UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2004
OR
Commission file number 1-10879
AMPHENOL CORPORATION
358 Hall AvenueWallingford, Connecticut 06492203-265-8900
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
As of November 2, 2004, the total number of shares outstanding of Class A Common Stock was 88,485,998.
Amphenol Corporation Index to Quarterly Report on Form 10-Q
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
AMPHENOL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(dollars in thousands)
See accompanying notes to condensed consolidated financial statements.
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AMPHENOL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (dollars in thousands, except per share data)
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AMPHENOL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (dollars in thousands)
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AMPHENOL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (dollars in thousands, except per share data)
Note 1—Principles of Consolidation and Interim Financial Statements
The condensed consolidated balance sheets as of September 30, 2004 and December 31, 2003, and the related consolidated statements of income for the three and nine months ended September 30, 2004 and 2003 and of cash flow for the nine months ended September 30, 2004 and 2003 include the accounts of Amphenol Corporation and its subsidiaries (the "Company"). The interim financial statements included herein are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such interim financial statements have been included. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and notes included in the Company's 2003 Annual Report on Form 10-K.
Note 2—Inventories
Note 3—Reportable Business Segments
The Company has two reportable business segments: (i) interconnect products and assemblies and (ii) cable products. The interconnect products and assemblies segment produces connectors and connector assemblies primarily for the communications, aerospace, industrial and automotive markets. The cable products segment produces coaxial and flat ribbon cable and related products primarily for communications markets, including cable television. The Company evaluates the performance of business units on, among other things, profit or loss from operations before interest expense, headquarter's expense allocations, income taxes and nonrecurring gains and losses. The Company's reportable segments are an aggregation of business units that have similar production processes and products.
The segment results for the three months ended September 30, 2004 and 2003 are as follows:
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The segment results for the nine months ended September 30, 2004 and 2003 are as follows:
Reconciliation of segment operating income to consolidated income before taxes for the three and nine months ended September 30, 2004 and 2003:
Note 4—Comprehensive Income
Total comprehensive income for the nine months ended September 30, 2004 and 2003 is summarized as follows:
Note 5—Commitments and Contingencies
In the course of pursuing its normal business activities, the Company is involved in various legal proceedings and claims. Management does not expect that amounts, if any, which may be required to be paid by reason of such proceedings or claims will have a material effect on the Company's consolidated financial position or results of operations.
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Certain operations of the Company are subject to federal, state and local environmental laws and regulations that 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 all applicable environmental laws and regulations and that the costs of continuing compliance will not have a material effect on the Company's financial position or results of operations.
The Company is currently involved in the environmental cleanup of several sites for conditions that existed at the time Amphenol was acquired from Allied Signal Corporation in 1987 (Allied Signal merged with Honeywell International Inc. in December 1999 ("Honeywell")). Amphenol and Honeywell were named jointly and severally liable as potentially responsible parties in relation to such sites. Amphenol and Honeywell have jointly consented to perform certain investigations and remedial and monitoring activities at two sites and they have been jointly ordered to perform work at another site. The costs incurred relating to these three sites are reimbursed by Honeywell based on an agreement (the "Honeywell Agreement") entered into in connection with the acquisition in 1987. For sites covered by the Honeywell Agreement, to the extent that conditions or circumstances occurred or existed at the time of or prior to the acquisition, Honeywell is obligated to reimburse Amphenol 100% of such costs. Honeywell representatives continue to work closely with the Company in addressing the most significant environmental liabilities covered by the Honeywell Agreement. Management does not believe that the costs associated with resolution of these or any other environmental matters will have a material adverse effect on the Company's financial position or results of operations. The environmental cleanup matters identified by the Company, including those referred to above, are covered under the Honeywell Agreement.
Note 6—Stock Options
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized for the stock options. Had compensation cost for stock options been determined based on the fair value of the option at date of grant consistent with the provisions of FAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share for the three and nine
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months ended September 30, 2004 and 2003 would have been reduced to the pro forma amounts indicated below:
Note 7—Stock Split
On January 21, 2004, the Company announced a two-for-one stock split that was effective for shareholders of record as of March 17, 2004. The additional shares were distributed on March 29, 2004. The share information included herein has been restated to reflect the effect of such stock split.
