market, the military market. They've continued to expand our leading position by driving the development of high-technology interconnect solutions that are incorporated into the broadest array of military electronics. As the defense spending environment has improved, our ability to execute on the increased demand from our diverse range of customers has, once again, confirmed that these customers can rely upon Amphenol to deliver when they need us most. Looking ahead, we expect sales in the second quarter to remain at these robust levels. And for the full-year 2018, we now expect to achieve low-double-digit growth in the military market.
Turning to the commercial aerospace market, comm aero represented 5% of our sales in the quarter. And our performance strengthened in the first quarter with sales increasing by 14% in U.S. dollars and 9% organically. Sequentially, sales were a bit better than we had expected coming into the New Year with sales increasing by 3% from the fourth quarter. And as we look into the second quarter, we expect sales to increase modestly from these levels. And for the full-year 2018, we continue to expect a low-single-digit increase from prior year. We're very encouraged by the company's strong performance in commercial aerospace in the first quarter and remain confident that our strong overall position in the market will remain very robust.
We continue to broaden our range of products in support of the revolution of new electronics and next-generation airplanes and we look forward to capitalizing on our leading technologies for many years to come. The industrial market represented 20% of our sales in the quarter. Sales in this market grew also by a very strong 27% in U.S. dollars and 14% organically, as we drove strong organic growth across essentially all segments of the industrial market and that included in particular hybrid bus and truck, oil and gas, heavy equipment, instrumentation as well as medical.
In addition, we're very pleased that we've realized significant benefits from several of our acquisitions that we've completed over the last year. Sequentially, sales in the industrial market were slightly down from the strong fourth quarter on normal seasonality. Looking into the second quarter, we expect sales to increase from these levels as we capitalize on our broad technological strength across the many various segments of the worldwide industrial market. And for the full-year 2018, we continue to expect sales growth in the mid-teens.
The diversified industrial market remains a great strength for Amphenol. The combination of our broad array of interconnect, antenna and sensor products, our access to and support of a very broad range of segments, as well as the company's geographical reach, have all positioned Amphenol strongly for the future in the industrial market. And as electronics continue to transform industrial applications, we look forward to realizing the benefits of our excellent position in this important market.
The automotive market represented 20% of our sales in the quarter. As we had expected coming into the quarter our sales again grew strongly in the automotive market, growing by 26% in U.S. dollars, 17% in local currencies, and 10% organically. Importantly, we did grow again in double-digits in all three of the major geographical regions: North America, Asia and Europe. Sequentially, our sales grew by 6% from the fourth quarter with the benefits from the Sunpool acquisition that we completed just at the end of December.
We remain excited by the company's excellent and growing position in the automotive market. Our continually expanding range of Interconnect Products, which include discrete connectors as well as complex interconnect assemblies, together with our broad range of automotive sensors and our strengthened position in automotive antennas, positions us to take advantage of the multitude of opportunities to enable new electronics in cars.
Whether in traditional fuel-powered hybrid or electric vehicles, carmakers are integrating advanced electronics into virtually every function in the automobile. And this creates an outstanding long-term growth opportunity for the company. Looking into the second quarter, we expect sales to grow moderately from these levels. And for the full-year 2018, we continue to expect sales growth in the high-teens.
The mobile devices market represented 14% of our sales in the quarter, and our sales, once again, grew very strongly from prior year, rising by an outstanding 68% from first quarter 2017 levels, as significantly stronger sales of products used in smartphones as well as production-related products were partially offset by softness in tablets. As we had expected coming into the quarter, our sales were down from the fourth quarter by 25% sequentially due to the typical seasonality that we see at the beginning of the year. I would just note that this was roughly the same sequential decline that we experienced last year.
Our performance over the last several quarters has truly reconfirmed the extraordinary abilities of our team working in the always dynamic mobile devices market. The reactivity and 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.
Looking ahead, we expect sales in the second quarter to reduce from these levels as volumes moderate for several new product ramps. Nevertheless, given our position on a number of new programs to be launched later this year, and, of course, understanding, as always, that the mobile devices market is inherently difficult to predict, we now expect sales to increase in the mid- to high-single-digits for the full year 2018, and that compares to our previous outlook of low-single-digit growth. We're encouraged by the strengthened outlook in the mobile devices market, and we look forward to realizing continued benefits from our strong position for many years to come.
The mobile networks market represented 8% of our sales in the quarter, and our sales were a bit better than expected, rising by 2% from both prior year and prior quarter. Growth in our sales with service providers more than offset a moderation of demand from OEMs. Given that somewhat stronger performance in the quarter, we now expect to achieve low-single-digit growth for the full-year 2018 in the mobile networks market. And looking into the second quarter, we expect a mid-single-digit sales increase from Q1 levels.
