Amphenol Corporation (APH) Q4 2015 Earnings Report, Transcript and Summary

Hello and welcome to the Fourth Quarter Earnings Conference Call for Amphenol Corporation. [Operator Instructions] At the request of the company, today’s conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today’s conference host, Mr. Craig Lampo. Sir, you may begin.

Good afternoon. My name is Craig Lampo and I am the Amphenol’s CFO. I am here together with Adam Norwitt, our CEO. We’d like to welcome everyone to our fourth quarter conference call. Q4 results were released this morning and I will provide some financial commentary on the quarter and then Adam will give an overview of the business and current trends and then Q&A. The company closed the fourth quarter with sales and EPS of $1.431 billion and $0.63. Sales were flat in U.S. dollars and up 3% in local currencies compared to the fourth quarter of 2014. From an organic standpoint, excluding both acquisitions and currency sales in the fourth quarter increased 1%. Sequentially, sales were down 2% in both U.S. dollars and organically after a very strong third quarter. For the full year 2015, sales grew 4% in U.S. dollars, 8% in local currencies and 3% organically compared to 2014. Breaking down sales into our two segments, our Cable business, which comprised 6% of our sales, was down 4% from last year primarily due to the effect of currency translations. The interconnect business, which comprised 94% of our sales, was up 1% from last year, reflecting the benefits of both organic growth and the company’s acquisition program partially offset by currency translation. Adam will comment further on trends by market in a few minutes. Operating income increased to $289 million in the fourth quarter. Operating margin, excluding one-time items, was a strong 20.2% equal to both the fourth quarter of 2014 as well as the third quarter of 2015. On an as-reported basis, operating margins were 19.5% in the fourth quarter of 2014. From a segment standpoint, in the Cable segment, margins were 12.5% compared to 12.1% last year. The increase in margins related primarily to strong operating execution and some favorable impact from commodities. In the interconnect segment, margins were 22.4%, which is consistent with last year on similar sales levels. We are 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 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. Interest expense for the quarter was $17 million compared to $20 million last year, reflecting the benefit of a lower average effective interest rate in the current quarter more than offsetting the impact of higher average debt levels resulting from the company’s acquisition and stock buyback programs. The lower average rate is primarily a result of the implementation of a new commercial paper program. Other income was $4 million in the fourth quarter of ‘15 compared to $5 million last year and consists primarily of interest income on cash and short-term cash investments. The company’s effective tax rate was 26.5% in the fourth quarter of 2015 compared to 26.4% in the fourth quarter of ‘14, excluding one-time items. On an as-reported basis, the company’s effective tax rate was 26.2% in the fourth quarter of ‘14. Net income was a very strong 14% of sales in the fourth quarter of 2015 and EPS was $0.63 equal to the fourth quarter of 2014, excluding one-time items. For the full year 2015, EPS, excluding one-time items, was $2.43, up 8% over 2014, an excellent performance considering the current market environment. Orders for the quarter were $1.463 billion, a 2% increase over the fourth quarter of 2014, resulting in a book-to-bill ratio of 1.02 to 1. The company continues to be an excellent generator of cash. Cash flow from operations was a record $322 million in the fourth quarter or approximately 159% of net income. For the full year, operating cash flow was $1.030 billion or 133% of net income. The company continues to target cash flow from operations in excess of net income. From a working capital standpoint, inventory was $852 million at the end of December, down 4% from September. Inventory days were 79 days, down 1 day compared to September. Accounts receivable was approximately $1.1 billion at the end of December, down approximately 5% from September. Days sales outstanding was 71 days consistent with September levels. Accounts payable was $588 million at the end of December, down approximately 11% from September levels. Payable days were 54 days, down 6 days compared to September levels and still within our normal range. The cash flow from operations of $322 million, along with stock option proceeds of $25 million, were used primarily to reduce debt by approximately $27 million, to purchase approximately 53 million of the company’s stock, to fund net capital expenditures of $39 million, to fund dividend payments of $43 million, which resulted in an increase of cash, cash equivalents and short-term investments of approximately $162 million net of translation. During the quarter, the company repurchased 1 million shares under its January 2015 10 million share stock repurchase program. 5.5 million shares remain available under the program through January 2017. At December 31, cash and short-term investments were $1.8 billion, the majority of which is held outside the U.S. The company used just under $1.2 billion of its cash and short-term investments net of cash acquired to fund the previously announced FCI acquisition on January 8. We are very pleased to have been able to fund the entire acquisition with cash on hand. Total debt at December 31 was $2.8 billion and net debt was approximately $1 billion. After funding the acquisition of FCI, net debt is approximately $2.2 billion. At quarter end, the company had issued $824 million under its $1.5 billion commercial paper program and Q4 2015 EBITDA was approximately $343 million. From a financial perspective, this was an excellent performance. Before I turn the call over to Adam, I wanted to just make a couple of comments relative to our guidance. As previously noted, we completed the acquisition of FCI on January 8, and consequently, the results of FCI will be included in the consolidated company results effective as of that date and therefore are incorporated in our guidance. For the full year 2016, we expect that the FCI acquisition will generate approximately $0.12 of accretion on sales of approximately $570 million. I would also note that while the acquisition is accretive to EPS, the inclusion of FCI in the company’s consolidated results will reduce our operating income margin by approximately 90 to 100 basis points as FCI currently operates at a low double-digit operating income level. As we have previously stated, the management team is fully committed to improving FCI margins up to the average of the company over time. From a sales perspective, our guidance reflects an organic growth rate, excluding all acquisitions and currency impacts, of down 6% to down 3% in the first quarter of ‘16 and down 1% to up 2% for the full year of 2016. In addition, our guidance excludes any one-time charges associated with the FCI acquisition related to external acquisition transaction costs or other one-time acquisition related costs such as amortization of backlog or any one-time costs associated with improvements in cost structure. Adam will now provide an overview of the business and current trends.