Note 8—Benefit Plans
The Company and its domestic subsidiaries have a defined benefit pension plan covering substantially all U.S. employees. Plan benefits are generally based on years of service and compensation and are noncontributory. Certain foreign subsidiaries have defined benefit plans covering their employees. Certain U.S. employees not covered by the defined benefit plan are covered by defined contribution plans. The Company also provides certain health care and life insurance benefits to certain eligible retirees through post-retirement benefit programs. The following is a summary, based on the most recent actuarial valuations, of the Company's net cost for pension benefits and other benefits for the three and nine months ended September 30, 2004 and 2003:
Based on the most recent actuarial calculations, the Company made a voluntary cash contribution to the U.S. defined benefit pension plan of $20 million in September 2004.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in millions, unless otherwise noted, except per share data)
Item 2. Results of Operations
Quarter and nine months ended September 30, 2004 compared to the quarter and nine months ended September 30, 2003
Net sales increased approximately 22% to $384.1 and 26% to $1,126.5 in the third quarter and nine months of 2004, respectively, compared to sales of $314.8 and $897.5, respectively, for the same periods in 2003. External sales of interconnect products and assemblies increased 24% in U.S. dollars and 20% in local currencies in the third quarter of 2004 compared to 2003 ($333.5 in 2004 versus $269.9 in 2003) and 26% in U.S. dollars and 22% in local currencies in the nine months of 2004 compared to 2003 ($980.5 in 2004 versus $777.9 in 2003). Sales increased in the Company's major end markets including the mobile communication, wireless infrastructure, military/aerospace, industrial, automotive and computer/data communications markets. Sales increases occurred in all major geographic regions and resulted primarily from the continuing development of new application specific and value added products, and to a lesser extent, from acquisitions. Sales of cable products increased 13% in the third quarter of 2004 compared to 2003 ($50.6 in 2004 versus $44.9 in 2003) and 22% in the nine months of 2004 compared to 2003 ($146.0 in 2004 and $119.6 in 2003). Such increase is primarily attributable to increased sales of coaxial cable products for the broadband communications market resulting from increased capital spending by both domestic and international cable operators for network upgrades and expansion. Sales in the United States in the third quarter and nine months of 2004 increased 23% and 26%, respectively, compared to the same periods in 2003 ($175.6 and $508.5 in 2004 versus $143.3 and $404.9 in 2003); and increased approximately 22% and 25%, respectively, in local currency compared to 2003. International sales for the third quarter and nine months of 2004 increased approximately 22% and 25%, respectively, in U.S. dollars ($208.5 and $618.0 in 2004 versus $171.5 and $492.6 in 2003) and increased approximately 16% and 19%, respectively, in local currency compared to 2003. Currency translation had the effect of increasing sales in the third quarter and nine months of 2004 by approximately $10.4 and $35.1, respectively, when compared to exchange rates for the 2003 period.
The gross profit margin as a percentage of net sales (including depreciation in cost of sales) was 33% and 32% for the third quarter and nine months of 2004, respectively, compared to 31% for both the third quarter and nine months of 2003. The increase in gross margin in the nine month period is generally attributable to an increase in margin for interconnect products and assemblies. The increase in gross margin in the third quarter is generally attributable to margin increases in both interconnect products and assemblies and cable products. The operating margin for interconnect products and assemblies increased approximately 2% in the third quarter and nine months of 2004 compared to the prior year. The increase in operating margin is generally attributable to the effects of higher sales volume, product mix and cost reduction activities relating to a shift in headcount to lower cost labor areas. Operating margins for cable products in the third quarter increased 2% due to price increases implemented late in the second quarter of 2004 which were partially offset by the impact of higher material costs.
Selling, general and administrative expenses increased to $53.6 and $159.3 or 14.0% and 14.1%, respectively, of net sales in the third quarter and nine months of 2004 compared to $44.6 and $128.6 or 14.2% and 14.3%, respectively, of net sales in the third quarter and nine months of 2003. The increase in the third quarter and nine months of 2004 is attributable to increases in selling expense and research and development costs that result from higher sales volume and increased spending relating to new product development and increased administrative costs for insurance and pension expense.
