Amphenol Corporation — 2009 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2009, compared with the corresponding 2008 periods. Amphenol manufactures interconnect products and assemblies and cable products serving communications, aerospace, industrial, automotive, wireless and broadband markets. The filing attributes weaker demand primarily to the global economic crisis.
Financial Results and Key Metrics
| Metric | Q2 2009 | Q2 2008 | Six Months 2009 | Six Months 2008 |
|---|---|---|---|---|
| Net sales | $685.2 million | $846.8 million | $1,345.2 million | $1,617.5 million |
| Gross profit | $214.2 million | $276.6 million | $420.5 million | $527.5 million |
| Gross margin | 31.3% | 32.7% | 31.3% | 32.6% |
| Operating income | $115.5 million | $168.2 million | $226.2 million | $318.5 million |
| Operating margin | 16.9% | 19.9% | 16.8% | 19.7% |
| Net income attributable to Amphenol | $74.9 million | $110.0 million | $149.3 million | $207.5 million |
| Diluted EPS | $0.43 | $0.61 | $0.86 | $1.15 |
| Cash flow from operations | Not separately provided | Not separately provided | $284.6 million | $205.8 million |
Q2 net sales declined 19% in U.S. dollars and 16% in local currencies. Six-month sales declined 17% in U.S. dollars and 14% in local currencies. The Interconnect Products and Assemblies segment represented approximately 91% of sales; its Q2 sales declined 19% in U.S. dollars. Cable Products represented approximately 9% of sales; its Q2 sales declined 16% in U.S. dollars.
June 30, 2009 cash and cash equivalents were $220.8 million, compared with $215.0 million at December 31, 2008. Total debt and capital lease obligations were approximately $821.1 million, including $820.6 million long term. Approximately $814.0 million was drawn under the $1.0 billion revolving credit facility, leaving $186.0 million available. The company was in compliance with all debt covenants.
Six-month investing cash outflows included $271.6 million for acquisitions and $30.8 million for capital additions. Financing cash inflows included $35.3 million of net revolving-facility borrowings. Receivables sold under the securitization program totaled approximately $79.0 million at June 30, 2009.
Material Changes Versus the Prior Comparable Period
- Demand weakened substantially in automotive, telecommunications, data communications, industrial, aerospace and international broadband and cable television markets.
- Gross margin decreased 140 basis points in Q2 and 130 basis points for the first six months, primarily because of lower volume. Interconnect segment margins declined, while Cable Products margins improved from lower material costs and cost-reduction actions.
- SG&A decreased in absolute dollars but increased to 14.4% of sales from approximately 12.8% to 12.9% in the comparable periods, reflecting operating deleverage.
- Operating income declined 31% in Q2 and 29% for the first six months; diluted EPS declined from $0.61 to $0.43 and from $1.15 to $0.86, respectively.
- Operating cash flow increased by $78.8 million year over year, mainly from working-capital reductions, including lower receivables and inventory, despite lower net income.
- Goodwill increased $117.4 million to $1.35 billion, primarily from two Interconnect Products and Assemblies acquisitions. Acquisition-related cash payments were substantially higher than in the prior-year period.
- No shares were repurchased during the first six months of 2009, compared with $143.7 million of treasury-stock purchases in the first six months of 2008.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific revenue or earnings guidance. Management expects ongoing cash requirements for operations, capital expenditures, product development, dividends, debt service, share repurchases and potential acquisitions. Management believes cash from operations, cash on hand, revolving-credit availability and receivables sales will fund obligations for the next twelve months and the foreseeable future.
- Key risks include continued weak end-market demand, economic and currency conditions, pricing and competitive pressures, cost factors, reduced credit availability, declining credit ratings and deterioration in receivables quality.
- Interest-rate swaps covering $650.0 million of borrowings fixed LIBOR rates between 4.40% and 4.73%. Their June 30, 2009 fair-value liability was $17.1 million, recorded in accumulated other comprehensive loss.
- The receivables securitization agreement was amended and extended to May 2010 and permits sales of up to $100.0 million of qualifying receivables.
- Unrecognized tax benefits totaled approximately $34.4 million. The six-month effective tax rate was 25.8%, versus 29.1% in 2008, primarily from a more favorable geographic mix and a $3.6 million first-quarter tax benefit from completed audits.
- Pension and post-employment benefit obligations totaled $169.7 million. The company expects to make minimum required pension contributions and may make voluntary contributions depending on plan-asset performance.
- Management expects legal proceedings and environmental matters, including sites covered by the Honeywell reimbursement agreement, to have no material effect on financial condition or results of operations.
- The company adopted SFAS 141R, SFAS 160, SFAS 161 and SFAS 165 during the period; the filing states that these adoptions did not have a material impact on the financial statements.
Investor Verification Checklist
- Verify whether the sharp 2009 sales decline and lower Interconnect segment margins were temporary or reflected lasting changes in end-market demand.
- Review acquisition purchase-price allocations, the $1.35 billion goodwill balance and potential impairment sensitivity.
- Monitor revolving-credit utilization, covenant compliance, the $186.0 million availability and the August 2011 facility expiration.
- Assess liquidity after acquisition spending, debt service, capital expenditures, pension contributions and potential share repurchases.
- Evaluate exposure from the $79.0 million receivables securitization balance and its May 2010 renewal or termination provisions.
- Track interest-rate swap expirations, refinancing requirements and the $17.1 million derivative liability.
- Review subsequent quarterly filings for changes in economic conditions, currency effects, tax positions, pension funding and environmental or legal contingencies.