Amphenol Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; unaudited results. Amphenol reported two segments: Interconnect Products and Assemblies, and Cable Products and Solutions.
Business Context and Key Financial Metrics
| Metric | Three Months 2016 | Three Months 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $1,548.2 million | $1,351.5 million | $2,999.4 million | $2,678.6 million |
| Gross profit | $497.3 million | $432.5 million | $956.6 million | $857.0 million |
| Operating income | $300.3 million | $260.7 million | $539.8 million | $520.9 million |
| Net income attributable to Amphenol | $206.5 million | $179.0 million | $363.2 million | $358.8 million |
| Diluted EPS | $0.65 | $0.56 | $1.15 | $1.13 |
| Cash flow from operations | Not separately provided | Not separately provided | $437.8 million | $422.8 million |
- Second-quarter gross margin was approximately 32.1%, compared with 32.0% in the prior-year quarter. Six-month gross margin was approximately 31.9%, compared with 32.0%.
- Second-quarter operating margin was 19.4%, compared with 19.3%; six-month operating margin was 18.0%, compared with 19.4%.
- Second-quarter net income increased 15% and six-month net income increased 1%. Six-month results included $30.3 million of acquisition-related expenses, reducing net income by $27.3 million, or $0.09 per share.
- At June 30, 2016, cash and cash equivalents were $794.0 million and short-term investments were $30.7 million, for total cash and short-term investments of $824.7 million.
- Total debt was $2,834.9 million, including $845.2 million of commercial paper and $2,000 million principal amount of senior notes. The company had no borrowings under its $2.0 billion revolving credit facility.
- Capital expenditures, net of disposals, were approximately $85.7 million for the first six months. Dividends paid were $86.3 million and share repurchases were $108.4 million.
Material Changes Versus the Prior Comparable Period
- Net sales increased 15% in the second quarter and 12% for the first six months in U.S. dollars. Management reported organic growth of 4% for the quarter and 1% year to date, excluding acquisitions and foreign exchange.
- The January 8, 2016 acquisition of FCI Asia Pte Ltd for approximately $1,178.6 million materially increased sales, goodwill, intangible assets, depreciation and amortization, and operating expenses. FCI was included in the Interconnect Products and Assemblies segment.
- Interconnect Products and Assemblies sales increased 15% in the quarter and 12% year to date in U.S. dollars. Growth was driven by information technology and data communications, mobile networks, industrial, and automotive markets, partly offset by modest declines in military and commercial aerospace.
- Cable Products and Solutions sales increased 11% in the quarter and 5% year to date, primarily from broadband communications.
- International sales increased 22% in the quarter and 18% year to date in U.S. dollars, while U.S. sales declined 2% and 1%, respectively. Foreign exchange reduced reported sales by approximately $9.0 million in the quarter and $28.4 million year to date.
- Adjusted six-month operating margin, excluding acquisition-related expenses, was 19.0%, below 19.7% in the prior-year period. Management attributed the decline primarily to FCI’s lower operating margin.
- Cash declined by $943.2 million during the first six months, principally because the company used $1,185.8 million for acquisitions. Goodwill increased to $3,641.7 million from $2,692.9 million at December 31, 2015.
Outlook, Risks, Contingencies and Unusual Items
- Management expects ongoing cash requirements to be funded through operating cash flow, cash and investments, commercial paper, and the revolving credit facility, and believes these resources will meet obligations for the next twelve months.
- The filing does not provide a clear quantitative revenue or earnings guidance range.
- Key risks include demand weakness, foreign currency fluctuations, interest-rate exposure on variable-rate commercial paper and credit facilities, acquisition integration, and potential deterioration in financial ratios or liquidity.
- The company expects approximately $22.0 million of aggregate pension contributions during 2016 based on current actuarial calculations; no cash contributions were made during the first six months.
- Several legal actions arise from normal business activities. Potential liabilities could not be reasonably estimated, but management does not expect a material adverse effect.
- The company states that its operations are substantially compliant with environmental laws and that continuing compliance costs are not expected to be material.
- Unrecognized tax benefits were approximately $124.6 million at June 30, 2016; approximately $2.9 million could be affected by audits or statute expirations over the following twelve months.
- The company replaced its $1.5 billion revolving facility with a $2.0 billion facility maturing in March 2021 and increased its commercial paper capacity to $2.0 billion. It was in compliance with applicable debt covenants at quarter-end.
- Management reported no material changes to previously disclosed risk factors, no defaults, and effective disclosure controls and procedures.
Investor Verification Points
- Verify the contribution of FCI to reported and organic growth, including the timing and costs of integration and the effect of its lower margins.
- Assess leverage, commercial paper refinancing needs, senior-note maturities, and available revolving-credit capacity.
- Monitor cash conversion, receivables and inventory growth, and whether working-capital usage normalizes.
- Reconcile reported operating margins with adjusted margins after excluding acquisition-related expenses and evaluate the sustainability of segment margins.
- Review goodwill and intangible-asset valuation assumptions arising from the FCI acquisition, including the preliminary nature of the purchase-price allocation.
- Evaluate foreign-exchange exposure, international sales concentration, and market weakness in aerospace, military, and mobile devices.
- Confirm future pension contributions, tax-audit developments, legal matters, and the remaining share-repurchase authorization.