Amphenol Corporation 2011 Q2 Form 10-Q Summary
Business context and reporting period
Amphenol Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company operates through two reportable segments: Interconnect Products and Assemblies, serving communications, aerospace, industrial and automotive markets, and Cable Products, serving primarily communications markets.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1,017.7 million | $1,958.3 million |
| Gross profit | $321.2 million | $625.3 million |
| Gross margin | 31.6% | 31.9% |
| Operating income | $214.9 million | $401.0 million |
| Operating margin | 21.1% | 20.5% |
| Net income attributable to Amphenol | $147.8 million | $275.7 million |
| Diluted EPS | $0.85 | $1.57 |
| Operating cash flow | Not separately provided for the quarter | $212.3 million |
- Cash, cash equivalents and short-term investments totaled $696.6 million at June 30, 2011, compared with $624.2 million at December 31, 2010.
- Total debt was approximately $1,157.9 million, consisting primarily of long-term debt; the balance sheet also reported $0.3 million of short-term debt.
- Revolving credit facility borrowings were $463.0 million, with $537.0 million available, under a $1.0 billion facility extended to July 2016.
- Receivables securitization borrowings were $92.4 million. The company also had $600.0 million of 4.75% senior notes due November 2014.
- Accounts receivable were $793.4 million and inventories were $642.3 million at June 30, 2011. Inventory days increased to approximately 83 from 77 at year-end 2010.
Material changes versus the prior comparable period
- Second-quarter sales increased 15% in U.S. dollars, 12% in local currencies and 8% organically. Six-month sales increased 18% in U.S. dollars, 16% in local currencies and 12% organically.
- Interconnect Products and Assemblies sales increased 15% in the quarter and 20% for the six-month period in U.S. dollars, driven by wireless devices, industrial, automotive and commercial aerospace markets, acquisitions and strength in Asia.
- Cable Products sales increased 9% in the quarter but only 2% for the six-month period in U.S. dollars; first-quarter international broadband weakness affected the year-to-date comparison.
- Gross margin declined from 32.7% to 31.6% in the quarter and from 32.5% to 31.9% year to date, primarily because higher material input costs offset volume, cost-reduction and pricing benefits.
- Operating income increased 22% in the quarter and 25% year to date. The results included a $17.8 million gain from reducing a contingent acquisition-related obligation, contributing approximately $11.2 million to second-quarter net income and $0.06 to diluted EPS.
- Excluding specified one-time tax items, the effective tax rate was 26.7% in the quarter and 27.1% year to date, compared with 27.5% in the comparable 2010 periods. Reported rates were higher because of a $6.6 million tax cost associated with the contingent-obligation gain; the 2010 quarter benefited from a $10.3 million international tax item.
- Operating cash flow increased to $212.3 million from $135.9 million. The 2010 period included an $82.0 million cash-flow impact from adoption of accounting guidance for receivable transfers, limiting comparability.
- The company repurchased and retired approximately 6.6 million shares for $361.0 million during the first six months under a program authorizing up to 20 million shares through January 2014. Net borrowings increased by approximately $352.4 million, primarily supporting the repurchases and other uses of cash.
Guidance, outlook, commentary and risks
- The filing does not provide specific revenue or earnings guidance. Management stated that cash, investments, operating cash generation and available credit are expected to fund obligations for the next twelve months.
- Management identified demand growth in wireless devices, industrial, automotive, aerospace and international markets, but noted that defense-market demand softened and certain defense programs were deferred beyond the contingent earn-out period.
- Primary ongoing cash requirements include operations, capital expenditures, product development, share repurchases, pension contributions, dividends, debt service and potential acquisitions.
- Management expects approximately $20.0 million of pension-plan contributions in 2011, including $18.0 million contributed during the first six months.
- Key risks include economic and currency conditions, market demand, pricing, competition, material costs, interest rates and the quality of accounts receivable. The filing states that there were no material changes to the risk factors in the 2010 Form 10-K.
- The company faces ordinary-course legal proceedings and environmental matters, including legacy landfill remediation obligations. Management does not expect these matters to have a material adverse effect, and identified costs are covered by the Honeywell Agreement.
- Unrecognized tax benefits totaled approximately $24.6 million at June 30, 2011; approximately $4.6 million could be affected by audits or statute closures during the following twelve months.
- The company was in compliance with its revolving-credit financial covenants at June 30, 2011. A 10% change in LIBOR was not expected to have a material effect on interest expense.
Most important facts for investors to verify
- Assess underlying earnings excluding the $17.8 million contingent-consideration gain and the related $6.6 million tax cost.
- Monitor gross-margin pressure from material costs and the effect of higher inventory levels and inventory days.
- Reconcile the $361.0 million share-repurchase program with the increase in borrowings and total debt.
- Review defense-market demand, deferred programs and the potential for further acquisition-related contingent payments.
- Evaluate liquidity, including $696.6 million of cash and investments, $537.0 million of revolving availability, debt maturities and receivables-facility terms.
- Consider the comparability limitations caused by the 2010 receivables-transfer accounting adjustment and the unusual 2010 tax benefit.
- Verify pension funding requirements, tax-audit developments, environmental coverage and the company’s stated forward-looking risk factors.