Amphenol Corporation 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2013, filed November 1, 2013. Amphenol designs and manufactures interconnect products and assemblies for communications, defense, aerospace, industrial, automotive and other markets, plus cable products primarily for broadband communications.
- Interconnect Products and Assemblies represented approximately 92% of sales; Cable Products represented approximately 8%.
- Results are not necessarily indicative of full-year results.
Financial Highlights
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $1,153.1 million | $1,103.4 million | $3,368.9 million | $3,146.1 million |
| Gross profit | $363.8 million | $344.3 million | $1,061.5 million | $987.8 million |
| Operating income | $224.5 million | $215.7 million | $655.5 million | $607.1 million |
| Net income attributable to Amphenol | $160.8 million | $147.5 million | $467.8 million | $415.0 million |
| Diluted EPS | $0.99 | $0.90 | $2.88 | $2.53 |
| Operating cash flow | Not separately provided | Not separately provided | $557.7 million | $467.6 million |
- Sales increased 5% in Q3 and 7% for the first nine months in U.S. dollars. Nine-month organic sales growth was 3%; Q3 organic sales were approximately flat.
- Gross margin was approximately 31.6% in Q3 and 31.5% for the first nine months, compared with 31.2% and 31.4%, respectively, in the prior-year periods.
- Operating margin based on reported operating income was approximately 19.5% in Q3 and 19.5% for the first nine months, compared with approximately 19.5% and 19.3% in the comparable periods.
- Q3 and nine-month effective tax rates were 23.9%, compared with 26.8% in 2012. Excluding specified tax benefits and acquisition-related expenses, management reported adjusted effective rates of 25.5% for Q3 and 26.3% for nine months.
Cash Flow, Liquidity and Debt
- Cash, cash equivalents and short-term investments totaled $1.284 billion at September 30, 2013, including $889.4 million of cash and cash equivalents.
- Total debt was approximately $1.870 billion, consisting of $85.0 million of short-term debt and $1.785 billion of long-term debt. The filing does not present a consolidated net-debt figure; cash and investments exceeded total debt by approximately $586 million.
- Operating cash flow of $557.7 million funded capital expenditures of $105.7 million, net acquisitions of $44.0 million, treasury-stock purchases of $297.0 million, dividends of $33.5 million and net purchases of short-term investments of $142.6 million.
- The revolving credit facility was amended in July 2013, increasing commitments to $1.5 billion and extending maturity to July 2018. Borrowings were $683.8 million, with $816.2 million available at quarter-end. The company was in compliance with its financial covenants.
- The company had $600 million of 4.75% senior notes due November 2014 and $500 million of 4.00% senior notes due February 2022.
- Receivables securitization borrowings were $84.5 million. A new $100 million uncommitted unsecured credit facility entered into in October 2013 was intended to replace this facility, which was scheduled for termination on November 15, 2013.
- Management stated that cash, operating cash flow and available credit were expected to fund obligations for the next twelve months.
Material Changes Versus Prior Comparable Period
- Sales growth was driven by commercial aerospace, automotive, industrial, information technology and data communications, as well as acquisitions. Mobile-device sales declined.
- Cable Products sales increased 28% in Q3 and 20% for the first nine months, primarily reflecting a 2012 acquisition. Cable segment operating margin increased approximately 140 basis points in Q3 and 20 basis points for nine months.
- Interconnect Products and Assemblies sales increased 3% in Q3 and 6% for nine months; its operating margin increased approximately 30 basis points in both periods due mainly to volume and cost reductions.
- Acquisition-related expenses were $2.5 million in Q3 and nine-month 2013, reducing net income by approximately $2.1 million, or $0.01 per diluted share.
- Interest expense increased to $16.0 million in Q3 and $47.1 million for nine months, primarily because of higher average debt related to share repurchases.
- The company repurchased 3.96 million shares for $297.0 million during the first nine months under a program authorizing up to 10 million shares through January 31, 2015. The quarterly dividend increased from $0.105 to $0.20 per share beginning with the third quarter dividend.
- Goodwill increased $39.7 million from December 31, 2012 to $1.972 billion, primarily due to a second-quarter acquisition and foreign-currency translation.
Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide specific earnings or revenue guidance.
- Management identified ongoing cash requirements for operations, capital expenditures, product development, share repurchases, pensions, dividends, debt service and potential acquisitions.
- Liquidity could be adversely affected by lower product demand, deterioration in financial ratios or deterioration in accounts-receivable quality.
- Foreign-exchange and interest-rate risks remain relevant. Management stated that a 10% change in LIBOR at quarter-end would not materially affect interest expense and that no material change had occurred in its market-risk assessment.
- Legal proceedings arise from normal business activities; management does not expect them to have a material adverse effect.
- Environmental matters include remediation and monitoring at several sites, including Superfund-related sites. Costs for three sites are currently reimbursed by Honeywell under a 1987 agreement; management does not expect environmental liabilities to be material.
- Unrecognized tax benefits were approximately $13.1 million at September 30, 2013, of which approximately $2.2 million could be affected by audits or expiring statutes of limitation during the following twelve months.
- Pension contributions totaled approximately $15.0 million through nine months, and 2013 contributions were estimated at approximately $21.0 million, subject to plan investment performance and other factors.
Investor Verification Checklist
- Verify the sustainability of reported sales growth, particularly the acquisition contribution versus organic growth and the decline in mobile-device sales.
- Assess the effect of the $297.0 million share-repurchase program and higher leverage on future interest expense, liquidity and capital allocation.
- Review the November 2014 maturity of the $600 million senior notes and the company’s refinancing plans.
- Separate recurring tax performance from the $3.6 million third-quarter and $11.3 million first-quarter tax benefits.
- Monitor acquisition integration, goodwill concentration and potential impairment risk, given goodwill of $1.972 billion.
- Review foreign-exchange exposure, derivative valuations, pension funding requirements, tax audits, legal matters and environmental obligations.