Amphenol Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Amphenol operates through Interconnect Products and Assemblies and Cable Products and Solutions. The filing states that results for the quarter are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,246.1 million | $1,079.8 million | 15% |
| Gross profit | $388.9 million | $337.9 million | 15% |
| Gross margin | 31.2% | 31.3% | Broadly stable |
| Operating income | $232.1 million | $207.0 million | 12% |
| Operating margin | 18.6% | 19.2% | Down 60 basis points |
| Net income attributable to Amphenol | $158.5 million | $153.0 million | 4% |
| Diluted EPS | $0.98 | $0.94 | 4% |
| Cash flow from operations | $202.7 million | $180.3 million | 13% |
Net income margin attributable to Amphenol was approximately 12.7%, compared with 14.2% in the prior-year quarter. The effective tax rate was 26.4%, versus 20.9% in Q1 2013; the prior-year rate benefited from an $11.3 million retroactive tax benefit. Excluding that benefit and acquisition-related expenses, effective tax rates were 26.5% in 2014 and 26.8% in 2013.
At March 31, 2014, cash and cash equivalents were $1,023.3 million and short-term investments were $276.1 million, for total cash, cash equivalents and short-term investments of $1,299.5 million. Total debt was approximately $2,223.6 million, consisting of $701.0 million of short-term debt and $1,522.6 million of long-term debt. The company had $1,230.0 million available under its $1,500.0 million revolving credit facility and was in compliance with its financial covenants. It also had $100.0 million outstanding under an uncommitted credit facility with no remaining availability.
Capital expenditures were $54.2 million, acquisitions used $9.0 million, and the company repurchased 1.4 million shares for $121.1 million. Cash increased by $136.5 million during the quarter, ending at $1,023.3 million. Management believes available liquidity and operating cash flow will fund obligations for the next twelve months.
Material changes versus the prior comparable period
- Sales increased 15% in U.S. dollars and local currencies and 7% organically, excluding foreign exchange and acquisitions.
- Interconnect Products and Assemblies sales increased 16% to $1,159.1 million, driven by industrial, automotive, mobile networks, commercial aerospace, information technology and data communications markets. Growth was partly offset by lower mobile device and military aerospace sales.
- Cable Products and Solutions sales increased 4% to $87.0 million, while segment operating income declined to $10.6 million from $11.6 million. Management attributed the decline primarily to market pricing and product mix.
- Operating margin declined primarily because a late-2013 acquisition had lower margins than the company average and was included for the full quarter in 2014. Excluding $2.0 million of acquisition-related expenses, operating margin was 18.8%, compared with 19.2% in Q1 2013.
- Interest expense increased to $19.1 million from $15.5 million, primarily because of higher average debt associated with share repurchases and acquisitions.
- In January 2014, the company issued $750.0 million of 2.55% senior notes due 2019. Net proceeds of $748.8 million were used to repay revolving credit borrowings.
- Operating cash flow increased $22.4 million, while capital expenditures increased substantially from $29.7 million to $54.2 million.
- The quarterly dividend was $0.20 per share, compared with $0.105 per share in the prior-year quarter. Dividends declared totaled $31.4 million and were paid in April 2014.
Outlook, risks, contingencies and unusual items
The filing does not provide specific financial guidance for full-year 2014. Management identifies ongoing cash requirements for operations, capital expenditures, product development, share repurchases, pension contributions, dividends, debt service and potential acquisitions.
Management estimates approximately $20.0 million of aggregate 2014 cash contributions to defined benefit plans, with the timing and amount dependent partly on plan investment performance. The company had no material cash contribution to its U.S. plans during the quarter.
Legal actions arising from normal business activities are not expected by management to have a material adverse effect. Environmental obligations, including remediation and monitoring at several sites, are covered by a Honeywell reimbursement agreement for specified sites; management does not expect environmental matters to be material. The company states that there were no material changes to previously disclosed risk factors.
Foreign currency exposure remains a risk; international sales represented approximately 69% of total sales in Q1 2014. Forward contracts used to hedge foreign exchange exposure had a net fair value liability of $3.4 million at March 31, 2014. Management stated that interest-rate changes were not expected to have a material effect on 2014 income or cash flows.
Unrecognized tax benefits totaled approximately $15.6 million, of which approximately $2.7 million could be affected by audits or statute expirations over the following twelve months. The quarter also included $2.0 million of acquisition-related expenses and a $14.998 million net other comprehensive loss, primarily from foreign currency translation.
Important facts for investors to verify
- Whether sales growth and margin performance remain sustainable after the contribution from recent acquisitions.
- The refinancing or repayment plan for the $600.0 million of 4.75% senior notes due November 2014.
- Progress and remaining authorization under the share repurchase program; approximately 4.1 million shares remained available at April 30, 2014.
- Whether higher capital expenditures, debt levels and interest expense affect future free cash flow.
- Exposure to foreign currency movements, end-market demand changes and pricing pressure in Cable Products and Solutions.
- Outcomes of tax audits and the timing of potential recognition of approximately $2.7 million of unrecognized tax benefits.
- Actual pension contributions, environmental costs and legal outcomes relative to management’s current assessments.