Amphenol Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
Amphenol reported unaudited results for the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company designs and manufactures interconnect products, assemblies, cable products and related solutions across industrial, automotive, mobile devices, military, aerospace, communications and information technology markets.
Reportable segments were Interconnect Products and Assemblies, representing approximately 95% of sales, and Cable Products and Solutions, representing approximately 5%.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,866.9 million | $1,560.1 million | +20% |
| Gross profit | $606.9 million | $515.9 million | +18% |
| Gross margin | 32.5% | 33.1% | Down 60 bps |
| Operating income | $376.9 million | $314.1 million | +20% |
| Operating margin | 20.2% | 20.1% | Up 10 bps |
| Net income attributable to Amphenol | $265.6 million | $224.9 million | +18% |
| Diluted EPS | $0.84 | $0.71 | +18% |
| Operating cash flow | $130.2 million | $237.8 million | Down $107.6 million |
| Free cash flow | $75.3 million | $189.1 million | Down $113.8 million |
International sales were $1,339.9 million, up approximately 22% in U.S. dollars, while U.S. sales were $527.0 million, up approximately 15%. Foreign-currency translation increased reported sales by approximately $63.4 million.
- Interconnect Products and Assemblies sales increased 21% in U.S. dollars, 17% in constant currencies and 13% organically. Segment operating margin was 22.1%, unchanged from the prior-year quarter.
- Cable Products and Solutions sales were essentially flat in U.S. dollars and declined 1% in constant currencies and organically. Segment operating margin declined to 11.7% from 14.2%, primarily due to higher commodity costs.
- SG&A increased 14% to $230.0 million, but declined to 12.3% of sales from 12.9%.
- Interest expense increased to $24.5 million from $19.3 million, reflecting higher rates, higher average debt and the 2017 senior-note issuances.
- The effective tax rate was 24.4%, compared with 23.8%. Excluding excess tax benefits from stock-option exercises, the adjusted effective tax rates were 25.5% and 26.5%, respectively.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments were $1,024.3 million at March 31, 2018, down from $1,753.7 million at December 31, 2017. Most cash was held outside the United States.
- Total debt was $3,239.3 million, including $869.6 million of commercial paper and $749.9 million classified as current debt. Net debt was approximately $2.2 billion, excluding short-term investments.
- The company had no borrowings under its $2.0 billion revolving credit facility, which matures in March 2021, and was in compliance with its financial covenants.
- The $750.0 million 2.55% senior notes mature in January 2019. Management stated that available cash, operating cash flow, credit facilities and capital-market access should provide adequate liquidity, including repayment of these notes.
- Financing cash outflows included $382.0 million of share repurchases, $304.8 million of net debt repayments and $58.1 million of dividends.
- The $1.0 billion 2017 share-repurchase program was completed by March 31, 2018. On April 24, 2018, the board authorized a new $2.0 billion program through April 2021; $55.5 million had been used by April 30, 2018.
- The quarterly dividend was increased from $0.19 to $0.23 per share effective with second-quarter 2018 declarations.
Material changes versus the prior comparable period
- Sales growth was strong, with reported growth of 20%, constant-currency growth of 16% and organic growth of 12%. Acquisitions and favorable currency translation contributed to reported growth.
- Operating margin was broadly stable despite higher sales, while gross margin decreased modestly.
- Operating cash flow and free cash flow declined substantially, primarily because of an approximately $81.0 million voluntary contribution that fully funded the U.S. defined-benefit pension plans, higher working-capital usage and increased capital expenditures.
- Acquisition spending increased to $99.5 million from $46.6 million. A first-quarter 2018 acquisition increased goodwill by $73.3 million; management stated that acquisitions were not individually or collectively significant.
- The company adopted ASC Topic 606 using the modified retrospective method. The adoption increased opening retained earnings by approximately $3.2 million and had no material effect on first-quarter financial statements.
- Cash declined because of share repurchases, debt repayments, acquisitions, dividends and pension funding. Inventory increased to $1,166.8 million from $1,106.9 million, while inventory days increased to approximately 84 from 76.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear numerical full-year revenue or earnings guidance range. Management stated that liquidity should be adequate for the next twelve months and foreseeable future and expected to continue repatriating certain pre-2018 foreign earnings during 2018.
- The company had not completed its accounting for the 2017 Tax Cuts and Jobs Act. The provisional fourth-quarter 2017 tax charge was $398.5 million, and adjustments could be recorded during the 2018 measurement period. Transition-tax payments may be made in annual installments through 2025.
- Management estimated total 2018 pension-plan contributions of approximately $90.0 million, including the $81.0 million first-quarter contribution.
- Principal risks include exposure to communications and military markets, customer and industry concentration, competition, foreign exchange and interest-rate changes, tariffs and geopolitical conditions, acquisition integration and goodwill impairment, commodity costs and material availability, tax-law changes, litigation, environmental matters and cybersecurity incidents.
- The company reported several legal actions arising from normal business activities but did not expect them to have a material adverse effect. It also stated that environmental compliance costs were not expected to be material.
- Disclosure controls and procedures were effective as of March 31, 2018, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether the company can refinance or repay the $750.0 million senior notes due January 2019 without materially increasing borrowing costs or reducing capital returns.
- The final accounting for the provisional $398.5 million Tax Act charge and the timing and amount of related transition-tax and repatriation payments.
- Whether organic growth in Interconnect Products and Assemblies continues and whether the Cable Products and Solutions margin recovers from commodity-cost pressure.
- Whether cash conversion improves after the one-time pension contribution and elevated working-capital investment.
- The pace, valuation and integration results of acquisitions, including potential goodwill impairment risk.
- The sustainability of the new $2.0 billion repurchase authorization and higher $0.23 quarterly dividend in light of debt maturities, acquisitions and cash-flow requirements.