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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 nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 Net sales were $1,358.7 in the third quarter of 2014 compared to $1,153.1 in the prior year quarter, an increase of 18% in both U.S. dollars and in local currencies and 11% organically (excluding the impact of foreign exchange and acquisitions) over the prior year quarter. Net sales for the first nine months of 2014 were $3,919.0 compared to $3,368.9 in the same period in 2013, an increase of 16% in both U.S. dollars and in local currencies and 8% organically over the prior year period. Sales in the Interconnect Products and Assemblies segment (approximately 93% of sales) increased 19% in both U.S. dollars and in local currencies in the third quarter of 2014 compared to the same period in 2013 ($1,268.6 in 2014 versus $1,063.2 in 2013) and 18% in U.S. dollars and 17% in local currencies in the first nine months of 2014 compared to the same period in 2013 ($3,650.0 in 2014 versus $3,104.9 in 2013). The sales growth was driven by increases in mobile networks, automotive, industrial, 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) were flat in U.S. dollars and down 1% in local currencies in the third quarter of 2014 compared to the same period in 2013 ($90.1 in 2014 versus $89.9 in 2013) and increased 2% in both U.S. dollars and in local currencies in the first nine months of 2014 compared to the same period in 2013 ($268.9 in 2014 versus $264.1 in 2013). Cable Products and Solutions sales are primarily in the broadband communications market. Geographically, sales in the United States in the third quarter and first nine months of 2014 increased approximately 20% and 15%, respectively, compared to the same period in 2013 ($434.3 and $1,231.0, respectively, in 2014 versus $363.5 and $1,072.3, respectively, in 2013). International sales for both the third quarter and first nine months of 2014 increased approximately 17% in both U.S. dollars and in local currencies, compared to the same period in 2013 ($924.3 and $2,688.0, respectively, in 2014 versus $789.6 and $2,296.7, respectively, in 2013). The comparatively weaker U.S. dollar for the third quarter and first nine months of 2014 had the effect of increasing sales by approximately $2.0 and $19.1, respectively, compared to foreign currency translation rates for the same periods in 2013. Operating income was $267.8 or 19.7% of net sales and $755.8 or 19.3% of net sales for the third quarter and first nine months of 2014, respectively, compared to $224.5 or 19.5% of net sales and $655.5 or 19.5% of net sales for the third quarter and first nine months of 2013, respectively. Operating income for the three and nine months ended September 30, 2014 is net of $2.5 and $4.5, respectively, of acquisition-related expenses, including $2.0 incurred in the first quarter of 2014 related to the amortization of the value associated with acquired backlog relating to a 2013 acquisition as well as $2.5 incurred in the third quarter of 2014 for transaction costs related to a 2014 acquisition (separately presented in the Consolidated Statements of Income). For the three and nine months ended September 30, 2014, these expenses had an impact on net income of $2.5 ($0.01 per share) and $3.8 ($0.02 per share), respectively. Operating income for both the three and nine months ended September 30, 2013 is net of $2.5 of acquisition-related expenses, which had an impact on net income of $2.1 ($0.01 per share). The gross profit margin percentage was approximately 31.8% and 31.6% for the third quarter of 2014 and 2013, respectively, and 31.6% and 31.5% for the first nine months of 2014 and 2013, respectively. Operating income of the Interconnect Products and Assemblies segment for the third quarter and first nine months of 2014 was $279.8, or 22.1% of net sales, and $786.8, or 21.6% of net sales, respectively, compared to $233.4, or 22.0% of net sales and $676.8, or 21.8% of net sales, respectively in 2013. The increase in operating income margins for the Interconnect Products and Assemblies segment for the third quarter of 2014 reflects the positive impact of higher volume and cost reduction actions. The operating income margin decrease for the first nine months of 2014, compared to the same periods in 2013 is primarily due to the impact of the inclusion in 2014 of an acquisition completed late in 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 for the first nine months of 2014 compared to the 2013 period. Operating income for the Cable Products and Solutions segment for the third quarter and first nine months of 2014 was $11.3, or 12.5% of net sales and $33.6 or 12.5% of net sales, respectively, compared to $12.4 or 13.8% of net sales and $36.4 or 13.8% of net sales, respectively, in the same periods in 2013. The decrease in operating income margin for the Cable Products and Solutions segment for both the third quarter and first nine months of 2014 compared to the same periods in 2013 is primarily due to the impact of market pricing and product mix compared to the prior year periods. 17 -------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses increased to $161.3 and $476.9 or 11.9% and 12.2% of net sales for the third quarter and first nine months of 2014, respectively, compared to $136.8 and $403.5 or 11.9% and 12.0% of net sales for the same periods in 2013. The selling, general and administrative expenses increase as a percentage of sales in the first nine months of 2014 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 $33.2 in the first nine 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 amortization of acquisition related identified intangible assets and represented approximately 4.7% of net of sales in the first nine months of 2014 and 4.5% of net sales for same periods in 2013. Research and development expenses increased $13.9 for the first nine months of 2014 compared to the same periods in 2013 primarily related to the impact of acquisitions and increases in expenses for