Amphenol Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Amphenol designs and manufactures interconnect products, connector systems, antennas, sensors, cable products and related assemblies. Its reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions. This unaudited quarterly report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,862.0 million | $1,958.5 million | Down 5% |
| Gross profit | $559.8 million | $627.8 million | Down 11% |
| Gross margin | 30.1% | 32.0% | Down 190 basis points |
| Operating income | $316.9 million | $376.2 million | Down 16% |
| Operating margin | 17.0% | 19.2% | Down 220 basis points |
| Net income attributable to Amphenol | $242.1 million | $267.5 million | Down 9% |
| Diluted EPS | $0.79 | $0.87 | Down 9% |
| Operating cash flow | $384.3 million | $343.6 million | Up 12% |
| Free cash flow | $323.5 million | $269.1 million | Up 20% |
Reported results were affected by COVID-19 disruptions and by unusual tax items. The effective tax rate was 15.9%, versus 22.8% in the prior-year quarter, including a $19.9 million discrete tax benefit from non-U.S. tax refund settlements and deferred-tax adjustments. Excluding specified items, management reported adjusted diluted EPS of $0.71 versus $0.89 and an adjusted effective tax rate of 24.5% in both periods.
Interconnect Products and Assemblies generated $1,779.0 million of sales, down 5% in U.S. dollars and 9% organically. Cable Products and Solutions generated $83.0 million, down 13% in U.S. dollars and 11% organically. Military-related demand and acquisitions partly offset weakness in mobile devices, mobile networks, information technology and data communications, automotive, industrial and broadband markets.
At March 31, 2020, cash, cash equivalents and short-term investments totaled $2,383.6 million, compared with $908.6 million at December 31, 2019. Cash provided by financing activities was $1,187.4 million, primarily reflecting borrowings under the revolving credit facility and issuance of 2025 senior notes. Total debt was $5,092.4 million, compared with $3,606.7 million at year-end 2019. Net debt was approximately $2,708.8 million, excluding short-term investments.
The Company had $1,255.6 million outstanding under its $2.5 billion revolving credit facility, $137.9 million under its Euro Commercial Paper Program and $100.0 million under an uncommitted line of credit. No U.S. commercial paper was outstanding. The Company remained in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Sales declined 5% in U.S. dollars, 4% in constant currency and 9% organically, primarily due to pandemic-related production interruptions and weaker demand.
- Operating margin declined to 17.0% from 19.2%; COVID-19-related shutdowns, productivity disruptions and limited ability to reduce payroll costs were significant factors.
- Q1 2019 included $16.5 million of acquisition-related expenses; Q1 2020 included none. Despite this comparison benefit, reported operating income and earnings declined.
- Operating cash flow increased because of working-capital benefits, including a $166.0 million decrease in accounts receivable, partially offset by lower net income and higher inventories.
- Inventory days increased to 92 from 80, reflecting lower sales and production disruptions. Accounts receivable days increased to 75 from 73.
- The Company completed one acquisition for $16.5 million, net of cash acquired, compared with $399.3 million spent on acquisitions in Q1 2019.
- The Company repurchased 2.7 million shares for $257.2 million and declared dividends of $74.0 million, or $0.25 per share. Remaining repurchase authorization was $587.9 million as of March 31, 2020.
- Accumulated other comprehensive loss increased substantially, primarily because of a $100.7 million after-tax foreign-currency translation loss.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative full-year or second-quarter earnings or revenue forecast. Management expected COVID-19 disruptions to continue at least through the second quarter but stated that the future impact could not be quantified.
During Q1, operations in China were closed for approximately three weeks. By March 31, most operations outside China were also affected by facility shutdowns, workforce constraints, supplier and logistics interruptions, travel restrictions and weaker customer demand. Management stated that the pandemic could materially and adversely affect operations, liquidity, financial condition and results of operations.
On April 1, 2020, the Company used $400.0 million of cash to repay the 2.20% senior notes at maturity. On April 22, 2020, a subsidiary borrowed £200.0 million, or $248.2 million at issuance, under the Bank of England’s COVID Corporate Financing Facility, with proceeds intended to repay revolving-credit borrowings.
Other significant risks include customer and market concentration in communications, supply and raw-material constraints, foreign-currency and interest-rate exposure, access to capital markets, acquisition integration and goodwill impairment, cybersecurity, government-contracting and export-control matters, tax audits, pension-asset volatility and litigation. The Company also disclosed a Department of Defense Inspector General subpoena concerning certain Military and Aerospace Group products; timing and outcome could not be estimated.
The Company finalized a $75.0 million contingent consideration liability related to the 2019 SSI acquisition, payable in Q2 2020. It also had approximately $158.6 million of unrecognized tax benefits at March 31, 2020.
Important facts for investors to verify
- Whether COVID-19 production constraints, customer demand reductions and supply-chain disruptions persisted or intensified after March 31, 2020.
- The Company’s post-quarter-end debt position after repayment of the $400.0 million notes and the £200.0 million government-facility borrowing.
- Compliance with revolving-credit and senior-note covenants as operating conditions and leverage changed.
- Future operating margins, especially in Interconnect Products and Assemblies, and whether margin recovery offsets lower volumes.
- Cash conversion, inventory levels and working-capital trends following the Q1 increase in inventory days.
- Whether the Company resumed or modified share repurchases and how capital allocation balances repurchases, dividends, acquisitions and debt reduction.
- Potential effects of the Department of Defense inquiry, tax audits, the $75.0 million SSI contingent payment and other contingencies.