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AMPHENOL CORP /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in millions, unless otherwise noted, except per share data)(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations Three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 Net sales were $1,314.2 in the second quarter of 2014 compared to $1,136.1 in the prior year quarter, an increase of 16% in U.S. dollars, 15% in local currencies and 7% organically (excluding the impact of foreign exchange and acquisitions) over the prior year quarter. Net sales for the first six months of 2014 were $2,560.2 compared to $2,215.9 in the same period in 2013, an increase of 16% in U.S. dollars, 15% in local currencies and 7% organically over the prior year period. Sales in the Interconnect Products and Assemblies segment (approximately 93% of sales) increased 17% in U.S. dollars and 16% in local currencies in the second quarter of 2014 compared to the same period in 2013 ($1,222.3 in 2014 versus $1,045.8 in 2013) and 17% in U.S. dollars and 16% in local currencies in the first six months of 2014 compared to the same period in 2013 ($2,381.4 in 2014 versus $2,041.7 in 2013). The sales growth was driven by increases in industrial, automotive, mobile networks, commercial aerospace, and mobile devices markets with contributions from both organic growth and the Company's acquisition program, partially offset by decreases in sales to the military aerospace and information technology and data communications equipment markets. Sales in the Cable Products and Solutions segment (approximately 7% of sales) increased 2% in both U.S. dollars and in local currencies in the second quarter of 2014 compared to the same period in 2013 ($91.9 in 2014 versus $90.3 in 2013) and 3% in both U.S. dollars and in local currencies in the first six months of 2014 compared to the same period in 2013 ($178.8 in 2013 versus $174.2 in 2013). Cable Products and Solutions sales are primarily in the broadband communications market. Geographically, sales in the United States in the second quarter and first six months of 2014 increased approximately 14% and 12%, respectively, compared to the same period in 2013 ($411.1 and $796.7, respectively, in 2014 versus $359.4 and $708.8, respectively, in 2013). International sales for the second quarter and first six months of 2014 increased approximately 16% and 17% in U.S. dollars, respectively, and 15% and 16% in local currencies, respectively, compared to the same period in 2013 ($903.1 and $1,763.6, respectively, in 2014 versus $776.6 and $1,507.1, respectively, in 2013). The comparatively weaker U.S. dollar for the second quarter and first six months of 2014 had the effect of increasing sales by approximately $9.1 and $16.1, respectively, compared to foreign currency translation rates for the same periods in 2013. Operating income was $255.8 or 19.5% and $487.9 or 19.1% of net sales for the second quarter and first six months of 2014, respectively, compared to $224.0 or 19.7% and $431.0 or 19.4% for the second quarter and first six months of 2013, respectively. Operating income for the first six months 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 six months ended June 30, 2014, these expenses had an impact on net income of $1.3, or $0.01 per share. 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 for both the second quarter and first six months of 2014 compared to the same periods in 2013. Operating income for the Interconnect Products and Assemblies segment for the second quarter and first six months of 2014 was $264.3 or 21.6% of net sales and $507.0 or 21.3% of net sales, respectively compared to $230.1 or 22.0% of net sales and $443.4 or 21.7% of net sales, respectively in 2013. This decrease in operating income margin relates to the impact of the inclusion 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 margin for the Cable Products and Solutions segment for the second quarter and first six months of 2014 decreased by 110 and 130 basis points compared to the same periods in 2013 due primarily to the impact of market pricing and product mix compared to the prior year periods. Operating income for the Cable Products and Solutions segment for the second quarter and first six months of 2014 was $11.7 or 12.7% of net sales and $22.3 or 12.5% of net sales, respectively, compared to $12.4 or 13.8% and $24.0 or 13.8%, respectively, in the same periods in 2013. The gross profit margin percentage was approximately 31.7% for the second quarter of 2014 and 2013 and 31.5% for the first six months of 2014 and 2013. Selling, general and administrative expenses increased to $161.0 and $315.7 or 12.2% and 12.3% of net sales, for the second quarter and first six months of 2014, respectively, compared to $135.8 and $266.7 or 12.0% of net sales for both the second quarter and first six months of 2013. The selling, general and administrative expenses increase as a percentage of sales in the 2014 periods compared to 2013 is partially 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 $9.8 