Amphenol Corporation: 2018 Q2 Form 10-Q Summary
Business context and reporting period
Amphenol designs and manufactures interconnect products, connector systems, antennas, sensors, cable, and related value-added products. Reported segments are Interconnect Products and Assemblies and Cable Products and Solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $1,981.4 | $1,666.5 | $3,848.3 | $3,226.6 |
| Gross profit | $644.8 | $552.6 | $1,251.7 | $1,068.5 |
| Gross margin | 32.5% | 33.2% | 32.5% | 33.1% |
| Operating income | $408.2 | $336.2 | $785.1 | $650.3 |
| Operating margin | 20.6% | 20.2% | 20.4% | 20.2% |
| Net income attributable to Amphenol | $284.8 | $251.5 | $550.4 | $476.4 |
| Diluted EPS | $0.91 | $0.80 | $1.75 | $1.51 |
| Cash flow from operations | Not separately reported | Not separately reported | $395.3 | $518.2 |
| Free cash flow | Not separately reported | Not separately reported | $261.2 | $418.0 |
Q2 sales increased 19% in reported dollars, 17% in constant currency, and 13% organically. H1 sales increased 19% in reported dollars, 16% in constant currency, and 12% organically. Interconnect sales represented approximately 94% of Q2 sales and grew 20% reported and 13% organically; Cable sales grew 4% reported and 5% organically.
At June 30, 2018, cash, cash equivalents, and short-term investments totaled $991.1, down from $1,753.7 at December 31, 2017. Total debt was $3,436.6, including $1,047.9 of commercial paper and $768.4 classified as current debt. The company had no borrowings under its $2.0 billion revolving credit facility and was in compliance with its covenants. The $750.0 million, 2.55% senior notes mature in January 2019.
Material changes versus the prior comparable period
- Revenue increased $314.9, or 19%, in Q2 and $621.7, or 19%, in H1, supported by organic growth, acquisitions, and favorable foreign-currency translation.
- Operating margin improved modestly despite lower gross margins, primarily because selling, general and administrative expenses declined as a percentage of sales and Interconnect margins improved.
- Cable segment operating margin declined to 13.2% in Q2 and 12.5% in H1 from 14.9% and 14.6%, respectively, primarily due to higher commodity costs.
- Operating cash flow and free cash flow declined year over year, mainly because of an $81.0 voluntary pension contribution, approximately $54.0 of Tax Act-related payments, higher working-capital usage, and increased capital expenditures.
- Financing cash outflows increased to $845.9 from $64.7, driven principally by $645.4 of share repurchases, $115.5 of dividends, and net debt repayments.
- The company completed three acquisitions in H1 2018 in the Interconnect segment. These acquisitions were not individually or collectively significant, but increased goodwill by $126.0 before currency effects.
- The quarterly dividend increased from $0.19 to $0.23 per share. The company completed its prior $1.0 billion repurchase program and authorized a new $2.0 billion program; $1,701.8 remained available after additional post-quarter-end repurchases through July 27, 2018.
- Revenue recognition guidance under Topic 606 was adopted using the modified retrospective method. The adoption increased opening retained earnings by approximately $3.2 but did not materially affect reported results.
Outlook, commentary, risks, and unusual items
Management stated that available cash, operating cash generation, credit facilities, and capital-market access should provide adequate liquidity for the next twelve months and the foreseeable future, including repayment of the January 2019 senior notes. The filing does not provide explicit full-year revenue or earnings guidance.
The 2017 Tax Cuts and Jobs Act charge of $398.5 remained provisional at June 30, 2018; the company expected to complete its accounting within the 2018 measurement period. The company paid approximately $18.0 of its transition-tax installment and approximately $36.0 of foreign and state taxes associated with repatriated cash during H1.
Key risks include communications and military-market exposure, customer concentration and pricing pressure, competition, foreign-exchange and interest-rate volatility, tariffs and geopolitical conditions, acquisition integration and goodwill impairment, commodity and materials availability, tax-law changes, litigation and environmental matters, and cybersecurity threats. The company reported no material change to previously disclosed risk factors, and no legal matter was expected to have a material adverse effect.
The company adopted the new lease standard effective January 1, 2019 and expected to recognize operating-lease right-of-use assets and liabilities; the ultimate impact had not yet been determined.
Most important facts for an investor to verify
- Whether the company refinanced or repaid the $750.0 million senior notes due January 2019 and how that affected debt and interest expense.
- The sustainability of 12% to 13% organic sales growth, particularly in the Interconnect segment and markets exposed to mobile devices, data communications, automotive, defense, and communications.
- Whether higher commodity costs continue to pressure Cable segment margins and consolidated gross margins.
- Whether working-capital investment, pension funding, tax payments, and capital expenditures normalize enough to restore free cash flow.
- The final accounting impact of the Tax Act and the timing of remaining transition-tax and repatriation-related payments.
- The pace and valuation of acquisitions, including integration performance and potential goodwill impairment.
- The scale and funding of additional share repurchases and dividends relative to operating cash flow and upcoming debt maturities.
- The balance-sheet impact of adopting the lease standard and any subsequent changes in liquidity or leverage.