Amphenol Corporation (APH)

APH 
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Amphenol Corporation (APH)

Q3 2010 Earnings Call

October 20, 2010 1:00 pm ET

Executives

Adam Norwitt - CEO

Diana Reardon - CFO

Analysts

Amit Daryanani - RBC Capital Markets

Wamsi Mohan - Bank of America/Merrill Lynch

Matt Sheerin - Stifel Nicolaus

Brian White - Ticonderoga

William Stein - Credit Suisse

Jim Suva - Citi

Amitabh Passi - UBS

Steve O'Brien - JPMC

Craig Hettenbach - Goldman Sachs

Shawn Harrison - Longbow Research

Presentation

Operator

Welcome to the third quarter earnings conference call for Amphenol Corporation. Following today’s presentation, there will be a formal question-and-answer session. (Operator Instructions)

I’d like to introduce today’s conference host, Ms. Diana Reardon. Ma'am, you may begin.

Diana Reardon

Thank you. Good afternoon. My name is Diana Reardon and I’m Amphenol's CFO. I'm here together with Adam Norwitt, our CEO and we’d like to welcome everyone to our third quarter call.

The results were released this morning. I will provide some financial commentary on the quarter and Adam will give an overview of the business and current trends. We’ll then have a question-and-answer session.

The company had a record third quarter, achieving strong growth in both sales and earnings per share and exceeding the high end of the company’s guidance. Sales were $948 million, up 7% in both US dollars and local currencies over the second quarter of 2010.

Compared to last year, sales were up 32% in US dollars and 33% in local currencies. From an organic standpoint, excluding both acquisitions and currency impact, sales in the third quarter were up 3% sequentially and 28% year-over-year, a very strong performance.

Breaking down sales into our two major components, our cable business, which comprised 7% of our sales, was down 6% from last year and 1% from last quarter.

The sales decline relates primarily to lower spending in North American broadband markets. The interconnect business, which comprised 93% of our sales, was up 36% from last year and 8% sequentially, with growth in all markets. Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $189 million, compared to $124 million last year. Operating margin was 19.9%, compared to 17.3% last year. Operating income as net of stock option expense was approximately $7 million or 0.7% of sales in the Q3 2010 quarter compared to $5.2 million and 07% of sales in the Q3 2009.

From a segment standpoint, in the cable business, margins were 13.5%, down from 16.1% last year. The margin decline relates both to higher relative material costs and the impact of market price reductions. In the interconnect business, margins were 22.3%, compared to 19.6% last year. The improvement in margin reflects the benefits of proactive and aggressive management of all elements of cost as volume has ramped back up.

Overall, we are extremely pleased with the company’s operating margin achievement of 19.9%. This represents a conversion margin on incremental sales over year of 28%. This is excellent performance in any environment, but particularly in the phase of increasing global inflationary pressures.

We continue to believe that the company’s entrepreneurial operating structure and culture of cost control will allow us to react in a fast and flexible manner and achieve strong profitability going forward.

Interest expense for the quarter was $10.6 million, compared to $9 last year. The increase over the prior year relates primarily to the inclusion in interest expense of fees on the company’s receivable securitization program in accordance with the adoption of the new accounting rules effective beginning this year.

In 2009, these fees which totaled approximately $400,000 were included in other expense. In addition interest expense include one-time costs of $0.5 million for the early extinguishing of debt relating to the write-off of unamortized deferred debt issuance costs associated with the refinancing in August of the company’s revolving credit facility.

In the third quarter, the company had an effective tax rate of 22.8%, compared to a rate of 27.5% in the third quarter of 2009. The 2010 quarter includes an $8.4 million or $0.05 per share net benefit relating to a reduction in tax expense due primarily to the favorable outcome of certain international tax positions and the completion of prior year audits.

Excluding, these adjustments the effective tax rate is approximately 27.5% and we currently expect a same type of rate in the fourth quarter of 2010. Net income was approximately 14% of sales, a very, very strong performance.

Diluted earnings per share in the third quarter was $0.78 as reported. Excluding the one-time tax adjustment, EPS was $0.73 and grew 55% over the prior year; an EPS growth rate of approximately 1.7 times sales growth, demonstrating the company’s significant operating leverage.

Orders for the quarter were $943 million, up 4% from Q2, 2010 and up 27% from last year, resulting in a book-to-bill ratio of approximately 0.99 to 1.

The company continues to be an excellent generator of cash. Cash flow from operations was $128 million or 98% of net income in the quarter, excluding tax items.

The cash flow from operations along with proceeds and related tax benefits from option exercise of $16 million and borrowings under the company’s credit and receivables facilities of $121 million was used primarily for capital expenditures of $29 million; acquisition related expenditures of a $151 million relating primarily to the previously disclosed acquisition of an Borisch in July; dividend payments of $2.6 million; $20 million relating to the purchase of a minority interest in the quarter; payment of $7 million in fees relating to the new revolving credit facility and increases short-term investments and cash and cash investments of $69 million.

In August, as previously reported, the company refinanced its senior credit facility. The new $1 billion facility matures in August to 2014 and at the end of the quarter the company had availability under the facility of $785 million.

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