Amphenol Corporation — Q3 2011 Form 10-Q Summary
Business context and reporting period
Amphenol Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company operates through Interconnect Products and Assemblies, serving communications, aerospace, industrial and automotive markets, and Cable Products, serving primarily communications markets. Interconnect Products and Assemblies represented approximately 93% of sales and Cable Products approximately 7%.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $1,032.8 million | $948.5 million | $2,991.1 million | $2,604.2 million |
| Gross profit | $323.5 million | $309.7 million | $948.8 million | $848.2 million |
| Gross margin | 31.3% | 32.7% | 31.7% | 32.6% |
| Operating income | $186.1 million | $189.1 million | $587.0 million | $509.8 million |
| Net income attributable to Amphenol | $134.6 million | $137.3 million | $410.3 million | $365.3 million |
| Diluted EPS | $0.79 | $0.78 | $2.36 | $2.08 |
| Operating cash flow | Not separately reported | Not separately reported | $396.6 million | $264.2 million |
Third-quarter sales increased 9% in U.S. dollars, 7% in local currencies and 5% organically. Nine-month sales increased 15% in U.S. dollars, 13% in local currencies and 9% organically. Growth was driven by application-specific products, wireless devices, industrial, automotive, commercial aerospace and international markets, particularly Asia.
Operating income declined 2% in the third quarter despite higher sales, reflecting lower gross margins, material-cost inflation, severance costs and flood-related lost sales and margin. Nine-month operating income increased 15%, including the benefit of a $17.8 million gain from reducing contingent acquisition consideration.
At September 30, 2011, cash and cash equivalents were $690.2 million and short-term investments were $90.7 million, for total cash and short-term investments of $780.9 million. Accounts receivable were $803.5 million and inventories were $634.8 million. Days sales outstanding increased to approximately 70 days from 68 days at December 31, 2010, while inventory days increased to 79 from 77.
Long-term debt was $1,265.0 million, compared with $799.6 million at December 31, 2010. Debt included $575.5 million drawn under the revolving credit facility, $87.7 million under the receivables securitization facility and $600.0 million of 4.75% senior notes due November 2014. The $1.0 billion revolving facility was amended in June 2011 to reduce borrowing costs and extend maturity to July 2016; $424.5 million remained available at September 30, 2011. The company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Sales increased $84.3 million, or 9%, in Q3 and $386.9 million, or 15%, in the first nine months.
- Q3 gross margin decreased 140 basis points to 31.3%; nine-month gross margin decreased 90 basis points to 31.7%.
- Q3 net income attributable to Amphenol decreased 2%, while diluted EPS increased to $0.79 from $0.78, primarily reflecting the lower share count following repurchases.
- Nine-month net income attributable to Amphenol increased 12% and diluted EPS increased 13%.
- Operating cash flow increased $132.4 million. The 2010 comparison included an $82.0 million adverse impact from the adoption of receivables-transfer accounting.
- The company repurchased approximately 10.4 million shares for $534.0 million during the first nine months. Through October 31, 2011, it repurchased an additional 0.4 million shares for $15.9 million.
- Long-term debt increased approximately $465.4 million from year-end, primarily supporting share repurchases and other capital needs.
- Goodwill increased $26.7 million to $1,560.0 million, primarily from an acquisition in the Interconnect Products and Assemblies segment.
Guidance, outlook, risks and unusual items
- A September 2011 flood damaged the Sidney, New York facility. The company recorded a $12.8 million pretax charge, or $8.1 million after tax, and estimated approximately $7.0 million of additional pretax cleanup and repair charges in Q4. The flood reduced Q3 sales by approximately $11.0 million and was expected to reduce Q4 sales by approximately $7.0 million.
- A previously recorded contingent acquisition obligation was reduced by $17.8 million because defense-market demand softened and related programs were deferred beyond the earn-out period. The adjustment increased nine-month net income by approximately $11.2 million, or $0.06 per share.
- Management expected liquidity from operating cash flow, cash and investments, the revolving facility and the receivables securitization facility to meet obligations for the next twelve months. Liquidity could be adversely affected by lower product demand, weaker financial ratios or deterioration in receivables quality.
- Management announced an intended increase in the quarterly dividend from $0.015 to $0.105 per share, effective with the first-quarter dividend payable in April 2012.
- Management cited material-cost increases, defense-market softness, program deferrals, foreign-exchange exposure, interest-rate exposure, acquisition execution and demand variability as relevant operating considerations.
- The effective tax rate was 23.5% in Q3 and 26.3% for the first nine months. Q3 included tax benefits related to the flood charge and prior-year audits; the nine-month rate included tax expense related to the contingent-consideration gain. Unrecognized tax benefits totaled approximately $21.6 million.
- Legal proceedings and environmental matters were described as not expected to have a material adverse effect. Certain historical environmental costs are reimbursed by Honeywell under an agreement.
- The company stated that there were no material changes to the risk factors disclosed in its 2010 Form 10-K, and that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether Q4 flood-related charges and production limitations approximate management’s estimates, including the expected $7.0 million pretax charge and $7.0 million sales impact.
- Whether defense-market softness and deferred programs continue to affect Interconnect Products and Assemblies sales and the contingent consideration outlook.
- Whether lower gross margins persist as a result of material costs, pricing, mix and operating leverage.
- The pace and funding of additional share repurchases, including the remaining authorization of approximately 9.2 million shares at October 31, 2011.
- The effect of increased debt and variable-rate borrowings on interest expense, liquidity and covenant compliance.
- Working-capital trends, particularly the increases in receivables and inventories and the related cash-conversion impact.
- The sustainability of reported earnings growth after excluding the $17.8 million contingent-consideration gain, flood-related items and one-time tax benefits.