Amphenol Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. Amphenol operates through Interconnect Products and Assemblies, serving communications, aerospace, industrial and automotive markets, and Cable Products, serving primarily communications and broadband markets.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,061.1 million | $1,017.7 million | $2,042.7 million | $1,958.3 million |
| Gross profit | $334.2 million | $321.2 million | $643.4 million | $625.3 million |
| Operating income | $206.2 million | $214.9 million | $391.5 million | $401.0 million |
| Net income attributable to Amphenol | $140.9 million | $147.8 million | $267.5 million | $275.7 million |
| Diluted EPS | $0.86 | $0.85 | $1.63 | $1.57 |
- Sales increased 4% in U.S. dollars in both the quarter and six-month period. Organic growth was 2% in Q2 and 1% year to date; local-currency growth was 6% and 5%, respectively.
- Gross margin was approximately 31.5% in both Q2 and the first six months, versus 31.6% and 31.9% in the comparable 2011 periods.
- Q2 operating margin was approximately 19.4%, versus 21.1% in Q2 2011; the six-month operating margin was approximately 19.2%, versus 20.5%. The comparison was affected by a $17.8 million contingent-acquisition-obligation gain recorded in Q2 2011.
- Excluding the prior-year unusual gain, operating income declined modestly while sales increased, reflecting higher input costs, interest expense, stock-based compensation and acquisition-related amortization.
- Operating cash flow was $291.6 million for the first six months, up from $212.3 million. Capital expenditures, net of disposals, were approximately $61.1 million, and acquisitions used $82.3 million.
- Cash and cash equivalents were $646.0 million at June 30, 2012, and cash, cash equivalents and short-term investments totaled $780.5 million, compared with $648.9 million at December 31, 2011.
- Total debt was approximately $1.54 billion, consisting primarily of $600 million of 4.75% senior notes due 2014, $500 million of 4.00% senior notes due 2022, $348 million drawn on the revolving facility and $89 million under the receivables securitization facility.
- The $1.0 billion revolving credit facility had $652 million of availability, and the company was in compliance with its financial covenants.
- Accounts receivable increased to $840.1 million and inventory to $675.3 million from December 31, 2011. Days sales outstanding remained approximately 71 days, while inventory days improved from 89 to 83.
Material changes versus the prior comparable period
- Interconnect Products and Assemblies sales increased 4% in Q2 and 4% year to date, primarily reflecting acquisitions and strength in industrial, commercial aerospace, telecommunications and data communications. Military and wireless markets declined.
- Cable Products sales increased 2% in Q2 and 9% year to date, supported by global broadband demand. Cable segment operating margins improved approximately 100 basis points in Q2 and 180 basis points year to date.
- Two second-quarter acquisitions increased goodwill by $57.6 million; total goodwill was $1.80 billion at June 30, 2012.
- Interest expense increased to $15.1 million in Q2 and $28.8 million year to date, primarily due to higher average debt and the January 2012 senior-notes issuance.
- The company repurchased 3.6 million shares for $201.0 million during the first six months and raised its quarterly dividend from $0.015 to $0.105 per share.
- Shares outstanding declined materially from the prior year because of repurchases; diluted weighted-average shares fell to 164.6 million from 175.7 million year to date. This supported higher diluted EPS despite lower net income.
- Comprehensive income attributable to Amphenol declined to $111.0 million in Q2 from $166.3 million, primarily because of unfavorable foreign-currency translation and other comprehensive losses.
Guidance, outlook, risks and unusual items
- The filing does not provide clear numerical earnings or revenue guidance. Management states that results for the interim periods are not necessarily indicative of full-year results.
- Management expects operating and capital requirements, dividends, repurchases, pension contributions and debt service to be funded by operating cash flow, cash and investments, and available credit facilities. Management believes liquidity is sufficient for the next twelve months.
- Key stated sensitivities include demand for the company’s products, defense-program timing, input costs, foreign-exchange rates, interest rates, acquisitions, accounts-receivable quality and financial-covenant compliance.
- The company estimates 2012 pension-plan contributions of approximately $26.0 million, including $12.9 million contributed during the first six months.
- Unrecognized tax benefits totaled approximately $23.0 million; approximately $7.0 million could be affected by audits or expiring statutes of limitation over the following twelve months.
- Legal proceedings and environmental matters arise in the ordinary course. Management does not expect them to have a material effect; costs for three specified historical landfill sites are currently reimbursed by Honeywell under the Honeywell Agreement.
- The $17.8 million contingent-consideration gain recorded in Q2 2011 was not repeated in 2012. The filing attributes the reversal to weaker defense-market expectations and deferred defense programs.
- Foreign-exchange forward contracts with a June 30 fair value of $9.7 million hedge an intercompany-loan exposure and mature in November 2012. Management reported no material change in market-risk exposure and no material expected 2012 interest-rate impact.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess whether modest organic growth and margin pressure persist after separating acquisition effects and the prior-year contingent-consideration gain.
- Reconcile reported leverage and interest costs with the $500 million 2022 notes, the 2014 notes, revolving borrowings and receivables securitization debt.
- Monitor acquisition integration, goodwill of $1.80 billion and potential impairment indicators.
- Evaluate the sustainability of the increased dividend and ongoing share repurchases relative to operating cash flow and debt requirements.
- Track defense and wireless-market weakness, input-cost trends, foreign-exchange effects and broadband demand.
- Review the status of tax audits, environmental reimbursements, legal matters, pension funding and the January 2013 expiration of the receivables securitization facility.