Well, thank you very much, Craig and it’s my pleasure to also welcome all of you to our call here and I hope it’s certainly not too late to wish each of you a Happy New Year. As Craig mentioned, I am going to highlight a little bit our fourth quarter and as well as reflect back on our full year achievements in 2015. I will then spend some time to discuss the trends and our progress in our served markets. And then finally, I will make a few comments on our outlook for the first quarter and the full year and of course we will have time at the end for questions. With respect to the fourth quarter, certainly our results in this quarter were stronger than expected as we exceeded the high end of our guidance in sales and earnings, despite what is clearly a heightened level of market uncertainty. Although we had expected some decline from prior year, our revenues ultimately were flat in U.S. dollars and increased by 3% in local currencies, reaching that level of $1.431 billion. I think Craig mentioned as well that the company booked a record $1.463 billion in orders, which represented a book to bill of 1.02 to 1. We are especially proud that in the quarter, we equaled our highest levels of profitability in the company’s history as we sustained our industry leading operating margins at the same 20.2% that we achieved in the third quarter. In fact, over the last five quarters, three of those quarters we have achieved that 20.2%. Operating cash flow was another real highlight in the quarter as we reached a new record of $322 million of operating cash flow and actually free cash flow of $281 million. These are really just great confirmations of the company’s discipline and financial strength. I am extremely proud of this Amphenol organization. Our results this quarter confirm once again the true value of our entrepreneurial culture as we once again exercised both the agility and the discipline necessary to perform well despite what are clearly significant and mounting uncertainties across the worldwide economy. Craig mentioned that we closed the FCI acquisition in – just here recently in January. And we are extremely excited to have completed that acquisition on January 8, after we finally received the last antitrust approval, which was from China at the end of December. FCI is the largest acquisition in the history of the company. It represents a significant expansion of our interconnect product offerings for customers in the IT datacom, industrial, mobile infrastructure, automotive and mobile devices markets. But most importantly, we have added a truly outstanding group of talented individuals to our organization. In fact just last week, we hosted a large group of the FCI management team here at our headquarters in Wallingford and what I can only confirm for you is that they are all truly excited to be part of the Amphenol organization. Looking into 2016, as Craig discussed we expect approximately $0.12 per share of accretion from the FCI transaction on revenues of approximately $570 million. Long-term, we look forward to capitalizing on the wide range of opportunities that will now be available to Amphenol, given our broader range of technologies and deeper penetration of customers in these many exciting markets that FCI brings us. And as we welcome this excellent new team to Amphenol, all I can say is that we remain very confident that our successful acquisition program will continue to create value for Amphenol into the future. Now with respect to the 2015, there is no question that 2015 was a very strong year for the company, in particular given the many economic and geopolitical disruptions that emerged throughout the year. First, we expanded our position in the overall market, growing our sales by 4% in U.S. dollars and 8% in local currencies, ultimately reaching that new sales record of $5.569 billion. In addition, we expanded our operating margins to the new record of 19.9% for the full year while generating EPS of $2.43, both excluding one-time items. This represented a growth of 8% in EPS from prior year. We also had as you all know a very busy year in our acquisition program as in addition to FCI, we acquired Invotec, DoCharm and ProCom earlier in the year. These acquisitions are going to create great value for the company, in fact already are creating that value as we expand our position across really most of our served markets. And in particular, we have now been joined by a great range of new talented managers thereby strengthening our already impressive management team. In 2015, it’s once again a reflection that our consistent focus on growing with the broadening array of customers across all of our diversified end markets has ultimately resulted in Amphenol strengthening our position across the many segments of the electronics industry. And in addition, our entrepreneurial organization has accelerated the development of innovative interconnect technologies in support of our simple but long-term mission to be the enabler of electronics revolution. These developments have allowed Amphenol to capitalize on exciting new markets and thereby have broadened the opportunity for our future expansion. While 2015 was not always an easy year, as we entered 2016 I can just say that our management team is highly confident that we have now built a new platform of strength from which we can drive even better long-term performance for many years to come. Now turning towards our progress across our various served markets, I just want to comment that our team remains extremely focused on maintaining a balance and diversified market position. And this is really an asset that becomes even more valuable during times of economic uncertainty. And I think we all know that we are in those times. In 2015, not one of our end markets represented more than 19% of our sales and I will just say with the acquisition of FCI, we continue to expect that no market will make up even 20% of our sales as we now see it. Turning to the markets, first the military market represented 10% of our sales in the fourth quarter and also 10% of our sales for the full year of 2015. Sales in the military market were down slightly in U.S. dollars and were flat in local currencies from prior year as growth in military airframe was offset by reductions in communications and rotorcraft. We were in fact pleased in the fourth quarter to see stronger than expected 4% sequential increase from the third quarter, with strength across most types of military equipment. For the full year 2015, our sales were down slightly in U.S. dollars and were up 2% in local currencies in the military market. While the overall market has remained basically stable in 2015, we are pleased to be seeing the early signs of some renewed growth. Our team has done an excellent job of strengthening our overall market position during these most recent more moderate years as we have continued to expand our high technology product offering across many complex new equipment platforms. Looking into 2016, while we expect sales in the first quarter to remain roughly at the levels of the fourth quarter, we now expect to achieve growth in the low single-digits for the full year as we realize the benefits of our expanded content on new military equipment and as certain new programs launch. The Commercial Aerospace market represented 6% of our sales in the fourth quarter and 6% also for the full year. Sales were down by 4% in U.S. dollars and were flat in local currencies compared to prior year as stronger sales on to new airplane platforms were offset by reductions in commercial helicopter and business jet related sales. We were actually very encouraged during the quarter to achieve a strong 12% sequential increase from our third quarter sales levels, which was driven in particular by ramp ups of new large jet programs. For the full year 2015, our sales declined by 7% in U.S. dollars and just slightly in local currency driven by reductions in commercial helicopter and business jets sales. And we believe that that was related in part to the significant declines in the purchases of such equipment by oil and gas companies. Regardless of this more challenging market environment in 2015, we are very pleased with our continued progress across the commercial end market as we have taken excellent advantage of the proliferation of new electronics on next generation jetliners, which we are enabling with our broadened range of high-technology interconnect products. Looking ahead to 2016, we expect sales to remain at or slight above these levels in the first quarter and we expect to return to solid growth for the full year as production volumes of certain new planes ramp up, creating an exciting long-term opportunity for the company. The industrial market represented 17% of our sales both in the quarter and for the full year. Sales in this market grew by actually a strong 7% in U.S. dollars and 10% in local currency and that was driven in particular by growth in the hybrid bus and truck, heavy equipment and alternative energy segments as well as by some contribution from the Goldstar acquisition we made last year. And this was offset in part by significant and continued declines in our sales to customers in the oil and gas segment. Sequentially, our sales grew by a higher than expected 6%, resulting also from strength in those same segments. For the full year of 2015, sales in the industrial market grew by 5% in U.S. dollars and 8% in local currency as the contributions from our acquisition program, together with that same strength in hybrid bus and truck, heavy equipment and alternative energy was in part offset by the significant declines in oil and gas. I can just say that we remain very proud of our diversified industrial businesses and we have continued to make progress selling an ever broader range of interconnect sensor and antenna products into the many growth segments of this market. Now with the addition of FCI, we have significantly strengthened our position across a wide array of embedded computing applications in the industrial market and we believe that this highly complementary offering is going to create an excellent long-term growth platform for the company. For the first quarter, we anticipate sales to increase from the current levels