UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
AMPHENOL CORPORATION
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 Noo
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý Noo
As of April 30, 2005, the total number of shares outstanding of Class A Common Stock was 88,207,927.
Amphenol Corporation
Index to Quarterly Reporton Form 10-Q
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
See accompanying notes to condensed consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
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AMPHENOL CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Principles of Consolidation and Interim Financial Statements
The condensed consolidated balance sheets as of March 31, 2005 and December 31, 2004, and the related consolidated statements of income and the condensed consolidated statements of cash flow for the three months ended March 31, 2005 and 2004 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 months ended March 31, 2005 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 2004 Annual Report on Form 10-K.
Note 2—Reclassifications
As discussed in the Company's 2004 Annual Report on Form 10-K, certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to the current year presentation.
Note 3—Inventories
Inventories consist of:
Note 4—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, headquarters' 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.
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The segment results for the three months ended March 31, 2005 and 2004 are as follows:
Reconciliation of segment operating income to consolidated income before taxes for the three months ended March 31, 2005 and 2004:
Note 5—Comprehensive Income
Total comprehensive income for the three months ended March 31, 2005 and 2004 is summarized as follows:
Note 6—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.
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 Corporation was acquired from Allied Signal Corporation in 1987 (Allied Signal merged with Honeywell International Inc. ("Honeywell") in December 1999). Amphenol
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Corporation and Honeywell were named jointly and severally liable as potentially responsible parties in relation to such sites. Amphenol Corporation 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 Corporation 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 7—New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard, No. 123R ("FAS 123R") "Share-Based Payments". FAS 123R applies to all transactions involving the issuance, by a company, of its own equity (stock, stock options, or other equity instruments) in exchange for goods or services, including employee services. FAS 123R requires entities to recognize the cost of employee services received in exchange for the stock-based compensation using the fair value of those stocks on the grant date (with limited exceptions). In April 2005, this statement was deferred and is now effective as of the beginning of the first fiscal year beginning after June 15, 2005. The Company is continuing to assess the impact that this statement will have on the Company's consolidated financial statements, but does not expect the after-tax charge to net income to exceed $1.3 million per quarter based on the options currently outstanding.
Note 8—Shareholders' Equity
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 months ended March 31, 2005 and 2004 would have been reduced to the pro forma amounts indicated below:
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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.
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. At March 31, 2005, approximately 3.4 million shares of common stock remained available for repurchase under the Program.
On January 19, 2005, the Company announced that it will commence payment of a quarterly dividend on its common stock of $.03 per share. The Company made its first dividend payment in the amount of $2.7 million on April 6, 2005 to shareholders of record as of March 15, 2005.
Note 9—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 generally 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.
The Company estimates that based on current actuarial calculations it will make a voluntary cash contribution to the U.S. pension plan of approximately $10 million in 2005.
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MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(dollars in millions, unless otherwise noted, except per share data)
Item 2. Results of Operations
Three months ended March 31, 2005 compared to the three months ended March 31, 2004
Net sales increased approximately 15% to $409.4 in the first quarter of 2005 compared to sales of $355.3 for the same period in 2004. Sales of interconnect products and assemblies increased 16% in U.S. dollars and 14% in local currencies in the first quarter of 2005 compared to 2004 ($361.2 in 2005 versus $310.7 in 2004). Sales increased in the Company's major end markets including the military/aerospace, mobile communications, 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 8% in the first quarter of 2005 compared to 2004 ($48.2 in 2005 versus $44.6 in 2004). 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. Geographically, sales in the United States in the first quarter of 2005 increased 13% compared to the same period in 2004 ($181.0 in 2005 versus $159.9 in 2004). International sales for the first quarter of 2005 increased approximately 17% in U.S. dollars ($228.4 in 2005 versus $195.4 in 2004) and increased approximately 13% in local currency compared to 2004. Currency translation had the effect of increasing sales in the first quarter of 2005 by approximately $7.7 when compared to exchange rates for the 2004 period.
