Amphenol Corporation — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Amphenol designs and manufactures interconnect products, connector systems, antennas, sensors, cable products and related solutions. Reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions.
- Interconnect Products and Assemblies represented approximately 94% of sales; Cable Products and Solutions represented approximately 6%.
- Major end markets included information technology and data communications, automotive, industrial, military, mobile devices, mobile networks, commercial aerospace and broadband communications.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,560.1 million | $1,451.2 million | 8% increase |
| Gross profit | $515.9 million | $459.2 million | 12% increase |
| Gross margin | 33.1% | 31.6% | 150 basis-point increase |
| Operating income | $314.1 million | $239.4 million | 31% increase |
| Operating margin | 20.1% | 16.5% | 360 basis-point increase |
| Net income attributable to Amphenol | $224.9 million | $156.6 million | 44% increase |
| Diluted EPS | $0.71 | $0.50 | 42% increase |
| Net cash from operating activities | $237.8 million | $194.2 million | 22% increase |
| Free cash flow | $189.1 million | $153.2 million | 23% increase |
Interconnect sales increased 7% in reported U.S. dollars, 8% in constant currency and 6% organically. Cable sales increased 16% in reported U.S. dollars and 13% in constant currency, primarily due to a third-quarter 2016 acquisition and modest organic growth.
SG&A increased to $201.8 million from $189.5 million, but declined to 12.9% of sales from 13.1%. Interest expense increased to $19.3 million from $18.1 million. The effective tax rate declined to 23.8% from 28.7%, partly because of the adoption of ASU 2016-09 and the absence of 2016 acquisition-related expenses.
At March 31, 2017, cash, cash equivalents and short-term investments totaled $1,279.7 million, including $1,242.9 million of cash and cash equivalents. Total debt was $3,237.2 million, including $1,247.1 million of commercial paper and $375.1 million of current debt. The Company had no borrowings under its $2.0 billion revolving credit facility and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger information technology and data communications, automotive, industrial and military demand, partly offset by declines in mobile devices, mobile networks and commercial aerospace.
- Gross and operating margins improved primarily from higher volumes, operational execution and improved FCI-related margins.
- Q1 2016 included $30.3 million of acquisition-related expenses, including FCI transaction costs, acquired-backlog amortization and restructuring charges. Excluding those items, Q1 2016 adjusted operating income was $269.7 million and adjusted diluted EPS was $0.59.
- Q1 2017 included no acquisition-related expenses. Reported Q1 2017 operating income and diluted EPS were $314.1 million and $0.71, respectively.
- Operating cash flow increased despite a $66.8 million working-capital use, driven principally by higher inventories, other current assets and lower accrued expenses.
- The Company repurchased 3.7 million shares for $249.2 million under a new $1.0 billion, two-year authorization and paid $49.3 million of dividends. The quarterly dividend rate was $0.16 per share.
- Goodwill increased by $69.9 million to $3,748.7 million, primarily from a first-quarter acquisition in the Interconnect Products and Assemblies segment and foreign-currency translation.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific numerical full-year revenue, earnings or margin outlook. Management stated that available cash, operating cash generation, credit facilities and access to capital markets provide adequate liquidity for the next twelve months, including repayment of the $375.0 million of 1.55% Senior Notes due September 2017.
- On April 5, 2017, after quarter-end, the Company issued $400.0 million of 2.20% notes due 2020 and $350.0 million of 3.20% notes due 2024. Proceeds were intended primarily to repay the September 2017 notes and temporarily repay commercial paper.
- Most cash and short-term investments were held outside the United States and were intended to remain indefinitely reinvested abroad; repatriation could result in additional income taxes.
- Management expects approximately $25.0 million of pension-plan contributions during 2017; none were made in the first quarter.
- The Company adopted ASU 2016-09 in Q1 2017. The change caused excess tax benefits and deficiencies from stock compensation to affect income tax expense and may cause future effective tax-rate volatility.
- The Company expects to adopt the new revenue standard in Q1 2018 using the modified retrospective method. Management expects many businesses to recognize revenue at a point in time, while certain customized-product businesses may recognize revenue over time.
- Key disclosed risks include changes in governmental, political, economic and end-market conditions; competition; technology; acquisitions; cybersecurity; foreign currency; interest rates; and reduced product demand.
- Legal proceedings arise in the ordinary course of business. Management does not expect them to have a material adverse effect. Environmental compliance costs are also not expected to be material.
Most Important Facts for Investors to Verify
- Whether reported earnings growth remains strong after adjusting for the absence of Q1 2016 acquisition-related expenses.
- The sustainability of the 33.1% gross margin and 20.1% operating margin.
- Organic growth by end market, particularly the performance of mobile devices, mobile networks and commercial aerospace.
- Commercial paper balances, refinancing of the September 2017 notes and leverage following the April 2017 debt issuance.
- The location and repatriation tax implications of offshore cash and investments.
- Progress and potential financial impact of the 2018 revenue-recognition implementation.
- Future share repurchases, dividend funding and the effect of capital returns on debt levels and liquidity.
- Potential effective-tax-rate volatility from stock-based compensation and the status of approximately $139.8 million of unrecognized tax benefits.