due to the benefit from the FCI acquisition and looking towards the full year of 2016, we now expect sales growth in the high-teens in the industrial market for the full year as we benefit from contributions of FCI together with moderate organic growth from the many segments of the industrial market. The automotive market represented 18% of our sales in the fourth quarter as well as in the full year of 2015. Sales in that market increased a very strong 5% in U.S. dollars and 12% in local currency. And this was driven by stronger sales of our products used in a wide array of new vehicle electronics. Sequentially, our sales were a bit stronger than expected and slightly exceeded our Q3 levels. For the full year 2015, we are very pleased to have achieved another year of excellent growth as our sales grew by 23% in U.S. dollars, 33% in local currency and 12% organically. This is an outstanding year by any industry comparison for our automotive products. Our successful strategy has included driving an expanded range of interconnect and sensor products across a more diversified range of vehicles and onboard electronics around the world, while at the same time identifying complementary high-technology acquisitions. We look forward to continuing to realize the benefits from this approach for many years to come. For the first quarter, we expect sales to increase moderately from current levels. And for the full year 2016, we expect to achieve mid to high single-digit growth as we continue to benefit from our recent acquisitions as well as our expanded range of automotive electronics into which our interconnect and sensor products are designed. The mobile devices market represented 20% of our sales in the quarter and 19% of our sales for the full year 2015. Our performance in this market was actually somewhat stronger than we had expected as sales were essentially flat to prior year and down by 14% sequentially from our very strong third quarter. Once again, our team demonstrated their incredible dynamic agility as they were able to flex their resources quickly in the face of this sequential reduction, all while staying poised to capitalize on any upside opportunities for incremental sales that became available in the market. For the full year of 2015, our sales in the mobile devices market increased a very strong 13% from prior year, driven by growth in next-generation laptops, mobile accessories as well as production-related products for customers in the mobile market. We remain very confident that our highly reactive and agile organization will continue to secure a strong position in the ever dynamic mobile devices market and are encouraged by our excellent technology positions that run across a wide range of new mobile computing platforms. In particular, mobile functionality continues to be integrated into an ever broader array of devices, expanding the growth opportunity for our interconnect and antenna products. Looking into the first quarter, we now expect a sequential reduction in sales of approximately 30% due to normal seasonality as well as the impact from strong ramp-ups that occurred during the second half of 2015. This decline is roughly similar to the seasonal decline that we experienced in the first quarter of 2015. At this point, we expect sales for the full year 2016 to be slightly down from our 2015 levels. Regardless of this more muted outlook for 2016, we remain extremely confident that our dynamic and agile team has positioned us to benefit from any increases in demand that may arise in this always exciting market. The mobile networks market represented 8% of our sales in the quarter as well as for the full year. And our sales in this market were a bit better than expected, but still declined from prior year by 7% in U.S. dollars and 2% in local currencies. Sequentially, our sales were essentially flat to the third quarter as growth in sales to wireless equipment manufacturers was offset by a normal seasonal decline in sales to service providers. No question that 2015 was a very challenging year in the mobile infrastructure market as our sales declined 18% in U.S. dollars and 13% in local currency, primarily due to a pause in spending by many wireless operators around the world. Nevertheless, we have continued to expand our position with customers around the world in the mobile infrastructure market. And in particular, we have made great strides in developing new interconnect and antenna products that are integrated into next-generation wireless systems. Looking into the first quarter as well as the full year 2016, we do expect a significant increase in our sales to the mobile infrastructure market due to the contributions from the FCI acquisition. While we do not at this time though expect overall spending environment to improve, our broadened product offering positions us better than ever before to capitalize on the opportunities that will arise when spending inevitably resumes in the future. Now, turning to the information technology and datacom market, sales in this market represented 15% of our sales in the fourth quarter and 16% of our sales for the full year 2015. As we had expected, our sales were down slightly from prior year as well as prior quarter as sales moderated in products that are integrated into servers, storage and networking equipment. For the full year of 2015, our sales grew by 2% in U.S. dollars and 3% in local currency as declines that we saw in storage and networking products were offset by increased sales into server applications, together with the strong progress that we have made selling into the new generation of web and datacenter customers. Regardless of this current moderation in growth, I could just say that we continue to make excellent progress in our development of advanced high-technology products as well as in our penetration of the many newly arising Web 2.0 and datacenter customers. Now, with the acquisition of FCI, we have truly the leading product offering for customers across all areas of the IT datacom market and this positions us very strongly as customers adapt to deal with the significant expansion of data traffic in all aspects around the world. Both our traditional as well as the new generation of customers are driving their datacenter equipment to new levels of performance in order to handle the rapid expansion of data that’s driven in particular by the proliferation of new mobile devices as well as by the continuing spread of video on the Internet and cloud computing. Looking ahead to the first quarter and the full year 2016, we expect a significant increase in our sales due to the FCI acquisition. And we continue to look forward to creating great long-term value with our many investments in this space. Finally, the broadband communication market represented 6% of our sales in the quarter as well as for the full year. And sales decreased slightly in U.S. dollars and were flat in local currencies from prior year as domestic MSO build-out activity slowed due to the traditional seasonality in that space. Sales were down slightly from the third quarter because of that seasonality. For the full year, our sales were down by 5% in U.S. dollars and 2% in local currency. And essentially, we were impacted by both the reduction in capital spending due to the many corporate consolidations that have occurred or are occurring in the broadband market together with the slowdown in spending by operators in certain regions, in particular Latin America, which as a result more due to the significant currency devaluations in that region. For the first quarter, while we expect demand to increase moderately from our current levels, we do believe that it’s still too early to expect growth for the full year of 2016. Nevertheless, as the industry eventually digests the many consolidations that are ongoing, we will be very well-positioned to capitalize with our expanded range of interconnect and cable products on the growth opportunities that will, no doubt, emerge. So, let me just say with respect to 2015, I am just extremely proud of our performance. While the global economy did weaken throughout the course of the year and the market environment remains even today very uncertain, the Amphenol organization continued and continues to execute extraordinarily well, both organically as well as through our acquisition program to expand our market position while strengthening our financial performance. The company’s superior performance is a direct reflection of our distinct competitive advantages, our leading technology, increasing position with customers in diverse markets, worldwide presence, our lean and very flexible cost structure combined all with our agile and entrepreneurial management team. Now, turning to the outlook. As I have already mentioned several times, there continues to be a great deal of market uncertainty around the world and accordingly and based on a continuation of the current economic environment as well as on constant exchange rates, we now expect for the first quarter and the full year 2016 the following results. For the first quarter, we anticipate sales in the range of $1.380 billion to $1.420 billion and EPS excluding one-time items, in the range of $0.55 to $0.57 respectively. This represents a sales increase versus prior year of 4% to 7% in U.S. dollars and 6% to 9% in local currency and an EPS change of down 4% to flat the prior year. For the full year 2016, we expect sales in the range of $6.04 billion to $6.2 billion and EPS excluding one-time items, in the range of $2.54 to $2.62, respectively. For the full year, this represents sales and EPS growth of 8% to 11% and 5% to 8% over 2015 levels. In constant currencies, this guidance represents a year-over-year growth of 9% to 12%. We are very, very encouraged by our current and strong outlook in sales and earnings, especially given the many dynamics across the global economy. And I am extremely confident that in the ability of our outstanding management team to build upon our newly established record levels of revenues and EPS and to continue to capitalize on the many opportunities to grow our market position and expand our profitability in 2016. And with that, Operator we would be very happy to take whatever questions there may be.

