Amphenol Corporation (APH)

APH 
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Amphenol (APH)

Q2 2011 Earnings Call

July 20, 2011 1:00 pm ET

Executives

R. Norwitt - Chief Executive Officer, President and Director

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

Analysts

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

Wamsi Mohan - BofA Merrill Lynch

Brian White - Ticonderoga Securities LLC

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 Second 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 everyone to our second quarter call.

Q2 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 Q2 achieving strong growth and beating the high end of the company's expectations. Sales were $1,018,000,000 and EPS was $0.85 including $0.06 relating to certain acquisition accounting adjustments. Excluding these items, diluted earnings per share was $0.79. This represents the company's first quarter with sales over $1 billion and represents new record for both sales and earnings per share.

Sales were up 15% in U.S. dollars and 12% in local currencies over the second quarter of 2010. From an organic standpoint excluding both acquisitions and foreign exchange, sales in Q2 2011 were up 8% over last year. Sequentially, sales were up to 8% in U.S. dollars and 6% organically from Q1.

Breaking down sales into our 2 major components. Our cable business, which comprised 7% of our sales, was up 9% from last year and up 17% from last quarter. The sales growth from last quarter relates primarily to increased spending in both North America and international broadband markets. The growth from last year relates primarily to strong demand in South American communications market.

The interconnect business, which comprised 93% of our sales, was up 15% from last year and 8% sequentially. Adam will comment further on trends by market in a few minutes.

Operating income for the quarter was $215 million compared to $176 million last year. Operating margin was 21.1% compared to 19.8% last year. Operating income includes income of approximately $18 million relating to an adjustment to reduce a previously recorded contingent payment obligation for a 2010 U.S.-based acquisition.

In accordance with the applicable accounting rules, contingent obligations are reassessed based on current performance expectations and adjusted accordingly through operating income. This adjustment relates primarily to the push out of certain defense-related program to periods beyond this year.

We continue to be excited about the acquisition and expect strong future performance. Excluding this adjustment, operating margin was 19.4% for Q2 2011. Operating income as net of stock option expense of approximately $7 million this quarter and $6.2 million in the prior year quarter, or 0.7% of sales in both quarters.

From a segment standpoint in the cable business, margins were 12.8%, down from 13.5% last year. The margin decline relates primarily to higher relative material costs.

From a sequential standpoint, cable margins improved from 11.8% in Q1 as a result of higher volume and pricing action. In the interconnect business, margins were 21.6% compared to 22.3% last year. The lower interconnect operating margins reflect a slight reduction in gross margin as a positive impact of higher volume, cost reduction actions and price increases were more than offset by increases in material input cost.

In addition, there were costs in the quarter that were somewhat higher as workforce reductions of about 4% were implemented in the areas of the business with slower demand. Overall, we're pleased with the company's operating margin achievement. Excluding the one-time acquisition adjustment, this represents a conversion margin on incremental sales over Q2 2010 of approximately 16%. While this conversion margin is below our long-term goal, the company's overall profitability level continued to be very strong in the face of significant global cost pressures and a mixed demand environment. 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 $11 million compared to $10 million last year, reflecting higher average debt levels from the company's stock buyback program. Other income was $2 million compared to $0.8 million last year, primarily as a result of higher interest income on higher levels of cash and short-term cash investments.

In Q2, the company had an effective tax rate of 27.6% compared to a rate of 21.3% in the second quarter of 2010. The prior year quarter included a net benefit relating to a reduction in international tax expense, primarily due to the favorable outcome of certain tax positions and the completion of prior year tax audits of about $10 million or $0.06 per share.

The 2011 quarter includes tax expense of approximately $6.6 million relating to the $18 million acquisition-related gain. Excluding this, the effective tax rate in Q2 2011 was just under 27%. We currently expect a rate of about 27% in the second half of this year. The reduction in the rate from 2010 reflects primarily a lower mix of U.S. income.

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