Amphenol Corporation (APH)

APH 
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Amphenol (APH)

Q1 2011 Earnings Call

April 20, 2011 1:00 pm ET

Executives

Diana Reardon - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

R. Norwitt - Chief Executive Officer, President and Director

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Wamsi Mohan - BofA Merrill Lynch

Shawn Harrison

Amit Daryanani - RBC Capital Markets, LLC

Jim Suva - Citigroup Inc

Amitabh Passi - UBS Investment Bank

Sherri Scribner - Deutsche Bank AG

Steven O'Brien - JP Morgan Chase & Co

Craig Hettenbach - Goldman Sachs Group Inc.

William Stein - Crédit Suisse AG

Presentation

Operator

Hello and welcome to the first quarter earnings conference call for Amphenol Corporation. [Operator Instructions] At the request of the company, today's conference is being recorded. [Operator Instructions] I would now 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 you all to our first quarter call.

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 closed the first quarter with sales of $941 million and EPS of $0.72, achieving strong growth in both sales and earnings per share and meeting the high end of the company's guidance. Sales were up 22% in U.S. dollars and 21% in the local currencies over Q1 of 2010. From an organic standpoint, excluding the effects of both currency and acquisitions, sales in Q1 2011 were up 17% over last year. From a sequential standpoint, sales were down 1% from a record Q4 of 2010.

Breaking down sales into our 2 major components, our Cable [Cable Products] business, which comprised 7% of sales in the quarter, was down 6% from last year and up 7% from last quarter. The sales decline from last year relates primarily to lower spending in North American broadband markets. The Interconnect [Interconnect Products and Assemblies] business, which comprised 93% of our sales, was up 25% from last year and down about 2% sequentially. Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $186 million compared to $145 million last year. Operating margin was 19.8% compared to 18.8% last year. Operating income in both periods is net of stock option expense of about 0.7% of sales or $6.3 million in the 2011 quarter and $5.4 million in the 2010 quarter.

From a segment standpoint, in the Cable business, margins were 11.8%, down from 14.9% last year. The margin decline relates primarily to higher relative material costs and lower volume. In the Interconnect business, margins were 22.1% compared to 21.1% last year. The improvement in margin of about 1% reflects the benefits of higher volume combined with the proactive and aggressive management of all elements of cost.

Overall, we're very pleased with the company's operating margin achievement of 19.8%. This represents a conversion margin on incremental sales over last year of about 24%. This is excellent performance in any environment, but particularly in the face of unprecedented global cost pressures. We continue to believe that the company's entrepreneurial operating structure and culture of cost control will allow us to continue to react in a fast and flexible manner and achieve strong profitability going forward.

Interest expense for the quarter was $10 million both this year and last year, reflecting a similar average debt level and interest rates. Other income was $1.7 million in the first quarter of 2011, up from about $0.5 million in the first quarter of 2010, primarily as a result of higher interest income and higher levels of cash and short-term cash investments.

The effective tax rate in the first quarter was 27.5% compared to 26.1% last year. The prior year quarter included a onetime benefit of about $1.9 million or $0.01 per share from a reduction in tax expense for tax reserve adjustments relating to the completion of certain prior year audits. We currently expect a rate of about 27.5% for the remainder of this year.

Net income was approximately 14% of sales, a very strong performance, and diluted earnings per share for the first quarter grew 29% over the prior year on an as-reported basis and 31% after adjusting the prior year earnings per share for the onetime tax benefit.

Orders in the quarter were a record $961 million, up 16% from last year, resulting in a book-to-bill ratio of approximately 1.02:1. The company continues to be an excellent generator of cash, and cash flow from operations in the first quarter was $108 million, about 83% of net income in the quarter. Operating cash flow in Q1 is net of a $15 million contribution to the company's U.S. defined benefit plans and a 7% sequential increase in the operating components of working capital, reflecting an increase in inventory and receivables, partially offset by an increase in accounts payable balances.

Inventory increased about 10% over December to $603 million in the quarter, resulting in inventory days of about 85. Approximately half the inventory increase relates to a higher investment in raw materials in the quarter. We consider this higher investment prudent given the potential for disruptions in the broader supply chain resulting from the events in Japan and the potential for further significant increases in commodity costs. The remaining increase is to support sequentially higher sales in Q2.

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