Amphenol - 10-Q quarterly report FY2014 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10879

AMPHENOL CORPORATION

358 Hall Avenue

Wallingford, Connecticut 06492

203-265-8900

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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of July 31, 2014, the total number of shares outstanding of Class A Common Stock was 156,825,858

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMPHENOL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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The segment results for the three months ended June 30, 2014 and 2013 are as follows:

The segment results for the six months ended June 30, 2014 and 2013 are as follows:

A reconciliation of segment operating income to consolidated income before income taxes for the three and six months ended June 30, 2014 and 2013 is summarized as follows:

Note 5—Changes in Equity and Noncontrolling Interests

Net income attributable to noncontrolling interests is classified below net income.  Earnings per share is determined after the impact of the noncontrolling interests’ share in net income of the Company.  In addition, the equity attributable to noncontrolling interests is presented as a separate caption within equity.

A rollforward of consolidated changes in equity for the six months ended June 30, 2014 is as follows:

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A rollforward of consolidated changes in equity for the six months ended June 30, 2013 is as follows:

Note 6—Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amphenol Corporation by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net income attributable to Amphenol Corporation by the weighted-average number of common shares and dilutive common shares issuable upon the exercise of outstanding stock options. A reconciliation of the basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and six months ended June 30, 2014 and 2013 is as follows (dollars in thousands, except per share amounts):

Excluded from the computations above were anti-dilutive stock options of 1,475,550 and 917,383 for the three months ended June 30, 2014 and 2013, respectively, and 2,028,171 and 1,115,174 for the six months ended June 30, 2014 and 2013, respectively.

Note 7—Commitments and Contingencies

The Company has been named as a defendant in several legal actions in which various amounts are claimed arising from normal business activities.  Although the amount of any ultimate liability with respect to such matters cannot be precisely determined, in the opinion of management, such matters are not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.

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, results of operations or cash flows.

Note 8—Stock-Based Compensation

In May 2009, the Company adopted the 2009 Stock Purchase and Option Plan for Key Employees of Amphenol and its Subsidiaries (the “2009 Employee Option Plan”).  The Company continues to maintain the 2000 Stock Purchase and Option Plan for

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Key Employees of Amphenol and Subsidiaries (the “2000 Employee Option Plan”).  No additional stock options can be granted under the 2000 Employee Option Plan.  The 2009 Employee Option Plan authorizes the granting of additional stock options by a committee of the Company’s Board of Directors and was amended in May 2014 to increase the number of shares of common stock reserved for issuance from 16,000,000 shares to 29,000,000 shares. As of June 30, 2014, there were 12,401,170 shares of common stock available for the granting of additional stock options under the 2009 Employee Option Plan. Options granted under the 2000 Employee Option Plan and the 2009 Employee Option Plan generally vest ratably over a period of five years and are generally exercisable over a period of ten years from the date of grant.

In 2004, the Company adopted the 2004 Stock Option Plan for Directors of Amphenol Corporation (the “2004 Directors Option Plan”).  The 2004 Directors Option Plan is administered by the Company’s Board of Directors.  As of June 30, 2014, there were 70,000 shares of common stock available for the granting of additional stock options under the 2004 Directors Option Plan, although no additional stock options are expected to be granted under this plan.  Options granted under the 2004 Directors Option Plan generally vest ratably over a period of three years and are generally exercisable over a period of ten years from the date of grant.

In May 2012, the Company adopted the 2012 Restricted Stock Plan for Directors of Amphenol Corporation (the “2012 Directors Restricted Stock Plan”). The 2012 Directors Restricted Stock Plan is administered by the Company’s Board of Directors.  As of June 30, 2014, the number of restricted shares available for grant under the 2012 Directors Restricted Stock Plan was 85,961.  Restricted shares granted under the 2012 Directors Restricted Stock Plan generally vest on the first anniversary of the grant date.  Grants under the 2012 Directors Restricted Stock Plan entitle the holder to receive shares of the Company’s common stock without payment.

The grant-date fair value of each option grant under the 2000 Employee Option Plan, the 2009 Employee Option Plan and the 2004 Directors Option Plan is estimated using the Black-Scholes option pricing model. The grant-date fair value of each restricted share grant is determined based on the closing share price of the Company’s stock on the date of the grant. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Use of a valuation model for option grants requires management to make certain assumptions with respect to selected model inputs. Expected share price volatility is calculated based on the historical volatility of the stock of the Company and implied volatility derived from related exchange traded options. The average expected life is based on the contractual term of the option and expected exercise and historical post-vesting termination experience. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The expected annual dividend per share is based on the Company’s dividend rate.

