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APH > SEC Filings for APH > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for AMPHENOL CORP /DE/

Form 10-Q for AMPHENOL CORP /DE/


7-May-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, unless otherwise noted, except per share data)

Results of Operations

Three months ended March 31, 2014 compared to the three months ended March 31, 2013

Net sales were $1,246.1 in the first quarter of 2014 compared to $1,079.8 in the prior year quarter, an increase of 15% in both U.S. dollars and in local currencies and 7% organically (excluding the impact of foreign exchange and acquisitions) over the prior year quarter. Sales in the Interconnect Products and Assemblies segment in the first quarter of 2014 (approximately 93% of sales) increased 16% in both U.S. dollars and in local currencies compared to the same period in 2013 ($1,159.1 in 2014 versus $995.9 in 2013). The sales growth was driven by increases in the industrial, automotive, mobile networks, commercial aerospace, information technology and data communications equipment markets with contributions from both organic growth and the Company's acquisition program, partially offset by decreases in sales to the mobile device and military aerospace markets. Sales in the Cable Products and Solutions segment in the first quarter of 2014 (approximately 7% of sales) increased 4% in U.S. dollars and 5% in local currencies compared to the same period in 2013 ($87.0 in 2014 versus $83.9 in 2013). Cable Products and Solutions sales are primarily in the broadband communications market.

Geographically, sales in the United States in the first quarter of 2014 increased approximately 10%, compared to the same period in 2013 ($385.5 in 2014 versus $349.4 in 2013). International sales in the first quarter of 2014 increased approximately 18% in U.S. dollars and 17% in local currencies compared to the same period in 2013 ($860.6 in 2014 versus $730.4 in 2013). The comparatively weaker U.S. dollar for the first quarter of 2014 had the effect of increasing sales by approximately $7.0 when compared to foreign currency translation rates for the same period in 2013.

Operating income in the first quarter of 2014 was $232.1 or 18.6% of sales. Operating income in the first quarter of 2014 is net of $2.0 of acquisition-related expenses (separately presented in the Consolidated Statements of Income) related to the amortization of the value associated with acquired backlog relating to a 2013 acquisition. For the three months ended March 31, 2014, these expenses had an impact on net income of $1.3, or $0.01 per share. Excluding these expenses, operating income was $234.1 million or 18.8% of sales in the first quarter of 2014, down approximately 40 basis points from operating income of $207.0 or 19.2% of sales in the first quarter of 2013. The decline in operating income as a percentage of sales relates primarily to a decrease in operating income margins in the Interconnect Products and Assemblies segment of 40 basis points compared to the prior year quarter ($242.8 or 21.0% of sales in 2014 versus $213.3 or 21.4% of sales in 2013). This decrease in operating income margin relates to the impact of the inclusion, for the full quarter in 2014, of an acquisition completed in late 2013 that has lower operating income margins than the average of the Company; as such its inclusion in the consolidated results of the Company lowered the consolidated operating income margin percentage. In addition, the operating income for the Cable Products and Solutions segment for the first quarter of 2014 decreased by approximately $3.2 and 160 basis points compared to the prior year quarter ($10.6 or 12.2% of sales in 2014 versus $11.6 or 13.8% of sales in 2013), due primarily to the impact of market pricing and product mix compared to the prior year quarter.

The gross profit margin as a percentage of sales was comparable at approximately 31% in both the first quarter of 2014 and 2013.

Selling, general and administrative expenses increased to $154.7 or 12.4% of net sales for the first quarter of 2014, compared to $130.9, or 12.1% of net sales for the same period in 2013. The percent of net sales increase in the first quarter of 2014 compared to the first quarter of 2013 is primarily due to higher selling, general and administrative expenses on a percent of net sales basis arising from the inclusion of the acquisition referred to above as compared to the average of the Company. Administrative expenses increased approximately $11.1 for the first quarter of 2014 compared to the same period in 2013, related to the impact of acquisitions as well as increases in stock-based compensation expense and employee-related benefits and represented approximately 4.8% and 4.4% of net sales for the first quarter of 2014 and 2013, respectively. Research and development expenses increased approximately $5.5 for the first quarter of 2014 compared to the same period in 2013, related to the impact of acquisitions as well as increases in expenses for new product development and represented approximately 2.4% and 2.3% of net sales for the first quarter of 2014 and 2013. Selling and marketing expenses increased approximately $7.1 for the first quarter of 2014 compared to the same period in 2013, related to the impact of acquisitions and an increase in sales volume and represented 5.2% and 5.4% of net sales for the first quarter of 2014 and 2013, respectively.

Interest expense for the first quarter of 2014 was $19.1, compared to $15.5 for the same period in 2013. The increase is primarily attributable to higher average debt levels related to the Company's stock repurchase program as well as acquisition activity.