I will say that while we're encouraged by our strengthened outlook in the mobile networks market, we don't believe that this yet marks a change in the overall outlook for carrier spending and does not yet reflect any meaningful benefits from prospective or future investments in 5G networks. Nevertheless, we continue to work on a wide range of next-generation systems with our customers around the world, and we are very encouraged by the strength of our position with both interconnect products and antennas for OEMs and operators. And we look forward to realizing the benefits from such strength for many years to come.
With the acceleration of video and data traffic through mobile networks, together with increasing demands for coverage, our company is well positioned to capitalize on whatever investments will be made in next-generation wireless networks in the future. The information technology and data communications market represented 18% of our sales in the quarter, and we are pleased that our performance was a bit better than expected in the first quarter with sales growing slightly from prior year and declining a less-than-expected 3% from the fourth quarter, a typically softer quarter in IT/Datacom.
Our year-over-year growth in servers and storage systems was almost fully offset by reduction in sales of our products incorporated into networking equipment. We remain very confident in our strength in the exciting IT/Datacom market, and the nucleus of the strength of that position is our industry-leading range of advanced technology, high-speed power and fiber optics products. These products are used in a wide array of equipment made by global OEMs as well as used in data centers of our web service provider customers. With the dramatic expansion of data traffic around the world, we look forward to realizing the benefits of that position for many years to come.
Looking into the second quarter, we expect sales to increase from these levels, and for the full-year 2018, we continue to expect low- to mid-single digit sales growth.
The broadband market represented 5% of our sales in the quarter, and sales in this market reduced from prior year by 6% as cable operators continued to moderate their spending. On a sequential basis, sales rose slightly from the seasonally softer fourth quarter.
As we look into the second quarter, we expect a significant seasonal increase in our sales as broadband operators accelerated investments in their data and video delivery networks. And for the full-year 2018, we now expect a low-single digit increase in sales. We remain very pleased with our position in the broadband market, and we look forward to realizing the benefits of our expanded product offering in support of customers who are delivering data, video and voice to consumers and businesses around the world.
There's still the possibility of more consolidation in the broadband industry, and as you know, that always has the potential to create pauses in capital investment. But, nevertheless, we are encouraged by the modestly more positive environment that we see here in 2018. And we look forward to continuing to diversify and strengthen our product offering to this market for many years to come.
So, just in summary, I can just say that I'm extremely pleased with the company's strong start to the year here in 2018. And while the global market environment remains very dynamic, I'm just so proud that the Amphenol organization is executing extraordinarily well and expanding our market position, while strengthening the company's financial performance.
Amphenol's superior performance is a direct reflection of our distinct competitive advantages, our leading technology, our increasing position with customers across our diverse markets, our worldwide presence, a lean and flexible cost structure, a highly effective acquisition program and most importantly, our agile, entrepreneurial management team.
Now, turning to our outlook for the second quarter and the full year, and assuming there are no significant changes to the current economic or geopolitical environment, and based as always on constant exchange rates, we now expect in the second quarter and full-year 2018 the following. For the second quarter, we expect sales in the range of $1.855 billion to $1.895 billion as well as adjusted diluted EPS in the range of $0.83 to $0.85. This represents a sales and adjusted diluted EPS increase versus prior year of 11% to 14% and 12% to 15%, respectively.
For the full year 2018, we now expect sales in the range of $7.630 billion to $7.750 billion, and adjusted diluted EPS in the range of $3.49 to $3.55. And for the full year, this represents sales and adjusted diluted EPS growth of 9% to 11% and 12% to 14% over 2017 levels, respectively. On an organic basis, our new outlook now represents full year sales growth of 4% to 6%, which is an increase from our prior organic growth guidance of 2% to 4%.
We're very encouraged by the company's strong start to 2018 as well as our improved guidance. And I'm confident in the ability of our outstanding management team to build upon this excellent start for the company by continuing to capitalize on the many opportunities to grow our market position while also delivering strong financial performance in 2018 and beyond.
So with that, operator, it'd be our pleasure to take any questions that may be there.
Thank you. We will now begin the question-and-answer session. Our first question comes from Amit Daryanani of RBC Capital Markets. Your line is now open.
Thanks a lot. Good afternoon, guys. I guess a question and a follow-up for me. To start with, I had one on the mobile device side. The uptick that you're talking about for the full year, it's really – I think it's all happening in the back half, September, December quarters. But this uptick is it more a reflection that you feel better about what unit numbers will do for your customer base? Or are you feeling more confident about the content you have per unit that's driving that uptick? Just between those two factors, what's driving it?