Thank you. The question-and-answer period will now begin. Our first question came from the line of Matt Sheerin of Stifel. Your line is now open.

Yes. Thanks and good afternoon and happy New Year Adam and Craig.

Thank you.

First, I have just a couple of questions actually on FCI. I know when you announced the deal last summer, I think you said it was at $600 million run rate for FY ‘15 and now you are guiding around $570 million this year, I know they have a lot of distribution exposure, what was the run rate coming out of 2015 and did they see the same weakness that other semiconductor and component suppliers saw in the distribution channel, was that why the number is lower now?

Thank you very much for the question. I wouldn’t actually say that it’s related necessarily to distribution channel. At the time we gave the guidance, I think there is two aspects of why the $600 million becomes $570 million. Number one is FCI certainly was impacted by currency as other companies were. They have similar, if not even slightly more exposure to certain currencies. And so there is a significant impact of currency translation. In addition, we closed on the deal in January 8, so we lose a solid week of sales in the year. And I would just tell you that if you think about the markets where FCI is, we have what I consider a relatively prudent and conservative outlook in those markets looking forward. And I would say that FCI is no different than that. But I wouldn’t necessarily say that there is any significant change in terms of distribution that is any different from what maybe we have seen nothing. That’s not the big thing happening.

Got it. And I know you talked about, Craig mentioned the plan to improve margins and get the FCI operating margins to the Amphenol level, could you give us a little bit more color on how you plan to get there in potential timeframe?

Sure, be happy to do that. As we previously mentioned, we don’t integrate companies in a traditional sense. We certainly will look at the overall cost, cost structure and to maximize certainly the value of their great technology that they do have. I think what we will do is, over time look at certainly all these aspects of their cost structure, look at their organizational structure and whatnot and certainly we will be able to – we are confident we will be able to increase the margins over that time. This is certainly not going to be an overnight action. We are certainly in the process of working with management to go through kind of the details of the organization. But we are very confident and that we would be able to bring the profitability levels up over some time period.

Yes. And the only thing that I would maybe add to that is the management team from FCI, they have also that same aspiration. We have seen this in many times with acquisitions that we have made where the performance of that company has may be at somewhat less of a level than ours. They always from the outside, say how is it that they can do it and as soon as they come into Amphenol, they start to see how there is that sort of cultural ability to achieve those high margins and there is nothing better than a little bit of a peer interaction to help that same management team find ways to spend less or sell the product at a higher value wherever that may be. Ultimately, with FCI just like it is with every one of our businesses, it comes down to the margin is the price less the cost and I think that there will be many actions that can be taken on both sides of that equation. But the most important action is already there, which is that the team is committed to it. When does it happen, ultimately what’s the timing of that, this is a very hard thing to predict at this stage. And I think we have taken an approach to guide towards the margins as they are today. Over time, though we remain very confident that we will bring that to close to if not above the levels of the company.

Thank you. The next question is from the line of Amit Daryanani of RBC Capital Markets. Your line is now open.

Perfect. Thanks. I have a question and a follow-up as well. So I guess maybe to start up on FCI question, Adam when you guys announced the deal, you also talked about low to mid-teens operating margins of FCI, I think the guidance implies 9% or so operating margins, so just maybe explain what’s the delta there if there is mark to market accounting or something else that’s driving it lower?

Yes. I think what Craig mentioned is that it’s low double-digit operating margins in the company. As you know when you make an acquisition, there are various things you have to do with amortization and other aspects that are related to acquisitions. But we think that that’s a low double-digit operating income company today.

Got it. And then just broadly, given the market volatility you are seeing, I would love to get your perspective on your desire to execute further deals post FCI. And really as you look at deals moving forward, your leverage is around 1.7 times I think right now, is there an appetite to do $1 billion plus kind of transactions as they come up or would like to do more to tuck-in deals as you go forward?

Yes. I think we have always said and we remain very committed to the fact that we want to stay as an investment grade company. In particular, when markets are turbulent like they are today, I think the investment grade rating is a very important thing. That being said, we still have a lot of capacity. And I think Craig talked about that that we have still significant capacity remaining even where we were to get to investment grade. The reality is our position as an acquirer of preference for companies around the world, that has not changed and that continues to grow and we have an excellent pipeline of acquisitions. Are we going to make another FCI tomorrow, I guess probably not. But do we have a great pipeline of acquisitions, a variety of sizes and are we committed to continuing to drive our acquisition program, which has created so much value for the company, no doubt about it we are still very committed to that program.