Other income, net, increased to $4.1 for the first quarter of 2014, compared to $2.8 for the same period in 2013, primarily related to higher interest income on higher levels of cash, cash equivalents and short-term investments.


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The provision for income taxes for the first quarter of 2014 and 2013 was at an effective rate of 26.4% and 20.9%, respectively. In the first quarter of 2013, the Company recorded a benefit of $11.3, or $0.07 per diluted common share, resulting from the delay, by the U.S. government, in the reinstatement of certain federal income tax provisions for the year 2012 relating primarily to research and development credits and certain U.S. taxes on foreign income that are part of the tax provisions within the American Taxpayer Relief Act. Such tax provisions were reinstated on January 2, 2013 with retroactive effect to 2012. Under U.S. GAAP, the related benefit to the Company of $11.3 relating to the 2012 tax year was recorded as a benefit in the first quarter of 2013 at the date of reinstatement; as such, between the fourth quarter of 2012 and the first quarter of 2013, there was no net impact on the Company from an income statement perspective. Excluding this impact as well as the net impact of the acquisition-related expenses, the Company's effective tax rate for the first quarter of 2014 and 2013 was 26.5% and 26.8%, respectively.

The Company is present in the U.S. and numerous foreign taxable jurisdictions, and at any point in time has numerous audits underway at various stages of completion. With few exceptions, the Company is subject to income tax examinations by tax authorities for the years 2010 and after. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite the Company's belief that the underlying tax positions are fully supportable. As of March 31, 2014, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was approximately $15.6, the majority of which is included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations. Based on information currently available, management anticipates that over the next twelve month period, audit activity could be completed and statutes of limitations may close relating to existing unrecognized tax benefits of approximately $2.7.

Liquidity and Capital Resources

Cash flow provided by operating activities was $202.7 in the first three months of 2014 compared to $180.3 in the same 2013 period. The increase in cash flow provided by operating activities for the first three months of 2014 compared to the same 2013 period is primarily due to an increase in net income and a lower increase in the components of working capital. The components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $10.2 in the first three months of 2014 due primarily to a decrease in accounts payable of $63.2, which was partially offset by a decrease in accounts receivable, inventory and other current assets of $24.9, $17.9 and $11.2, respectively. The components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $12.1 in the first three months of 2013 due primarily to decreases in accounts payable and other accrued liabilities and an increase in other current assets of $49.7, $18.1 and $6.6, respectively, which were partially offset by a decrease in accounts receivable and inventory of $43.8 and $18.6, respectively.

The following describes the significant changes in the amounts as presented on the accompanying Condensed Consolidated Balance Sheets at March 31, 2014. Accounts receivable decreased $29.4, or 2.9% to $971.6 primarily due to higher collections in the first quarter and translation resulting from the comparatively weaker U.S. dollar at March 31, 2014 compared to December 31, 2013 ("Translation"). Inventories decreased $19.9, or 2.5% to $772.7 primarily as a result of a reduction in purchasing activity. Land and depreciable assets, net, increased $6.3 to $538.7 primarily due to net capital expenditures of $53.6, offset by depreciation of $30.5, adjustments to the fair value related to recent acquisitions and Translation. Goodwill increased $13.3 to $2,302.4 primarily as a result of fair value adjustments made from the Company's evaluation of the fair value attributes of the assets acquired related to recent acquisitions offset by Translation. Accounts payable decreased $70.2, or 12.8% to $479.8, primarily as a result of payments to vendors and a reduction in purchasing activity. Total accrued expenses increased $16.8 to $375.4, primarily due to the accrual of dividends declared in March 2014 that were paid in April 2014, accrued interest on the Senior Notes partially offset by the payment of incentive compensation during the quarter and lower accrued wages.

For the first three months of 2014, cash flow provided by operating activities of $202.7, net borrowings of $84.8, sales of short-term investments of $24.2 and proceeds from the exercise of stock options including tax benefits from stock-based payment arrangements of $16.4 were used to fund purchases of treasury stock of $121.1, capital expenditures (net of disposals) of $53.6, acquisition-related payments of $9.0 and payments to shareholders of noncontrolling interests of $1.1, which resulted in an increase in cash and cash equivalents including the impact of Translation of $136.5. For the first three months of 2013, cash flow provided by operating activities of $180.3 and proceeds from the exercise of stock options including tax benefits from stock-based payment arrangements of $39.4 were used to fund net repayments under credit facilities of $17.9, purchases of treasury stock of $85.3, capital expenditures (net of disposals) of $28.9, net purchases of short-term investments of $35.3, and payments to shareholders of noncontrolling interests of $1.2, which resulted in an increase in cash and cash equivalents including the impact of Translation of $44.1.