Yeah. Well, thanks very much, Amit. I think you're correct in assuming that that is the back half, which is not surprising. If you look at our performance last year, I think we grew somewhere in the mid 90%, second half to first half. I don't think we have that same expectation this year. But as normal, we would expect that to be back half.
I think we are not making a prognosis here necessarily on unit volumes. Rather, I think what has given us the comfort to strengthen our outlook is just the strength of our position on the various programs in which we are participating. And whether that is content, whether that is allocation, it's just an overall sense of the strength of our position.
Last year was a fabulous year for us in mobile devices. We had come into the year, as you know very well, with a less sanguine outlook. And then over the course of the year, we were able to capitalize on some opportunities that really were there in support of several of our customers. And I think that everybody asked the question coming into this year, does that have some ability to perpetuate itself with those customers who are happy that you worked so closely and effectively with them. And I think our team's done a great job to confirm that we do, indeed, have a very strong position with a number of those customers. And that's what's reflected here in these numbers.
And again, I will always say relative to mobile devices that it is an inherently very challenging market to forecast, and we always try to give you our best view of what we see at the time of our earnings release. And we're pleased that at least at this point, we feel like we have a little bit of a stronger position than we did 90 days ago.
Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is now open. Craig Hettenbach of Morgan Stanley, your line is now open. Please mute your line.
Thanks. Want to focus, Adam, on just IT/Datacom, if we look at some of the strengths in hyperscale, Google CapEx just this week, even traditional enterprise looking a bit better from a spend. So just wanted to get your thoughts, I know you're more focused on the hyperscale, but just overall in IT/Datacom, how you're seeing that market today and as you go through the year?
Yeah. I think as I talked about in my prepared remarks, IT/Datacom was modestly better performance in the first quarter for us than we had thought coming into the year. So we continue to feel like we have a fantastic position in IT/Datacom. Our outlook for the second quarter is to grow from these levels, and our outlook for the full year is to have kind of mid-single-digit growth from prior year.
I think we've demonstrated over a number of years that our team, working in IT/Datacom, has just done an outstanding job of really pivoting towards some of those opportunities that are encompassed in some of the names that you talked about, and more broadly than that, into the overall service provider market in IT/Datacom while not losing sight of the importance of our work that we do with OEMs around the world.
And as we look at our program win rates with customers, as we look at our support of customers when they need us most, when they're ramping up, when they're building new data centers, when they're releasing new products, there's no question that our position in the IT/Datacom market today is really stronger than it's ever been before. And so we look forward to more spending that will come. I think sitting where we sit today, I think the guidance that we've given is a strong guidance. And if there arise any opportunities to do better than that, you can bet we're going to be very well poised to do so.
Great. Thank you.
Thank you, Craig.
Thank you. Our next question comes from Matt Sheerin of Stifel. Your line is now open.
Yes. Thanks and good afternoon, Craig and Adam. Just a question, Craig, on the margin, the operating margin, if you sort of back into the number based on midpoint of EPS and revenue, it looks like operating margin year-over-year will be flat to down slightly. I'm just trying to reconcile that. You've been growing margins modestly every quarter. Are there any kind of headwinds in terms of investments or commodity costs? I know you talked about some commodity headwinds in the Cable business.
Yes, thanks, Matt, appreciate the question. Actually obviously, we don't guide specifically to operating margins, but I would say actually, our guidance does have an assumption that there is actually going to be some expansion in the margin at some level year-over-year. And we were certainly very proud that achieving the 20.2% that we achieved in the first quarter.
As we have talked about before and you would certainly see a little bit in certainly the first quarter and even maybe the second quarter, a little bit results that would have had a little bit of a commodity headwind with regards to our Cable segment, which we certainly talked about, and I did talk about in my prepared remarks, in addition to some of the newly acquired companies that we acquired last year that are at a bit lower profitability levels that certainly are accretive from an EPS perspective, but certainly, aren't quite yet up to our operating margins from an overall company average perspective.
So, and we do expect over time to certainly get them to that level as they certainly adapt that operating discipline that we have hopes that they will do. So, but I'd say in the second quarter, we're certainly optimistic about their operating margins. And we do expect some expansion. And certainly, if you look at our full year guidance, we also have kind of a typical kind of conversion, long-term conversion, 25% target. And I would say for the full year, we're kind of in that range. That's obviously higher or lower in any one particular year. But over time, this is certainly a conversion that we would expect to be able to continue to achieve.
Okay. Thank you.
Thanks, Matt.
