APH

Business Context and Reporting Period

Company: Amphenol Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Amphenol operates two primary reportable segments: (1) Interconnect products and assemblies (connectors for communications, military, aerospace, industrial, and automotive markets) and (2) Cable products (coaxial and flat ribbon cable for communications). The company is a large accelerated filer with 178,270,189 shares of Class A Common Stock outstanding as of the reporting date.

Key Financial Metrics

Margins (9 Months 2007):
- Gross Margin: 32.6%
- Operating Margin: 19.3%
- Effective Tax Rate: 29.8%

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15% in Q3 2007 and 14% for the nine-month period compared to 2006. Growth was driven by both volume and price increases, particularly in the interconnect segment (16% Q3 growth) and cable products (7% Q3 growth).
• Profitability: Net income rose 37% in Q3 and 43% for the nine-month period. Operating margins improved in both segments due to higher mix of specialty products, operating leverage, and cost control programs.
• Comparison to 2006 Flood Impact: The prior year (2006) included a $20.7 million casualty loss related to flooding at the Sidney, NY facility, which reduced sales by approximately $25.0 million. No such losses were recorded in 2007.
• Working Capital: Accounts receivable increased by $89.2 million and inventory by $30.6 million, primarily due to higher sales volume and currency translation effects. Days sales outstanding increased from 66 to 68 days.
• Acquisitions: Goodwill increased by $46.3 million, primarily due to a third-quarter acquisition in the interconnect segment.

Guidance, Outlook, and Risks

Management Commentary: Management attributes sales increases to the development of new application-specific solutions and increased presence with leading companies in target markets. The company expects to fund operations, capital expenditures, dividends, and share repurchases through cash on hand, operating cash flow, and its revolving credit facility.

Liquidity and Capital Resources:
- Debt: The company has a $1.0 billion revolving credit facility with $706 million drawn as of September 30, 2007. Availability stands at $280.2 million after letters of credit.
- Share Repurchases: Under an authorized program, the company retired 1.6 million shares in March 2007. Approximately 1.7 million shares remain available for repurchase.
- Dividends: A quarterly dividend of $0.015 per share was declared and paid.

Risks and Contingencies:
- Environmental: The company is involved in remediation of sites from its 1987 acquisition from Allied Signal. Costs are reimbursed 100% by Honeywell under an existing agreement; management does not expect a material adverse effect.
- Market Risk: Exposure to foreign currency exchange rates and interest rate fluctuations. The company uses interest rate swaps to hedge floating rate debt.
- Legal: Various legal proceedings are ongoing, but management does not expect them to have a material effect on financial condition.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 15% sales growth, particularly in the military/aerospace and mobile device markets.
• Working Capital Efficiency: Monitor the increase in Days Sales Outstanding (66 to 68 days) and inventory levels to ensure collection and turnover remain healthy.
• Debt Utilization: Confirm the company's ability to service $717 million in debt while maintaining liquidity, given the $280 million remaining availability on the credit line.
• Acquisition Integration: Assess the impact of the recent third-quarter acquisition on future goodwill amortization and segment profitability.
• Environmental Liabilities: Confirm the status of the Honeywell reimbursement agreement regarding environmental remediation costs.