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Other expense, net, for the third quarter is comprised primarily of foreign currency transaction losses ($.1 in 2004 and $.6 in 2003), reflecting the weakness of the U.S dollar in both 2004 and 2003, program fees on sale of accounts receivable ($.8 in 2004 and $.4 in 2003), minority interests ($.7 in 2004 and 2003), agency and commitment fees on the Company's credit facilities ($.2 in 2004 and 2003), and secondary stock offering fees (nil in 2004 and $.8 in 2003).
Other expense, net, for nine months is comprised primarily of foreign currency transaction losses ($.8 in 2004 and $1.7 in 2003), reflecting the weakness of the U.S. dollar in both 2004 and 2003, program fees on sale of accounts receivable ($1.5 in 2004 and $1.1 in 2003), minority interests ($2.4 in 2004 and $1.6 in 2003), fees relating to secondary stock offerings ($.2 in 2004 and $.8 in 2003), agency and commitment fees on the Company's credit facilities ($.7 in 2004 and $.6 in 2003), and gains and losses on the sale of assets ($.1 gain in 2004 and $.4 loss in 2003).
Expenses for early extinguishment of debt totaling $10.4 for 2003 relate to the refinancing of the Company's senior credit facilities. Such one-time expenses include the call premium related to the redemption of the Company's Senior Subordinated Notes of $4.7, write-off of unamortized deferred debt issuance costs of $3.9 and other related fees and expenses of $1.8.
Interest expense for the third quarter and nine months of 2004 was $5.6 and $17.0 respectively, compared to $7.2 and $23.0, respectively for the 2003 periods. The decrease is attributable to lower average debt levels and lower interest rates.
The provision for income taxes for the 2004 and 2003 periods was at an effective rate of 34%.
Liquidity and Capital Resources
Cash provided by operating activities was $133.1 in the first nine months of 2004 compared to $105.3 in the 2003 period. The increase in cash flow relates primarily to an increase in net income partially offset by a decrease in long term assets and liabilities of $13.6 relating primarily to a $20.0 contribution to the Company's pension plan and a net increase of $1.0 in non-cash components of working capital. The non-cash components of working capital increased $1.0 in the first nine months of 2004 due primarily to increases of $28.3 and $8.0, respectively, in accounts receivable and inventory due to the higher level of sales partially offset by increases of $34.6 in accrued liabilities relating to an increase in liabilities for income taxes and acquisitions. The non-cash components of working capital decreased $2.7 in the first nine months of 2003, due primarily to a $8.3 increase in accounts payable and operating reduction of $8.1 in inventory and an increase of $6.1 in accrued liabilities relating primarily to an increase in liabilities for income taxes, partially offset by a $19.3 increase in accounts receivable due to higher levels of sales. In addition, other long term assets and liabilities decreased $7.4 relating primarily to a $10.0 contribution to the Company's pension plan.
Accounts receivable increased $26.8 to $199.3, due to increased sales volume and $9.9 from acquired companies, partially offset by an $11.2 increase in sales of receivables. Days sales outstanding, computed before sales of receivables, declined 2 days to 64 days. Inventory increased $12.5 to $233.9. Such increase was attributable to the impact of higher sales volume and $4.7 from acquired companies. Inventory turnover improved to 4.4x in 2004 from 3.8x in 2003. Land and depreciable assets, net, increased $7.2 to $185.4, reflecting depreciation of $28.4, capital expenditures of $32.0 and $6.8 from acquired companies. Goodwill increased $29.9 to $546.3, as a result of acquisitions. Accounts payable increased $14.1 to $130.9 as a result of higher operating levels and $9.5 from acquired companies.