Thank you. The next question is from Mike Wood of Macquarie. Your line is now open.

Hi, excellent job navigating this very tough market. First question, just wanted to get some help on the guidance bridge, it looks like the currency that you had guided to roughly offsets the FCI accretion, so I am just curious with flat organic growth if you could just maybe point to one or two things that’s driving the majority that roughly $0.15 earnings bridge to your midpoint. And I am wondering embedded in that if there is some prior acquisition margin ramps like from advanced sensors or something?

Yes. I think Mike, it’s not quite clear what you are asking, but it appears that what you are asking is did we have here a slightly higher conversion margin on our organic sales. And if that’s what you are asking, there is maybe a slightly higher conversion margin on that. We have an environment right now that we think there can be some slight positive impact from some of the commodity benefits that we had. And we started to see, Craig mentioned that we saw a little bit of benefit in the quarter in our cable business. And you can bet that our team is being very aggressive on that. But overall, we think that is still a guidance that is well in line with the profitability trends of the company.

Okay, great. That’s exactly what I wanted to understand. And then just Adam from your perspective managing the business, is there any – in terms of how you manage day-to-day given this market volatility, what do you do proactively, do you react to market movements to try to cut costs in front of potential contagion risk or are you just sort of looking at how trends are coming in and running it as a normal course of business?

So I am going to be a little flip in a second, which is to say that we spent two decades building a culture of a company that has then the inherent agility at the Street management level to react to changes. That’s number one thing we do. That’s not something you can do overnight. It’s something we have spent the better part of two decades kind of incubating and developing in the culture of the company. And I think I have mentioned many times in the past for those especially who followed us through many cycles that in a time of turbulence, this is really when the Amphenol management team excels the most, because we have around the world 90 plus general managers. Those general managers are facing customers every day as they are going back from the customers with the information that they have gathered and they are going into the factory to allocate and arrange their resources. And you can bet in certain times that they are hearing from customers not positive news and when they are hearing not positive news, they don’t report to someone who reports to someone who reports to someone at headquarters and then we make sort of a big decision about what to do, they go back to their factory that say, hey, I don’t see the orders, I better adjust my resources and that can mean cutting cost with people, that can mean cutting spending, that can mean redeploying towards growth opportunities, whatever it is. That’s the essence of the agility that is embodied and really across this entire organization. So, in a time like this where everybody wants to sort of buckle their seatbelts, because it doesn’t feel like a very smooth flight, this is when the Amphenol team buys new pairs of shoes, gets out there, makes sure that they are getting real-time information from customers, goes back, make some real-time cost adjustments, real-time resource reallocations to make sure that we preserve strong operating performance and we expand our market position. That’s the playbook that we have had through many cycles. God forbid, if we go into a cycle like that, we are going to have that same playbook.

Thank you. The next question is from the line of Sherri Scribner of Deutsche Bank. Your line is now open.

Hi, thanks. I wanted to ask a quick question, Craig, on the assumptions for SG&A as we move into fiscal ‘16. How should we model SG&A with the FCI acquisition trying to understand what hits SG&A and what hits the gross margin line for FCI?

Sure. No problem. Yes, in regards to SG&A, as you know, the company Amphenol continues to tightly manage SG&A to maximize return on certainly this very important customer-facing resource of the company, we have always deployed a very strong return on investment policy with both our sales and engineering efforts. With the inclusion of FCI which currently carries a higher level of SG&A, we expect to see an increase in our SG&A for 2016 with our overall SG&A percent probably increasing about 80 to 90 basis points, I would think probably you can include. And then if you want to think about on the gross margin side, I would just add that although FCI does have slightly lower margins, I wouldn’t think that that’s going to have such an impact on the company overall.

Okay. That’s helpful. And then Adam, I wanted to ask you a big picture question. You mentioned a number of times that there is a lot of uncertainty in the market. It seems like the industrial segment has gotten a little bit weaker. There is a lot of concern about China. Could you maybe talk about what you are seeing maybe specifically in China and then also what you are seeing on the industrial side? I know you provided some detail, but it was a little bit masked by the growth related to FCI. Thanks.

Sure. I mean, I think what we saw in the fourth quarter relative to industrial was actually a pretty positive result compared to what we had thought coming into the quarter. You remember, Sherri, very well as we came into the quarter, we saw some signs of a pullback from customers in the industrial market. And it seemed to be really very much related to this turbulence in the many emerging markets. I think I gave a lot of credit to our organization and by the way some of that organization in China that we have worked to identify where there are segments of growth in industrial. So, I mentioned maybe a new piece of business that we haven’t talked about before as part of industrial and that’s this whole universe of hybrid transportation equipment. As an example, our team just did a phenomenal job over the last year or two to ferret out this whole new area that is there that is really harsh environment, hybrid performance going into things like buses and trucks. And as you probably know, China is an area where that is happening more than any place in the world. And so the reality is actually our business in China in the fourth quarter did pretty well, because we had really ferreted out some of these new things. I mean, you think we grew in industrial year-over-year 10% in local currencies in the quarter and that’s with oil and gas being down by a very, very significant amount. As we look at the guidance going into the year, I think we continue to have a favorable outlook for the industrial market. Organically, we expect it to be kind of mid single-digit growth for the year. And I think that that’s a very robust outlook actually given all what one reads in the paper everyday, which seems to be not a great time to be reading paper these last few days. So, I think that – and that’s coming again from our organization really poking their necks everywhere they can and ferreting out growth opportunities and then executing really fast to capitalize on those and to redeploy the resources towards those growth opportunities.

Thank you. And the next question is from the line of Craig Hettenbach of Morgan Stanley. You may now ask your question.

Yes, thanks. Adam, you highlighted just the strength of the combined company with FCI and IT. Any other end markets you trust in terms of where you will have more of a critical mass or strategic place? And then also from a geographic perspective kind of what FCI does for you?

