Amphenol Corporation Form 10-Q Summary
Business context and reporting period
Amphenol Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company operates through two reportable segments: Interconnect Products and Assemblies, and Cable Products and Solutions. The filing compares the three and six months ended June 30, 2014 with the comparable 2013 periods.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $1,314.2 million | $1,136.1 million | $2,560.2 million | $2,215.9 million |
| Gross profit | $416.8 million | $359.8 million | $805.6 million | $697.7 million |
| Gross margin | 31.7% | 31.7% | 31.5% | 31.5% |
| Operating income | $255.8 million | $224.0 million | $487.9 million | $431.0 million |
| Operating margin | 19.5% | 19.7% | 19.1% | 19.4% |
| Net income attributable to Amphenol | $174.9 million | $154.0 million | $333.4 million | $307.0 million |
| Diluted EPS | $1.09 | $0.95 | $2.07 | $1.89 |
| Operating cash flow | Not separately provided | Not separately provided | $383.3 million | $360.8 million |
For the quarter, sales increased 16% in U.S. dollars, 15% in local currencies and 7% organically. For the six-month period, sales increased 16% in U.S. dollars, 15% in local currencies and 7% organically. Interconnect Products and Assemblies represented approximately 93% of sales and grew 17% in U.S. dollars in both periods. Cable Products and Solutions represented approximately 7% of sales and grew 2% in the quarter and 3% for the six months.
At June 30, 2014, cash and cash equivalents were $1,080.1 million and short-term investments were $363.8 million, for total cash, cash equivalents and short-term investments of $1,443.9 million. Total debt was $2,343.6 million, including $800.7 million classified as short-term and $1,542.9 million classified as long-term. The company had $1,210.0 million available under its $1,500.0 million revolving credit facility and was in compliance with its financial covenants.
Capital expenditures were $105.9 million during the first six months, while acquisitions, net of cash acquired, used $19.5 million. The company repurchased 2.8 million shares for $250.2 million and paid $31.4 million in dividends. The quarterly dividend was increased from $0.20 to $0.25 per share effective with the third-quarter 2014 dividend.
Material changes versus the prior comparable period
- Six-month net sales increased by $344.4 million, or 16%, driven by organic growth, acquisitions and favorable foreign currency translation.
- Net income attributable to Amphenol increased 9% for the quarter and 9% for the six months; diluted EPS increased to $1.09 from $0.95 and to $2.07 from $1.89, respectively.
- Gross margins were stable, but operating margins declined 20 basis points for the quarter and 30 basis points for the six months.
- Management attributed the margin pressure primarily to the inclusion of a late-2013 acquisition with lower-than-average margins and weaker margins in Cable Products and Solutions due to pricing and product mix.
- Interest expense increased to $20.1 million for the quarter and $39.2 million for the six months, primarily because of higher average debt associated with share repurchases and acquisitions.
- Cash flow from operations increased to $383.3 million from $360.8 million, although working capital used $41.3 million, principally because of higher accounts receivable and inventory.
- The company issued approximately $748.8 million of senior notes during the first six months and reduced borrowings under credit facilities by approximately $538.5 million on a net basis.
- The first six months of 2014 included $2.0 million of acquisition-related expenses, reducing net income by approximately $1.3 million, or $0.01 per share.
Guidance, outlook, risks and unusual items
Management stated that cash, cash equivalents and short-term investments, operating cash generation and available credit capacity are expected to fund obligations for the next twelve months. Primary cash requirements include operations, capital expenditures, product development, share repurchases, dividends, pension contributions, debt service and potential acquisitions.
The company estimated 2014 pension-plan contributions of approximately $20.0 million, including approximately $4.0 million contributed during the first six months. The timing and amount of future contributions may vary with plan-asset performance.
A $600.0 million principal amount of 4.75% senior notes was scheduled to mature in November 2014. Other senior notes included $750.0 million due in January 2019 and $500.0 million due in February 2022. The company also had $200.0 million outstanding under its uncommitted Credit Agreement, leaving no availability under that facility at June 30, 2014.
The company identified foreign currency and interest-rate exposure but reported no material change from its 2013 Annual Report. Management stated that a 10% change in LIBOR would have no material effect on interest expense and that interest-rate changes were not expected to materially affect 2014 income or cash flows.
The filing reports several legal actions arising from normal business activities, but management does not expect them to materially affect financial condition, results of operations or cash flows. Environmental compliance costs were also not expected to be material. There were no material changes to previously disclosed risk factors.
The company was evaluating newly issued revenue-recognition guidance, ASU 2014-09, which was effective for annual periods beginning after December 15, 2016 and was not expected to be early adopted.
Important facts for investors to verify
- Verify the refinancing, repayment or other disposition of the $600.0 million senior notes due November 2014.
- Assess whether the lower operating margins in the Interconnect and Cable segments persisted after the quarter.
- Review acquisition performance, including the acquired business that reduced consolidated margins.
- Monitor leverage, interest expense and available revolving-credit capacity following debt issuance and substantial share repurchases.
- Evaluate working-capital trends, particularly accounts receivable, inventory and accounts payable.
- Confirm the effect of the July 2014 dividend increase to $0.25 per share and subsequent share repurchase activity.
- Track tax audits and the approximately $16.2 million of unrecognized tax benefits, including approximately $2.5 million potentially affected over the following twelve months.
- Review pension funding requirements, acquisition contingencies, legal proceedings and foreign-currency exposure.