Business Context and Reporting Period
Amphenol Corporation filed an unaudited Form 10-Q for the quarter ended March 31, 2016. The company designs and manufactures interconnect products, assemblies, cable products and solutions across diverse end markets. Reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $1,451.2 million | $1,327.1 million | Up 9% in U.S. dollars; up 11% in local currencies |
| Gross profit | $459.2 million | $424.6 million | Up 8% |
| Gross margin | 31.6% | 32.0% | Down approximately 40 basis points |
| Operating income | $239.4 million | $260.2 million | Down 8% |
| Operating margin | 16.5% | 19.6% | Down approximately 310 basis points |
| Adjusted operating income excluding acquisition-related expenses | $269.7 million | Not provided | Adjusted margin of 18.6% |
| Net income attributable to Amphenol | $156.6 million | $179.8 million | Down 13% |
| Diluted EPS | $0.50 | $0.57 | Down 12% |
| Cash flow from operations | $194.2 million | $188.3 million | Up $5.9 million |
Interconnect Products and Assemblies generated $1,367.8 million of sales and $281.2 million of segment operating income. Cable Products and Solutions generated $83.4 million of sales and $11.1 million of segment operating income.
Excluding acquisitions and foreign exchange, organic sales decreased approximately 1%. Acquisition-related expenses were $30.3 million, or $27.3 million after tax, reducing reported diluted EPS by approximately $0.09. Excluding these expenses, the effective tax rate was 26.5%, compared with a reported rate of 28.7% in Q1 2016 and 26.5% in Q1 2015.
Balance Sheet, Debt and Liquidity
- Cash, cash equivalents and short-term investments were $713.6 million at March 31, 2016, compared with $1,760.4 million at December 31, 2015.
- Total debt was $2,866.5 million, including $877.1 million of commercial paper and $1,999.1 million of senior notes before deferred debt issuance costs.
- The company had no borrowings under its new $2.0 billion unsecured revolving credit facility, which matures in March 2021.
- Commercial paper averaged 0.85% interest and was classified as long-term debt because the company intended and was able to refinance it through the revolving facility.
- Management stated that cash resources, operating cash flow and available credit facilities should meet obligations for the next twelve months.
- Capital expenditures, net of disposals, were $38.3 million. The company made no cash pension contributions during the quarter and estimated 2016 aggregate pension contributions of approximately $22.0 million.
Material Changes Versus the Prior Comparable Period
- Amphenol acquired FCI Asia Pte Ltd on January 8, 2016, for approximately $1,178.6 million net of cash acquired. The transaction was funded with cash, cash equivalents and short-term investments held outside the United States.
- FCI contributed to sales growth but operated at lower margins than the company average, reducing Interconnect Products and Assemblies’ operating margin to 20.6% from 21.8%.
- Goodwill increased to $3,659.8 million from $2,692.9 million, primarily from the FCI acquisition. Intangibles and other long-term assets increased to $547.3 million from $306.0 million.
- Cash used in investing activities increased to $1,227.1 million from $136.3 million, primarily because acquisition spending increased to $1,185.8 million from $76.1 million.
- Cash and cash equivalents declined by $1,050.2 million during the quarter, mainly reflecting the FCI acquisition.
- SG&A increased to 13.1% of sales from 12.4%, primarily due to FCI. Depreciation and amortization increased to $61.9 million from $40.1 million, and reported amortization expense increased to $19.7 million from $8.4 million.
- The company repurchased 1.0 million shares for $49.2 million and increased its declared quarterly dividend to $0.14 per share from $0.125.
- International sales increased 14% in U.S. dollars and 16% in local currencies, while U.S. sales decreased approximately 1%. Foreign exchange translation reduced sales by approximately $19.3 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quarterly or full-year revenue or earnings guidance. Management indicated that the company expects ongoing cash requirements to be funded by operating cash flow, cash and investments, commercial paper and the revolving credit facility.
- The FCI purchase price allocation remained preliminary and may be adjusted as valuation work is completed.
- Management identified demand reductions, deterioration in financial ratios, foreign exchange movements and interest-rate changes as factors that could adversely affect liquidity or results.
- The company is exposed to foreign currency and interest-rate risk. There were no LIBOR-based revolving-facility borrowings at quarter-end; commercial paper borrowings were subject to variable market conditions.
- Legal proceedings arising from normal business activities were not expected to have a material adverse effect, although potential liabilities could not be reasonably estimated.
- The company stated that it was substantially compliant with applicable environmental laws and did not expect continuing compliance costs to be material.
- Unrecognized tax benefits that could affect the effective tax rate totaled approximately $129.1 million. Management expected that approximately $2.2 million could be affected by audits or statute expirations during the following twelve months.
- The company reported no material changes to the risk factors in its 2015 Annual Report and stated that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether FCI integration produces expected revenue synergies, cost savings and margin improvement, given its initial lower operating margins.
- The final purchase price allocation for FCI, including goodwill, acquired intangible assets and assumed liabilities.
- Progress in reducing leverage and rebuilding cash following the $1.2 billion acquisition payment.
- Organic demand trends in mobile devices, military, industrial, automotive, information technology, data communications and broadband markets.
- Commercial paper refinancing capacity, revolving-credit covenant compliance and upcoming senior-note maturities beginning in September 2017.
- Foreign exchange effects on international sales and profitability, as well as exposure to variable interest rates.
- The resolution and timing of uncertain tax positions, legal proceedings and pension funding requirements.