Business Context and Reporting Period
Amphenol Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company operates through two reportable segments: Interconnect Products and Assemblies, and Cable Products and Solutions. Results are not necessarily indicative of full-year performance.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $1,459.6 million | $1,358.7 million | $4,138.2 million | $3,919.0 million |
| Gross profit | $464.0 million | $431.6 million | $1,321.1 million | $1,237.3 million |
| Operating income | $294.8 million | $267.8 million | $815.7 million | $755.8 million |
| Net income attributable to Amphenol | $204.5 million | $182.2 million | $563.3 million | $515.6 million |
| Diluted EPS | $0.65 | $0.57 | $1.78 | $1.60 |
| Operating cash flow | Not separately provided | Not separately provided | $708.2 million | $607.4 million |
- Sales increased 7% in U.S. dollars, 11% in local currencies and 5% organically in Q3; nine-month increases were 6%, 9% and 3%, respectively.
- Gross margin was 31.8% in Q3 and 31.9% for the nine months, compared with 31.8% and 31.6% in the prior-year periods.
- Operating margin was 20.2% in Q3 and 19.7% for the nine months, versus 19.7% and 19.3%. Excluding acquisition-related expenses, nine-month operating margin was 19.8% versus 19.4%.
- Interest expense declined to $17.0 million in Q3 and $51.1 million for nine months, primarily because of lower average borrowing rates.
- At September 30, 2015, cash and cash equivalents were $1,575.6 million and short-term investments were $22.1 million, for total cash and short-term investments of $1,597.7 million.
- Total debt was $2,853.4 million, including $852.3 million of commercial paper. The company had no borrowings under its $1.5 billion revolving credit facility and was in compliance with its financial covenants.
- Nine-month cash uses included $199.8 million for acquisitions, $195.6 million for share repurchases, $124.1 million of net capital expenditures, $116.1 million of dividends and $6.1 million of distributions to noncontrolling interests.
- Cash increased $606.7 million during the first nine months, after a $32.7 million unfavorable foreign-exchange translation effect.
Material Changes Versus Prior Comparable Period
- Interconnect Products and Assemblies sales rose 9% in Q3 and 7% for the nine months in U.S. dollars, benefiting from mobile devices, automotive, information technology, data communications and industrial markets, as well as acquisitions.
- Cable Products and Solutions sales declined 10% in Q3 and 8% for the nine months in U.S. dollars, primarily because of reduced spending by cable operators. Nine-month segment operating margin declined to 12.1% from 12.5%.
- International sales grew faster than U.S. sales, but the stronger U.S. dollar reduced reported sales by approximately $47.8 million in Q3 and $149.0 million for the nine months.
- Goodwill increased $89.6 million to $2,706.3 million, primarily from three acquisitions, partly offset by currency translation.
- Share repurchases declined to $195.6 million for the first nine months from $400.8 million in the prior-year period. The company repurchased 3.5 million shares and had approximately 6.5 million shares remaining under its authorization at October 31, 2015.
- The quarterly dividend increased from $0.125 to $0.14 per share beginning with the third quarter of 2015.
- Other comprehensive loss increased to $98.4 million for the nine months from $42.4 million, primarily due to larger foreign-currency translation losses.
Outlook, Commentary, Risks and Unusual Items
- Amphenol agreed to acquire FCI Asia Pte Ltd for $1,275 million in cash, subject to closing adjustments and regulatory approvals. Closing was expected by the end of 2015 and was expected to be financed with a combination of cash and debt.
- Management stated that cash, operating cash generation and available credit facilities should fund obligations for the next twelve months. Primary cash requirements include operations, capital expenditures, product development, dividends, pension contributions, share repurchases and debt service.
- Management estimated 2015 pension-plan cash contributions of approximately $22.0 million, including $16.0 million contributed through the third quarter.
- Goodwill impairment testing performed in the third quarter resulted in no impairment; reported segment fair values were substantially above carrying amounts. The assessment depends on estimates including growth, profitability and valuation multiples.
- Acquisition-related expenses were $5.7 million for the nine months, compared with $4.6 million in the prior-year period. The filing text does not provide a separate Q3 2015 amount because none was recorded.
- Material risks include foreign-currency exposure, variable interest rates on commercial paper and revolving-credit borrowings, acquisition execution and integration, demand weakness in broadband communications, and general economic and market conditions.
- The company disclosed several routine legal actions and environmental compliance matters but stated that they were not expected to have a material effect. It reported no material changes to the risk factors in its 2014 Form 10-K.
- Management indicated that the newly issued accounting standards discussed in the filing were not expected to have a material impact, and early adoption of ASU 2015-16 had no material effect.
Important Facts for Investors to Verify
- Confirm the closing, financing, purchase accounting and integration results of the planned $1.275 billion FCI acquisition.
- Monitor commercial paper balances, refinancing capacity, interest rates and the maturity profile of the $2.85 billion debt balance.
- Assess whether organic growth and margin gains in Interconnect Products and Assemblies offset continuing weakness in Cable Products and Solutions.
- Evaluate the effects of foreign-currency movements, particularly given the substantial international sales base and accumulated other comprehensive loss.
- Review goodwill and intangible-asset valuation assumptions following the acquisition program and the company’s quantitative impairment assessment.
- Track cash deployment among acquisitions, capital expenditures, dividends, pension funding and share repurchases.