Sure. Thank you very much, Craig. I definitely hired an IT. I think I also mentioned in mobile infrastructure where we have just a tremendous span of presence. And then industrial, I talked about the fact that what we get with FCI is something that we have really never had and we have in all honesty struggled to build organically, which is a real pervasive presence across embedded computing on a broad sense. And the embedded computing revolution that’s happening in the industrial market whether that be in places like factory automation, in energy management, in heavy equipment, wherever I mean you can go up and down the list of industrial applications where they are putting more sensors and there is more processing power and thus there is more embedded computing. And it is that sort of excellent job that the FCI team has done to repurpose essentially very robust computer interconnect products, some of which are not so new, but repurposing them into those embedded computing applications where the reliability of the product becomes such a premium. So, I think those we see all really, really real strengthening of our position. Relative to geographic, I think that FCI, as we have talked about in the past, they have a significant position in Asia, but they also have a very strong position in the North American and European distribution channels. And I view that the strength in the distribution channel is really one and the same with the geographical strength that it brings, because it allows us access with those types of products that we haven’t had in the past. So, I think that there is really strength both from market and a regional perspective.

Got it. And then just as my follow-up, in mobile devices, you guys have done a good job growing that business, as we see smartphones start to slow and you guys have also kind of navigated and your end market mix has shifted overtime with new opportunities. So just curious, as that market slows, do you think you can still drive new opportunities or content or will you see better growth opportunities in other end markets as you go forward?

Well, look I think I have just said relative to our guidance that we do expect that market to be down moderately coming into 2016. It’s a very volatile space. It’s one where we came in to 2015 with relatively muted expectations. Ultimately, our team was able really to outperform in that space growing for the full year essentially by 13%, which was certainly not what we had expected coming into the year. But it is a very hard market to kind of put a line in the sand on and say that’s – we do anticipate to grow. So, we are taking what I believe is the prudent, but a necessarily prudent approach to our outlook for the market. That being said, I tell you that we continue to grow our position. And we grow our position with a range of customers. Obviously, it’s not like there is millions of customers out there. So, there is some concentration in the customer base, but we continue to diversify. We continue to attract new applications. If you look at where the growth came this year, it wasn’t necessarily, for example, from something like tablets, which several years ago had driven a lot of our growth. We saw more growth coming out of new-generation interconnected laptops, which years ago, we didn’t work in laptops. And now, we seem to have built a very significant business there as laptops become essentially mobile devices. So, what will it ultimately be? What will the kind of new architecture of mobile be? This is very hard for us to predict. Will we continue to have a very strong position and will we capitalize on every opportunity that we see? No doubt about it. And I think nobody executes like the Amphenol team in the mobile devices market.

Thank you. And the next question is from Wamsi Mohan of Bank of America Merrill Lynch. Your line is open.

Yes. Thank you. Good afternoon. Adam, can you comment on the auto end market, it’s been very strong growth for your organically, how are you viewing production versus content growth and any regional color that you might share would also be helpful here in 2016 and I have a follow-up?

Great. Thank you very much, Wamsi. I think I have already shied away from talking too much about content versus unit volume. To be honest, we don’t pay for all these reports. I couldn’t even tell you exactly what content growth is and what unit volume growth is. I think I read the same papers, but I know there is lots of other detailed studies that we don’t pay for. What I can tell you is our growth is clearly above the market. When we look at our performance here in the year of 2015, whether that was in the fourth quarter or whether that was the full year, growing 12% organically for the year, growing 33% in local currencies, there is no question, this is a very strong report. And as we look into 2016, I think we continue to have a strong guidance with real mid to high single-digit organic growth and a very positive outlook there. So where does that come from, it’s clearly not just coming from units. I think that’s very clear. So it’s coming from our penetration to new applications, what I would say is a broadening range of new applications and also a broadened base of customers. I mentioned during my prepared remarks that we have made a lot of excellent acquisitions. And one of the great things that we have got through our acquisition program in automotive beyond just the product capability is access to OEMs and vehicle manufacturers where traditionally we may not have had that open door. And I think that, that has been a real great asset, in particular as we now have a product offering ranging from interconnect to sensors and even to antennas in the automotive market. From a regional perspective, I would just tell you that in the quarter, we actually saw on a year-over-year basis not bad performance in a place like Asia. Actually sequentially even we grew in Asia by double digits and I think the difference between our original expectations in the automotive market and ultimately, the results that we were able to get was in part due to a great job that our team did in Asia to drive sales.

Thanks Adam. Thanks for the color. For my follow-up, on mobile devices did you see incremental deterioration on demand as you went through the course of the quarter and your guidance was slightly down year-on-year for the full year, is that a function of just market declines or is there any share changes options within that and do you have any production related accessories sales that you expect in 2016? Thanks.

Yes. So the answer – let me answer it in reverse order. We do continue to have some production related accessories sales in 2016. I think that over the course of the fourth quarter, you naturally see a declining rate of sales during the quarter because the beginning of the quarter tends to be stronger sales than towards the end of the quarter. So I think that we would have expected that and we did see that. I mentioned that our sales in the quarter were a little stronger than we had come into but still over the course from October through to December, certainly you saw lower sales in December than you saw in October. And with respect to our guidance for the full year, we do not anticipate any share loss across. But on the other hand, we don’t win everything. So there is always new programs, there is always new positions that you have on new products, but there is no share loss that we would note or that we have noted across any of our business in mobile. It is just a volatile space where each new thing comes out, you fight for as much content as you can get. And then you see how many the customers are going to sell of it. And then you react accordingly and you get your resources in the right position to support that demand.

Thank you. The next question is from Steven Fox of Cross Research. You may now ask your question.

Thanks very much. Good afternoon. I was just curious Adam, if we could – if you could talk a little bit higher level about the markets. You are calling for about flat organic growth for the full year, my understanding of the company is historically you do better than the markets which seems implied more of your markets going down and up, I was curious which markets you are most concerned about under that premise and which ones do you think have some organic growth prospects besides your own ability to grow above the market that you can take advantage, which ones are more positive? And then I had a follow-up.

Thank you very much, Steve. I think I would – I think I went over most of that in the prepared remarks, but I would just say that we have probably a more positive view of military, of commercial air, industrial and automotive and we have a less positive view of mobile devices, broadband, wireless infrastructure and IT datacom. I think that in a nutshell, how we see the markets. I think those latter four markets we would expect to be essentially flattish organically at a market level. Obviously, we have a big impact on wireless infrastructure and IT datacom with FCI. So we will report certainly strong sales growth in those markets. But our organic expectations are more muted in that space. On the contrary, we feel very good about automotive, about industrial, aerospace. And as I mentioned very early on, we start to see some renewed signs, green shoots, if you will of growth in the military market.