new product development and represented approximately 2.3% of net sales for the first nine months of 2014 and 2013. Selling and marketing expenses increased approximately $26.4 for first nine months of 2014 compared to the same periods in 2013 primarily related to the impact of acquisitions and increase in sales volume and represented approximately 5.1% of net sales for the first nine months of 2014 and 5.2% of net sales for the same periods in 2013. Interest expense for the third quarter and first nine months of 2014 was $21.1 and $60.2, respectively, compared to $16.0 and $47.1 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 $4.7 and $13.1 for the third quarter and first nine months of 2014, respectively, compared to $3.6 and $9.4 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 third quarter and the first nine months of 2014 was at an effective rate of 26.8% and 26.6%, respectively. Excluding the net impact of acquisition-related expenses, the effective tax rate in the third quarter and the first nine months of 2014 was 26.5%. The provision for income taxes for the third quarter and the first nine months of 2013 was at an effective rate of 23.9%. The lower effective rate in the third quarter and first nine months of 2013 included a tax benefit of $3.6 resulting primarily from the completion of prior audits as well as a first quarter tax 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 within the American Taxpayer Relief Act relating primarily to research and development credits and certain U.S. taxes on foreign income. Such tax provisions were reinstated on January 2, 2013 with retroactive effect to 2012. Excluding the effect of these benefits as well as the net impact of acquisition-related expenses, the effective tax rate in the third quarter and the first nine months of 2013 was 25.5% and 26.3%, 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 2011 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 September 30, 2014, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was approximately $18.5, the majority of which is included in accrued pension obligations and 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 the closing of statutes of limitation. Based on information currently available, management anticipates that over the next twelve month period, audit activity could be completed and statutes of limitation may close relating to existing unrecognized tax benefits of approximately $2.5. Liquidity and Capital Resources Cash flow provided by operating activities was $607.4 in the first nine months of 2014 compared to $557.7 in the same period in 2013. The increase in cash flow provided by operating activities for the first nine months of 2014 compared to the same 2013 period is primarily due to an increase in net income. The components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $24.3 in the first nine months of 2014 due primarily to an increase in accounts receivable, inventory, and prepaid and other current assets of $73.4, $36.9 and $16.9, respectively, partially offset by an increase in accounts payable and accrued liabilities of $37.5, and $65.4, respectively. The components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $24.2 in the first nine months of 2013 due primarily to a decrease in accounts payable of $25.5, and an increase in accounts receivable and other current assets of $11.5 and $10.9, respectively, which were partially offset by an increase in accrued liabilities of $21.5. The following describes the significant changes in the amounts as presented on the accompanying Condensed Consolidated Balance Sheets at September 30, 2014. Accounts receivable increased $91.4, or 9% to $1,092.4 primarily as a result of higher sales 18 -------------------------------------------------------------------------------- Table of Contents levels and the impact of an acquisition of $35.8, partially offset by the effect of translation resulting from exchange rate changes at September 30, 2014 compared to December 31, 2013 ("Translation"). Days sales outstanding, excluding the impact of acquisitions, were approximately 70 days at September 30, 2014 and December 31, 2013. Inventories increased $55.4, or 7% to $848.1 primarily as a result of higher sales activity and the impact of an acquisition of $25.4, partially offset by Translation. Inventory days, excluding the impact of acquisitions, were approximately 80 days at September 30, 2014 and December 31, 2013. Land and depreciable assets, net, increased $52.9 to $585.4 primarily due to net capital expenditures of $160.4, the impact of an acquisition of $18.6, partially offset by depreciation of $93.8, adjustments to the fair value related to a recent acquisition and Translation. Goodwill and other long term assets increased $415.8 to $2,893.8 primarily as a result of a 2014 acquisition of $423.0 and fair value adjustments made from the Company's evaluation of the fair value attributes of the assets acquired related to a recent acquisition, offset by Translation. Accounts payable increased $49.8, or 9% to $599.8, primarily as a result of the impact of an acquisition of $23.4 and an increase in purchasing activity offset by Translation. Payable days at September 30, 2014 and December 31, 2014, excluding the impact of acquisitions, were approximately 56 days. Accrued pension benefit obligations and other long-term liabilities increased $28.9 primarily related to an increase in deferred tax liabilities due to the impact of an acquisition. For the first nine months of 2014, cash flow provided by operating activities of $607.4, net borrowings of $480.2, proceeds from the exercise of stock options including tax benefits from stock-based payment arrangements of $118.4 and cash and cash equivalents of $13.8, net of Translation were used to fund acquisitions of $468.0, purchases of treasury stock of $400.8, capital expenditures (net of disposals) of $160.4, dividend payments of $101.9, net purchases of short-term investments of $68.5, and payments to shareholders of noncontrolling interests of $3.6. Translation