Amphenol Corporation: 2014 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Amphenol designs and manufactures interconnect products, connector systems, antennas, sensors, cable products and related components serving mobile networks, automotive, industrial, aerospace, communications, broadband and other markets. The filing covers the three and nine months ended September 30, 2014. The financial statements are unaudited. A two-for-one stock split paid October 9, 2014 was reflected retroactively in share and per-share data.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $1,358.7 million | $1,153.1 million | $3,919.0 million | $3,368.9 million |
| Gross profit | $431.7 million | $363.8 million | $1,237.3 million | $1,061.5 million |
| Gross margin | 31.8% | 31.6% | 31.6% | 31.5% |
| Operating income | $267.8 million | $224.5 million | $755.8 million | $655.5 million |
| Operating margin | 19.7% | 19.5% | 19.3% | 19.5% |
| Net income attributable to Amphenol | $182.2 million | $160.8 million | $515.6 million | $467.8 million |
| Diluted EPS | $0.57 | $0.50 | $1.60 | $1.44 |
| Operating cash flow | Not separately provided | Not separately provided | $607.4 million | $557.7 million |
Sales increased 18% in both U.S. dollars and local currencies in the third quarter and 16% for the first nine months. Organic growth was 11% in the quarter and 8% year to date, excluding foreign exchange and acquisitions. Interconnect Products and Assemblies represented approximately 93% of sales; its Q3 sales increased 19%, while Cable Products and Solutions sales were essentially flat.
Cash, cash equivalents and short-term investments totaled $1.245 billion at September 30, 2014, compared with $1.192 billion at December 31, 2013. Total debt was $2.624 billion, including $600.8 million of short-term debt and $2.023 billion of long-term debt. The company had $1.478 billion available under its $1.5 billion revolving credit facility and $200 million available under its uncommitted credit agreement. No commercial paper was outstanding.
Current assets were $3.373 billion versus current liabilities of $1.555 billion. Accounts receivable increased 9% to $1.092 billion and inventories increased 7% to $848.1 million, primarily reflecting higher activity and acquisitions. The company reported approximately 70 days sales outstanding and 80 inventory days, excluding acquisition effects.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by mobile networks, automotive, industrial, commercial aerospace and mobile devices, with contributions from acquisitions and organic growth. Military aerospace and information technology/data communications equipment were weaker.
- Gross margin improved modestly, while the nine-month operating margin declined to 19.3% from 19.5%. Management attributed the decline principally to a late-2013 acquisition with lower margins than the company average.
- Cable Products and Solutions operating margin declined to 12.5% from 13.8% in both comparable periods, primarily because of market pricing and product mix.
- Interest expense increased to $21.1 million in Q3 and $60.2 million for nine months, from $16.0 million and $47.1 million, respectively, due primarily to higher average debt associated with acquisitions and share repurchases.
- Net cash provided by operating activities increased $49.7 million to $607.4 million for the first nine months. Investing cash use increased substantially to $696.9 million, including $468.0 million for acquisitions and $162.7 million for capital expenditures.
- In September 2014, the company issued $375 million of 1.55% senior notes due 2017 and $375 million of 3.125% senior notes due 2021. Proceeds were intended to refinance the $600 million of 4.75% senior notes due November 2014 and for general corporate purposes.
- The company repurchased 8.5 million shares for $400.8 million during the first nine months and repurchased an additional 2.9 million shares for $138.6 million through October 31, 2014, completing the authorization under its 2013 repurchase program.
- The quarterly dividend increased to $0.125 per share from $0.10, effective with the third-quarter 2014 dividend.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash, investments, operating cash generation and available credit facilities should be sufficient to meet obligations for the next twelve months. No specific revenue, earnings or margin guidance was provided in the filing. Expected cash requirements include operations, capital expenditures, product development, acquisitions, debt service, dividends, pension contributions and share repurchases.
The 2014 effective tax rate was 26.8% for the quarter and 26.6% for nine months, versus 23.9% in both 2013 periods. The prior-year rates benefited from tax audit developments and retroactive reinstatement of certain U.S. tax provisions. Acquisition-related expenses were $2.5 million in Q3 and $4.6 million year to date. Goodwill increased by approximately $303.0 million, primarily from a third-quarter 2014 acquisition; the purchase-price allocation remained subject to completion.
Other comprehensive loss was $44.8 million in Q3 and $42.3 million for nine months, driven primarily by foreign currency translation. The company has exposure to foreign currency and floating-rate debt, although management did not identify a material change in market-risk sensitivity and did not expect interest-rate changes to materially affect 2014 income or cash flows.
Legal proceedings arise from normal business activities, but management does not expect them to have a material effect. The company also reported substantial compliance with environmental requirements. Unrecognized tax benefits were approximately $18.5 million, with approximately $2.5 million potentially affected by audits or statute expirations over the following twelve months. Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Reconcile reported sales growth with the 11% Q3 and 8% year-to-date organic growth figures, including acquisition and currency effects.
- Review the financial contribution, margin profile and final purchase-price allocation of the 2014 acquisition.
- Verify refinancing of the $600 million senior notes due November 2014 and assess the effect of higher total debt and interest expense.
- Assess whether working-capital increases, particularly receivables and inventory, remain consistent with sales growth.
- Monitor foreign currency translation, segment pricing and product mix, especially in Cable Products and Solutions.
- Confirm the cash requirements and sustainability of acquisitions, capital spending, dividends and share repurchases relative to operating cash flow.
- Review tax audit developments, unrecognized tax benefits and the higher 2014 effective tax rate.