Stock-based compensation expense includes the estimated effects of forfeitures, which are adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates.  Changes in estimated forfeitures are recognized in the period of change and impact the amount of expense to be recognized in future periods.  For the three months ended June 30, 2014, the Company’s income before income taxes and net income were reduced for stock-based compensation expense by $9,973 and $7,333, respectively, and those reductions were $19,249 and $14,137, respectively, for the six months ended June 30, 2014. For the three months ended June 30, 2013, the Company’s income before income taxes and net income were reduced for stock-based compensation expense by $8,890 and $6,473, respectively, and these reductions were $17,175 and $12,503, respectively, for the six months ended June 30, 2013. The expense incurred for stock-based compensation is included in selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Income.

Stock Options

Stock option activity for the three and six months ended June 30, 2014 was as follows:

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A summary of the status of the Company’s non-vested options as of June 30, 2014 and changes during the three and six months then ended is as follows:

During the three and six months ended June 30, 2014 and 2013, the following activity occurred under the Company’s option plans:

As of June 30, 2014, the total compensation cost related to non-vested options not yet recognized is approximately $112,848 with a weighted average expected amortization period of 3.78 years.

Restricted Shares

Prior to the third quarter of 2013, the Company issued 17,045 restricted shares with a weighted-average fair value at grant date of $53.78 per share, all of which became fully vested in 2013.  In the second quarter of 2013, the Company issued 12,824 restricted shares with a weighted-average fair value at grant date of $78.00, all of which became fully vested in the second quarter of 2014.  Additionally, in the second quarter of 2014, the Company issued 9,170 restricted shares with a weighted-average fair value at grant date of $95.43.  As of June 30, 2014, the total compensation cost related to non-vested restricted shares not yet recognized was approximately $781 with a weighted average expected amortization period of 0.90 years.

Note 9—Shareholders’ Equity

In January 2013, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to 10,000,000 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 2,765,797 shares of its common stock for $250,159.  These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly.  Through July 31, 2014, the Company has repurchased an additional 205,448 shares of its common stock for $19,996.  At July 31, 2014, approximately 2,743,060 additional shares of common stock may be repurchased 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 $0.105 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 $31,418 and declared dividends in the amount of $31,370 and $62,788, respectively.  For the three and six months ended June 30, 2013, the Company paid dividends in the amount of $16,756 and declared dividends in the amount of $16,713 and $33,468, respectively.

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Note 10—Benefit Plans and Other Postretirement Benefits

The Company and certain of its domestic subsidiaries have defined benefit pension plans (the “U.S. Plans”), which cover certain U.S. employees and which represent the majority of the assets and benefit obligations of the aggregate defined benefit plans of the Company. The U.S. Plans’ benefits are generally based on years of service and compensation and are generally noncontributory.  Certain U.S. employees not covered by the U.S. Plans are covered by defined contribution plans.  Certain foreign subsidiaries have defined benefit plans covering their employees (the “International Plans” and, together with the U.S. Plans, the “Plans”). The following is a summary, based on the most recent actuarial valuations of the Company’s net cost for pension benefits, of the Plans and other postretirement benefits for the three and six months ended June 30, 2014 and 2013.

For the three and six months ended June 30, 2014, the Company made cash contributions to the U.S. Plans of approximately $4,000 and estimates that, based on current actuarial calculations, it will make aggregate cash contributions to the Plans in 2014 of approximately $20,000, 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.

The Company offers various defined contribution plans for certain U.S. and foreign employees. Participation in these plans is based on certain eligibility requirements. The Company matches the majority of employee contributions to U.S. defined contribution plans with cash contributions up to a maximum of 5% of eligible compensation.  During the six months ended June 30, 2014 and 2013, the total matching contributions to these U.S. defined contribution plans were approximately $1,800 and $1,600, respectively.

Note 11—Goodwill and Other Intangible Assets

As of June 30, 2014, the Company has goodwill totaling $2,318,955 of which $2,195,562 is related to the Interconnect Products and Assemblies segment with the remainder related to the Cable Products and Solutions segment.  For the six months ended June 30, 2014, goodwill increased by $29,870, primarily as a result of the fair value adjustments made from the Company’s evaluation of the fair value attributes of the assets acquired related to recent acquisitions and currency translation.  The Company anticipates that the final assessment of values of those assets will not differ materially from the preliminary assessment.

Other than goodwill and an indefinite-lived trade name intangible asset with a value of approximately $4,300, the Company’s intangible assets are subject to amortization.  A summary of the Company’s amortizable intangible assets as of June 30, 2014 and December 31, 2013 is as follows:

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Customer relationships, proprietary technology, license agreements and trade names and other amortizable intangible assets have weighted average useful lives of approximately 9 years, 14 years, 8 years and 15 years, respectively, for an aggregate weighted average useful life of approximately 10 years.