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The Company has a $1,500.0 unsecured credit facility (the "Revolving Credit Facility") with a maturity date of July 2018. At March 31, 2014, borrowings and availability under the Revolving Credit Facility were $270.0 and $1,230.0, respectively. As of March 31, 2014, the interest rate on borrowings under the Revolving Credit Facility was at a spread over LIBOR. The Revolving Credit Facility requires payment of certain annual agency and commitment fees and requires that the Company satisfy certain financial covenants. At March 31, 2014, the Company was in compliance with the financial covenants under the Revolving Credit Facility.

In November 2009, the Company issued $600.0 principal amount of unsecured 4.75% Senior Notes due November 2014 (the "4.75% Senior Notes") at 99.813% of their face value. Net proceeds from the sale of the 4.75% Senior Notes were used to repay borrowings under the Company's Revolving Credit Facility. Interest on the 4.75% Senior Notes is payable semi-annually on May 15 and November 15 of each year to the holders of record as of the immediately preceding May 1 and November 1. The Company may, at its option, redeem some or all of the 4.75% Senior Notes at any time by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of repurchase. The 4.75% Senior Notes are unsecured and rank equally in right of payment with the Company's other unsecured senior indebtedness. The fair value of the 4.75% Senior Notes at March 31, 2014 was approximately $615.9 based on recent bid prices.

In January 2012, the Company issued $500.0 principal amount of unsecured 4.00% Senior Notes due February 2022 (the "4.00% Senior Notes") at 99.746% of their face value. Net proceeds from the sale of the 4.00% Senior Notes were used to repay borrowings under the Company's Revolving Credit Facility. Interest on the 4.00% Senior Notes is payable semi-annually on February 1 and August 1 of each year, to the holders of record as of the immediately preceding January 15 and July 15. The Company may, at its option, redeem some or all of the 4.00% Senior Notes at any time by paying 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of repurchase, and if redeemed prior to November 1, 2021, a make-whole premium. The 4.00% Senior Notes are unsecured and rank equally in right of payment with the Company's other unsecured senior indebtedness. The fair value of the 4.00% Senior Notes at March 31, 2014 was approximately $503.2 based on recent bid prices.

In January 2014, the Company issued $750.0 principal amount of unsecured 2.55% Senior Notes due January 2019 (the "2.55% Senior Notes") at 99.846% of their face value. Net proceeds from the sale of the 2.55% Senior Notes in the amount of $748.8 were used to repay borrowings under the Company's Revolving Credit Facility. Interest on the 2.55% Senior Notes is payable semi-annually on January 30 and July 30 of each year, commencing July 30, 2014, to the holders of record as of the immediately preceding January 15 and July 15. The Company may, at its option, redeem some or all of the 2.55% Senior Notes at any time by paying 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, and if redeemed prior to December 30, 2018, a make-whole premium. The 2.55% Senior Notes are unsecured and rank equally in right of payment with the Company's other unsecured senior indebtedness. The fair value of the 2.55% Senior Notes at March 31, 2014 was approximately $750.4 based on recent bid prices.

The Company has a $100.0 uncommitted and unsecured credit facility with the ability to borrow at a spread over LIBOR, which is renewable annually (the "Credit Agreement"). At March 31, 2014, borrowings and availability under the Credit Agreement were $100.0 and nil, respectively.

The carrying value of borrowings under the Company's Revolving Credit Facility and Credit Agreement approximated their fair value at March 31, 2014.

The Company's primary ongoing cash requirements will be for operating and capital expenditures, product development activities, repurchase of its common stock, funding of pension obligations, dividends and debt service. The Company may also use cash to fund all or part of the cost of acquisitions. The Company generally pays a quarterly dividend on its common stock. In July 2013, the Board of Directors approved an increase in the quarterly dividend rate from $0.105 to $0.20 per share effective with the third quarter 2013 dividend. For the three months ended March 31, 2014, the Company did not pay any dividends and declared dividends in the amount of $31.4 which were paid in April 2014. For the three months ended March 31, 2013, the Company did not pay any dividends and declared dividends in the amount of $16.8. The Company's debt service requirements consist primarily of principal and interest on the Senior Notes, the Revolving Credit Facility and the Credit Agreement.

The Company's primary sources of liquidity are internally generated cash flow, the Company's credit facilities, and cash, cash equivalents and short-term investments. The Company expects that ongoing cash requirements will be funded from these sources; however, the Company's sources of liquidity could be adversely affected by, among other things, a decrease in demand for the Company's products or a deterioration in certain of the Company's financial ratios. However, management believes that the Company's cash, cash equivalents and short-term investment position, ability to generate strong cash flow from operations, and availability under its credit facilities will allow it to meet its obligations for the next twelve months.

