Amphenol Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2009, compared with the corresponding 2008 periods. Amphenol operates through Interconnect Products and Assemblies, serving communications, aerospace, industrial, automotive and related markets, and Cable Products, serving communications, broadband and cable television markets. Management attributed weaker results primarily to the global economic crisis and reduced end-market demand.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net sales | $716.6 million | $863.7 million | $2,061.8 million | $2,481.2 million |
| Gross profit | $224.4 million | $281.3 million | $644.9 million | $808.7 million |
| Gross margin | 31.3% | 32.6% | 31.3% | 32.6% |
| Operating income | $124.3 million | $171.3 million | $350.5 million | $489.8 million |
| Operating margin | 17.3% | 19.8% | 17.0% | 19.7% |
| Net income attributable to Amphenol | $80.9 million | $113.0 million | $230.2 million | $320.4 million |
| Diluted EPS | $0.47 | $0.63 | $1.33 | $1.78 |
| Cash flow from operations | Not separately provided | Not separately provided | $430.6 million | $310.7 million |
- Q3 sales declined 17% in U.S. dollars and 16% in local currencies; nine-month sales declined 17% in U.S. dollars and 15% in local currencies.
- Interconnect Products and Assemblies represented approximately 90% of sales. Q3 sales declined 18% in U.S. dollars, while Cable Products sales declined 12%.
- SG&A declined to $100.1 million in Q3 and $294.5 million for nine months, but increased as a percentage of sales to 14.0% and 14.3%, respectively, from 12.7% and 12.9%.
- At September 30, 2009, cash and cash equivalents were $307.6 million, compared with $215.0 million at December 31, 2008. Cash, cash equivalents and short-term investments totaled $326.1 million.
- Total debt and capital lease obligations were approximately $792.5 million, including $792.0 million long term. Approximately $780.0 million was drawn on the $1.0 billion revolving credit facility, leaving $220.0 million available.
- Total assets were $3.14 billion and shareholders’ equity was $1.64 billion at September 30, 2009. Goodwill increased to $1.37 billion, primarily from two acquisitions.
Material changes versus the prior comparable period
- Lower demand in automotive, telecommunications, data communications, wireless communications, industrial, commercial aerospace and international broadband markets reduced sales across major geographic regions.
- Gross margin declined 130 basis points to 31.3%, principally reflecting lower production volumes. Interconnect segment margins decreased, while Cable Products margins improved from lower material costs and cost-reduction actions.
- Operating income decreased 27% in Q3 and 28% for nine months; net income attributable to Amphenol decreased 28% and 28%, respectively. Diluted EPS declined from $0.63 to $0.47 in Q3 and from $1.78 to $1.33 for nine months.
- Operating cash flow increased $119.9 million year over year, primarily from favorable working-capital changes, including lower receivables and inventories, despite lower earnings.
- Acquisition spending increased to $272.7 million from $100.4 million, and goodwill increased by $132.8 million. Capital additions declined to $45.6 million from $83.0 million.
- No shares were repurchased during the first nine months of 2009, compared with $143.7 million of treasury-stock purchases in the 2008 period. Approximately 1.8 million shares remained available under the repurchase authorization at September 30, 2009.
Guidance, outlook, risks and unusual items
- The filing does not provide specific revenue, earnings or margin guidance. Management expected ongoing liquidity needs for operations, capital expenditures, product development, dividends, debt service, potential repurchases and acquisitions to be funded by operating cash flow, available credit and receivables sales.
- Management stated that working capital, operating cash generation, revolving-credit availability and access to credit markets should support obligations for the next twelve months and the foreseeable future.
- Key risks include continued weakness in product demand, economic and currency conditions, pricing and competitive pressures, cost factors, deterioration in financial ratios or credit ratings, and deterioration in receivables quality.
- The receivables securitization facility permits sales of up to $100.0 million and expires in May 2010. Approximately $76.0 million of receivables had been sold and excluded from accounts receivable at September 30, 2009.
- Interest-rate swaps totaling $650.0 million fixed portions of LIBOR exposure at rates of 4.40%, 4.65% and 4.73%; their September 30 fair value represented a pre-tax termination loss of $11.8 million. Approximately $11.8 million was expected to be reclassified from accumulated other comprehensive loss into earnings over the following twelve months.
- The effective tax rate was 27.5% for Q3 and 26.4% for nine months, compared with 28.0% and 28.7%, respectively, in 2008. The nine-month rate benefited from a $3.6 million reduction related to completed prior-year tax audits.
- Unrecognized tax benefits were approximately $36.6 million. Pension funding requirements were met, and no U.S. pension contribution was required or expected in 2009.
- Legal, environmental and other proceedings were not expected by management to have a material adverse effect. Certain environmental costs are covered by the Honeywell Agreement.
- The company adopted new accounting guidance, including the FASB Accounting Standards Codification. It was evaluating the potential impact of SFAS 166 and SFAS 167, including possible effects on receivables securitization and variable-interest-entity accounting.
Important facts for investors to verify
- Whether end-market demand and sales volumes recover, particularly in communications, automotive, industrial and commercial aerospace markets.
- Whether gross and operating margins stabilize as cost reductions offset lower volumes.
- Debt maturity, covenant compliance, interest-rate exposure and the $220.0 million remaining revolving-credit availability.
- Renewal or replacement of the receivables securitization facility before its May 2010 expiration and the effect of applicable accounting changes.
- Acquisition integration, purchase-accounting finalization and the substantial goodwill balance.
- Potential cash requirements for acquisitions, performance-based acquisition consideration, dividends, repurchases and debt service.
- Future tax payments, recognition of unrecognized tax benefits, pension funding needs and environmental or legal contingencies.