Amphenol Corporation — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2017, compared with the same periods in 2016. Amphenol designs and manufactures interconnect products, assemblies, cable products and related solutions. Reportable segments are Interconnect Products and Assemblies, representing approximately 94% of sales, and Cable Products and Solutions, representing approximately 6%.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $1,840.8 million | $1,635.9 million | $5,067.4 million | $4,635.3 million |
| Gross profit | $606.1 million | $537.3 million | $1,674.6 million | $1,494.0 million |
| Gross margin | 32.9% | 32.9% | 33.0% | 32.2% |
| Operating income | $377.9 million | $326.3 million | $1,028.2 million | $866.1 million |
| Operating margin | 20.5% | 19.9% | 20.3% | 18.7% |
| Net income attributable to Amphenol | $277.5 million | $224.3 million | $753.9 million | $587.5 million |
| Diluted EPS | $0.88 | $0.71 | $2.39 | $1.86 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $716.4 million | $728.7 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $560.6 million | $592.4 million |
Q3 sales increased 13% in reported dollars, 12% in constant currency and 8% organically. Nine-month sales increased 9% in reported dollars, 10% in constant currency and 6% organically. Q3 diluted EPS increased 24%; nine-month diluted EPS increased 28%.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments were $1,489.6 million at September 30, 2017, compared with $1,173.2 million at December 31, 2016. Most cash was held outside the United States and was intended to remain indefinitely reinvested offshore unless repatriation became tax-effective.
- Total debt was $3,560.8 million, including $1,191.9 million of commercial paper. Long-term debt was $3,559.7 million, compared with $2,635.5 million at year-end 2016.
- The Company had no borrowings under its $2.0 billion revolving credit facility and was in compliance with its financial covenants. Commercial paper averaged 1.48% and was rated A-2 by Standard & Poor’s and P-2 by Moody’s.
- In April 2017, Amphenol issued $400.0 million of 2.20% notes due 2020 and $350.0 million of 3.20% notes due 2024. In September, proceeds were used to repay $375.0 million of 1.55% notes due September 2017.
- The Company repurchased 7.7 million shares for $555.6 million during the first nine months and paid $147.1 million of dividends. Approximately $444.4 million remained available under the repurchase authorization as of October 31, 2017.
- Management stated that cash on hand, operating cash generation, credit availability and capital-market access provided adequate liquidity for the next twelve months.
Material changes versus the prior comparable period
- Growth was supported by industrial, automotive, military, information technology and data communications markets, organic growth and acquisitions. Mobile networks declined, while mobile devices improved in Q3 but declined for the nine-month period. Commercial aerospace was relatively flat.
- Interconnect Products and Assemblies sales increased 12% in Q3 and 9% for nine months in reported dollars. Cable Products and Solutions sales increased 18% and 17%, respectively, primarily reflecting an acquisition completed in Q3 2016.
- Gross margin improved for the nine-month period, primarily from higher volumes, operational execution and improvement related to FCI. Cable segment operating margins declined, primarily due to higher commodity costs.
- Operating margin benefited from improved Interconnect segment profitability and lower acquisition-related expenses. Acquisition-related expenses were $4.0 million in the first nine months of 2017 versus $36.6 million in the comparable 2016 period.
- Interest expense increased to $24.6 million in Q3 and $67.3 million for nine months, primarily due to higher average debt and interest rates.
- Operating cash flow decreased modestly despite higher earnings because working capital usage increased to $252.8 million, driven mainly by higher receivables, inventories and other current assets. Free cash flow declined to $560.6 million from $592.4 million.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear quantitative revenue or earnings guidance figure. Management expects continued cash requirements for operations, capital expenditures, product development, acquisitions, dividends, repurchases, pension funding and debt service.
- Management identified risks related to economic and end-market conditions, competition, technology, acquisitions, cybersecurity, foreign currency, commodity costs and interest rates. The filing states that there were no material changes to the risk factors in the 2016 Form 10-K.
- Working-capital metrics increased: days sales outstanding rose to approximately 76 from 73, inventory days to 80 from 76, and payable days to 60 from 55.
- Adoption of ASU 2016-09 produced discrete stock-compensation tax benefits of approximately $16.6 million in Q3 and $45.8 million for nine months, reducing the effective tax rate by approximately 470 basis points and increasing EPS by approximately $0.05 and $0.14, respectively. Future effective tax rates may fluctuate materially based on stock-option exercise activity.
- Goodwill increased to $3,969.3 million, including $192.7 million of acquisition-related additions and $97.8 million from foreign currency translation. No goodwill or indefinite-lived intangible impairment was recorded.
- The Company was involved in legal actions arising from normal business activities, but management did not expect these matters to have a material adverse effect. Environmental compliance costs were also not expected to be material.
- Unrecognized tax benefits, including penalties and interest, were approximately $136.0 million at September 30, 2017. Management anticipated that approximately $5.1 million could be resolved or otherwise affected over the following twelve months.
- The Company estimated 2017 pension contributions of approximately $25.0 million, including $17.0 million contributed through September 30.
Important facts for investors to verify
- Whether organic sales growth and Interconnect segment margins remain durable after acquisition effects and favorable operating execution.
- The sustainability of cash conversion as receivables and inventories grow faster than sales and working-capital usage remains elevated.
- Debt refinancing requirements, commercial-paper exposure and sensitivity to higher interest rates.
- The future impact of stock-option exercises on effective tax rates and EPS comparability.
- Use of the remaining $444.4 million repurchase authorization alongside acquisitions, dividends and debt service.
- The effect of foreign currency movements, commodity costs, mobile-market weakness and other end-market risks on future results.