Thank you. Our next question comes from Wamsi Mohan of Bank of America Merrill Lynch. Your line is now open.
Yes. Thank you. One for Craig and one for Adam, if I could. Craig, as you look at this $2 billion in new repurchase authorization, I mean, your last one, you completed that, you had announced a two-year timeframe, you finished that in five quarters. How should we think about the cadence of share repurchases for this $2 billion? And the magnitude of that step-up – is that sort of just a reflection of the longer-term confidence? Or is it meant to signal any change in your longer-term M&A strategy? And I have a follow-up for Adam.
Sure. Thanks a lot, Wamsi. In regards to the program and the cadence, we're certainly very happy to be able to announce this $2 billion program. And it's a three-year program, which is a little bit longer of a program in terms of the term than we had historically done. But we thought certainly this was an appropriate time to increase the size of the program.
I think if you think about our share return or return of capital to shareholders, our strategy over time continues to be kind of returning our capital, about 50% of our free cash flow over time to our shareholders. And we certainly have been able to do that over time. And this really doesn't change that.
And in terms of cadence, I would say that it doesn't indicate that we're going to do that evenly or not. This buyback could be lumpy. It depends on a number of factors. It depends on other cash needs. It depends on M&A activity. It depends on certainly market price of the stock. It depends on a whole host of different factors that we consider when we're buying back stock. And certainly, we'll continue to consider those things.
But I think what you see over time is that we've been able to do all of what we do in terms of deployment of capital, which is a very balanced approach of returning capital to shareholders and performing our M&A activities. And we have been able to kind of balance all of that.
So whether or not that happens sooner than that three-year term, I certainly wouldn't say that at this point in time. But certainly we'll continue to look at the opportunities to buy back shares and ensure that our balanced and flexible approach around our deployment of our capital continues to be maintained as it has been over many years.
Okay. Thanks, Craig. And, Adam, as a follow-up, how are you viewing your China exposure relative to some of the trade rhetoric risk? And how are you planning for any contingencies, if anything, at this point? Or do you think it's just too early at this point to take a longer-term view on that? Thank you.
Well, thanks very much, Wamsi. I mean, obviously, we are very sensitive and watching all of the news. And I can just tell you that as a global electronics company you can imagine that we are actively monitoring all of these policy dynamics. And beyond just monitoring it, we continue to lend our voice to those and many other companies who have a belief that ultimately free trade is a positive force for the world, not just for our global electronics industry. It's a good thing for our customers, for end consumers as well as for our employees and the other stakeholders in Amphenol.
And if I look at what has been talked about so far, at this point, we don't believe that any of the policies that have been announced would have any material negative financial impact on the company. But, more importantly, we remain very committed to ensuring that we and our customers around the world are not going to be negatively impacted by any potential changes. And the most important part of that is that we are prepared to react in our typical fast and flexible manner to whatever comes our way.
I mean, you know very well that the entrepreneurial culture that we have is actually uniquely suited to times like this where sometimes, you can't exactly predict what's going to come along. And we have this team of more than 100 general managers around the world, and they're always poised to react to any changes that are there. I mean, specific to China, I will tell you that we are in China, like we are in every other country, a very local participant in the market. And we are not a company that is staffed by a bunch of expats flying around the world. And while we may be a U.S.-headquartered company, our team in China is Chinese, and our team in India is Indian, and our team in Germany is German.
And so we are viewed by customers really as a local and trusted partner in helping to make their electronics equipment higher performing and ultimately, allowing them to send more. Of course, we will comply with whatever laws are put in place, and we will react to those in our typical manner. But at this point, I think it's a little too early to give a kind of prognosis about what will ultimately happen. It's a little bit all over the place, I would say. And so we're just going to stay agile, stay flexible and keep supporting our customers wherever they may be.
Our next question comes from Sherri Scribner of Deutsche Bank. Your line is now open.
Hi. Thank you. Just thinking about the full year guidance and the implications for the linearity for the year, it seems like if you look at the EPS guide, you guys beat by about $0.04 in the first quarter. The second quarter guide is about flat with the Street. It implies about a $0.05 increase in the back half of the year to EPS. But the sales guidance doesn't reflect all of that upside you saw in 1Q. Can you maybe give us some thoughts on what drives that linearity? And how much of the buyback is reflected in that $0.05 in the second half?
Sure, Sherri. Thanks. I'll take that. I'm not sure I'm quite getting into the same math, but we did beat by actually – on the high end, we beat by $0.03 on our almost $50 million beat on the high end. And then we raised, obviously, $150 million, and we raised, I guess, on the high end by about $0.08. So I think that that is pretty consistent with our typical conversion in terms of how we think about converting our revenue into ultimately the bottom line, and ultimately, EPS.
