Amphenol Corporation — 2018 Third-Quarter Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. 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 95% of consolidated sales and serves mobile devices, military, information technology and data communications, industrial, mobile networks, automotive and commercial aerospace markets.
- Cable Products and Solutions represented approximately 5% of sales and primarily serves broadband communications and information technology markets.
- Sales were geographically diversified: for the quarter, the United States represented $572.0 million, China $698.3 million and other foreign locations $858.7 million.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $2,129.0 million | $1,840.8 million | $5,977.3 million | $5,067.4 million |
| Gross profit | $688.2 million | $606.1 million | $1,939.9 million | $1,674.6 million |
| Gross margin | 32.3% | 32.9% | 32.5% | 33.1% |
| Operating income | $444.2 million | $377.9 million | $1,229.3 million | $1,028.2 million |
| Operating margin | 20.9% | 20.5% | 20.6% | 20.3% |
| Net income attributable to Amphenol | $316.6 million | $277.5 million | $866.9 million | $753.9 million |
| Diluted EPS | $1.01 | $0.88 | $2.76 | $2.39 |
| Effective tax rate | 23.8% | 21.8% | 24.3% | 21.8% |
| Cash flow from operations | Not separately provided | Not separately provided | $734.5 million | $716.4 million |
| Free cash flow | Not separately provided | Not separately provided | $526.3 million | $560.6 million |
At September 30, 2018, cash, cash equivalents and short-term investments totaled $1,019.8 million, compared with $1,753.7 million at December 31, 2017. Accounts receivable were $1,737.6 million and inventories were $1,245.5 million.
- Total debt was $3,258.5 million, including $790.2 million classified as current debt. Long-term debt was $2,468.3 million.
- The Company had no borrowings under its $2.0 billion revolving credit facility and was in compliance with applicable debt covenants.
- Commercial paper outstanding totaled $850.8 million: $337.9 million under the U.S. program and approximately $512.9 million under the Euro program.
- Capital expenditures were $208.2 million for the first nine months, compared with $155.8 million in 2017. Acquisitions used $158.9 million of cash.
- Financing activities used $1,068.6 million, including $680.2 million of share repurchases and $184.4 million of dividends.
- The quarterly dividend increased from $0.19 to $0.23 per share beginning with the second quarter of 2018.
Material changes versus the prior comparable period
- Q3 sales increased 16% in reported U.S. dollars, 17% in constant currency and 15% organically. Nine-month sales increased 18% in reported dollars, 16% in constant currency and 13% organically.
- Interconnect Products and Assemblies sales increased 17% in Q3 and 19% for the first nine months in reported dollars. Cable Products and Solutions sales were flat in Q3 and increased 2% for the first nine months.
- Operating margin improved by 40 basis points in Q3 and 30 basis points for the first nine months, primarily due to higher volume and operating execution in the Interconnect segment.
- Cable segment nine-month operating margin declined to 12.7% from 14.0%, primarily because of higher commodity costs.
- Net income attributable to Amphenol increased 14% in Q3 and 15% for the first nine months; diluted EPS increased 15% and 15%, respectively. Share repurchases reduced diluted weighted-average shares to 312.4 million in Q3 from 315.7 million.
- Free cash flow declined to $526.3 million from $560.6 million, principally because capital expenditures increased to support new customer programs.
- Interest expense increased to $75.3 million for the first nine months from $67.3 million, reflecting higher commercial-paper rates, 2017 senior-note issuances and higher average debt used for dividends and repurchases.
- Foreign currency translation reduced Q3 sales by approximately $15.6 million but increased nine-month sales by approximately $87.2 million.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear numerical full-year revenue or earnings guidance range. Management stated that available cash, operating cash generation, credit facilities and capital-market access were adequate for the next twelve months, including repayment of the $750.0 million senior notes due January 2019.
- Management expects 2018 pension contributions of approximately $90.0 million, including an $81.0 million voluntary contribution made in January to fully fund the U.S. plans.
- On October 8, 2018, after quarter-end, the Company issued approximately $574.6 million of 2.000% Euro senior notes due 2028. A portion of the proceeds was used to repay commercial paper.
- The Company recorded a provisional $398.5 million Tax Act charge in Q4 2017 and had not adjusted it through September 30, 2018. Finalization within the one-year measurement period could result in a Q4 2018 adjustment. The first Transition Tax installment was approximately $18.0 million, and foreign and state taxes related to repatriated cash were approximately $43.0 million.
- Revenue recognition under Topic 606 was adopted January 1, 2018 using the modified retrospective method. The opening retained-earnings increase was approximately $3.2 million, and the standard was not material to 2018 reported results.
- The Company completed three non-material acquisitions during the first nine months, all in the Interconnect segment. Goodwill increased by $126.5 million from acquisition activity, partly offset by $55.4 million of foreign-currency translation.
- The Department of Defense Office of Inspector General subpoenaed documents concerning certain Military and Aerospace Group products purchased or used by the U.S. government. The inquiry was in its early stages, and timing and outcome could not be estimated.
- Key disclosed risks include communications and military-market concentration, competition, foreign-exchange and interest-rate exposure, tariffs and trade policies affecting China, supply and commodity costs, acquisition integration and goodwill impairment, tax-law changes, litigation, environmental matters and cybersecurity incidents.
- The Company reported no material goodwill or intangible-asset impairment and stated that ordinary legal and environmental matters were not expected to have a material adverse effect.
Investor verification items
- Verify the final accounting for the 2017 Tax Act charge and any Q4 2018 adjustment.
- Verify repayment or refinancing of the $750.0 million senior notes due January 2019 and the subsequent use of the 2028 Euro-note proceeds.
- Monitor commercial-paper balances, refinancing dependence, interest rates and covenant compliance.
- Assess whether higher capital expenditures and working-capital investment are converting into sustained organic growth and free cash flow.
- Track commodity-cost pressure in the Cable Products and Solutions segment and the sustainability of Interconnect segment margins.
- Follow developments in the Department of Defense inquiry and any related legal or compliance exposure.
- Review acquisition integration, purchase-accounting finalization and goodwill concentration in the Interconnect segment.