and $20.9 for the second quarter and first six months of 2014 compared to the same periods in 2013 primarily related to the impact of acquisitions as well as increases in employee related benefits, stock-based compensation expense and 16 -------------------------------------------------------------------------------- Table of Contents amortization of acquisition related identified intangible assets and represented approximately 4.7% of sales for both the second quarter and first six months of 2014 and 4.5% of sales for same periods in 2013. Research and development expenses increased approximately $6.0 and $11.5 for the second quarter and first six months of 2014 compared to the same periods in 2013 reflecting increases in expenses for new product development and represented approximately 2.4% of sales for both the second quarter and first six months of 2014 and 2.3% of sales for the same periods in 2013. Selling and marketing expenses increased approximately $9.4 and $16.5 for the second quarter and first six months of 2014 compared to the same periods in 2013 primarily related to the increase in sales volume and represented approximately 5.2% of sales for both the second quarter and first six months of 2014, respectively, and 5.1% and 5.3% for the same periods in 2013, respectively. Interest expense for the second quarter and first six months of 2014 was $20.1 and $39.2, respectively, compared to $15.6 and $31.1 for the same periods in 2013. The increases are 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 $4.3 and $8.4 for the second quarter and first six months of 2014, respectively, compared to $3.0 and $5.8 for the same periods in 2013, primarily related to higher interest income on higher levels of cash, cash equivalents and short-term investments. The provision for income taxes for the second quarter and the first six months of 2014 were both at an effective rate of 26.5%. The provision for income taxes for the second quarter and the first six months of 2013 was at an effective rate of 26.8% and 24.0%, respectively. The effective rate in the first six months of 2013 included a first quarter benefit of $11.3 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 were 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. Excluding the effect of this benefit, the effective tax rate in the first six months of 2013 was 26.8%. 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 June 30, 2014, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was approximately $16.2, 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 $2.5. Liquidity and Capital Resources Cash flow provided by operating activities was $383.3 in the first six months of 2014 compared to $360.8 in the same period in 2013. The increase in cash flow provided by operating activities for the first six months of 2014 compared to the same 2013 period is primarily due to an increase in net income partially offset by a higher increase in the components of working capital. The components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $41.3 in the first six months of 2014 due primarily to an increase in accounts receivable and inventory of $38.3 and $12.7, respectively, and a decrease in accounts payable of $10.0 which was partially offset by an increase in other accrued liabilities of $20.5. The components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $26.7 in the first six months of 2013 due primarily to a decrease in accounts payable of $49.3 which was partially offset by a decrease in inventory of $27.7. The following describes the significant changes in the amounts as presented on the accompanying Condensed Consolidated Balance Sheets at June 30, 2014. Accounts receivable increased $30.1, or 3.0% to $1,031.1 primarily as a result of higher sales levels partially offset by the effect of translation resulting from exchange rate changes at June 30, 2014 compared to December 31, 2013 ("Translation"). Inventories increased $12.8, or 1.6% to $805.5 primarily as a result of higher sales activity partially offset by Translation. Land and depreciable assets, net, increased $26.2 to $558.7 primarily due to net capital expenditures of $104.6, partially offset by depreciation of $60.9, adjustments to the fair value related to recent acquisitions and Translation. Goodwill increased $29.9 to $2,319.0 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 and Translation. Accounts payable decreased $15.6, or 2.8% to $534.4, primarily as a result of a decrease in payable days from 56 at December 31, 2013 to 54 at June 30, 2014. Total accrued expenses increased $18.2 to $376.7, primarily due to the accrual of dividends declared in June 2014 that were paid in July 2014 and accrued interest on the Senior Notes 17 -------------------------------------------------------------------------------- Table of Contents partially offset by the payment of incentive compensation, acquisition-related liabilities and lower accrued income taxes. Other long-term liabilities increased $12.5 to $79.1 primarily due to an increase in deferred tax liabilities. For the first