So I think that there isn't anything, I guess, special or something that would point out as being abnormal about that in regarding to our overall – and certainly, we're extremely happy to be able to and pleased to be able to raise our guidance and continue to convert very strongly on the bottom line. And I think it indicates, as I mentioned in my prior remarks, about very strong operating margins for the year any conversion. So anyway, so I think that certainly very happy with the results, and we do think it's kind of a typical beat on the high end in regards to its translation at the EPS level.
Okay. And then just quickly on the Mobile Devices segment, I think you guys had expected that to be down 20% sequentially, and it was down 25%. Can you maybe give us some details on the puts and takes on what drove that a little bit lower than your expectations? You guys have already commented on the full year. So I think I understand the full year. Thanks.
Yeah, thanks very much, Sherri. I wouldn't comment on anything significant. I think maybe just overall volumes were a little bit lower than we had expected. But I think in a typical first quarter, like I said, last year, first quarter was also down 25%. We said we thought it would be approximately 20%. 25% was maybe slightly more than approximately 20%. But nothing material or meaningful was very different. So, I guess, at the end of the day, it was just a little bit lower volume, but nothing of note.
Our next question comes from Shawn Harrison of Longbow Research. Your line is now open.
Hi, Adam and Craig, congrats on the results. Two questions, if I may...
Thanks so much, Shawn.
Thanks. First, Adam, just on the defense business, the DOD budget went up I think after you guys guided for the year. And was wondering if you saw any of that benefit in the March quarter, if that increase would still be coming to you later as the year progresses?
And then second, Craig, just the $100 million on M&A in the quarter, I didn't see any deals that were announced. I was wondering if that was maybe just earn-outs or for prior deals?
Yeah. So let me first talk about the defense budget. It's true. As we released our earnings 90 days ago, there was still this hot debate on Capitol Hill about continuing resolutions and whether there would, in fact, be a permanent budget. And we were very pleased like everyone that there is, in fact, a budget that we can all kind of base our businesses upon, and which did include, as you correctly point out, an increase in the defense budget.
I think our performance in the first quarter; I don't know that that had any relation to the defense budget being passed. We did upgrade our outlook for the year. And whether that is related to the budget, it's related to what we hear from our customers. So we are not forecasting our defense business based on kind of macro trends. We forecast it based on what we hear from our customers. Now, are our customers spending more with us because they're getting more from at least in the case of the U.S., the U.S. Department of Defense, I think it's not crazy to think that that could be some relation to that.
So we've actually seen strong performance in our military business on a global basis and all those geographies where we can and do participate. And if you look at our performance, 18% organic growth in the quarter and outlook for the year to be in low double digits, I mean, this is just very, very strong performance and a confirmation of the depth and breadth of our position in the military market.
And so to the extent that there is more money being spent and to the extent that that more money is being spent on upgrades of systems, on new electronic systems, I think there's no doubt about it that we'll be there to participate in that, and look forward to it.
And as it relates to the acquisition payments on the cash flow, as you recall, we announced the CTI acquisition in our January guidance, which actually closed in January. So a large portion of that on the cash flow related to that acquisition, in addition to some deferred purchase payments on some acquisitions that closed in the fourth quarter.
Our next question comes from Jim Suva of Citigroup. Your line is now open.
Thanks very much. A question for Adam, and then I have a question for Craig. Adam, when we think about the operating results of your company, they were very strong. But one has to also think about total company operating margins, about flattish year-over-year. But Cable Products were down year-over-year on revenues higher. Is that cost of goods sold a little bit higher? Or are you integrating some acquisitions or some timing? Or what's the real swing factors we should kind of list as far as operating margin impacts going forward?
And then, Craig, just to make sure for the stock buyback and dividend it sounds like – or maybe this is Adam also – maybe this is more of a don't put M&A on the hold, it's just the cash flows are strong enough to support continued M&A as well as stock buyback and dividends, is that correct?
Yes. Well, Jim, just very simply put, that's correct. We're not putting M&A on hold. To answer your second question, we always prioritize M&A as well as our organic investments, but the company is a fabulous generator of cash. And we believe that a balanced return of capital to shareholders, together with a prioritization of our M&A program, is the right way to manage our capital structure. And it's a very consistent approach that we have taken.
Relative to the operating results, and specifically Cable, I think Craig talked already about the fact that we have seen some pressure on commodities in our Cable business specifically. And that has resulted in the Cable margins being under pressure and down on a year-over-year basis. But even with that, to have the ROS still growing by 10 basis points year-over-year is a great confirmation of the performance in the Interconnect business in an environment that is inflationary.