For the first nine months of 2004, cash from operating activities of $133.1, proceeds from exercise of stock options including tax benefit of $22.4, additional sale of receivables of $11.2 and cash on hand of $1.0 were used primarily to fund capital expenditures of $29.2, acquisitions of $30.7, treasury stock purchases of $32.9, and a net reduction in debt of $74.9. For the first nine months of 2003, cash from operating activities of $105.3, cash on hand of $3.7, proceeds from the refinancing of $27.9, additional
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sales of receivables of $6.1 and proceeds from exercise of stock options of $27.8 were used primarily to fund capital expenditures of $21.7, acquisitions of $34.5 and for a net debt reduction of $114.5.
In May 2003, the Company completed a refinancing of its senior credit facilities. Borrowings of $625.0 under a new bank loan agreement (the "Bank Agreement"), described below, were used to repay $439.5 outstanding under the Company's previous bank agreement, redeem all outstanding senior subordinated notes totaling $148.7 (including the call premium of $4.7) and to pay other fees and expenses associated with the refinancing of $8.9. The Company's Bank Agreement includes a Term Loan, consisting of a Tranche A and B, and a $125.0 revolving credit facility. At September 30, 2004, the Tranche A had a balance of $38.0 and matures over the period 2007 to 2008, and the Tranche B had a balance of $400.0 and matures in 2010. The revolving credit facility expires in 2008; availability under the facility at September 30, 2004 was $116.2, after a reduction of $8.8 for outstanding letters of credit. The Company's interest rate on the revolving credit facility and Tranche A loan was LIBOR plus 150 basis points. The interest rate on the Tranche B loan is LIBOR plus 200 basis points. The Bank Agreement is secured by a first priority pledge of 100% of the capital stock of the Company's direct domestic subsidiaries and 65% of the capital stock of direct material foreign subsidiaries, as defined in the Bank Agreement. In addition, if the Company's credit rating as assigned by Standard & Poor's or Moody's were to decline to BB- or Ba3, respectively, the Company would be required to perfect liens in favor of participants in the Bank Agreement in substantially all of the Company's U.S. based assets. At September 30, 2004, the Company's credit rating from Standard and Poor's was BB+ and from Moody's was Ba1. The Bank Agreement requires that the Company satisfy certain financial covenants including an interest coverage ratio of higher than 3x (EBITDA divided by interest expense) and a leverage test (debt divided by EBITDA) lower than 3.75x and 3.50x based on total debt and senior debt, respectively. At September 30, 2004, such ratios as defined in the Bank Agreement were 11.91x and 1.81x, respectively. The Bank Agreement also includes limitations with respect to, among other things, indebtedness in excess of $50.0 for capital leases, $200.0 for general indebtedness and $200.0 for acquisition indebtedness, of which approximately $5.3, $0 and $0, respectively, were outstanding at September 30, 2004, and restricted payments, including dividends on the Company's Common Stock, in excess of 50% of consolidated cumulative net income, or approximately $97.8 at September 30, 2004. The Company has interest rate swap agreements that fix the Company's LIBOR interest rate on $250.0 and $50.0 of floating rate bank debt at 2.44% and 3.01%, respectively, expiring in May 2006 and June 2006, respectively.
The Company's primary ongoing cash requirements will be for operating and capital expenditures, product development activities and debt service. The Company's debt service requirements consist primarily of principal and interest on bank borrowings. The Company's primary sources of liquidity are internally generated cash flow, the Company's revolving credit facility and the sale of receivables under the Company's accounts receivable agreement. The Company expects that ongoing requirements for operating and capital expenditures, product development activities and debt service 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, a deterioration in certain of the Company's financial ratios or a deterioration in the quality of the Company's accounts receivable.
In March 2004, the Company announced that its Board of Directors authorized an open market stock repurchase program of up to two million shares of the Company's common stock during the period ending December 31, 2005. In October 2004, the program was amended to increase the authorized number of shares to up to five million of the Company's common stock and extend the expiration of the program to September 30, 2006. The timing and price of any purchases under the program will depend on market conditions. In March 2004 the Company purchased 530,800 shares of common stock for $16.2 or an average price of $30.47 per share. In the third quarter the Company purchased an additional 567,000 shares of common stock for $16.7 or an average price of $29.46 per share.