Great. And then if I could just follow-up real quickly on the FCI deal, my understanding is that a lot of the value, obviously not all of the value was with the technology that you mentioned in the data center and datacom area, can you just sort of talk about how that may be either accelerate your growth or how you take advantage of those products as part of Amphenol a little bit more, you have alluded to it a few times, but if there is any examples you can give, that would be great?

Sure. No, look I think number one, I would just modify it slightly, which is we see a lot of benefit of the product and the technologies from FCI in the IT datacom, but we also see that in mobile infrastructure and we see that absolutely in the industrial space where we also have very complementary and additive high-technology products. But with respect to IT datacom, we have talked for several quarters about the real transformation that’s happening in that space, where you have a kind of generational shift whereby the balance of power is moving towards these service providers, be they are web service providers, data center service providers or whatever you want to call them. And many of those are really kind of calling the technology shots today whereas before, they were just unpacking boxes of stuff and configuring it. And I think in such an environment, the ability to present to those customers are kind of an A to Z product offering that helps them reach their price performance requirements is more critical than ever before. It used to be that you could have a couple of pillar products, you could work with the couple of box builders and you could know that, that product was what the box builder needed. Today, the range of customers that you have to work with and interface with is so much broader that if you don’t have a product offering that fills essentially every hole, whether that be in high-speed connectors, whether that be in power connectors, in I/Os, in cable assemblies, you run the real risk of missing out on the one that ultimately will grow. And I think with FCI, we eliminate that risk wholeheartedly. We get a total A to Z offering. We can walk into customers of any nature and say you tell us what you need and we have it, somewhere on that ultimate price performance curve that the products all fall on. And I think that that is something that will over the long-term, pay great dividends for the company. Obviously, here I am talking about an IT datacom market in 2016, where we had a more modest expectation. But I think that is something that is commensurate with the market environment that we are in. It is a very uncertain environment. IT spending also it’s a capital item and I think that at the end of the day, capital spending tends to be a bit more constrained when the markets are crazy like they are today. Ultimately though, data is flowing at speeds unlike we have ever imagined, applications are growing logarithmically and people need to equip their data centers and their networks with the equipment ultimately that can handle those speeds. And we are going to have the best solution for it.

Thank you. The next question is from Shawn Harrison of Longbow Research. Your line is now open.

Good afternoon Adam.

Hello Shawn.

Wanted to just get into I guess the mobile networks business, it sounds like you have a dour outlook again for the market and I am wondering if there is any signs of life out there because it’s been probably about 18 months since we have seen I think any positive growth and all regions were down in 2015 and so if can you just maybe comment on what you are seeing globally in that market and if there is the potential for it to rebound at any point in time in the year?

Sure. I mean look, dour and dour, I think we have an outlook essentially for the market organically to be at about the level that is it this year. So, that’s certainly less dour than it was in 2015 when we were down 13% in local currencies. I think 2014 we were up by a significant amount. If I recall, 23%, 24% increase. So, I don’t know about six quarters, even if maybe the first half of 2014 was a little stronger than the second half. I think in the fourth quarter, essentially our sales were flat to the third quarter and that is in a quarter where normally you would be down sequentially. So, if you talk about signs of life, I think one could interpret that flat performance in the fourth quarter where normally you see that to be down is maybe not the worst sign that one ever sees. I think that ultimately, they will – there is developing like there was last time a pent-up demand for capacity and coverage that needs to be, one day, solved. And to solve that pent-up demand, it will take equipment, it will take antennas, it will take the interconnect products that we have and it will be upon us who has really the broadest range of products at least in our industry to support both the OEMs and the operators. In fact, last quarter, I think I mentioned we actually saw growth from the OEMs on a year-over-year basis and that was the first quarter in I would say three or four that we saw OEM growth in wireless infrastructure. It is normal in the fourth quarter to see the operators down a little bit. From a regional basis, I would tell you that we have seen actually pretty good performance in North America in the wireless infrastructure market at least in the recent quarter. And we have started to see actually in Asia some pretty solid signs here, in particular in place like India. India is going through quite a significant infrastructure build. We seem to be at the early stages of that. And our team has done an excellent job to position ourselves. I am never going to bet on India in terms of a market, but I will tell you that we are very strongly positioned in India and to the extent that they do ultimately build that the levels that they have that can be also another sign of life for mobile networks.

Okay. And then as a follow-up, just I think the free cash flow dynamics of Amphenol are well understood, but what is the free cash flow profile of FCI like is it very similar to Amphenol? So we expect similar free cash flow return of the FCI business for fiscal ‘16 as Amphenol generates?

Yes. I would say that it’s actually very similar to Amphenol. So, that’s I think a good way to think about it.

Thank you. The next question is from Will Stein of SunTrust. Your line is now open.

Great. Thanks for taking my question. Adam, I am wondering if you can give us an update on your sensor product category traction with clients and remind us, is the end market exposure there tilted somewhat towards automotive or industrial? And any update on that category would be helpful.

Yes, I think we feel very pleased. We just finished two years as a sensor company. In fact, we acquired the GE advanced sensor business. I think it was December 5, 2013. So, it really just finished our two years. And I can tell you that we feel really good about the progress and we added obviously Casco a year later and that is – I can just say that that’s a very positive impression, both with our customers as well as internally. There has been a lot of collaborative initiatives between engineers across the company. We have seen some nice wins with customers where maybe they would not have had access and we have also seen great reception from some customers where we didn’t have a strong access before with our interconnect products. So I tell you from my perspective I give it a real strong grade, a solid A, let me say, in terms of our experience. In terms of the end market exposure, advanced sensors when we bought it was about two-thirds industrial, one-third automotive and then Casco was essentially all automotive. So, I would say that our business is roughly balanced between automotive and industrial. And within industrial, again there is a diversification ranging from heavy equipment to medical to automated building products and things like that. So, there is a great diversification in that. And within the automotive, there is a very strong geographical diversification and OEM diversification as well as the types of sensors, pressure and temperature and otherwise the types of sensors that we are selling into those applications. So, we feel great about the deals. We feel great about the progress so far. And we continue to actively look for new ways to expand both organically and through acquisition.