In January 2013, the Company's Board of Directors authorized a stock repurchase program under which the Company may repurchase up to 10 million shares of its common stock during the two year period ending January 31, 2015 (the "2013 Stock


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Repurchase Program"). The price and timing of any such purchases under the 2013 Stock Repurchase Program after March 31, 2014 will depend on factors such as levels of cash generation from operations, the volume of stock option exercises by employees, cash requirements for acquisitions, economic and market conditions and stock price. During the three months ended March 31, 2014, the Company repurchased 1.4 million shares of its common stock for approximately $121.1. These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly.

For the three months ended March 31, 2014, the Company did not make a cash contribution to the U.S. defined benefit pension plans and estimates that, based on current actuarial calculations; it will make aggregate cash contributions to its defined benefit pension plans in 2014 of approximately $20.0, the majority of which is to the U.S. defined benefit pension plans. The timing and amount of cash contributions in subsequent years will depend on a number of factors, including the investment performance of the plan assets.

Environmental Matters

Certain operations of the Company are subject to environmental laws and regulations which govern the discharge of pollutants into the air and water, as well as the handling and disposal of solid and hazardous wastes. The Company believes that its operations are currently in substantial compliance with applicable environmental laws and regulations and that the costs of continuing compliance will not have a material effect on the Company's financial condition, result of operations or cash flows.

Owners and occupiers of sites containing hazardous substances, as well as generators of hazardous substances, are subject to broad liability under various environmental laws and regulations, including expenditures for cleanup and monitoring costs and potential damages arising out of past disposal activities. Such liability in many cases may be imposed regardless of fault or the legality of the original disposal activity. The Company has performed remediation activities and is currently performing operations and maintenance and monitoring activities at three off-site disposal sites previously utilized by the Company's facility in Sidney, New York, and others - the Richardson Hill Road landfill, the Route 8 landfill and the Sidney landfill. Actions at the Richardson Hill Road and Sidney landfills were undertaken subsequent to designation as "Superfund" sites on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. The Route 8 landfill was designated as a New York State Inactive Hazardous Waste Disposal Site, with remedial actions taken pursuant to Chapter 6, Section 375-1 of the New York Code of Rules and Regulations. In addition, the Company is currently performing monitoring activities at, and in proximity to, its manufacturing site in Sidney, New York. The Company is also engaged in remediating or monitoring environmental conditions at certain of its other manufacturing facilities and has been named as a potentially responsible party for cleanup costs at other off-site disposal sites.

Subsequent to the acquisition of Amphenol from Allied Signal Corporation ("Allied Signal") in 1987 (Allied Signal merged with Honeywell International Inc. in December 1999 ("Honeywell")), the Company and Honeywell were named jointly and severally liable as potentially responsible parties in connection with several environmental cleanup sites. The Company and Honeywell jointly consented to perform certain investigations and remediation and monitoring activities at the Route 8 landfill and the Richardson Hill Road landfill, and they were jointly ordered to perform work at the Sidney landfill, all as referred to above. All of the costs incurred relating to these three sites are currently reimbursed by Honeywell based on an agreement (the "Honeywell Agreement") entered into in connection with the acquisition in 1987. The environmental investigation, remediation and monitoring activities identified by the Company, including those referred to above, are covered under the Honeywell Agreement. Management does not believe that the costs associated with resolution of these or any other environmental matters will have a material effect on the Company's consolidated financial condition, result of operations or cash flows.

Since 1987, the Company has not been identified nor has it been named as a potentially responsible party with respect to any other significant on-site or off-site hazardous waste matters. In addition, the Company believes that its manufacturing activities and disposal practices since 1987 have been in material compliance with applicable environmental laws and regulations. Nonetheless, it is possible that the Company will be named as a potentially responsible party in the future with respect to additional Superfund or other sites. Although the Company is unable to predict with any reasonable certainty the extent of its ultimate liability with respect to any pending or future environmental matters, the Company believes, based upon information currently known by management about the Company's manufacturing activities, disposal practices and estimates of liability with respect to known environmental matters, that any such liability will not have a material effect on the Company's consolidated financial condition, result of operations or cash flows.

Safe Harbor Statement

Statements in this Form 10-Q, which are other than historical facts, are intended to be "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws. While the Company believes such statements are reasonable, the actual results and effects could differ materially from those currently anticipated. Please refer to Part I, Item 1A of the Company's 2013 Annual Report, for some factors that could cause the actual results


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to differ from estimates. In providing forward-looking statements, the Company is not undertaking any duty or obligation to update these statements publicly as a result of new information, future events or otherwise.

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