Amphenol Corporation — Q2 2013 Form 10-Q Summary
Business context and reporting period
Amphenol designs and manufactures interconnect products, assemblies, antennas, connectors, cable and related products serving communications, defense, commercial aerospace, industrial, automotive, mobile network and broadband markets. The filing covers the unaudited three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,136.1 million | $1,061.1 million | $2,215.9 million | $2,042.7 million |
| Gross profit | $359.8 million | $334.2 million | $697.7 million | $643.4 million |
| Gross margin | 31.7% | 31.5% | 31.5% | 31.5% |
| Operating income | $224.0 million | $206.2 million | $431.0 million | $391.5 million |
| Operating margin | 19.7% | 19.4% | 19.4% | 19.2% |
| Net income attributable to Amphenol | $154.0 million | $140.9 million | $307.0 million | $267.5 million |
| Diluted EPS | $0.95 | $0.86 | $1.89 | $1.63 |
- Q2 sales increased 7% in U.S. dollars and local currencies and 3% organically. Six-month sales increased 8% in U.S. dollars and local currencies and 4% organically.
- Interconnect Products and Assemblies represented approximately 92% of sales; Q2 sales increased 6%. Cable Products sales increased 19%, primarily reflecting a 2012 acquisition.
- Management cited growth across nearly all served markets, led by commercial aerospace, automotive and mobile networks.
- Six-month operating cash flow was $360.8 million, compared with $291.6 million in 2012. Capital expenditures were $66.0 million, acquisitions used $44.0 million, and net purchases of short-term investments used $167.2 million.
- Cash, cash equivalents and short-term investments totaled $1.143 billion at June 30, 2013, including cash and cash equivalents of $723.7 million.
- Total debt was approximately $1.783 billion, consisting primarily of $594.1 million drawn on the revolving credit facility, $82.0 million under the receivables securitization facility and $1.1 billion of senior notes principal. Total shareholders’ equity was $2.585 billion.
- At June 30, 2013, the $1.0 billion revolving facility had $405.9 million of availability, and the Company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Q2 net sales increased 7%, operating income increased 9%, and net income attributable to Amphenol increased 9%. Six-month net sales increased 8%, operating income increased 10%, and net income increased 15%.
- Gross margin improved by approximately 20 basis points in Q2 and was flat for the six-month period. Selling, general and administrative expense declined to 12.0% of sales from 12.1% in Q2 2012 and 12.3% in the first six months of 2012.
- Interest expense increased to $15.6 million in Q2 and $31.1 million for the first six months, primarily because of higher average debt associated with stock repurchases.
- Operating cash flow increased $69.2 million year over year, while cash flow used in investing activities increased to $275.9 million from $144.1 million, largely because of higher purchases of short-term investments.
- The Company repurchased 2.47 million shares for $181.1 million during the first six months. Through July 31, 2013, it repurchased an additional 669,054 shares for $51.9 million.
- Goodwill increased $19.5 million to $1.952 billion, primarily due to a second-quarter acquisition, partially offset by foreign currency translation.
Outlook, commentary, risks and unusual items
- The filing does not provide a specific full-year revenue or earnings guidance range. Management stated that cash, investments, operating cash flow and available credit are expected to fund obligations for the next twelve months.
- On July 1, 2013, the revolving facility was amended to reduce borrowing costs, extend maturity from July 2016 to July 2018 and increase commitments from $1.0 billion to $1.5 billion. Availability was approximately $906 million on July 1.
- The quarterly dividend was increased in July 2013 from $0.105 to $0.20 per share, beginning with the dividend expected around October 2, 2013.
- The six-month effective tax rate was 24.0%, benefiting from an $11.3 million first-quarter tax benefit related to retroactive reinstatement of certain U.S. tax provisions. Excluding that benefit, the rate was 26.8%.
- Unrecognized tax benefits totaled approximately $17.8 million, of which approximately $5.8 million could be affected by audits or statute expirations over the following twelve months.
- Management identified demand reductions, deterioration in financial ratios or receivables quality, foreign exchange, interest rates, market conditions, product pricing and mix, acquisitions, environmental matters, litigation and pension funding as relevant risks. No material changes to previously disclosed risk factors were reported.
- Legal proceedings and environmental obligations arise in the ordinary course. Management does not expect them to have a material effect; certain legacy environmental costs are reimbursed by Honeywell under the 1987 acquisition agreement.
- Estimated 2013 defined-benefit pension contributions are approximately $21.0 million, including $4.0 million contributed during the first six months.
Important facts for investors to verify
- Confirm the sustainability of 3% organic Q2 growth and the contribution from acquisitions, particularly in interconnect and cable products.
- Reconcile reported operating income with segment operating income and monitor the effect of stock-based compensation, amortization and other corporate costs.
- Assess leverage, the November 2014 maturity of the $600 million 4.75% senior notes, and the Company’s reliance on revolving and receivables-backed borrowings to fund repurchases and acquisitions.
- Evaluate whether the higher dividend and continuing share repurchases are consistent with future cash generation and acquisition requirements.
- Track the effective tax rate excluding the one-time $11.3 million benefit and monitor tax audits and the $17.8 million unrecognized tax benefit balance.
- Review acquisition-related goodwill of $1.952 billion and test whether operating performance supports its carrying value.