Amphenol Corporation — 2019 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Amphenol operates primarily through Interconnect Products and Assemblies, approximately 95% of sales, and Cable Products and Solutions, approximately 5% of sales.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $2,100.6 million | $2,129.0 million | $6,074.4 million | $5,977.3 million |
| Gross profit | $661.9 million | $688.2 million | $1,937.3 million | $1,939.9 million |
| Gross margin | 31.5% | 32.3% | 31.9% | 32.5% |
| Operating income | $413.6 million | $444.2 million | $1,189.4 million | $1,229.3 million |
| Operating margin | 19.7% | 20.9% | 19.6% | 20.6% |
| Net income attributable to Amphenol | $280.3 million | $316.6 million | $836.3 million | $866.9 million |
| Diluted EPS | $0.92 | $1.01 | $2.72 | $2.76 |
| Cash flow from operations | Not separately reported | Not separately reported | $1,078.2 million | $734.5 million |
| Free cash flow | Not separately reported | Not separately reported | $855.2 million | $526.3 million |
- Q3 sales decreased 1% in U.S. dollars, were flat in constant currency, and declined 6% organically. Nine-month sales increased 2% in U.S. dollars and 4% in constant currency, but declined 1% organically.
- Q3 adjusted diluted EPS was $0.95 versus $0.99 in the prior-year period. Nine-month adjusted diluted EPS was $2.76 versus $2.72.
- Q3 net income included a $14.3 million loss on early extinguishment of debt, or $12.5 million after tax and $0.04 per diluted share. Nine-month operating income included $25.4 million of acquisition-related expenses.
- At September 30, 2019, cash, cash equivalents and short-term investments totaled $986.7 million, down from $1,291.7 million at December 31, 2018.
- Total debt was $3,949.1 million, compared with $3,570.7 million at December 31, 2018. Current debt was $403.7 million and long-term debt was $3,545.4 million.
- The company had no borrowings under its $2.5 billion revolving credit facility and was in compliance with applicable debt covenants. Commercial paper outstanding totaled approximately $753.7 million.
Material Changes Versus the Prior Comparable Period
- Sales mix and end markets: Interconnect sales declined 1% in Q3 and 6% organically, reflecting moderation in mobile devices, information technology and data communications, broadband communications, and mobile networks. Growth in military, commercial aerospace, industrial and automotive markets partly offset the declines.
- Cable segment weakness: Cable Products and Solutions sales declined 9% in Q3 and 10% organically, primarily because of lower demand from broadband service providers. Segment operating margin fell to 10.2% from 13.1% because of lower volumes and product mix.
- Geography: Q3 U.S. sales increased 17%, while foreign sales declined 8%. The stronger U.S. dollar reduced reported sales by approximately $23.6 million in Q3 and $112.2 million year to date.
- Acquisitions: The company completed eight acquisitions for $891.2 million during the first nine months, including SSI Controls Technologies for approximately $397 million. Goodwill increased to $4,750.0 million from $4,103.2 million at year-end 2018.
- Debt refinancing: Amphenol issued $500 million of 4.350% notes due 2029 and $900 million of 2.800% notes due 2030. Proceeds were used to repay or refinance existing debt, including tendered 2021 and 2022 notes, and for general corporate purposes.
- Capital returns: The company repurchased 6.1 million shares for $558.7 million during the first nine months and paid $205.5 million of dividends. The quarterly dividend increased from $0.23 to $0.25 per share.
- Cash generation: Operating cash flow increased by $343.7 million year over year, primarily because of lower working-capital usage and the absence of the $81.0 million voluntary pension contribution made in 2018. Acquisition spending rose materially from $158.9 million to $891.2 million.
- Lease accounting: Adoption of Topic 842 resulted in recognition of approximately $180 million of operating lease assets and liabilities at January 1, 2019; management reported no material income-statement or cash-flow impact.
Outlook, Commentary, Risks and Unusual Items
- Management stated that cash on hand, expected operating cash flow, available credit facilities and capital-markets access should provide adequate liquidity for at least the next twelve months.
- No specific quantitative full-year revenue or earnings guidance is provided in the filing text.
- Management expects continued cash requirements for capital expenditures, acquisitions, debt service, dividends, share repurchases, taxes, pension obligations and Transition Tax installments through 2025.
- Key disclosed risks include global economic and geopolitical conditions, U.S.-China trade policies and tariffs, foreign-exchange movements, materials availability and pricing, communications-industry concentration, defense spending, acquisition integration, cybersecurity, intellectual property, government contracting, tax audits and litigation.
- The company is cooperating with an early-stage U.S. Department of Defense Inspector General subpoena concerning products manufactured by its Military and Aerospace Group. The timing and outcome cannot currently be estimated.
- Legal matters arising from ordinary business activities and environmental compliance obligations were not expected to have a material adverse effect, although certain potential liabilities cannot be reasonably estimated.
- There was no goodwill or indefinite-lived intangible-asset impairment recorded in 2019, and the company reported no material change to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether organic sales trends, particularly in mobile, communications and broadband markets, improve or deteriorate after September 30, 2019.
- The integration, profitability and contingent consideration associated with the eight 2019 acquisitions, including SSI Controls Technologies.
- Debt maturities, commercial-paper refinancing needs, interest-rate exposure and the company’s ability to maintain covenant compliance.
- Whether acquisition spending and share repurchases remain consistent with operating cash generation and liquidity targets.
- The eventual outcome and potential exposure from the Department of Defense inquiry and other legal, tax and environmental matters.
- The effect of foreign-exchange movements, tariffs, materials costs and global economic conditions on reported sales and margins.