six months of 2014, cash flow provided by operating activities of $383.3, net borrowings of $204.6, and proceeds from the exercise of stock options including tax benefits from stock-based payment arrangements of $76.4 were used to fund purchases of treasury stock of $250.2, capital expenditures (net of disposals) of $104.6, net purchases of short-term investments of $62.6, dividend payments of $31.4, acquisition-related payments of $19.5 and payments to shareholders of noncontrolling interests of $1.7, which resulted in an increase in cash and cash equivalents $193.2, net of Translation. For the first six months of 2013, cash flow provided by operating activities of $360.8, proceeds from the exercise of stock options including tax benefits from stock-based payment arrangements of $80.2 and net borrowings under credit facilities of $76.7 were used to fund purchases of treasury stock of $181.1, net purchases of short-term investments of $167.2, capital expenditures (net of disposals) of $64.6, acquisitions (net of cash acquired) of $44.0, dividend payments of $16.8 and payments to shareholders of noncontrolling interests of $1.7, which resulted in an increase in cash and cash equivalents of $32.8, net of Translation. The Company has a $1,500.0 unsecured credit facility (the "Revolving Credit Facility") with a maturity date of July 2018. At June 30, 2014, borrowings and availability under the Revolving Credit Facility were $290.0 and $1,210.0, respectively. As of June 30, 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 June 30, 2014, the Company was in compliance with the financial covenants under the Revolving Credit Facility. The Company has a $200.0 uncommitted and unsecured credit facility (the "Credit Agreement") with the ability to borrow at a spread over LIBOR, which is renewable annually. On May 30, 2014, the Company amended and restated the Credit Agreement to increase the borrowing capacity by $100.0 to $200.0. At June 30, 2014, borrowings and availability under the Credit Agreement were $200.00 and nil, respectively. The carrying value of borrowings under the Company's Revolving Credit Facility and Credit Agreement and notes payable approximated their fair value at June 30, 2014. The Company has issued senior notes (the "Senior Notes") with principal amounts of $600.0, $750.0 and $500.00 with interest rates of 4.75%, 2.55% and 4.00%, respectively which are due in November 2014, January 2019 and February 2022, respectively (Note 12). The Senior Notes are unsecured and rank equally in right of payment with the Company's other unsecured senior indebtedness. Interest on each series of the Senior Notes is payable semiannually. The Company may, at its option, redeem some or all of any series 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 the date of maturity, a make-whole premium. The fair value of the 4.75%, 2.55% and 4.00% Senior Notes at June 30, 2014 was approximately $610.7, $761.3 and $516.0, respectively, based on recent bid prices. The Company's primary ongoing cash requirements are expected to be for operating and capital expenditures, product development activities, repurchase of 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'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 Repurchase Program"). The price and timing of any such purchases under the 2013 Stock Repurchase Program after June 30, 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 six months ended June 30, 2014, the Company repurchased 2.8 million shares of its common stock for approximately $250.2. These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly. 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 and in July 2014, approved a further increase in the quarterly dividend rate from $0.20 to $0.25 per share effective with the third quarter 2014 dividend. For the three and six months ended June 30, 2014, the Company paid dividends in the amount of $31.4 and declared dividends in the 18 -------------------------------------------------------------------------------- Table of Contents amount of $31.4 and $62.8, respectively. For the three and six months ended June 30, 2013, the Company paid dividends in the amount of $16.8 and declared dividends in the amount of $16.7 and $33.5, respectively. For the three and six months ended June 30, 2014, the Company made cash contributions to the U.S. Plans of approximately $4.0 and estimates that, based on current actuarial calculations, it will make aggregate cash contributions to the Plans in 2014 of approximately $20.0, the majority of which will be to the U.S. Plans. The timing and amount of cash contributions in subsequent years will depend on a number of factors, including the investment performance of the assets of the Plans. Environmental Matters Certain operations of the Company are subject to environmental laws and regulations which govern the discharge of pollutants into the air, water and soil, 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. 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 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. |