The gross profit margin as a percentage of net sales (including depreciation in cost of sales) was 33% for the first quarter of 2005 compared to 32% for the 2004 period. The increase in gross margin is generally attributable to an increase in margin of interconnect products and assemblies. The operating margin for interconnect products and assemblies increased approximately 1.5% 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 including a shift in headcount to low cost labor areas. Operating margin for cable products in the first quarter increased 0.7% 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 $57.8 or 14.1% of net sales in the first quarter of 2005 compared to $51.3 or 14.4% of net sales in the 2004 period. The increase in the first quarter of 2005 is attributable to increases in selling expense resulting from higher sales volume, increased spending relating to new product development and increased administrative costs for insurance and pension expense.
Other expense, net, is comprised primarily of program fees on sale of accounts receivable ($0.8 in 2005 and $0.4 in 2004), minority interests ($0.6 in 2005 and $0.8 in 2004), agency and commitment fees on the Company's credit facilities ($0.3 in 2005 and $0.2 in 2004), foreign currency transaction losses ($0 in 2005 and $0.4 in 2004), fees related to secondary stock offerings from which the Company did not receive any proceeds ($0 in 2005 and $0.1 in 2004) and gain on sale of fixed assets ($0 in 2005 and $0.2 in 2004).
Interest expense for the first quarter of 2005 was $5.4 compared to $5.8 for the 2004 period. The decrease is attributable to lower average debt levels partially offset by higher average interest rates.
The provision for income taxes for the first quarter of 2005 and 2004 was at an effective rate of 34%.
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Liquidity and Capital Resources
Cash provided by operating activities was $38.6 in the first quarter of 2005 compared to $28.1 in the 2004 period. The increase in cash flow relates primarily to an increase in net income in addition to a smaller net increase in non-cash components of working capital. The non-cash components of working capital increased $18.8 in the first quarter of 2005 due primarily to a decrease of $13.5 in accrued liabilities resulting primarily from increased income tax payments, and increases of $12.5 and $11.8, respectively, in accounts receivable and inventory due to higher levels of sales partially offset by an increase in receivables sold under the Company's accounts receivable securitization program of $5 and an increase in accounts payable of $11.3 due to increased activity. The non-cash components of working capital increased $22.7 in the first quarter of 2004 due primarily to a decrease of $3.6 in accrued liabilities resulting from increased income tax payments, a decrease in receivables sold under the Company's accounts receivable securitization program of $3.7 and increases of $10.3 and $3.7, respectively, in accounts receivable and inventory due to higher levels of sales.
Accounts receivable increased $16.4 to $230.5, due primarily to increased sales volume and $12.9 from acquired companies partially offset by the translation impact resulting from a relatively stronger U.S. dollar at March 31, 2005 compared to December 31, 2004. Sales of receivables under the Company's accounts receivable securitization program increased $5 million during the quarter. Days sales outstanding, computed before sales of receivables, increased 2 days to 66 days. Inventory increased $16.1 to $263.4. Such increase was attributable to the impact of higher sales volume and $7.1 from acquired companies. Inventory turnover, excluding the impact of acquisitions, remained constant at 4.2x. Land and depreciable assets, net, increased $5.4 to $203.2, reflecting capital expenditures of $12.5 and $6.6 from acquired companies partially offset by depreciation expense of $10.7 and the translation impact resulting from a relatively stronger U.S. dollar at March 31, 2005 compared to December 31, 2004. Other accrued liabilities decreased $10 to $75.1 primarily due to higher tax payments and payments related to fringe benefits, partially offset by $5.0 from acquired companies. Goodwill increased $49.6 to $595.1, as a result of acquisitions during the period. Accounts payable increased $14.3 to $149.1 as a result of higher operating levels and $4.0 from acquired companies. Dividends payable were recorded of $2.7 as a result of the Company declaring its first dividend in the first quarter 2005.
For the first quarter of 2005, cash from operating activities of $38.6, borrowings of $23.7, proceeds from exercise of stock options of $4.0 and a reduction in cash on hand of $3.9, were used primarily to fund capital expenditures of $12.5, acquisitions of $53.0 and treasury stock purchases of $4.7. For the first quarter of 2004, cash from operating activities of $28.1, and proceeds from exercise of stock options of $15.2 were used primarily to fund capital expenditures of $6.7, acquisitions of $0.5, treasury stock purchases of $16.2, a net debt reduction of $15.2 and an increase in cash on hand of $4.9.
