Amphenol Corporation (APH)

APH 
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Amphenol (APH)

Q4 2011 Earnings Call

January 18, 2012 1:00 pm ET

Executives

R. Adam Norwitt - Chief Executive Officer, President and Director

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

Analysts

Wamsi Mohan - BofA Merrill Lynch, Research Division

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Mike Wood - Macquarie Research

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

William Stein - Crédit Suisse AG, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Jim Suva - Citigroup Inc, Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Shawn M. Harrison - Longbow Research LLC

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

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Steven B. Fox - Cross Research LLC

Presentation

Operator

Hello, and welcome to the Fourth 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. You may begin, ma'am.

Diana G. 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 fourth quarter conference call. Q4 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 fourth quarter, achieving sales of $949 million and EPS, excluding onetime items, of $0.73, beating the high end of the company's guidance. On an as-reported basis, EPS was $0.69 and included an $8.6 million or $0.03 charge relating to the impact of the previously reported flood and a charge of $2 million or $0.01 relating to acquisition transaction expenses for the acquisition of FEP closed in the quarter.

Sales were flat in U.S. dollars and local currencies compared to Q4 of 2010. From an organic standpoint, excluding both acquisitions and foreign exchange, sales in Q4 2011 were down 3% from last year. Sequentially, sales were down 8% in both U.S. dollars and organically from Q3.

For the full year 2011, sales grew 11% over 2010. Breaking down sales into our 2 major components, our Cable business, which comprised 6% of our sales, was up 4% from last year and down 19% from last quarter. The Interconnect business, which comprised 94% of our sales, was flat with last year and down 7% sequentially. Adam will comment further on trends by market in a few minutes.

Operating income for the quarter, excluding onetime items, was $175 million compared to $191 million last year. Operating margin was 8.5%, a little better than our expectations, reflecting a negative conversion margin of approximately 28% from Q3 on an 8% sequential sales decline. The Q4 2011 ROS of 18.5% compared to a record Q4 2010 ROS of 20.1% and a Q3 2011 ROS of 19.3%. For the full year, ROS, excluding onetime items, is 19.2% compared to 19.7% for the full year 2010.

The year-over-year margin reduction in Q4 of 1.6% is mainly attributable to lower margins in the Interconnect business, which were 20.8% in the quarter compared to 22.4% last year and 21.5% last quarter. In addition, stock option expense was higher in the quarter on flat sales, reducing overall ROS by 10 basis points or 0.1%.

From an Interconnect margin standpoint, about 1/3 of the reduction from last year relates to higher depreciation expense in the 2011 quarter compared to the 2010 quarter. While depreciation expense as a percentage of sales for the full year 2011 is comparable to 2010, the sequential decline in sales in Q4 2011 resulted in higher relative expense levels in the current quarter.

The remaining reduction in margin reflects the impacts of increases in material input costs versus the prior year, particularly for precious metals and plastics and, to a lesser extent, cost in the quarter relating to workforce reductions of about 3%. These impacts were partially offset by the positive impacts of cost reduction actions and price increases.

In the Cable business, margins improved to 13.1%, up from 12.3% last year. The margin improvement relates to higher volume of specialty cable products and lower relative material costs, primarily copper and aluminum. Overall, we're pleased with the company's operating margin performance of 18.5% in the fourth quarter and 19.2% for the full year 2011, excluding onetime items. The achievement of this profitably level in a year, where significant inflationary pressures on input costs coexisted with a volatile and less-than-supportive demand environment in many of our markets, is a hard-fought accomplishment by operating management. In response to that environment, from a headcount perspective for the year, we reduced headcount by about 4%, excluding the impact of acquisitions. 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.

In addition, as we look forward to 2012, there are some signs from an input cost perspective, that the new year may bring a somewhat more balanced operating environment. In that more normal environment, the management team remains fully committed to margin expansion, as business volumes expand. Accordingly, the company's guidance for 2012 reflects the return of sequential quarterly operating income conversion rates in line with the company's long-term target of 25%.

Interest expense for the quarter was $11.1 million compared to $10.2 million last year, reflecting higher average debt levels from the company's stock buyback program. Other income was $2 million in the quarter, up from $1.6 million last year, primarily as a result of higher interest income and higher levels of cash and short-term cash investments. In the fourth quarter, the company had an effective tax rate of 26.1% compared to a rate of 27.2% in last year's quarter. The 2011 quarter includes an aggregate tax benefit of approximately $3.3 million or 31% of the $10.6 million pretax onetime items described earlier. Excluding these effects, the effective tax rate in Q4 2011 was approximately 26.4%. For the full year 2011, excluding onetime items, the company's effective tax rate was 26.8%, and we currently expect the same tax rate in 2012.

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