had the impact of decreasing cash and cash equivalents by $16.6 for the first nine months of 2014. For the first nine months of 2013, cash flow provided by operating activities of $557.7, net borrowings under credit facilities of $161.0 and proceeds from the exercise of stock options including tax benefits of $98.4 were used to fund purchases of treasury stock of $297.0, net purchases of short-term investments of $142.6, capital expenditures (net of disposals) of $103.7, acquisitions of $44.0, dividend payments of $33.5 and payments to shareholders of noncontrolling interests of $4.4, which resulted in an increase in cash and cash equivalents of $198.5. Translation had the impact of increasing cash and cash equivalents by $6.7 for the first nine months of 2013. The Company has a $1,500.0 unsecured credit facility (the "Revolving Credit Facility") with a maturity date of July 2018. At September 30, 2014, borrowings and availability under the Revolving Credit Facility were $21.8 and $1,478.2, respectively. As of September 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 September 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 September 30, 2014, borrowings and availability under the Credit Agreement were nil and $200.0, respectively. The carrying value of borrowings under the Company's Revolving Credit Facility, Credit Agreement and notes payable approximated their fair value at September 30, 2014. The Company has issued senior notes (the "Senior Notes") as follows: Principal Interest Approximate Amount Rate Maturity Fair Value (1) $ 600.0 4.75 % November 2014 $ 602.9 375.0 1.55 September 2017 374.5 750.0 2.55 January 2019 754.8 375.0 3.125 September 2021 373.8 500.0 4.00 February 2022 525.3 -------------------------------------------------------------------------------- (1) Based on recent bid prices. 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 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 19 -------------------------------------------------------------------------------- Table of Contents 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. In September 2014, the Company issued $375.0 principal amount of unsecured 1.55% Senior Notes due November 2017 at 99.898% of their face value (the "1.55% Senior Notes") and $375.0 principal amount of unsecured 3.125% Senior Notes due September 2021 at 99.912% of their face value (the "3.125% Senior Notes" and together with the 1.55% Senior Notes "the Notes"). Interest on each series of Notes is payable semi-annually on March 15 and September 15 of each year, beginning on March 15 2015. The Company may, at its option, redeem some or all of the Notes at any time by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of the repurchase. The Company intends to use all of the net proceeds to repay the outstanding $600.0 4.75% Senior Notes due in November 2014 and for general corporate purposes. Prior to November 2014, the Company used the net proceeds to repay amounts outstanding under its Revolving Credit Facility and Credit Agreement. In September 2014, the Company entered into a commercial paper program (the "Program") pursuant to which the Company may issue short-term unsecured commercial paper notes (the "Commercial Paper Notes") in one or more private placements. Amounts available under the Program may be borrowed, repaid and re-borrowed from time to time, with the maximum aggregate principal amount of the Commercial Paper Notes outstanding under the Program not to exceed $1,500.0 at any time. At the Company's option, amounts undrawn under the Company's Revolving Credit Facility are available to repay the Commercial Paper Notes. The maturities of the Commercial Paper Notes will vary, but may not exceed 397 days from the date of issue. The Commercial Paper Notes will be sold under customary terms in the commercial paper market and may be issued at a discount from par, or, alternatively, may be sold at par and bear varying interest rates on a fixed or floating basis. At September 30, 2014, there were no outstanding borrowings under the Program. 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. The Company affected a two-for-one stock split in the form of a stock dividend, payable to stockholders of record as of October 2, 2014, which was paid on October 9, 2014. The share and per share information included herein has been retroactively restated to reflect the effect of the stock split for all periods presented. In January 2013, the Company's Board of Directors authorized a stock repurchase program under which the Company may repurchase up to 20 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 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 nine months ended September 30, 2014, the Company repurchased approximately 8.5 million shares of its common stock for approximately $400.8. These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly. Through October 31, 2014, the Company has repurchased an additional 2.9 million shares of its common stock for $138.6. At October 31, 2014, the Company had repurchased all shares authorized under the 2013 Stock Repurchase Program. Contingent upon declaration by the Board of Directors, 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 $0.0525 to $0.10 per share effective with the third quarter 2013 dividend and in July 2014, approved a further increase in the quarterly dividend rate from $0.10 to $0.125 per share effective with the third quarter 2014 dividend. For the nine months ended September 30, 2014, the Company paid and declared dividends in the amount of $101.9. For the nine months ended September 30, 2013, the Company paid dividends in the amount $33.5 and declared dividends in the amount $65.1. For the three and nine months ended September 30, 2014, the Company made cash contributions to the U.S. Plans of approximately $11.2 and $15.2, respectively, 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. 20 -------------------------------------------------------------------------------- Table of Contents 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. |