Amphenol Corporation — Q2 2010 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2010. Amphenol operates through Interconnect Products and Assemblies, serving communications, aerospace, industrial and automotive markets, and Cable Products, serving primarily communications and broadband markets. The financial statements are unaudited.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $884.8 million | $685.2 million | $1,655.8 million | $1,345.2 million |
| Gross profit | $289.3 million | $214.2 million | $538.5 million | $420.5 million |
| Gross margin | 32.7% | 31.3% | 32.5% | 31.3% |
| Operating income | $175.6 million | $115.5 million | $320.7 million | $226.2 million |
| Net income attributable to Amphenol shareholders | $129.7 million | $74.9 million | $228.0 million | $149.3 million |
| Diluted EPS | $0.74 | $0.43 | $1.30 | $0.86 |
| Operating cash flow | Not separately provided | Not separately provided | $135.9 million | $284.6 million |
Q2 operating margin was approximately 19.8%, compared with 16.9% in the prior-year quarter. Six-month operating margin was approximately 19.4%, compared with 16.8%. SG&A was $113.7 million in Q2 and $217.8 million for the six-month period, representing 12.8% and 13.2% of sales, respectively.
At June 30, 2010, cash and cash equivalents were $436.7 million and short-term investments were $82.6 million, for total cash and short-term investments of approximately $519.3 million. Total debt consisted primarily of $781.6 million of long-term debt and $0.4 million of short-term debt. Revolving credit borrowings were $150.0 million, with $602.0 million available under the $752.0 million facility.
Material changes versus the prior comparable period
- Q2 sales increased 29% in U.S. dollars and 30% in local currencies; six-month sales increased 23% in U.S. dollars and 22% in local currencies.
- Interconnect Products and Assemblies sales increased 31% in Q2 and 24% for the first six months in U.S. dollars. Cable Products sales increased 6% and 11%, respectively.
- Management cited stronger demand across telecommunications, data communications, industrial, automotive and wireless communications markets, with moderate improvement in aerospace.
- Operating income increased 52% in Q2 and 42% for the first six months. The principal drivers were higher volume and cost management, particularly in Interconnect Products and Assemblies.
- Operating margins in Cable Products declined approximately 2.3 percentage points in Q2 and 0.5 percentage points for the first six months because of higher material costs and price reductions.
- The effective tax rate declined to 21.3% in Q2 from 27.5%, and to 23.4% for the first six months from 25.8%. Q2 benefited from a $10.3 million net reduction in international tax expense relating primarily to favorable tax-position settlements and completed audits.
- Operating cash flow declined to $135.9 million from $284.6 million. Excluding the $82.0 million accounting impact from the receivables securitization change, 2010 operating cash flow was $217.9 million.
- Cash increased $52.1 million during the first six months, compared with a $5.8 million increase in the prior-year period. The 2010 period included $43.1 million of capital expenditures, $13.6 million of acquisition payments and $44.6 million of short-term investment purchases.
Guidance, outlook, risks and unusual items
Management stated that cash, investments, expected operating cash generation, available credit and access to capital markets should fund operating needs, capital expenditures, product development, pension obligations, dividends and debt service for at least the next twelve months. The filing does not provide specific revenue or earnings guidance.
- The company adopted ASU 2009-16 effective January 1, 2010. Receivables previously treated as sold are now reflected as secured borrowings; $82.0 million reduced reported operating cash flow and increased financing cash flow. Borrowings under the facility were $28.0 million at June 30, 2010, and the facility was extended to May 2013.
- The company issued $600.0 million of 4.75% unsecured Senior Notes due November 2014. The revolving credit facility matures in August 2011 and includes financial covenants with which the company was compliant at June 30, 2010.
- Interest-rate swaps totaling $150.0 million fixed LIBOR at 4.73% and were scheduled to expire in July 2010. Their June 30 fair value represented a pre-tax loss of approximately $0.4 million.
- Accounts receivable rose to $645.6 million, partly because of the receivables accounting change and higher sales. Days sales outstanding increased to approximately 66 days from 64 days at December 31, 2009. Inventory increased to $498.6 million, while inventory days improved to 75 from 80.
- Management estimated a possible voluntary 2010 contribution of approximately $15.0 million to the U.S. pension plan.
- Unrecognized tax benefits were approximately $29.5 million; approximately $7.0 million could be affected by audits or statute expirations over the following twelve months.
- Legal proceedings and environmental matters were not expected by management to have a material adverse effect. Certain legacy environmental costs are reimbursable by Honeywell under the Honeywell Agreement.
- Principal risks include economic and currency conditions, market demand, pricing, competition and costs. The filing reported no material changes to the risk factors in the 2009 Form 10-K.
Most important facts for investors to verify
- Whether the strong 2010 sales recovery, particularly in communications, industrial and automotive markets, was sustainable beyond the comparison with weak 2009 demand.
- The effect of working-capital growth, especially receivables and inventory, on normalized operating cash flow.
- The ongoing impact of the ASU 2009-16 receivables-securitization accounting change on reported debt and cash flow.
- Refinancing and covenant considerations for the $150.0 million revolving facility borrowing and the facility’s August 2011 maturity.
- The sustainability of the lower effective tax rate after the $10.3 million Q2 international tax benefit.
- Cable Products margin pressure from material costs and price reductions.
- Potential pension contributions, tax settlements and environmental or legal contingencies.
- The company’s ability to maintain liquidity while funding acquisitions, capital expenditures, product development, dividends and debt service.