Business Context and Reporting Period
Amphenol Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2011. The company operates through two reportable segments: Interconnect Products and Assemblies, serving communications, aerospace, industrial and automotive markets, and Cable Products, serving primarily communications and cable television markets.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $940.6 million | $771.0 million | 22% |
| Gross profit | $304.1 million | $249.2 million | 22% |
| Gross margin | 32.3% | 32.3% | Flat |
| Operating income | $186.1 million | $145.0 million | 28% |
| Operating margin | 19.8% | 18.8% | Up approximately 100 bps |
| Net income attributable to Amphenol | $128.0 million | $98.4 million | 30% |
| Diluted EPS | $0.72 | $0.56 | 29% |
| Cash flow from operations | $107.7 million | $31.8 million | Higher; comparison affected by 2010 accounting adoption |
Interconnect Products and Assemblies sales increased 25% to $877.5 million, while Cable Products sales declined 6% to $63.1 million. Segment operating income increased to $201.6 million from $158.7 million. Interconnect margins improved approximately 1.0 percentage point, while Cable Products margins declined approximately 3.1 percentage points.
Cash, cash equivalents and short-term investments totaled $691.4 million at March 31, 2011, including cash and cash equivalents of $593.0 million. Accounts receivable were $744.2 million and inventories were $603.0 million. Total assets were $4.17 billion.
Total debt consisted primarily of $949.4 million of long-term debt and $0.3 million of short-term debt. Revolving credit facility borrowings were $250.2 million, with $749.8 million available under the $1.0 billion facility. Receivables securitization borrowings were $93.8 million, and the company had $600.0 million principal amount of 4.75% senior notes due November 2014.
Operating cash flow benefited from higher net income but was reduced by a $44.1 million working-capital investment and a $15.0 million pension contribution. Capital expenditures were $23.2 million. The company repurchased approximately 3.4 million shares for $188.5 million and paid $2.6 million of dividends. Net cash increased $67.1 million to $593.0 million.
Material Changes Versus the Prior Comparable Period
- Sales increased 22% in U.S. dollars and 21% in local currencies, reflecting broad-based strength across most major end markets. International sales increased 24% in U.S. dollars and 23% in local currencies; U.S. sales increased approximately 19%.
- Gross margin remained approximately 32.3%, while operating margin improved due primarily to higher volume and cost management in the Interconnect segment.
- SG&A increased to $118.0 million from $104.1 million, but declined to 12.5% of sales from 13.5%, reflecting higher sales volume and increased research and development spending.
- Net income attributable to Amphenol increased 30%, and diluted EPS increased to $0.72 from $0.56.
- Operating cash flow increased from $31.8 million to $107.7 million. The 2010 comparison included an $82.0 million reduction related to adoption of ASU 2009-16 for receivables transfers; excluding that effect, 2011 operating cash flow was affected by increased working capital and pension funding.
- The company initiated substantial share repurchases in Q1 2011. Through April 30, 2011, approximately 4.3 million shares had been repurchased for $238.8 million, with approximately 15.7 million shares remaining under the authorization.
- Long-term debt increased from $799.6 million at December 31, 2010 to $949.4 million at March 31, 2011, primarily reflecting higher revolving facility and receivables securitization borrowings.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that it expects cash, operating cash flow, available credit facilities and short-term investments to fund obligations for the next twelve months.
Management identified ongoing cash requirements including operations, capital expenditures, product development, share repurchases, pension funding, dividends, debt service and potential acquisitions. Liquidity could be adversely affected by lower product demand, deterioration in financial ratios or deterioration in accounts receivable quality.
The company was in compliance with its revolving credit facility covenants at March 31, 2011. Management estimated 2011 pension contributions of approximately $23.0 million, including the $15.0 million contribution made during the quarter.
An acquisition-related contingent consideration payment of $40.0 million was made in April 2011. A further payment of $19.0 million is due in April 2012 based on specified 2011 profitability levels.
The company reported approximately $24.4 million of unrecognized tax benefits that could affect the effective tax rate if recognized. Approximately $5.0 million may be affected by audits or statute expirations over the following twelve months.
Legal proceedings and environmental matters arise in the ordinary course of business, but management does not expect them to have a material adverse effect. Environmental remediation costs for specified sites are reimbursed by Honeywell under an existing agreement. The filing states that there were no material changes to previously disclosed risk factors. Key market risks include economic conditions, currency movements, demand, pricing, competition, costs and interest rates.
Important Facts for Investors to Verify
- Confirm whether the strong Interconnect Products and Assemblies growth continued and whether Cable Products recovered from lower North American broadband spending.
- Monitor gross margin stability and the effects of material costs, pricing and foreign-currency movements.
- Assess working-capital trends, particularly inventory days, which increased from 77 to 85, and accounts receivable days, which increased from 68 to 71.
- Track debt levels, revolving facility utilization, refinancing requirements and compliance with financial covenants.
- Evaluate the cash impact of share repurchases, including the remaining authorization of approximately 15.7 million shares as of April 30, 2011.
- Verify the timing and amount of the $19.0 million contingent consideration payment due in April 2012 and estimated pension contributions.
- Review tax audits and the potential realization or reversal of approximately $24.4 million in unrecognized tax benefits.
- Consider the company’s stated exposure to demand, pricing, competitive, cost, currency and broader economic risks.