There's no doubt about it. There are inflationary pressures, and I think our team has done just a phenomenal job to either drive that in pricing with customers or in redesigning of products or in somehow making sure that we don't suffer the impact on the interconnect side of some of those commodity price increases, which are very broad.
It's harder to do that in the Cable business, as you know, having the followed the company for so many years, because of the intensity of the consumption of commodities into that Cable combined with the nature of the market where it is a more constrained market and where pricing power is not always so evident.
We continue to be very disciplined in that space, and we will remain disciplined. And whenever there are opportunities for us to pass on the impact of these commodities, we will certainly do so in a very quick fashion. But at this stage, I think the overall operating results of the company are very strong. We have grown on a year-over-year. And as Craig said earlier, we have a good outlook for the continuation of that performance in 2018.
Thanks so much for the details.
Thanks so much, Jim.
And our next question comes from William Stein of SunTrust. Your line is now open.
Great. Thank you for taking my question. I'm wondering if you can comment, Adam, on your own lead times today, also customer inventories and the influence of any component shortages you're seeing. Basically sort of an update on supply chain conditions, please.
Yeah, no, thank you very much, Will. I mean, there is obviously a lot written about component shortages and lead times and things like this, and I think most of that – those discussions revolve around passive components, things like capacitors and transistors and various chips and things like that. We have not seen in our company meaningful or broad-based changes in our lead times, and we have some businesses that are doing very, very well. And occasionally, when that happens, you'll see the odd lead time go slightly up. But I can just tell you we continue to satisfy truly the needs of our customers. We're not on allocations, nothing like that.
I mean, our team has done a fabulous job of flexing. I mean, just look at that business which is typically the least flexible, which is the military business where sometimes it does take you time to build capacity. And our team was able to grow on a year-over-year basis by 18% organically; just a very, very strong performance in a business where sometimes it is not as easy to flex in that way. And so I think our customers really continue to see with us a great supporter of their needs in that time of growing demand.
And accordingly, I wouldn't expect that customers are necessarily building up kind of safety inventory. Now, I'll caveat that to say that we don't have peer visibility into the warehouses of our customers, in particular OEM customers. We get a little bit of visibility to our distributors. But what we see with those customers or hear at least anecdotally, is not a real sort of structural buildup in their inventory, and part of that is because we have been able to really satisfy their demand with our operational flexibility.
Maybe one other if I can. Given the increase in rates that we've seen, I'm wondering if there's any change in the M&A environment or your pipeline?
Yes. I think we always, as you know, take a very long view in M&A. Whether markets are up or markets are down or rates are up or rates are down, that has not changed our strategic approach to M&A, whereby we cultivate a pipeline of companies, a very big pipeline of companies over a long time period where we remain poised when companies that we didn't know pop up in an instance. And we continue to have very strong pipeline of acquisitions. Yes, it's true. We didn't announce any new acquisitions this quarter, albeit having closed one early in the quarter that we talked about three months ago.
But we continue to have a very strong pipeline of acquisitions, and I think the company, Amphenol, remains just a wonderful destination for companies large and small who are considering one day having a change in their ownership. And I think the credibility of our track record, the hospitableness of the organizational structure that we have, whereby new companies can join Amphenol without that significant disruption that is sometimes accompanied with an acquisition, together with our willingness to pay fair prices for great companies.
And again, whatever the rate environment is or the market environment, market multiples, we look at this with a very, very long-term view towards M&A. And we're willing to pay reasonable and fair prices for very strong companies. And that discipline that we have had for many years has never resulted in us failing to have a strong acquisition program. And we don't think that that'll be the case, regardless of which way rates are headed.
Our next question comes from Steven Fox of Cross Research. Your line is now open.
Yeah, thanks. Good afternoon. I was just curious. Obviously, your sales guidance calls for reasonable deceleration in organic sales growth. Some of the markets you participate in are cyclical. I guess I'm trying to gauge your confidence that we have sort of a soft landing in markets like auto, industrial maybe even commercial air versus prior cycles. Why do you think that could be the case outside of obviously your own content wins? Thanks.
Yeah. No. I mean I don't know soft landing, I think it's a strong sales guidance. We've increased our organic guide for the year. As you know, we came into the year with a guide of 2% to 4% and now we've increased that to 4% to 6% organically.
And yes while we grew in this quarter on an organic basis by 12% that would mathematically imply that there is a little bit less growth in subsequent quarters. We should also recognize that mobile devices in this quarter grew 68% a very, very strong performance.
