Amphenol Corporation — Form 10-Q Summary
Business context and reporting period
Amphenol designs and manufactures interconnect products, connector systems, antennas, sensors, cable products and related solutions. Its two reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions. This unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $1,666.5 million | $1,548.2 million | $3,226.6 million | $2,999.4 million |
| Gross profit | $552.6 million | $497.3 million | $1,068.5 million | $956.6 million |
| Gross margin | 33.2% | 32.1% | 33.1% | 31.9% |
| Operating income | $336.2 million | $300.3 million | $650.3 million | $539.8 million |
| Operating margin | 20.2% | 19.4% | 20.2% | 18.0% |
| Net income attributable to Amphenol | $251.5 million | $206.5 million | $476.4 million | $363.2 million |
| Diluted EPS | $0.80 | $0.65 | $1.51 | $1.15 |
- Net sales increased 8% in U.S. dollars in both the quarter and first six months. Constant-currency growth was 9%, and organic growth was 6% in both periods.
- Operating income increased 12% in the second quarter and 20% in the first six months. Adjusted operating margin, excluding acquisition-related expenses, was 20.4% for the quarter and 20.3% year to date.
- Net income attributable to Amphenol increased 22% in the quarter and 31% year to date. The effective tax rate was 20.1% for the quarter and 21.9% year to date, benefiting from the adoption of ASU 2016-09 and stock-option exercise activity.
- Six-month cash flow from operations was $518.2 million, compared with $437.8 million in 2016. Free cash flow was $418.0 million, compared with $348.7 million.
- Capital expenditures were $100.2 million, compared with $89.1 million. Cash used for acquisitions was $199.0 million, compared with $1,185.8 million in 2016, which included the $1,178.6 million FCI acquisition.
- At June 30, 2017, cash, cash equivalents and short-term investments totaled $1,360.1 million. The company stated that the vast majority was held outside the United States and intended to be reinvested outside the United States unless repatriation became tax effective.
- Total debt was $3,396.6 million, including $654.7 million of commercial paper and $376.0 million classified as current. No borrowings were outstanding under the $2.0 billion revolving credit facility, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Interconnect Products and Assemblies sales increased 7% in U.S. dollars and 6% organically in both the quarter and first six months. Growth was driven by industrial, military, information technology and data communications, and automotive markets, partly offset by declines in mobile devices and mobile networks.
- Cable Products and Solutions sales increased 16% in U.S. dollars in both periods, primarily due to an acquisition completed in the third quarter of 2016 and modest organic growth.
- Gross margin improved by 110 basis points in the quarter and 120 basis points year to date, primarily from higher Interconnect margins, higher volumes, operational execution and improvement related to FCI.
- Interest expense increased to $23.4 million in the quarter and $42.7 million year to date, reflecting higher average debt and interest rates, including the April 2017 senior-note issuances.
- The company issued $400.0 million of 2.20% senior notes due 2020 and $350.0 million of 3.20% senior notes due 2024. Proceeds were initially used in part to repay commercial paper and were intended to fund repayment of $375.0 million of senior notes due September 2017 and general corporate purposes.
- The company repurchased 5.7 million shares for $399.9 million during the first six months under a new $1.0 billion authorization. Approximately $600.1 million remained available as of July 31, 2017.
- The quarterly dividend increased from $0.16 to $0.19 per share beginning with dividends declared in the third quarter of 2017.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear full-year revenue or earnings guidance figure. Management stated that available cash, operating cash generation, credit facilities and capital-market access should provide adequate liquidity for the next twelve months, including repayment of the September 2017 notes.
- Second-quarter acquisition-related expenses were $4.0 million, or $3.7 million after tax. The comparable six-month 2016 period included $30.3 million of acquisition-related expenses, primarily connected with FCI.
- Adoption of ASU 2016-09 generated tax benefits of approximately $21.2 million in the quarter and $29.2 million year to date, increasing diluted EPS by approximately $0.07 and $0.09, respectively. Management cautioned that future effective tax rates may fluctuate significantly based on stock-option exercise timing and value.
- Inventories increased to $1,059.2 million from $928.9 million at year-end 2016; inventory days increased to 84 from 76. Accounts receivable days increased modestly to 74 from 73, while payable days increased to 61 from 55.
- The company expects approximately $25.0 million of pension-plan contributions during 2017 based on current actuarial calculations; no contributions were made during the first six months.
- Management identified exposure to foreign currency, interest rates, economic and end-market conditions, competition, technology, acquisitions, cybersecurity and political or governmental developments. The filing states that there were no material changes to previously disclosed risk factors.
- The company is subject to ordinary-course litigation, environmental requirements and tax audits. Management does not expect current legal or environmental matters to have a material adverse effect. Unrecognized tax benefits were approximately $133.7 million at June 30, 2017.
Important facts for investors to verify
- Whether sales growth remains broad-based across industrial, automotive, military, data communications and other end markets, and whether weakness in mobile devices and mobile networks persists.
- Whether improved gross and operating margins are sustained after adjusting for acquisition-related expenses and the favorable ASU 2016-09 tax impact.
- The company’s ability to refinance or repay the $375.0 million senior notes due September 2017 without materially increasing borrowing costs.
- Inventory growth, working-capital usage and the conversion of earnings into operating and free cash flow.
- Future acquisition spending, goodwill additions and the completion of purchase-price accounting for recent acquisitions.
- The amount and location of offshore cash, potential tax costs of repatriation, and the balance between debt-funded buybacks, dividends, acquisitions and deleveraging.