The Company's bank agreement (the "Bank Agreement") includes a Term Loan, consisting of a Tranche A and B, and a $125.0 revolving credit facility. At March 31, 2005, the Tranche A had a balance of $13.0 and matures in 2008, and the Tranche B had a balance of $400.0 and matures over the period 2005 to 2010 with annual payments of $4 million and a balloon payment due at maturity. The revolving credit facility expires in 2008; availability under the facility at March 31, 2005 was $94.8, after a reduction of $21.4 outstanding under the revolving credit facility and $8.8 for outstanding letters of credit. The Company's interest rate on loans under the Bank Agreement is LIBOR plus 150 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 March 31, 2005, 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
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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 3.5x and 3.25x based on total debt and senior debt, respectively. At March 31, 2005, such ratios as defined in the Bank Agreement, were 13.75x, 1.64x and 1.64x, respectively. The Bank Agreement also includes limitations with respect to, among other things, indebtedness in excess of $50 million for capital leases, $450 for general indebtedness and $200 for acquisition indebtedness, of which approximately $10.4, $0 and $5.0, respectively, were outstanding at March 31, 2005, and restricted payments, including dividends on the Company's common stock, in excess of 50% of consolidated cumulative net income plus $50, or approximately $193.7 at March 31, 2005. In conjunction with entering into the Bank Agreement, the Company entered into interest rate swap agreements that fixed 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 and expansion activities, repurchases of its Common Stock, dividends 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 securitization agreement. The Company expects that ongoing 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 had authorized an open market stock repurchase program (the "Program") of up to 2.0 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 number of authorized shares to five million and to extend the expiration date until September 30, 2006. The timing and price of any purchases under the Program will depend on market conditions. During the first quarter, the Company purchased 127,000 shares of Common Stock for $4.7, or an average price of $37.16 per share. At March 31, 2005, approximately 3.4 million shares remained available for purchase under the Program.
On January 19, 2005, the Company announced that it will commence payment of a quarterly dividend on its Common Stock of $.03 per share. The Company's first dividend payment was made in the amount of $2.7 on April 6, 2005 to shareholders of record as of March 15, 2005. The Company intends to retain the remainder of its earnings to provide funds for the operation and expansion of the Company's business, payment of dividends, repurchases of its Common Stock and to repay outstanding indebtedness. Management believes that the Company's working capital position, ability to generate strong cash flow from operations and access to credit markets will allow it to meet its obligations for the next twelve months and the foreseeable future.
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 Company services, administers and collects the receivables on behalf of the purchaser. The agreement includes certain covenants and provides for various events of termination. The agreement expires in May 2007. At March 31, 2005, approximately $85.0 ($80.0 at December 31, 2004) of receivables were sold under the agreement and are therefore not reflected in the accounts receivable balance in the accompanying Condensed Consolidated Balance Sheets.
Environmental Matters
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
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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 Corporation was acquired from Allied Signal Corporation in 1987 (Allied Signal merged with Honeywell in December 1999). Amphenol Corporation and Honeywell were named jointly and severally liable as potentially responsible parties in relation to such sites. Amphenol Corporation 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 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 Corporation 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.
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 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 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 2004 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company, in the normal course of doing business, is exposed to the risks associated with foreign currency exchange rates and changes in interest rates. 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 2004 Annual Report on Form 10-K. Relative to interest rate risk, at March 31, 2005, the Company had interest rate swap agreements that fixed 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 March 31, 2005, the Company's average LIBOR rate was 2.57%. A 10% change in the LIBOR interest rate at March 31, 2005 would have had the effect of increasing or decreasing interest expense by approximately $0.3. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2005, although there can be no assurances that interest rates will not significantly change.
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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) of the Securities Exchange Act of 1934 (the "Exchange Act")), and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of the end of the period covered by this quarterly report. There were no significant changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None
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 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. At March 31, 2005, approximately 3.4 million shares of Common Stock remained available for repurchase under the Program.
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
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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: May 6, 2005
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