Amphenol Corporation — Q3 2012 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Amphenol operates through two reportable segments: Interconnect Products and Assemblies, serving communications, defense, aerospace, industrial and automotive markets; and Cable Products, serving primarily communications and cable television markets.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $1,103.4 million | $1,032.8 million | $3,146.1 million | $2,991.1 million |
| Gross profit | $344.3 million | $323.5 million | $987.8 million | $948.8 million |
| Gross margin | 31.2% | 31.3% | 31.4% | 31.7% |
| Operating income | $215.7 million | $186.1 million | $607.1 million | $587.0 million |
| Operating margin | 19.5% | 18.0% | 19.3% | 19.6% |
| Net income attributable to Amphenol | $147.5 million | $134.6 million | $415.0 million | $410.3 million |
| Diluted EPS | $0.90 | $0.79 | $2.53 | $2.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $467.6 million | $396.6 million |
Q3 net income attributable to Amphenol increased approximately 9.5%, while nine-month net income increased approximately 1.1%. The effective tax rate was 26.8% in both the third quarter and first nine months of 2012. The filing does not provide a separate quarterly cash flow statement.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $725.5 million at September 30, 2012, compared with $515.1 million at December 31, 2011. Cash, cash equivalents and short-term investments totaled $892.9 million.
- Total debt was approximately $1.605 billion, consisting of $94.1 million of short-term debt and $1.511 billion of long-term debt, compared with approximately $1.377 billion of long-term debt at year-end 2011.
- The $1.0 billion revolving credit facility had $405.9 million drawn and $594.1 million available. Amphenol was in compliance with its financial covenants.
- The company had $93.8 million outstanding under its receivables securitization facility, which was classified as short-term debt and was scheduled to expire in January 2013.
- In January 2012, Amphenol issued $500 million of 4.00% senior notes due February 2022. It also had $600 million of 4.75% senior notes due November 2014.
- Accounts receivable increased to $903.3 million and inventories to $712.2 million. Days sales outstanding increased to approximately 72 days from 71 days at year-end; inventory days declined to 83 from 89.
Material changes versus the prior comparable periods
- Q3 sales increased 7% in U.S. dollars, 9% in local currencies and 4% organically. Nine-month sales increased 5% in U.S. dollars, 7% in local currencies and 2% organically.
- Interconnect Products and Assemblies sales increased 8% in Q3 and 5% for the nine months in U.S. dollars, supported by acquisitions and strength in commercial aerospace, industrial, telecommunications and data communications. Nine-month growth was partly offset by declines in wireless infrastructure, defense and wireless device markets.
- Cable Products sales declined 7% in Q3, primarily because of lower specialty cable demand internationally, but increased 3% for the nine months due mainly to stronger global broadband demand.
- Q3 operating margin improved despite a slight gross-margin decline, reflecting higher volume and cost reduction actions. Nine-month gross margin declined 30 basis points, primarily reflecting input-cost pressure.
- Interest expense increased to $15.2 million in Q3 and $44.0 million for the nine months, principally because of higher average debt and the January 2012 senior notes issuance.
- Four acquisitions made during the first nine months increased goodwill by $130.4 million and contributed to a $179.6 million use of cash for acquisitions.
- Weighted-average diluted shares declined approximately 3.6% in Q3 and 5.4% for the nine months, reflecting share repurchases. The company repurchased 4.1 million shares for $229.4 million during the nine months.
- The quarterly dividend increased from $0.015 per share in 2011 to $0.105 per share beginning with the first-quarter 2012 dividend.
Guidance, outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided in the filing.
- Management expects cash, investments, operating cash flow, revolving-credit availability and receivables-facility availability to fund obligations for the next twelve months. Liquidity could be affected by weaker product demand, deterioration in financial ratios or lower receivables quality.
- Primary ongoing cash requirements include operating and capital expenditures, product development, acquisitions, share repurchases, dividends, pension contributions and debt service. Capital expenditures were $96.5 million in the first nine months.
- The 2011 comparison included a $12.8 million pretax flood-related casualty charge, approximately $8.1 million after tax, and approximately $11.0 million of lost Q3 sales at the Sidney, New York facility. No comparable charge was recorded in 2012.
- The 2011 comparison also included a $17.8 million pretax gain from reducing a contingent acquisition-related obligation; the related 2012 payment was confirmed not to be payable.
- Unrecognized tax benefits were $26.7 million at September 30, 2012; approximately $5.3 million could be affected by audits or statute expirations during the following twelve months.
- The company faces ordinary-course litigation and environmental matters. Management does not expect them to have a material effect. Certain historical environmental remediation costs are reimbursed by Honeywell under an agreement.
- Key operating risks include demand weakness in defense, wireless infrastructure and wireless devices; input-cost and pricing pressure; foreign-exchange exposure; acquisition integration; leverage and refinancing; and pension funding requirements. The filing states that there were no material changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Reconcile reported sales growth with the contribution from acquisitions, organic growth and foreign-exchange translation.
- Assess whether gross-margin pressure and higher interest expense persist as debt remains above year-end 2011 levels.
- Review the maturity and refinancing requirements for the $600 million of 4.75% senior notes due in November 2014 and the receivables facility scheduled to expire in January 2013.
- Evaluate acquisition performance, goodwill of $1.877 billion and potential impairment sensitivity.
- Monitor accounts receivable, inventory levels, working-capital consumption and cash conversion.
- Track defense-market demand, wireless-related weakness, commodity and input costs, foreign exchange and pricing conditions.
- Confirm the pace of share repurchases, dividend increases, pension contributions and remaining authorization under the repurchase program.