Amphenol Corporation 2019 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Amphenol operates through Interconnect Products and Assemblies, which represented approximately 96% of second-quarter sales, and Cable Products and Solutions, which represented approximately 4%. Products serve automotive, industrial, military, aerospace, mobile, communications, broadband, information technology and data communications markets.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,015.3 million | $1,981.4 million | $3,973.8 million | $3,848.3 million |
| Gross profit | $647.6 million | $644.8 million | $1,275.4 million | $1,251.7 million |
| Gross margin | 32.1% | 32.5% | 32.1% | 32.5% |
| Operating income | $399.5 million | $408.2 million | $775.7 million | $785.1 million |
| Operating margin | 19.8% | 20.6% | 19.5% | 20.4% |
| Net income attributable to Amphenol | $288.4 million | $284.8 million | $556.0 million | $550.4 million |
| Diluted EPS | $0.93 | $0.91 | $1.80 | $1.75 |
| Net cash from operating activities | Not separately provided | Not separately provided | $666.0 million | $395.3 million |
| Free cash flow | Not separately provided | Not separately provided | $516.1 million | $261.2 million |
At June 30, 2019, cash, cash equivalents and short-term investments were $997.3 million, compared with $1,291.7 million at December 31, 2018. Total debt was $3,972.5 million, including $403.1 million classified as current. Derived debt less cash and short-term investments was approximately $3.0 billion. The company had no borrowings under its $2.5 billion revolving credit facility and was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Second-quarter sales increased 2% in reported U.S. dollars, 4% in constant currencies and declined 1% organically. Six-month sales increased 3% in reported U.S. dollars, 6% in constant currencies and 2% organically.
- Interconnect Products and Assemblies sales increased 3% in reported dollars in Q2 and 4% for the first six months, supported by acquisitions and growth in military, aerospace, mobile networks and selected other markets.
- Cable Products and Solutions sales declined 19% in Q2 and 11% year to date, primarily because of lower broadband service-provider demand. Its Q2 operating margin declined to 9.7% from 13.2%.
- Operating income and reported margins declined despite higher sales, primarily because of $8.9 million of Q2 acquisition-related expenses and $25.4 million for the first six months, as well as lower Cable segment volumes and mix.
- Net income and diluted EPS increased, helped by lower effective tax rates and a lower share count. The six-month effective tax rate was 22.0%, versus 24.5% in 2018; stock-option exercise tax benefits reduced the rate by approximately 270 basis points.
- The company completed five acquisitions for $756.2 million in cash during the first six months, including SSI Controls Technologies for approximately $397 million. Goodwill increased to $4,706.1 million from $4,103.2 million at year-end 2018.
- Cash from operations increased by $270.7 million year over year, partly because 2018 included an $81.0 million voluntary pension contribution and had greater working-capital cash usage.
- The company issued $500 million of 4.350% senior notes due 2029 and used the proceeds, together with commercial paper borrowings, to repay $750 million of notes due January 2019. Commercial paper outstanding totaled $1,292.9 million at quarter-end.
- On January 1, 2019, the company adopted the lease standard and recorded approximately $180 million of operating lease right-of-use assets and liabilities without a cumulative retained-earnings impact.
- The company repurchased 4.4 million shares for $408.7 million during the first six months and had $1,038.1 million remaining under its repurchase authorization at July 23, 2019.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash, operating cash generation, available credit and capital-market access should provide adequate liquidity for at least the next twelve months. The filing does not provide a clear numerical full-year revenue or earnings guidance figure.
- Management identified continued acquisition activity, military and aerospace demand, mobile markets and other end-market trends as sales drivers, while noting weakness in broadband and moderation in certain industrial, information technology, mobile-device and automotive markets.
- Key risks include economic and geopolitical conditions, trade policies and tariffs affecting China, foreign-exchange movements, material availability and pricing, communications-industry concentration, defense spending, acquisition integration, interest rates, access to capital markets, cybersecurity, tax audits, government contracting and environmental or legal matters.
- The Department of Defense Office of Inspector General subpoena concerning certain Military and Aerospace Group products remains in an early stage. The company is cooperating and cannot estimate the timing or outcome.
- The company reported approximately $140.3 million of unrecognized tax benefits, of which approximately $41.8 million could be affected by audits or expiring statutes of limitation during the following twelve months.
- The company paid its second annual installment of the Tax Act transition tax and expects remaining payments through 2025.
- On July 23, 2019, the board approved an increase in the quarterly dividend from $0.23 to $0.25 per share, effective with third-quarter 2019 declarations.
Important facts for investors to verify
- Whether broadband demand and Cable Products and Solutions margins recover, and whether weakness spreads to other end markets.
- The sustainability of reported EPS growth after excluding acquisition-related expenses and stock-option tax benefits.
- Integration results, purchase accounting and future goodwill or intangible-asset impairment risk from the 2019 acquisitions.
- Refinancing and liquidity requirements for commercial paper and the $400 million of senior notes due April 2020.
- The outcome and potential financial or compliance implications of the Department of Defense inquiry.
- Future cash deployment among acquisitions, share repurchases, dividends, debt reduction and transition-tax payments.
- Foreign-exchange, tariff, interest-rate and raw-material exposure, particularly given the company’s substantial foreign operations and commercial paper borrowings.