Business Context and Reporting Period
Amphenol Corporation’s unaudited Form 10-Q covers the three and six months ended June 30, 2015. The company designs and manufactures interconnect products, assemblies, cable products and related solutions across automotive, mobile devices, industrial, information technology, communications, military, aerospace and broadband markets. Reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions.
Financial Results and Key Metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,351.5 million | $1,314.2 million | $2,678.6 million | $2,560.2 million |
| Gross profit | $432.5 million | $416.8 million | $857.0 million | $805.6 million |
| Gross margin | 32.0% | 31.7% | 32.0% | 31.5% |
| Operating income | $260.7 million | $255.8 million | $520.9 million | $487.9 million |
| Operating margin | 19.3% | 19.5% | 19.4% | 19.1% |
| Net income attributable to Amphenol | $179.0 million | $174.9 million | $358.8 million | $333.4 million |
| Diluted EPS | $0.56 | $0.54 | $1.13 | $1.03 |
| Operating cash flow | Not separately provided | Not separately provided | $422.8 million | $383.3 million |
- Q2 sales increased 3% in U.S. dollars, 7% in local currencies and 1% organically. Six-month sales increased 5% in U.S. dollars, 9% in local currencies and 2% organically.
- Interconnect Products and Assemblies generated Q2 sales of $1,268.7 million, up 4% in U.S. dollars, and six-month sales of $2,511.3 million, up 5%. Segment operating margin was 21.9% in both periods.
- Cable Products and Solutions generated Q2 sales of $82.8 million, down 10%, and six-month sales of $167.3 million, down 6%. Segment operating margins declined to 11.8% and 11.9%, respectively, from 12.7% and 12.5%.
- Cash, cash equivalents and short-term investments totaled $1,397.2 million at June 30, 2015, including cash and equivalents of $1,242.8 million.
- Total debt was $2,759.6 million, primarily consisting of $757.8 million of commercial paper and $1,874.0 million of senior notes. Net debt relative to cash and short-term investments was approximately $1,362.4 million.
- Capital expenditures were $85.2 million; acquisition payments were $171.8 million; dividends paid were $77.5 million; and share repurchases totaled $143.6 million for the first six months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by automotive, mobile devices, industrial, information technology and data communications equipment, and military markets. Mobile networks and commercial aerospace declined.
- Cable Products and Solutions declined primarily because of slower spending by cable operators.
- Gross margin improved due primarily to higher Interconnect Products and Assemblies volumes and cost-reduction actions.
- Operating income increased despite $5.7 million of acquisition-related expenses in 2015; excluding those expenses, six-month operating margin was 19.7% versus 19.1% in the prior year.
- Interest expense declined to $17.1 million in Q2 and $34.1 million year to date, from $20.1 million and $39.2 million, respectively, due primarily to lower average borrowing rates.
- Goodwill increased $92.3 million to $2,709.0 million, primarily from three Interconnect Products and Assemblies acquisitions, partly offset by currency translation.
- Inventory increased $27.4 million to $893.0 million, while accounts payable decreased $58.9 million to $559.5 million. Inventory days increased to 87 from 79.
- Foreign currency translation reduced first-half sales by approximately $101.2 million and reduced cash and cash equivalents by $10.7 million.
- The company repurchased 2.5 million shares for $143.6 million and declared dividends of $0.25 per share during the first six months, compared with $0.20 per share in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quantitative revenue or earnings guidance. Management states that cash, operating cash generation and available credit are expected to fund obligations for the next twelve months.
- On July 17, 2015, after quarter-end, the company agreed to acquire FCI Asia Pte Ltd for $1,275 million in cash, subject to closing adjustments and regulatory approvals. Closing was expected by year-end 2015 and was expected to be funded with a combination of cash and debt.
- The company had a $1,500 million unsecured revolving credit facility maturing in July 2018, with no borrowings outstanding at June 30, 2015. Commercial paper outstanding was $757.8 million, with an average interest rate of 0.50%; the program was rated A-2 by Standard & Poor’s and P-2 by Moody’s.
- Management estimated 2015 pension contributions of approximately $22.0 million; no cash contributions were made during the first six months.
- Legal proceedings arise from normal business activities, but management did not expect a material adverse effect. Environmental compliance costs were also not expected to be material.
- Unrecognized tax benefits totaled approximately $19.3 million, of which approximately $1.5 million could be affected by audits or statute expirations over the following twelve months.
- Key risks include foreign currency exposure, variable interest rates on commercial paper and revolving credit borrowings, acquisition execution and financing, demand weakness in broadband markets, inventory growth, and the company’s ability to maintain cash generation and financial covenant compliance. The filing states that there were no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify the final purchase price, financing, regulatory approvals, purchase accounting and contribution from the FCI acquisition.
- Assess commercial paper refinancing capacity and leverage after the FCI transaction.
- Monitor organic growth, currency effects and margin trends by segment, particularly the continuing weakness in Cable Products and Solutions.
- Review inventory days, working-capital requirements and conversion of earnings into operating cash flow.
- Confirm the status of pension contributions, tax audits and the $19.3 million of unrecognized tax benefits.
- Reconcile share repurchases, dividend increases and dilution from stock options with future per-share results.