Intangible assets are included in Goodwill and other long-term assets in the accompanying Condensed Consolidated Balance Sheets.  The amortization expense for the three months ended June 30, 2014 and 2013 was approximately $6,000 and $4,900, respectively.  The amortization expense for the six months ended June 30, 2014 and 2013 was approximately $14,500 and $10,000, respectively.  As of June 30, 2014, amortization expense estimated for each of the next five fiscal years is approximately $27,000 in 2014, $24,500 in 2015, $23,700 in 2016, $23,500 in 2017, and $19,400 in 2018.

Note 12—Debt

The Company’s debt consists of the following:

(1)         The Senior Notes are unsecured and rank equally in the right of payment with the Company’s other unsecured indebtedness.

The carrying value of borrowings under the Company’s Revolving Credit Facility, Credit Agreement and other notes payable approximated their fair value at June 30, 2014 due to their relative short-term maturities and market interest rates and are therefore classified as Level 2 in the fair value hierarchy.  The fair value of the Senior Notes were based on recent bid prices in an active market and are therefore classified as Level 1 in the fair value hierarchy.

The Company has a $1,500,000 unsecured credit facility (the “Revolving Credit Facility”) with a maturity date of July 2018 and the ability to borrow at a spread over LIBOR.  At June 30, 2014, borrowings and availability under the Revolving Credit Facility were $290,000 and $1,210,000, respectively.  The Company has a $200,000 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 $100,000 to $200,000.

Note 13—Fair Value Measurements

The Company follows the framework within the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification, which requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. These requirements establish market or observable inputs as the preferred source of values. Assumptions

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based on hypothetical transactions are used in the absence of market inputs. The Company does not have any non-financial instruments accounted for at fair value on a recurring basis.

The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1                                Quoted prices for identical instruments in active markets.

Level 2                                Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3                                Significant inputs to the valuation model are unobservable.

The Company believes that the assets or liabilities subject to such standards with fair value disclosure requirements are short-term investments and derivative instruments.  Substantially all of the Company’s short-term investments consist of certificates of deposit with original maturities of twelve months or less and as such, are considered as Level 1 in the fair value hierarchy as they are traded in active markets which have identical assets.  The carrying amounts of these instruments, the majority of which are in non-U.S. bank accounts, approximate their fair value.  The Company’s derivative instruments represent foreign exchange rate forward contracts, which are valued using bank quotations based on market observable inputs such as forward and spot rates and are therefore classified as Level 2 in the fair value hierarchy. The impact of the credit risk related to these financial assets is immaterial.  The fair values of the Company’s financial and non-financial assets and liabilities subject to such standards at June 30, 2014 and December 31, 2013 are as follows:

The amount recognized in accumulated other comprehensive income (loss) associated with foreign exchange rate forward contracts and the amount reclassified from accumulated other comprehensive income (loss) to foreign exchange gain (loss) in the accompanying Condensed Consolidated Statements of Income during the six month periods ended June 30, 2014 and 2013 was not material.

Note 14—Income Taxes

The provision for income taxes for the three and six months ended June 30, 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 $11,300 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 for 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

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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.

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 Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in its 2013 Annual Report.  As of June 30, 2014, the Company’s average LIBOR rate was 0.15%.  A 10% change in the LIBOR interest rate at June 30, 2014 would have no material effect on interest expense. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2014, 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 Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the period covered by this report. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management, including the Company’s principal executive and financial officers, to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal controls over financial reporting during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.         Legal Proceedings

The Company has been named as a defendant in several legal actions in which various amounts are claimed arising from normal business activities. Although the amount of any ultimate liability with respect to such matters cannot be precisely determined, in the opinion of management, such matters are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

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Item 1A.  Risk Factors

There have been no material changes to the Company’s risk factors as disclosed in Part I, Item 1A of the Company’s 2013 Annual Report.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Equity Securities

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 million.  These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly.  Through July 31, 2014, the Company has repurchased an additional 0.2 million shares of its common stock for $20.0 million.  At July 31, 2014, approximately 2.7 million additional shares of common stock may be repurchased under the 2013 Stock Repurchase Program.

Item 3.         Defaults Upon Senior Securities

None.

Item 4.         Mine Safety Disclosures

Not Applicable.

Item 5.         Other Information

None.

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Item 6.         Exhibits

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*                                         Incorporated herein by reference as stated.

**                                  Filed herewith.

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