We don't expect that same year-over-year performance, especially as we get into the back half of the year where last year Q4 we also grew something like 67% in mobile devices. But regardless of that we still think that this year will be a strong year for mobile devices in its totality.
So I don't think if you were to take out for example that impact of the mobile devices which as you know has its certain volatility relative to what quarters are strong and what quarters are not strong, I think that you'd see a relatively balanced year; that is inherently implied in our outlook.
That's helpful; and then just a quick follow-up. Can you guys give us a sense for your capital spending expectations for the full year roughly, maybe as a percent of the sales or dollars whatever you're comfortable with?
Yeah. I mean as you know, our typical capital spending for the company is somewhere in the range of 2% to 4% that we talk about historically and we've been kind of averaging around that 3% level.
I think this year based on program ramps, there could be some slight increase over the 3% level. But I would still expect to be in the range of the 2% to 4% give or take this year, so really no significant change versus over the last 2 years and certainly no difference in terms of trends going forward.
So I think as Craig said I mean we may see maybe here in the second quarter and a little bit in the third quarter a little bit higher than normal but not over the course of the year.
Right.
Our next question comes from Deepa Raghavan of Wells Fargo Securities. Your line is now open.
Good afternoon, Adam and Craig. A couple questions...
Good afternoon, Deepa.
A couple questions on outlook, specifically in automotive. Could you talk about some of the regional performances that either came in better or worse than your expectation coming into the year and what they could mean for outlook? And also I'm looking for any confirmation that your underlying organic growth in automotive and industrial is still high-single-digits. You report it as mid-to high teens. Just if you can compare and contrast how the quarter progressed across regions, what that means for outlook, that'll be helpful.
Yeah, sure. Well, just simple answer on your final part of the question, the organic growth outlook, we still think that is in the high single-digits, very robust outlook for the year on both auto and industrial. And then we have the benefits of some of the acquisitions that we've talked pretty extensively about.
Relative to the auto outlook and the performance on a regional basis I think I talked about the fact that we're very pleased in the first quarter that we had double-digit growth really in all regions and strong double-digit growth I would say in all those regions.
And I think that's just a testament to our team's great work in diversifying the business from a geographical perspective in addition to customer, in addition to application and product. And that is a big change for the company. If you look over the last half decade or so, we were predominantly a European automotive player. And today, it's a much, much more balanced position.
Now, I wish I could tell you that we were sophisticated enough to have detailed and scientific guidance per region in our automotive business, and then, I'd be able to tell you that we do better or worse in each region, but we're maybe not that sophisticated.
I think that we had strong performance in the quarter in all the regions. I don't think we were terribly surprised by one or another given region, or there's anything really special to report from one of the regions. I think our growth was fastest in Asia, and that was followed by Europe and then North America. I think that hasn't been a new trend necessarily.
Of course, we had the acquisition of Sunpool at the end of the fourth quarter, which supported our Asian growth, but we had also good organic growth in Asia. So, I don't think regionally, we have any change to our outlook. We continue to feel very good about the company's broad position really around the world.
Our next question comes from Mark Delaney of Goldman Sachs. Your line is now open.
Yes. Good afternoon. Thanks for taking the questions. I do have two, if I could. First on broadband, understood the slightly better view for this year. Can you talk about what geographic region or regions may be driving that? And if any of that is potentially price increases? I think some of your competitors have talked about trying to put in place because of rising copper prices. And are you seeing higher prices maybe start to take hold?
Yeah. I think the broadband growth – again, it's modestly better performance and I guess, I would say, that's more related to North America than other regions. Well, look, we're waiting for the price increase dynamic to change, and we're looking very much forward to that. I've said it before many times. We won't let the sun set on an opportunity to raise prices when the material prices have gone up like they have in broadband. I can't tell you that our outlook – the change in our outlook is related yet to pricing. That, we have not yet seen. But, we're hopeful apparently like you are that that could happen.
And then, a follow-up on mobile networks, which I know came in a little bit better. Any regional drivers on a geographic basis that caused this somewhat better mobile networks outlook? And appreciate the comments about not seeing any real benefit yet from 5G, but given all the engagement Amphenol has with different customers, do you have any view of when 5G may become a more material driver to your mobile networks business? Thank you.
Thanks very much, Mark. I think regionally, our performance in mobile networks was strongest in the quarter in North America. I think if I survey where we participate, that's probably the region where we've seen a little bit more momentum than we had anticipated coming into the year, and where we will continue to see that through the last three quarters of the year.
Relative to 5G, it's very true. We have very close relationships with our customers, both OEMs and service providers. And we're working very broadly on a wide array of next-generation technologies, both interconnect and antennas, that will be incorporated into next-generation systems.
