Amphenol Corporation — Q3 2010 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2010, compared with the same periods in 2009. 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 key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $948.5 million | $716.6 million | $2,604.2 million | $2,061.8 million |
| Gross profit | $309.7 million | $224.4 million | $848.2 million | $644.9 million |
| Gross margin | 32.7% | 31.3% | 32.6% | 31.3% |
| Operating income | $189.1 million | $124.3 million | $509.8 million | $350.5 million |
| Net income attributable to Amphenol shareholders | $137.3 million | $80.9 million | $365.3 million | $230.2 million |
| Diluted EPS | $0.78 | $0.47 | $2.08 | $1.33 |
| Operating cash flow | Not separately provided | Not separately provided | $264.2 million | $430.6 million |
- Sales increased 32% in Q3 and 26% for the first nine months, in both cases reflecting broad strengthening across products, customers, geographies and end markets, with acquisitions contributing to a lesser extent.
- Interconnect Products and Assemblies represented approximately 93% of sales and increased 36% in Q3 and 28% for the first nine months. Cable Products represented approximately 7% of sales, declining 2% in Q3 but increasing 6% year to date.
- Operating margin improvement was driven primarily by higher volume and cost management in Interconnect Products and Assemblies. Cable Products margins declined because of higher relative material costs and price reductions.
- Effective tax rates were 22.8% in Q3 and 23.2% for the first nine months, compared with 27.5% and 26.4%, respectively, in 2009. The reductions primarily reflected one-time net benefits of approximately $8.4 million and $20.7 million from international tax matters.
- At September 30, 2010, cash and cash equivalents were $480.5 million, short-term investments were $107.2 million, and total liquidity including both balances was $587.8 million.
- Total debt was approximately $904.4 million, consisting primarily of $904.0 million of long-term debt and $0.4 million of short-term debt. The balance includes $84.0 million outstanding under the receivables securitization facility.
- Shareholders’ equity attributable to Amphenol was $2.146 billion; total equity including noncontrolling interests was $2.170 billion.
Cash flow, liquidity and capital allocation
- Operating cash flow was $264.2 million for the first nine months, or $346.2 million excluding the $82.0 million cash flow classification effect from adopting ASU 2009-16.
- Cash used in investing activities was $306.4 million, including $164.9 million for acquisitions, $72.3 million for capital expenditures and $69.1 million for net purchases of short-term investments.
- Financing activities provided $137.4 million, including $618.2 million of long-term borrowings and $468.4 million of debt repayments.
- Cash and cash equivalents increased $95.9 million from year-end 2009 to $480.5 million at September 30, 2010.
- The company refinanced its senior credit facility in August 2010 with a new $1.0 billion unsecured revolving facility maturing in August 2014. Borrowings were $215.0 million, leaving $785.0 million available at quarter-end. The company was in compliance with its financial covenants.
- The company had $600.0 million of 4.75% unsecured senior notes due November 2014.
- Quarterly dividends remained $0.015 per share. The open-market repurchase program expired January 31, 2010, with no shares repurchased under the program in 2010 or 2009.
Material changes versus the prior comparable period
- Sales, operating income, net income and diluted EPS increased substantially as end-market demand recovered from the global economic crisis that affected 2009.
- Gross margin increased 140 basis points to 32.7% in Q3 and 130 basis points to 32.6% for the first nine months.
- Accounts receivable increased to $727.5 million from $449.6 million at December 31, 2009, partly because $82.0 million of receivables previously treated as sold were brought onto the balance sheet under ASU 2009-16. Days sales outstanding increased to approximately 67 from 64.
- Inventories increased to $539.7 million from $461.8 million, while inventory days improved to 76 from 80.
- Goodwill increased $159.2 million to $1.528 billion, primarily from two acquisitions in the Interconnect Products and Assemblies segment.
- In connection with a third-quarter acquisition, contingent consideration had a maximum undiscounted amount of $59.0 million. The recorded fair value was $57.1 million, including $39.2 million due in 2011 and $17.9 million due in 2012.
- Operating cash flow declined from 2009 as working capital absorbed cash, particularly through higher receivables and inventory; the comparison is also affected by the ASU 2009-16 classification change.
Outlook, commentary, risks and unusual items
- Management stated that cash, operating cash generation and available revolving-credit capacity should fund obligations for the next twelve months. No specific revenue or earnings guidance was provided in the filing text.
- Primary risks include economic and currency conditions, market demand, pricing pressure, competition, input costs, foreign exchange exposure, customer receivables quality and deterioration in financial ratios.
- All interest-rate swaps expired in July 2010. Management reported no material change in foreign-currency risk assessment and no material expected effect from interest-rate changes in 2010.
- The company has legal proceedings and environmental matters arising in the ordinary course. Management does not expect these matters to have a material adverse effect. Certain legacy environmental costs are subject to reimbursement by Honeywell under the Honeywell Agreement.
- Unrecognized tax benefits were approximately $25.1 million at September 30, 2010; management indicated that approximately $5.0 million could be affected by audits or statute expirations during the following twelve months.
- One-time items included international tax benefits, $0.5 million of early debt-extinguishment expense, and $6.9 million of fees related to the revolving-credit refinancing.
Investor verification points
- Verify whether the strong 2010 sales recovery and Interconnect segment margin expansion persisted after the quarter, particularly across communications, aerospace, industrial and automotive markets.
- Reconcile operating cash flow on a comparable basis by adjusting for the $82.0 million ASU 2009-16 classification effect and monitor receivables growth and days sales outstanding.
- Review acquisition performance, goodwill and intangible-asset balances, and the timing and amount of contingent consideration payments of up to $59.0 million.
- Assess leverage, interest costs, covenant compliance and remaining availability under the $1.0 billion revolving credit facility.
- Evaluate the sustainability of the lower effective tax rate after the approximately $20.7 million year-to-date one-time tax benefit.
- Monitor Cable Products profitability, material costs and pricing pressure, as well as foreign-currency and broader end-market risks.