Amphenol Corporation — Q1 2010 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2010, compared with the same period in 2009. Amphenol operates through Interconnect Products and Assemblies and Cable Products segments, serving communications, aerospace, industrial, automotive, broadband and cable television markets.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $771.0 million | $660.0 million | +17% in U.S. dollars; +14% in local currencies |
| Gross profit | $249.2 million | $206.4 million | +21% |
| Gross margin | 32.3% | 31.3% | +1.0 percentage point |
| Operating income | $145.0 million | $110.7 million | +31% |
| Operating margin | 18.8% | 16.8% | +2.0 percentage points |
| Net income attributable to Amphenol shareholders | $98.4 million | $74.4 million | +32% |
| Diluted EPS | $0.56 | $0.43 | +30% |
| Cash flow from operations | $31.8 million | $142.8 million | Down $110.9 million |
- Interconnect Products and Assemblies sales increased to $703.6 million from $602.0 million; segment operating income increased to $148.7 million from $116.4 million.
- Cable Products sales increased to $67.4 million from $58.0 million; segment operating income increased to $10.0 million from $7.8 million.
- Cash and cash equivalents were $431.7 million at March 31, 2010, compared with $384.6 million at December 31, 2009. Cash, cash equivalents and short-term investments totaled $477.8 million.
- Total debt was approximately $802.0 million, consisting of $752.5 million of long-term debt and $49.4 million of short-term debt. The short-term balance includes $49.0 million drawn under the receivables securitization facility.
- The $752.0 million revolving credit facility had $150.0 million borrowed and $602.0 million available. The company was in compliance with its financial covenants.
- Capital expenditures were approximately $18.4 million, acquisition spending was $3.0 million, and dividends paid were $2.6 million.
Material changes versus the prior comparable period
- Sales benefited from broad recovery in automotive, telecommunications, data communications, industrial, broadband and cable television markets compared with weak first-quarter 2009 demand during the global economic crisis.
- Higher volumes and cost-control actions improved operating margins in both segments. SG&A increased to $104.1 million from $95.7 million, but declined to 13.5% of sales from 14.5%.
- Operating cash flow declined primarily because adoption of ASU 2009-16 reduced operating cash flow by $82.0 million, while working capital absorbed $15.3 million. The accounting change also brought receivables previously treated as sold onto the balance sheet and classified the related financing as short-term debt.
- Accounts receivable increased to $572.6 million from $449.6 million at year-end 2009, including the $82.0 million accounting reclassification and higher sales. Inventory increased to $476.1 million from $461.8 million.
- The effective tax rate increased to 26.1% from 24.1%, primarily because the company recognized smaller reductions in tax expense from the resolution of uncertain tax positions.
Guidance, outlook, risks and unusual items
- No specific earnings or revenue guidance was provided in the filing. Management stated that first-quarter results are not necessarily indicative of full-year results.
- Management expected liquidity to fund operating and capital expenditures, product development, dividends, debt service and potential acquisitions for at least the next twelve months.
- The receivables securitization facility, with borrowings of $49.0 million and capacity of up to $100.0 million, was scheduled to expire in May 2010; management intended to replace it with a similar program.
- The company estimated a voluntary U.S. pension contribution of approximately $15.0 million to $20.0 million during 2010.
- Unrecognized tax benefits that could affect the effective tax rate totaled approximately $39.4 million; approximately $19.0 million could be affected by audits or statute expirations over the following twelve months.
- The company had $150.0 million of interest-rate swaps fixing LIBOR at 4.73% through July 2010. The swaps had a pre-tax fair-value loss of $2.1 million at March 31, 2010.
- Legal proceedings and environmental matters, including sites covered by a Honeywell reimbursement agreement, were not expected by management to have a material adverse effect. The filing identifies economic conditions, currency movements, demand, pricing, competition and costs as key forward-looking risks.
- The company’s stock repurchase program authorizing up to 20 million shares expired January 31, 2010; no shares were repurchased under the program in 2010 before expiration.
Investor verification points
- Verify the sustainability of the market recovery and the reported margin expansion after the unusually weak Q1 2009 comparison.
- Assess operating cash conversion, particularly the effects of receivables, inventory and working-capital growth excluding the ASU 2009-16 accounting change.
- Monitor refinancing or replacement of the receivables securitization facility and compliance with revolving-credit covenants.
- Evaluate total leverage, the 2014 senior notes maturity, variable-rate exposure and the July 2010 expiration of interest-rate swaps.
- Review pension funding requirements, tax-audit outcomes and the potential resolution of approximately $39.4 million of unrecognized tax benefits.