If I can just follow-up with one more, we have talked a bit – you have talked a bit today about what sounds like a bit more of a uniqueness or strategic benefit of FCI and that’s in the embedded end market. Is that – am I summarizing that correctly? Are there other end markets where there is a more unique advantage that FCI builds out for Amphenol? It was my impression that the company’s exposure to distribution might be part of that.

Yes. I mean, distribution, we have talked about from day one with FCI that it is a great asset for us. 40% of their sales are through distribution. And I think I have mentioned before, but I will reiterate that the strength that we see is not that we are not exposed to those distributors, we certainly are and we are bigger than they are, those distributors, but they are exposed to the part of those distributors that markets into areas that we have not been successful. So, we have been very strong with our harsh environment, military, aerospace and industrial products and they have been much stronger in identifying and working with distributors on new IT datacom, embedded computing and all of those areas where we just have not had the traction, because we didn’t have the shelf space of the products. And so I think that is a big advantage. Industrial is one which I have already spoken extensively about today. I think that in the IT datacom market, FCI did an outstanding job. And I would say in part because they have just a phenomenal reach into places like Taiwan and China. They did a fabulous job attacking the new generation of ODM and new generation of IT datacom, new customers, the nontraditional, let me say. And while our team has done also an excellent job there, FCI was even a few steps ahead of us in that respect. And so I think that’s another real additive thing that we get with FCI. The other thing that we get with FCI irrespective of the market position is capabilities that are truly second to none in certain respects, plating technology, manufacturing in certain areas, low cost areas of products that we don’t make in those areas. So, there is a whole range also of capabilities that we are very excited about. And I can tell you, our respective teams are spending a lot of time together right now to identify kind of the low hanging fruit around where the collaboration can create value for the company.

Thank you. The next question is from Jim Suva of Citi. Your line is now open.

Thank you and congratulations to you and your team there at Amphenol. I have a question and a follow-up and I will ask them at the same time. The question is I think I heard you, Adam, talk about mobility of being down 30%, which if my numbers are right, it look like that’s pretty normal. So, if you can just confirm that? But the real question is then I think I heard you say you expect it to be down slightly for this year. And I kind of scratch my head, because the smartphone market is expected to grow. So, are you kind of deemphasizing some things or is your exposure causing you to do that just because it’s really not like the industry is expecting the handset industry to be down. I mean, there is some other part of the business I am missing. And then the follow-up question is on the industrial side, it seems like we saw some strength and if I heard right, correctly, the hybrid bus and truck did well. Is that sustainable or is that more driven by some credits or some type of programs that came up and went away or just kind of wondering because it’s kind of surprising and encouraging to hear about strength in industrial? Thank you.

Sure. Thank you, Jim. These are three very good questions. With respect to mobility, I think you did the right calculation, 30% down. And as I said, that’s similar to what we saw in prior year and I think even for the last three years almost. And I think I already addressed our outlook for the year. I will just summarize maybe, which is that yes, we do see that our sales will be down slightly for the year. We take a very prudent approach to this market. It’s a market that’s extremely hard to predict and one that’s volatile. We came into 2015 also with a very muted expectation. And ultimately, we did a lot better. But that was not something that you can see coming into the year. What are the expectations for smartphone growth? What are the expectations for tablets, for laptops, for all the accessories that are there? I don’t know. If you add them all up together, does that reflect the market that is growing or not growing? I think you can read five reports and get five different answers right now. So, what we do is we guide based on what we are seeing. But as I said earlier, we are not expecting and nor do we anticipate any losses per se. And I think I addressed that already. With respect to industrial, I mentioned this kind of new and exciting area of hybrid heavy trucks and buses and is that related to credit, I don’t know necessarily that that’s related to credits. I think it’s related to really dirty air. And so I think that there is a lot of places in the world who are coming to terms with the fact that their air is not breathable and they are doing things about it. And I don’t know that, that is necessarily a short-term trend. I think that is a trend that is probably at the beginning stages of such a trend. Will that always be a driver of growth over time, we will see. But I think our team has done a great job to position themselves and position ourselves in a new and exciting area and what is otherwise an industrial market that certainly sees its ups and downs.

Thank you. Our final question came from the line of Mark Delaney of Goldman Sachs. Your line is now open.

Yes. Good afternoon and thanks very much for taking the questions. First question was on FCI, of the $570 million forecast for this year, can you help us understand the split between your different end markets, so is it a quarter industrial and 50% IT datacom, etcetera?

Yes. We are not going to dive too deeply into the real specific splits of FCI, but let’s just say in order I would say it’s IT datacom, industrial, mobile infrastructure and then automotive and a little bit of mobile devices, kind of in that order.

Okay. And then for a follow-up question also on FCI, I mean I know traditionally, Amphenol runs the companies that it acquires independently unless its franchises, I mean just given the size of FCI and you talked about a plan to improve the margins, are you expecting to do anything there differently in terms of integrating some of the manufacturing where some of the Amphenol products are built in former FCI factories, etcetera?

Yes. No, we are not integrating it per se. We are not restructuring, closing, consolidating facilities. The one thing we are doing is that we have running FCI as of the time it’s joined Amphenol an individual who has been with Amphenol for a long time. He was actually the individual who shepherded us – shepherded the TCS company into Amphenol 10 years before. He has been with the company – with TCS for more than 27 years, been with Amphenol for more than a decade and he knows exactly what it takes to bring a large enterprise into Amphenol and to really go through the cultural transformation that is something that takes time, but takes also great focus. The prior executive running FCI, who is also a fabulous individual as part of a private equity sale, that was natural that he would be moving on and we were very happy that the whole current management team who now reports to the gentleman who is running that as part of Amphenol. They are very strong robust and excited to be part of the team. And they are doing that under the leadership of someone who has gone through this exact same transformation in a very, very successful fashion in years past. So otherwise, we are not mushing things together. We are not going through radical transformations. But we are doing the things that are necessary from an operating standpoint as Craig alluded to, to get the margins up. And long-term, in Amphenol, it’s not like we have sacred cows and we say nothing can go, we are going to be very thoughtful about that. But at the end of the day, we feel that that is an enterprise that is going to be a high performance enterprise going forward.

Very good. I think that is our final question. So on behalf of Craig and I we again wish you all happy New Year. Hope that everybody enjoys the current market environment and we certainly look forward to talking to you all again here in 90 days and best wishes for a strong start to the New Year. Appreciate it.

Thank you.