All that being said, I cannot tell you when those real scale investments will be. Like everybody, I have read all the reports and heard some of them even firsthand about initial build-outs being done in certain places or targets of doing certain build-outs associated with certain events, like the Olympics and other things like that.
But, in terms of when the real build-out will come and when you will see a true change in the spending associated with that build-out or a transition from current generation to next generation and the broad spending patterns of our customers, that, we don't have a good visibility on yet. But what we will be regardless is poised to take advantage of it when it comes.
And I think there are always with – in the mobile networks market, just aspects of that that are hard to predict. There are combinations of companies that come. There's continued innovation that has to happen. You have to have also the innovation that happens on the devices that ultimately connect to the network. You have the availability of capital. You have capital markets. All those things ultimately go into the calculus of our customers whether they're going to ultimately drive a different level of spending and in adoption of those new networks. And we'll be ready whenever that does happen.
Our next question comes from Joe Giordano of Cowen. Your line is now open.
Hi guys. Good afternoon.
Hi, Joe.
Craig, just had a quick clarification for you. With your free cash flow guide for the year, slightly better than conversion than – well, to approximate net income or slightly better than net income, is that adjusting for the pension payment this quarter or is that inclusive of that spend?
Yeah. I was actually – well specifically I was talking about operating cash flow but...
Okay.
... anyway certainly free cash flow is certainly we were talking. When we talk about our targets, we do talk about operating cash flow exceeding kind of net income and historically we've done usually even a little bit better than that, but that is – I think you have to really put in this one-time kind of voluntary contribution of the $80 million and then certainly that will have some impact on the operating cash flow for the year, but certainly from a payback perspective, from a return on investment perspective, that just made all the sense in the world. We've got a nice tax deduction under the current regime that we won't get under the new regime, and also certainly it reduces the cost of the plan quite significantly over a period of time, but anyways, to answer your question, yeah, you really probably would have to consider the payment that we made to the pension.
Okay. Fair enough. And then on commercial aero, I think you guys said sales up like 9% organically, 14% in U.S. dollars and expecting low-single-digits for the full year, is that correct? And if so, like what's kind of driving that change from here? Is it comp? The comps looked okay when I look back to last year. So just some color there would be helpful.
Well, I mean if you mean the change from the performance in Q1 to a little bit less of an outlook for the full year, I think this is just the normal cadence that we see. Sometimes, it depends on the comparisons. I think we had probably a little bit of a more favorable comparison in Q1 of this year than we had in last year in some of the other quarters and so I wouldn't read anything more into that than maybe it has to do with the compares from last year.
The next question comes from Amit Daryanani of RBC Capital Markets. Your line is now open.
Just had a quick follow-up. Craig, on the cash flow conversion, even if I adjust for the pension payment, I think I get cash flow conversion at 80% in the March quarter. That's well below the 100% average you guys have had for five years. So, would you call out something specific that impacted cash flow conversion, again, adjusting for pension plan in March? And how does that true-up as you go out?
Sure. Thanks. Thanks, Amit. Appreciate the question. Yeah. I mean I think that certainly, the cash flow – we generated a lot of cash flow and then I think this really – one quarter can vary from another quarter. We saw this in the third quarter of last year where we had a little bit lower cash flow because of the dynamics of the quarter in terms of when revenue was ramping into the fourth quarter. And then obviously, we had a very strong fourth quarter that was a little bit back-end weighted as fourth quarters normally are. So certainly, that did have some impact on the first quarter cash flow in addition to the fact that, but working capital needs coming into the second quarter which we are expecting some increase into the second quarter.
So our working capital from a kind of cash collection cycle perspective wasn't significantly different than kind of what our normal kind of range would be. It certainly was a little bit higher, and the first quarter sometimes could be a little bit softer. So I wouldn't necessarily note anything specific other than working capital needs in the first quarter. And as I mentioned in my prepared remarks, I do expect the full year to kind of be typically strong where we would be over that 100% mark again, taking into account the pension payment that I just talked about before. So, nothing specific other than again quarters can vary from one to another. And sometimes we have very strong quarters and another times, for different reasons, usually working capital needs ramps when we have a little bit softer, but nothing from a longer-term perspective, that I would note.
Thank you very much, Amit. Sorry that you had gotten cut-off before.
We show no further questions at this time.
Great. Well, listen, and thank you all very much. We truly appreciate all of your interest in the company and we wish that you have a very nice spring. It's rainy here in Wallingford. Hopefully, where you are, the sun is shining and we look forward to talking to all of you here in about 90 days. Thanks again. Bye-bye.
Thank you.
Thank you for attending today's conference and have a nice a day.