Amphenol Corporation — Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Amphenol designs and manufactures interconnect, connector, cable, antenna, sensor, and related products. Reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions.
The January 8, 2016 acquisition of FCI Asia Pte Ltd, purchased for approximately $1,178.6 million net of cash acquired, materially affected the period. FCI is included in the Interconnect Products and Assemblies segment.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $1,635.9 million | $1,459.6 million | $4,635.3 million | $4,138.2 million |
| Gross profit | $537.3 million | $464.0 million | $1,494.0 million | $1,321.1 million |
| Operating income | $326.3 million | $294.8 million | $866.1 million | $815.7 million |
| Operating margin | 19.9% | 20.2% | 18.7% | 19.7% |
| Net income attributable to Amphenol | $224.3 million | $204.5 million | $587.5 million | $563.3 million |
| Diluted EPS | $0.71 | $0.65 | $1.86 | $1.78 |
| Cash flow from operations | Not separately provided | Not separately provided | $728.7 million | $708.2 million |
Q3 sales increased 12% in U.S. dollars, 13% in constant currency, and 2% organically. Nine-month sales increased 12% in U.S. dollars, 13% in constant currency, and 1% organically. Foreign exchange reduced reported sales by approximately $11.9 million in Q3 and $40.3 million for the first nine months.
Adjusted operating income, excluding acquisition-related expenses, was $332.6 million, or 20.3% of sales, in Q3 2016, and $902.7 million, or 19.5%, for the first nine months. These are non-GAAP measures.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $853.6 million at September 30, 2016, compared with $1,737.2 million at December 31, 2015. Including short-term investments, total cash and short-term investments were $1,016.9 million.
- Total debt was $2,972.5 million, including $982.1 million of commercial paper and $374.5 million of current debt. Net debt, using cash and short-term investments, was approximately $1,955.6 million.
- The Company had no borrowings under its new $2.0 billion revolving credit facility, which matures in March 2021, and was in compliance with its financial covenants.
- Commercial paper capacity increased to $2.0 billion; outstanding commercial paper carried an average interest rate of 0.80% at September 30, 2016.
- Management stated that available liquidity and operating cash flow were adequate for the next twelve months, including repayment of the $375 million 1.55% senior notes due September 2017.
- Capital expenditures were $136.3 million for the first nine months. Acquisition spending was $1,272.6 million, primarily for FCI.
- The Company repurchased 4.0 million shares for $229.6 million during the first nine months and approximately 1.0 million additional shares for $63.3 million through October 31, 2016.
- Quarterly dividends were $0.14 per share through Q3; the Board approved an increase to $0.16 per share beginning with Q4 2016 declarations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by acquisitions, particularly FCI, and organic strength in information technology and data communications, industrial, mobile networks, automotive, commercial aerospace, military, and broadband communications markets. Mobile devices remained a weaker area.
- Interconnect Products and Assemblies represented approximately 94% of sales. Its Q3 sales increased 12% in U.S. dollars, while nine-month sales increased 12%.
- Cable Products and Solutions sales increased 14% in Q3 and 8% for the first nine months in U.S. dollars. Its operating margin improved to 14.9% in Q3 and 14.4% for the first nine months, from 12.5% and 12.1%, respectively.
- Consolidated reported operating margin declined because FCI had lower margins than the Company average and because of acquisition-related costs. Nine-month acquisition-related expenses increased to $36.6 million from $5.7 million.
- SG&A increased to 12.5% of Q3 sales and 12.8% of nine-month sales, from 11.6% and 12.1%, respectively, primarily due to FCI.
- Goodwill increased by approximately $1,014.9 million to $3,707.8 million, and intangible and other long-term assets increased by $233.2 million to $539.2 million, primarily from acquisitions.
- Interest expense increased to $18.1 million in Q3 and $54.2 million for the first nine months, reflecting higher average debt levels. Other income declined because lower cash balances reduced interest income.
- Comprehensive income improved substantially, aided by foreign currency translation: nine-month comprehensive income attributable to Amphenol rose to $639.7 million from $465.5 million.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific revenue or earnings guidance for full-year 2016. Management described operating cash generation as a fundamental strength and expected liquidity to support operating needs, capital expenditures, dividends, repurchases, pension funding, debt service, and potential acquisitions.
- Forward-looking results remain exposed to economic, political, end-market, competitive, technological, acquisition-related, cybersecurity, and foreign-currency risks.
- Demand weakness in mobile devices, integration and execution risks associated with acquisitions, and lower acquired-company margins could affect future performance.
- Legal proceedings arise from normal business activities. Potential liabilities cannot be reasonably estimated, but management does not expect a material adverse effect.
- The Company believes it is substantially compliant with environmental laws and does not expect compliance costs to be material.
- Unrecognized tax benefits were approximately $125.5 million at September 30, 2016; approximately $6.6 million could be affected by audits or statute expirations over the following twelve months.
- Estimated 2016 pension contributions were approximately $22.0 million, including $16.0 million contributed through September 30.
- No goodwill impairment was recorded, and the July 1, 2016 qualitative assessment indicated that reporting-unit fair values exceeded carrying amounts.
- The Company was evaluating several new accounting standards, including revenue recognition and leases; it did not expect a material impact from the revenue and inventory standards, while the impact of the lease standard remained under evaluation.
Important Facts for Investors to Verify
- Assess the sustainability of reported growth after separating FCI and other acquisition contributions from the approximately 1% to 2% organic growth rate.
- Track integration costs, FCI margins, amortization, goodwill, and potential impairment exposure following the substantial acquisition activity.
- Verify the refinancing or repayment plan for the $375 million senior notes due September 2017 and monitor commercial paper dependence.
- Evaluate the effect of higher debt, interest rates, foreign exchange, and reduced cash balances on future earnings and liquidity.
- Monitor working-capital trends, particularly the $1,319.4 million accounts receivable balance and $926.6 million inventory balance at September 30, 2016.
- Distinguish GAAP results from management’s non-GAAP adjusted operating income, margin, constant-currency growth, and organic growth measures.
- Review tax audits, the $125.5 million unrecognized tax benefit liability, pension obligations, legal matters, and environmental contingencies.