Amphenol Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
Amphenol designs and manufactures interconnect products, connector systems, antennas, sensors, cable products and related solutions. The report covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. Reportable segments were Interconnect Products and Assemblies and Cable Products and Solutions.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,958.5 million | $1,866.9 million | +5% |
| Gross profit | $627.8 million | $606.9 million | +3% |
| Gross margin | 32.1% | 32.5% | Down 40 bps |
| Operating income | $376.2 million | $376.9 million | Flat; margin down to 19.2% from 20.2% |
| Adjusted operating income | $392.7 million | $376.9 million | Adjusted margin 20.1% vs. 20.2% |
| Net income attributable to Amphenol | $267.5 million | $265.6 million | +1% |
| Diluted EPS | $0.87 | $0.84 | +4% |
| Operating cash flow | $343.6 million | $130.2 million | +164% |
| Free cash flow | $269.1 million | $75.3 million | +257% |
| Effective tax rate | 22.8% | 24.4% | Down 160 bps |
Interconnect Products and Assemblies represented approximately 95% of sales and grew 5% in reported dollars, 8% in constant currency and 5% organically. Cable Products and Solutions represented approximately 5% of sales and declined 1% in reported dollars but increased 2% in constant currency and organically.
Sales growth was strongest in information technology and data communications, industrial, military, commercial aerospace and mobile networks. Growth was partly offset by weakness in mobile devices and a small decline in automotive. The stronger U.S. dollar reduced reported sales by approximately $46.6 million.
Cash, cash equivalents and short-term investments were $987.6 million at March 31, 2019, compared with $1,291.7 million at December 31, 2018. Total debt was $3,560.8 million, including $888.6 million of commercial paper, and long-term debt was $3,554.8 million. The company had no borrowings under its $2.5 billion revolving credit facility and was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Amphenol acquired SSI Controls Technologies in January 2019 for approximately $397 million net of cash acquired, plus contingent consideration. The acquisition added approximately $347.1 million of goodwill and increased intangible assets.
- Acquisition-related expenses were $16.5 million, including $12.5 million of acquired-backlog amortization and $4.0 million of transaction costs. Management reported a $13.2 million after-tax impact, or approximately $0.04 per diluted share.
- The company issued $500 million of 4.350% senior notes due 2029 and used the proceeds, together with commercial paper borrowings, to repay $750 million of 2.55% senior notes due January 2019.
- Interest expense increased to $29.7 million from $24.5 million, primarily because of higher average debt, higher commercial paper rates and the new 2029 notes.
- Cash flow from operations benefited from lower working-capital usage and the absence of the approximately $81 million voluntary pension contribution made in Q1 2018.
- The company repurchased 1.8 million shares for $160.0 million and paid $68.7 million of dividends. The quarterly dividend increased to $0.23 per share from $0.19.
- Effective January 1, 2019, the company adopted the new lease standard and recorded approximately $179.6 million of operating lease right-of-use assets and $180.1 million of lease liabilities, with no material income-statement or cash-flow effect.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative revenue or earnings outlook. Management stated that available cash, expected operating cash flow, credit facilities and capital-market access should provide adequate liquidity for the next twelve months. Ongoing cash requirements include capital expenditures, acquisitions, dividends, share repurchases, debt service, taxes, transition-tax installments and pension obligations.
Management described the company’s ability to generate operating cash flow as a fundamental financial strength. It expects future results to remain exposed to economic and geopolitical conditions, trade policies and tariffs, foreign-exchange movements, material availability and pricing, communications-industry concentration, defense spending, competition, acquisition integration and potential goodwill impairment.
Additional risks include cybersecurity incidents, government-contracting and export-control requirements, intellectual-property protection, environmental matters, tax audits and changes in tax law. The company is cooperating with an early-stage U.S. Department of Defense Inspector General subpoena concerning products manufactured by its Military and Aerospace Group; the timing and outcome cannot currently be estimated.
The company reported no material change to previously disclosed risk factors, no defaults upon senior securities and no legal matter expected to have a material adverse effect on financial condition, results of operations or cash flows. The company stated that its disclosure controls were effective at March 31, 2019.
Most important facts for investors to verify
- Whether organic growth in data communications, industrial, aerospace and other markets offsets weakness in mobile devices, automotive and broadband-related businesses.
- The ongoing earnings effect of the SSI acquisition, including contingent consideration, acquired-backlog amortization and integration performance.
- Commercial paper balances, refinancing needs and interest-rate exposure, particularly ahead of the April 2020 senior-note maturity.
- Whether cash generation can support acquisitions, $160 million of quarterly repurchases, dividends and required tax payments while maintaining liquidity.
- The impact of foreign-exchange movements, tariffs, trade disputes and supply-chain pricing on reported sales and margins.
- Developments in the Department of Defense Inspector General inquiry and any related government-contracting or compliance consequences.
- Future effective tax rates, including the effect of stock-option exercises, tax audits and remaining transition-tax installments.