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The Company has not paid, and does not have any present intention to commence payment of, cash dividends on its common stock; however this policy will be reviewed on an ongoing basis. The Company expects that ongoing requirements for operating and capital expenditures, product development activities and debt service will be funded by internally generated cash flow and availability under the Company's revolving credit facility. The Company may also use cash to fund part or all of the cost of future acquisitions.
A subsidiary of the Company has an agreement with a financial institution whereby the subsidiary can sell an undivided interest of up to $85.0 in a designated pool of qualified accounts receivable. The agreement was amended in June 2004 to, among other things, extend its term for a three year period ending June 2007. The Company services, administers and collects the receivables on behalf of the purchaser. The agreement provides certain covenants and provides for various events of termination. At September 30, 2004, approximately $85.0 of receivables were sold under the agreement and therefore are not reflected in the accounts receivable balance in the accompanying Condensed Consolidated Balance Sheet.
Environmental Matters
Certain operations of the Company are subject to federal, state and local 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 all applicable environmental laws and regulations and that the costs of continuing compliance will not have a material effect on the Company's financial position or results of operations.
The Company is currently involved in the environmental cleanup of several sites for conditions that existed at the time Amphenol was acquired from Allied Signal Corporation in 1987 (Allied Signal merged with Honeywell International Inc. in December 1999, with Honeywell being the surviving entity). Amphenol and Honeywell were named jointly and severally liable as potentially responsible parties in relation to such sites. Amphenol and Honeywell have jointly consented to perform certain investigations and remedial and monitoring activities at two sites and they have been jointly ordered to perform work at another site. The costs incurred relating to these three sites are reimbursed by Honeywell based on the Honeywell Agreement entered into in connection with the acquisition in 1987. For all sites covered by the Honeywell Agreement, to the extent that conditions or circumstances occurred or existed at the time of or prior to the acquisition, Honeywell is obligated to reimburse Amphenol 100% of such costs. Honeywell representatives work closely with the Company in addressing the most significant environmental liabilities covered by the Honeywell Agreement. Management does not believe that the costs associated with resolution of these or any other environmental matters will have a material adverse effect on the Company's financial position or results of operations. The environmental cleanup matters identified by the Company, including those referred to above, are covered under the Honeywell Agreement.
Stock Split
On January 21, 2004, the Company announced a two-for-one stock split that was effective for stockholders of record as of March 17, 2004. The additional shares were distributed on March 29, 2004. The prior year share information included herein has been restated to reflect the effect of such stock split.
Safe Harbor Statement
Statements in this report that are not historical are "forward-looking" statements, which should be considered as subject to the many uncertainties that exist in the Company's operations and business
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environment. These uncertainties, which include, among other things, economic and currency conditions, market demand and pricing and competitive and cost factors are set forth in the Company's 2003 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's assessment of its sensitivity to foreign currency exchange rate risk since its presentation set forth, in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in its 2003 Annual Report on Form 10-K. Relative to interest rate risk, the Company completed a refinancing of its senior credit facilities during the second quarter of 2003 as discussed in liquidity and capital resources above. At September 30, 2004, the Company had interest rate swap agreements that fix the Company's LIBOR interest rate on $250.0 and $50.0 of floating rate debt at 2.44% and 3.01%, respectively, expiring in May 2006 and June 2006, respectively. At September 30, 2004, the Company's average LIBOR rate was 2.3%. A 10% change in the LIBOR interest rate at September 30, 2004 would have had the effect of increasing or decreasing interest expense by approximately $0.2. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2004, although there can be no assurances that interest rates will not significantly change.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Inapplicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Equity Securities
On March 4, 2004, the Company announced that its Board of Directors authorized an open market stock repurchase program (the "Program") of up to 2.0 million shares (on a post-split basis) of its common stock during the period ending December 31, 2005. On October 20, 2004 the Program was amended to increase the number of authorized shares to 5.0 million and to extend the expiration date until September 30, 2006. Approximately 3.9 million shares of common stock remain available for repurchase under the Program.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
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Item 5. Other Information
Item 6. Exhibits
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 5, 2004
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Exhibit Index
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